Money Talk with Carl Stuart

Are target-date retirement funds worth it? How aggressive should you be in the stock market after retirement? And is the market capitalization of S&P 500 overconcentrated? Just a few of many questions Carl Stuart helps answer. Plus one texter gets some inadvertently gets some marriage counseling and another nominates Carl for the Medal of Freedom.

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] [00:00:01] 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 [00:00:21] 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 determine our agenda by calling or texting 512-921-5888. It’s always a great idea to call or text at the beginning of the broadcast. Gives me a chance to do my best to answer your question. Also, I take today’s calls first, and then today’s texts, and then any previous sex that I have either not answered or in my view not answered fully. I have one of those to do today, so I’m gonna get started one more time. Let me remind you, 512-921-5888.

[Text] Carl, how do I analyze the social security plus pension that I had against my stock holdings in my asset allocation? I’m currently, I’m 68 years old. I’ve got stocks and mutual funds, but stocks versus bonds, I consider those other two income streams, pension and social security. How do I analyze that to get a reasonable allocation?

I think that’s a terrific question. And because we are in central Texas, if you are listening on KUT, we have a lot of people who work for the federal government. We have people who worked for. The state, for the county, for the city, and they may be accumulating, frequently are, pension benefits. That’s called the defined benefit plan. And if you work at a place like a teacher does, for a certain length of time, you get a lifetime guaranteed income. These were very popular coming out of World War II as companies were competing for labor. But over time, they became unsustainable for profit.

For-profit corporations and you begin to see big corporations like Coca-Cola or 3M or IBM stop doing those and they switch to what are called defined contribution plans. We call them 401K plans and in the nonprofit sector we call them 403B plans. You put money in on a voluntary basis versus the defined benefit plan where money automatically deduction from your pay check. You do not choose, and the employer puts money in, and obligated to do so. And when you retire or move to another employer, whatever amount is in that 401k plan is yours to take with you, as long as you’ve been there long enough to get the employer contribution, but there’s no guaranteed income. This person has both social security and a pension, so he or she has a real, fundamental, solid base for their retirement. Because they have two incomes that they are not responsible for the investments. The risks of these people and this person is frankly the rising cost of living, inflation. Because this individual is 68 years old, she or he may have a long life expectancy and if inflation’s at two and a half or 3% and income doesn’t grow by that amount, you can get into a situation where the cost of living exceeds what your income is. And so when I encounter this type of thing,

I find if the individual can learn to live with the volatility of the stock market, the way in which they actually reduce the risk of outliving their money on an after inflation basis is to invest more heavily in equities. Oh, by the way, when you hear that noise, that means that tax is coming in. And so you might say a 68 year old person shouldn’t have, let’s say, 100% of their money in equities, and I understand that. But when you consider the value of a lifetime income and how much you would have to put in bonds to get that income, it’s a massive amount of money. So I think you ought to lean into being more aggressive, and I would go with something that you’re comfortable with maybe even as high as 75% equities. I’d split that 75% domestic and 25% foreign. And then on the other part, I think I’d add precious metals because there historically may be an inflation edge. I would suggest a gold exchange traded fund for maybe 10%. And then I would probably have an intermediate term investment grade bond fund for the balance. 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. Here is a new text.

[Text] Does a Roth conversion actually help a middle-income, soon-to-retire person? When might it be beneficial and when would it be precluded?

It’s an excellent question, it’s one I get all the time and one I think about a lot.

There are lots of moving parts. So, if you are contemplating a Roth conversion, then that means you have an IRA. And when you have a IRA, when you reach a certain age, depending on your year of birth, you have what’s called a required minimum distribution. You have to take out at least that amount and pay income tax on it. If you have Roth IRA, you’re not subject to a required minimum distribution. And when you take the money out, you don’t pay any income tax. But here’s the difficulty. To get that money from your IRA to your Roth IRA, that’s called a conversion, that’s a taxable event. So the question becomes kind of a long, not kind of, a long-term financial planning question. And so let me play out several variables.

I have learned and observed people who are good savers and investors reach a point in their lives where they believe, using conservative assumptions, they’re not gonna spend all their financial assets. Then the question becomes, are you willing to pay the taxes so that your beneficiary, your spouse, or your children, or whoever, can take the money out over 10 years and pay no taxes? If that doesn’t sound like an attractive situation to you. And if your beneficiary is not in a super high tax bracket, then go ahead and just stay right where you are.

