#258 – From FOMO to Focused: Retirement Strategies for Market Volatility and Asset Allocation

Christa DiBiase [00:01:00]:
I think that’s how it’s supposed to be pronounced, but I don’t know where is that from. Is Italian nationality. It’s Italian.

Wes Moss [00:01:05]:
Oh, that’s cool.

Christa DiBiase [00:01:06]:
Yeah, it’s actually my ex husband’s last name and I kept it cuz my maiden name.

Wes Moss [00:01:09]:
Oh, never mind. So your heritage is not Italian?

Christa DiBiase [00:01:16]:
No, Irish.

Wes Moss [00:01:17]:
So you married into the name.

Christa DiBiase [00:01:19]:
Okay, I sure did. All right. And today we’re going to revisit one of our favorite characters, FOMO Freddy.

Wes Moss [00:01:27]:
Yeah, we were going to talk about one of the most annoying guys you’re ever.

Christa DiBiase [00:01:30]:
You