It’s much more of a life situation than it is math because you’re either gonna pay income tax when you take the money out of the IRA later or you’re gonna pay the income tax when you’re taking the money out of IRA to do the Roth conversion or someone’s gonna pay them income tax upon your demise as your IRA beneficiary. If you are contemplating a Roth conversion. You want to be extra careful of the tax bracket you’re in. That’s called the marginal bracket. It’s not your actual combined tax liability. It’s what will the next dollar of your income be taxed at what level? And the levels go from 22 to 24%. That’s not a big deal, but then it jumps from 24% to 32%. And I would suggest that you don’t want to do that. There’s no emergency here. So if I chose a Roth conversion, what I would want to do is I’d want to take it and take it in such a fashion to be aware of what it does to my income taxes. 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. And by the way, you can catch past shows at kut.org slash money talk. Okay, here’s another one

[Text] Hi, Carl. What are the advantages of target-date retirement funds? Is it worth a slightly higher fee than myself modeling after the fun?

So let’s step back and talk about target date funds It’s my belief that these came about after we had some really bad Experiences in 401k plans the one that truly sticks in my mind was Enron I remember reading a story in the Wall Street Journal that a person had, and I think it was the gentleman, had 100% of his retirement savings in Enron stock, which was a terrific idea because Enron skyrocketed until we all learned that it was doing so based on fraudulent activity and the stock went to zero. And that person’s life was upended to say the very least. So the industry, the asset management industry came up with, we understand some people find it confusing for the menu, and too many people put it all in company stock or leave it all into cash investment.

So, let’s put together a balanced portfolio and pick a date, five, 10, 15, 20 years from now, so that the planned participant picks the date, and originally it was the date that they were gonna retire. And then Vanguard or T. Rowe Price or Fidelity or JP Morgan or American Funds. We’d manage the portfolio between stock funds and bond funds so that you would have a glide path and would become more conservative as you got toward retirement. So is that a better deal than doing it yourself? The answer is no. It is really made for someone who doesn’t have the time or the interest or the desire to do this, to pick their own funds from the menu of the plan, then it’s a lot better than doing nothing. And you can game the system if you want to be more aggressive. Then you pick a longer dated fund if you want to be more conservative, you pick the shorter dated fund. But if you are a person who invests on your own and you have a nice robust menu of funds from which to choose, then would I suggest that you do it? The answer is I would not.

You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Call or text 512-921-5888. Hi, you’re on the air, how may I help?

Caller [00:10:42] Carl, thank you for what you do, and I tend to want to ask you, the gentleman who was 68 years old, the 75% stocks seems pretty aggressive. The rule of thumb of 110 minus one’s age would suggest that he should be doing about 42% stock. Maybe he could do uh… 45 or 50% but 75 % seems pretty aggressive

Carl [00:11:20] Sure, and I understand that. A friend of mine, years ago, retired from 3M in Central Texas. He had a defined benefit plan and he had Social Security. Today he’s 85 and he has 100% in stocks and he is really, really happy he did. So I think it’s a personal decision.

Caller  Well, I tell you, unless it’s Berkshire Hathaway or Vanguard or something-

Carl  I’m sorry, let me finish- Well, then we’re just going to have to continue without you because you wouldn’t let me talk. I just think it’s a personal decision. I’m not fond of formula, the 110 formula or any other formula. I think you have to decide yourself what’s best for you and whether you’re investing for yourself or you’re for a legacy. So that’s how I think about it.

You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Call or text, 512-921-9228. 5888 oh and by the way it’s time for me to take a break stick around I’ll be back

[KUT Announcer Jimmy Maas] [00:12:30] 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 Gallardo] [00:13:00] This is Money Talk with Carl Stuart. Call or text him with your questions at 512-921-5888. Now, here’s Carl.

Carl [00:13:14] Welcome back. You’re listening to Money Talk. I’m Carl Stuart. Thanks for listening. Call or text your financial investment planning questions at 512-921-5888. Here is a text.

[Text] Amazing show.

Thank you. You are welcome.

[Text] I am and have been worried about the large concentration of the S&P 500. I believe that just a few companies make up 35% of the total market capitalization. Seems like all investors are heavily on a few stocks. Please give your thoughts and ideas. Thank you.

I’m worried about the same thing. So, let’s explain for everybody else. The vast amounts of money are going into index funds. They’re called passive investments. And the reason is, whether it’s Vanguard or Fidelity or whoever it is, if you have an S&P 500 fund in your 401k, as a lot of people do, and every month, every pay period, you’re making that contribution as going into the fund and Vanguard or Fidelity or whoever has to take that money and invest it in such a way that it matches to the best of their ability the underlying index.

The S&P 500 is what’s called a capitalization-weighted index. And a capitalization-weighted index takes every second of the day, of the trading day, the price of the stock times the number of shares outstanding. And the result of that multiplication is called the market capitalization, or in the investment world, market cap. So, then companies like Morningstar break down companies by large, mid, and small cap. So as more and more money flows into passive and out of active investments, what you get is more and money going into the largest market cap companies, which drives them to be bigger and bigger percentages of the index.

In fact, I was reading today in Barron’s magazine that since a 2008 financial crisis, small cap stocks, small cap companies, which historically over a long period of time have had superior returns, have woefully lagged large cap stocks. So am I worried about this? Yes. When was the last time there was, in my memory, there was a huge example of the risk? And that was back in the late 90s. The internet came along in the middle 90s and from 1995 through 1999, we had one heck of a bull market. The Standard& Poor 500, as I recall, it was up about 20% or more every year, finishing in 1999. It was 1999, there were tech funds up 100%. We then had, now looking back on it, what we call the dot com bubble bursting. And the NASDAQ, which is where a lot of these stocks traded, took 15 years to get back to where it was at the beginning of 2000. Could that happen again? Of course, it could.

So to the degree that you don’t want to take the risk in this phenomenon, you need to have some other funds in your portfolio. Actively managed funds, because the active managers make bets against the index. They’re looking for stocks that meet their criteria. Not the hottest stocks. And when that happens and the hot stocks keep going, the odds are you will underperform. And when those hot stocks roll over and decline, the odds you will outperform. Other than that, you can buy other indexes. You can buy like a Russell 2000, which is small cap. You can by the S&P mid-cap. So there’s some other, if you prefer passive investing over active investing in the equity market. You do have other opportunities. You just have to get out of the total stock market index and the S&P 500, particularly, because they are market-cap. Not that the Russell 2000 is not market cap, because it is, but still it’s smaller companies. Thanks for the call, 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. And by the way, you can listen to past shows at KUT.org slash money talk. Alright, let’s see here. Here’s a text.

[Text] Carl, I recently visited on the big investment firm that begins with an F.

I’m just going to guess that might be Fidelity.

[Text] They were suggesting a separately managed account for an international investment. The minimum investment is $100,000. How is this type of investment different from an actively managed mutual fund? I presume this is not a good type of an investment for a Roth account since it won’t benefit from tax loss harvesting.

That is an excellent question. So, as long as I’ve been around this game, coming up on 47 years, there have been separately managed accounts. You put your money in with Fidelity, or Vanguard, or UBS, or Merrill Lynch. They have a manager or managers who are managing this portfolio of specific stocks. These are not index bonds, they’re actively managed. And the idea is that over time, they provide attractive returns. And while you, they also offer, to this person’s question, at any time, but certainly towards the fourth quarter, they can take losses to offset some of their realized gains. So that’s considered a benefit. You’re right, if you’re in a Roth, That’s not a real benefit.

Here’s my experience. I do not have hard data to prove this. But when I see separately managed accounts, I see somebody having 15 shares of that and 17 shares of this and 42 shares of the that. I’m unconvinced that a separately managed account on a just pure total return basis is better than having the same manager in a 40 act mutual fund. Or in an actively managed exchange traded fund where the fees could easily be lower. And of course, you always have the opportunity yourself in the fourth quarter to take that taxable loss if you want to and stay out of that fund for 31 days to avoid the wash sale rule and to go back in. So I must say, color me skeptical.

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. Let’s just see. Here we go.

[Text] Carl, target date funds. I just switched companies one to two years until retirement. I have roughly $1.25 million in IRAs. We’re gonna be at a good place for a vehicle to invest money for the last few months.

This is a really interesting and difficult question because let’s suppose, since we don’t know, that you’re one to 2 years till you’re 65. If you are a saver and investor, which you clearly are, to have one and a quarter million dollars in IRAs, you probably have had access to quality healthcare as well. I’m going to assume that you’ve taken care of yourself and you’re not a smoker and you eat healthily.

Unless you have just a guaranteed genetic problem that you’re gonna keel over in four years, you’re a long-term investor. And you cannot, or you should not, you can, obviously, it’s your money, you should be too conservative. Because what you’re looking at is three things you don’t know. How long are you gonna live? What’s gonna happen to the cost of living? And what’s gonna be the return on your investment? So back in the day, when I got into this profession, I was told, take your age and subtract that from 100. And that’s what you oughta have. You oughta that in stocks and the balance in bonds. You’re 65, you ought to be 65% in bonds, that has not worked out.

Did it work out in the 70s? No, because bonds and stocks went down. But since the stock market bottomed in 1982, that’s been terrible advice. And if you lived to be 85, 90, I mean, I read the obituaries, I see people up regularly over 100 years of age. So do not get too conservative. If you’re in the target date fund and you’ve got one or two years, you ought to find out what happens to the asset allocation of that company. Some companies will have that target date will have you down to a very modest or very small allocation to stocks because what I just said, that’s the traditional thinking. Others will say, no, you’ve got a long life expectancy.

We’re still gonna have a sizable amount in stocks. So I think you have to decide what’s the proper asset allocation for you because that’s gonna drive your return not only over the next one to two years, but also over the rest of your lifetime. Do not get too conservative too quickly. If you don’t want to select the funds yourself, then look at the various asset allocations of the various target dates and pick one that still has predominantly equities because I think that’s the place you ought to be.

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. Thank you for all the amazing advice.

You’re welcome.

[Text] I was recently listening to J.L. Collins and his perspective on renting versus buying. He recommends that buying a residential property does not make financial sense and is more of a lifestyle choice. If someone considering to buy his first house, would you recommend that I stay out of the home buying market and just continue renting?

We get such great questions on Money Talk.

First of all, you have to recognize that a house is not an investment. I’m sure people are screaming at the radio right now, but the truth of the matter is that the two investment options that have outperformed inflation over the long term are income-reducing real estate, which is not what your house is, it’s an income-eating real estate and common stocks because you’re investing and betting on human ingenuity.

So, you’re absolutely right. It is a psychological decision. We have a myth, and I don’t mean that in a critical term, In America of the benefit of home ownership. I can tell you, people I know in Europe look at us like, really? That is not common across Western Europe. It’s not a bad thing, but it doesn’t mean that it’s, I know everybody ought to have it. Because when you think about this, when you own a home, the idea is you’re not paying rent and you’re building equity in the house because you’re paying down on the mortgage. The mortgage is probably gonna cost you two or three times what you originally borrowed over a 30-year period.

I’ve owned homes since I was a young person and I’ve enjoyed it. But I’ve seen long periods of time, six, seven years, where residential real estate prices have declined. And periodically, like happened in the global financial crisis, where people’s homes were worth far less than the outstanding mortgage. So I think it really is homeownership. It gives you a sense of pride if you like it, you’re gonna have to take care of it, something always going to be needed. You don’t have those issues with rent. And the other thing you have to think about is you have limited income, and you’re not gonna sell your house when you’re 65 and live in the car. And people tell me, oh, I’m gonna downsize. Well, good luck with that unless you move to a rural area. And then how’s that gonna be when you have a stroke or a heart attack? So I think home ownership’s terrific, but I think this person’s nailed it. I don’t think you do it because it’s just a great investment. I think you’d do it, because you want it, because the money that you’re putting into that mortgage is money you’re not building in savings on your own elsewhere. So it’s complicated. So I don’t buy into, it’s always good for everybody, or we all should rent. I think it really depends on your personal situation.

You’re listening to Money Talk on KUT News 90.5 and on the KUT app. Call or text 512. 9 2 1 5 8 Al, you’re on the air. How may I help?

Al [00:25:52] Oh, yes, sir. Thank you for your advice so far. Thank you. I want to ask, I’m 74 and I have over a million dollars in 4-1K. Yes. I wonder if it makes sense to do a one-time conversion of everything and pay a 32% tax bracket, so to get rid of the Medicare surcharge.

Carl [00:26:18] I don’t think so. I think you should take it and look at your tax bracket and take it out over time. Because if you have a million dollars, you’re gonna be, add that up, plus any other income, everything over, if you’re married finally, jointly, everything over $750,000 is gonna be taxed at 37%. And a lot of it’s gonna be taxes at 36%. If you’re married finally jointly, from 500 to 750,000 is 36%, and from 400,000 to 500,000, it’s 32%. I think you should take your time to do it so that you can take it slowly and not pay any unnecessary tax. If you’re 74, if you are healthy, you can spread this out for three or four or five years. I think that makes more sense. I would be less focused on the impact on the Medicare tax and more focused on income tax liability doing it all at one time out. I think if I were in your shoes, I would spread it out over time.

Al [00:27:19] Okay, thank you so much.

Carl [00:27:20] You’re very welcome. 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. I have been alarmed at the low rate of return of what I thought was a safe, solid overall bond ETF, BND. Its three-, five-, and 10-year returns have been disappointing. Do you have a recommendation for a similar bond fund with better returns? Thanks, Bruce.

So, for everybody else, it’s my understanding, the largest bond fund is the Vanguard Total Bond Market. And it is an index fund available both as a 40-act mutual fund and as an exchange-traded fund. And like all passive Vanguard funds, it’s very, very inexpensive. It is attempting to match, and it does so successfully, the index, which is called the Barclays Ag. You can buy that, it’s AGG, or you can buy, these are ETFs, or we can buy the BND. Year-to-date, the AGG’s up 3.59%, and the BND’s up three point six six. However, however, if you take the dividend over the last month and assume it stays flat for a year, you also get additional yield on the B and D as 4.37%. 4.37 plus 3.66%, frankly. Given it’s a bond fund is attractive. So, I think you have to decide if you want something that has greater return because it’s gonna have greater risk. If you don’t wanna do that, then I think if you still wanna stay in fixed income, take your time.

One of the categories I like, these are Morningstar categories, it’s called multi-sector bond fund. It gives the active bond manager the opportunity to go anywhere that they think there’s opportunity where bonds look cheap, whether it’s investment grade, treasuries, foreign, domestic. Historically, they have paid out more income and can get better total returns. Year to date, the one that I like is up 5.5% and the trailing 12-month yield is 6.03. I don’t make specific recommendations on Money Talk. I am simply unwilling to take the liability and my lawyer would not allow me to do that. But I would say, at a multi-sector bond, but you’re getting the index. With BND. Remember, a heavy portion, I can’t remember the total, but I believe it’s more than 50% of the index, is U.S. Treasuries.

So, you’re getting a lot of the U. S. Treasury market. 2022 was a terrible year. In fact, I read it was the worst year ever for the bond market. So the AG was down between 13 and 14%. So if you have an asset class that has a historic return of 4% or 5%. You have one year down 13 or 14, you have dug yourself a heck of a hole. It’s going to take time to come back. B&D is not a bad fund. It delivers what it’s supposed to deliver. If you don’t like that and you want to stay with fixed income, look at multi-sector. 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 You know what, it’s getting close to the time for me to take a break. And I’ve got Susan on the line. I don’t want to have to interrupt her, but give you those numbers one time more. 512-929-5888, I’ll be back.

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

Susan [00:31:29] Hi, I’m 75. I’m still teaching high school. And I’m trying to determine when I should retire. I could retire at the end of this school year or maybe the end of the next school year. But I feel like even though I already have two teacher pensions, one from Mass and one from Arizona. When I get the Texas one and add my Social Security, which is now I get the full Social Security because the web was repealed, I still won’t have enough to live on. And I heard you advising someone to not buy a home to rent, and I was looking at houses this summer where I want to move to, and they’re very expensive and the rent is even more expensive. So, you know, I feel stuck.

Carl [00:32:31] Yeah, yeah, I understand. I’d feel stuck if I were in your shoes and please understand I was not Recommending against owning a home. I was just saying that we shouldn’t we shouldn’t t just take the blind Faith that that’s the thing we do because some people and I was referring to a lot of people in Western Europe I know don’t own their own home So you really have you’re looking at the homeownership in my view the proper way, which is from a financial standpoint at your age and stage of life, it’s reasonable for you to first determine with your projected retirement income whether or not you would qualify for a mortgage because that’s gonna be a big deal. If you can’t get a mortgage and it doesn’t matter about buying a home, then you would just have to rent. If you don’t have enough money to live on And you’re caught that that That surprises me, because you have Social Security and the pension as well. There’s nothing simple about this, because you can’t make the pension become greater. You can’t the Social Security become greater, you do have either, you have healthcare through the school you’re working for right now.

Susan [00:33:49] No, I have a Medicare Advantage.

Carl [00:33:54] Do you have any other investments, 401k, any investments other than the pensions, Susan?

Susan [00:34:02] I have an annuity with F&G and I have $457, which I’m going to add. I’ve been doing $200 a month, but since we’re supposed to get this big increase this year, I was going to have another $100 to it.

Carl [00:34:21] And how much is in the F&G annuity, Susan?

Susan [00:34:25] 28,000

Carl [00:34:27] and how much is in your 457 plan.

Susan [00:34:30] Right now, it’s about, must be about 4,000.

Carl [00:34:38] Well, first of all, I’m sorry you’re in this situation. What I would do with the 457, it’s a modest amount of money. I would just go aggressive with that and put it in the stock market, because the stock market drops 20%. It’s only $800. You need to try to figure out ways in which you can grow that income stream. And you sound like a person who’s very prudent. So, the other thing is you look at your expenses. And you look for places, you know, I tell people when they’re in a situation like this, that to start writing down or taking receipts of every purchase, whether it’s cash or credit, and then say once a month, looking at all my expenditures and looking for ways to reduce my expenditures. Because if you can’t increase your income, which you cannot, you can increase your savings very much, the only other lever you have to push on are expenses. I’m going to talk about something I seldom talk about on Money Talk, and you’re a smart person so you can do your homework. Some people who get stuck in this predicament can look at something called an immediate life annuity, an immediate life annuity, where you take a sum of money and you give it to a life insurance company, a good, high quality, safe life insurance company, and they give you lifetime income. And because you’re 75 Even though you’re a female, you’re gonna get a lot more income than if you were a 65-year-old female because you have a shorter life expectancy. These are designed for people who end up in the predicament you’re in today, Susan, where you can give the life insurance money. They know how many people are gonna pass away this year. They even know them by gender, but they don’t know them name. They’re gonna give you more money because they’re gonna keep what’s left when you pass away. And frankly, you don’t care. You’re trying to get the most income you can. So you are, frankly, the perfect candidate to consider an immediate life annuity. And I would go do some homework on that if I were you, Susan.

Susan [00:36:44] Okay, thank you so much.

Carl [00:36:46] You’re very welcome. 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] Carl, this is Shiva. Love your show. Can you explain the pros and cons of mutual funds versus exchange traded funds for long-term investor? Specifically, if we wanna buy and hold for long periods, thanks.

So mutual funds, let’s just take the simple one. Let’s just a passive index fund. Let’s say the S&P 500. For years and years, you could buy from Fidelity or Vanguard or Schwab, and no doubt lots of other companies, a mutual fund that sought to have the same return minus expenses of the S& P 500. These were under the Securities Act of 1940. These are mutual funds. And mutual funds are priced once a day. So if you bought the Fidelity S&P 500 at 10 a.m. Or at 2 p.m., you got the same price because at the end of the day, they took the value of the portfolio, they divided it by the number of outstanding shares, and that was the price per share. And that’s called the net asset value. If you sold shares, it didn’t matter whether you sold them at 10 am or at two p. M., the price you got per share was the value at the end of the day. Exchange-traded funds came along, and they’re called that because they are traded on an exchange, like the New York Stock Exchange. So their price goes up and down throughout the day, so if you buy it at two, you’re gonna get a slightly different price, or in some cases a significantly different price than if you bought it. If you buy at a 10, it’ll be a different price than two. One of the features that people like about exchange-trading funds is that they’re tax-efficient. Without getting into the weeds as to how they do this, they’re able to offset and not deliver capital gains. If you’re looking at actively managed funds where you have people selecting stocks, they have to pay out any realized net capital gains, exchange funds, these traded funds don’t do that. Also, by and large, it’s been my experience that exchange traded funds have lower operating expenses.

So, there are two reasons that the exchange traded are popular. Is that they have low operating expenses, and they seldom, if ever, deliver realized capital gains. So either one, that or an open-end fund, the 40 act fund is fine, but given the choice, if they’re the same investment, I would use the exchange-traded fund. 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. And by the way, you can catch past shows at kut.org slash money talk. Here we go. Andrew, you’re on the air. How may I help?

Andrew  [00:39:52] I have a question. I know when you make improvements to a house, you can add that to the cost basis, but I’m curious if it’s a very large expenditure, let’s say, you know, I don’t know, $20,000 for windows and you finance that. Can you add the cost of financing the interest you pay? Does that also go to the costs basis of the house or is it only the actual cost of the web.

Carl [00:40:16] So Andrew, I’m not a CPA, but my common sense tells me the interest doesn’t count because another person might take $20,000 of savings and do the same thing. I think it’s the actual cost you paid for it, whether that’s the hard cost or the labor. You obviously wanna keep receipts and keep track of that. So when you sell the house, you can increase your cost basis by that. But I believe that the financing of it is not included in the cost basis. Got it, perfect, thanks so much. You bet, thanks for calling.

You’re listening to Money Talk on KUT News. If you’re a CPA and I’ve just made a mistake, let me know, but if you’re not, you can still call or text 512-921-5888. Okay, let’s just see.

[Text] Carl, situation, not sure if this is a rule of thumb best practice approach for a family, but I’m really trying to get a good level set of my family’s worst so that I can plan well. The problem, my wife likes to keep money that she earns and not bring it to the table so that I see a total of what we make. Is that a problem?

Yes. I am probably the best one to answer that, but I mean an alignment with financial practices to get the most positive outcome. Thank you, sir. Well, I have read, I’m not a therapist. I have read that money problems are one of the top problems in a marriage and a long-term relationship. This is not something that’s gonna be easily solved. There’s, your wife has likely had experiences in her life that have led her to this situation. And if you were married and filing jointly, the revenue service knows what both of you make. They don’t know what your savings are, but you are correct. You cannot plan for the future without knowing your full financial situation. I would tell you that you, both of you, not her. Because it’s a problem for both of you. If I were in your shoes, I’d have a sincere, loving conversation with her, and I would suggest that we find a counselor to work through the fundamental issues that are causing her to feel this way, whether it’s fear or childhood experience or whatever the case is that’s legitimate, and she feels strongly about this, and pushing her is not gonna help whatsoever. You need to get to the base of what’s causing her to believe and feel this way. That’s what I would do if I were in your shoes.

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

[Text] I know of no other financial program that does this. I think you deserve the Medal of Freedom because you answer questions directly, rather than inviting folks to come for a consultation.

Ha ha ha, that’s exactly right. Been that way since 1995.

[Text] You have saved people thousands because of your direct advice. Wow, what a wonderful compliment. Thank you so much.

You’re listening to Money Talk on KUT News 90.5 and on the KUT app. And what do we have? We got about another seven minutes. You can call or text. Five one two 921-5888. Carl, as a follow up on the home buying versus renting question, if I had enough saved up to be able to reduce the total monthly payment of the house, including the taxes, insurance, and mortgage, at par with renting a house, would you recommend that I buy a property? Would you recommend that I invest all that cash in the capital bond? Well, your house should have a higher return than the stock market and the bond market. And here’s why, this is kind of finance geeky stuff. When you own an illiquid asset, and real estate’s an illquid asset. If you own a piece of real estate, whether it’s your house or rental property, and you get up on Monday morning and you want to sell it, that doesn’t mean you can sell it. And if it’s in a rising rate environment or a declining real estate market, you may not be able to sell it because you can’t get a buyer to buy it. So you ought to have a higher return. That’s called the liquidity premium. The less liquid an asset is, the higher the expected return should be. So if you put aside the psychological benefits or liabilities of home ownership, then there ought to be a higher returned. There is no evidence that residential property over long periods of time performs as well as income producing property. And equities. Now, you can live through a bull market like we’ve had in central Texas where we had a 40% increase in residential real estate in one year, but you could have lived here when people lost their homes, savings loans failed, we lost almost all of our big banks. Real estate is a long-term illiquid investment. You’re getting no income from it. So if you are indifferent, indifferent to the benefits of home ownership, then the liquid investment based on history is a superior investment. Thanks for your question. People are gonna start getting mad at me. You’re against home ownership. No, I’m not. I’ve had homes for a long time.

512-921-5888.

[Text] Carl, I am very fortunate to have grown a sizable portfolio. Congratulations. The fluctuation this year from low to high is significant. Boy, you’re telling me April could get whiplash. The portfolio is 100% in equities, the third in individual stocks, and two-thirds in exchange traded funds, index funds, and active funds. What ideas do you suggest to reduce my standard deviation?

Very sophisticated question. So I’m going to answer it with what I hope is a sophisticated answer. You need to start looking at correlation and not just diversification. You need start working on finding exchange traded funds and 40 act funds that invest strategies. That do not move in lockstep with the stock market. Okay, I’m gonna give you some generic terms and you go do your homework. One is merger arbitrage, which has a history of outperforming the bond market in rising interest rate environments when bonds go down. Another one is market neutral, which seeks to deliver a positive return, but not correlated to the stock markets. To buy certain stocks and shorts others, uses a lot of quantitative analysis. And the third is called trend following. The regular term is managed futures. I look at this one as being your homeowner’s insurance so that when you have a really bad period like 2022, this will help you. Now in periods that are trend and trendless, like we’ve had this year, up and down and up and down, they will not help you, but two of the ones that I personally use In 2022, when the S&P was down 19, and the NASDAQ was down 33, and the Bloomberg AI was down 13, they were up 17 and 16% respectively. So those are three strategies, market neutral, arbitrage, merger arbitrage and managed futures. I’d go do my homework on those if I were you. Thanks for the text.

You’re listening to Money Talk on KUT News 90.5 and the KUT app.

[Text] Hi, Carl. I received about $700,000 from a 401k that was dissolved. Historically, I’ve been an aggressive investor. However, with our current administration, I’m hesitant to reinvest in stocks. What do you suggest? I’m 68 and retired. Thanks, Suzanne.

You’re way too young to be out of the stock market, Suzanne. I think here’s what you do. You dollar cost average. Be sure you have a hefty international allocation. My favorite allocation, which is for most people way above what they have. Is 75% in equities and 75% domestic and 25% international. Take that $700,000, divide it into $100,000 pieces, and on the same day every month, just hold your nose, don’t look at where the stock market is, and invest it. We could easily have a sell-off this year based on the very things that you’re worried about. And if that happens, you’re in great shape because you’re investing every month. And as prices decline, you’ll be buying more shares. And will the market come back? Will human ingenuity go away? No, the market will come back. I don’t know when. I just know what history teaches me in my own personal experience. Get back in, take your time, use a government money market fund for the balance and make 4% while you’re waiting your turn.

You’re listening to Money Talk on KUT News 90.5.

[Text response from earlier in the show] Carl, thank you so much for your response. It was quite empathetic and I appreciate it. I’m going to see counseling about the marriage or a lack of intimacy and might as well throw in the financials. This is terrible, but it’s my marriage. Thank you.

Well, this is the benefit of this show. Everybody is anonymous.

[Text] Carl, I’m wondering whether to change my current investments from U.S. Funds to more international funds based on Trump’s tariff issue. My U. S. Large caps have done very well, but I am concerned that it’s about to change. Here’s what I think. U.S. Foreign companies have two tailwinds. They’re cheaper as an aggregate. They’re less expensive than US. And they have the second one, which is the weakening dollar. So far, year to date, the Vanguard total stock market is up 8.95%. The Spyder SPY 500 is at 9.3. And the Vanguard XUS is up 20, 20.83. So I think you’re wise to move some of your money international. That’s what I would do if I were in your shoes.

Well, we’ve had a lot of fun this afternoon, a terrific broadcast. I’m gonna thank Marc for doing his usual wonderful job. And as always reminds you that next Saturday, after the news at five, be sure and tune in to Money Talk.

[KUT Announcer Laurie Gallardo] [00:50:32] You’ve been listening to Money Talk with Carl Stuart. Carl Stuart is an Investment Advisor representative of Stuart Investment Advisors.

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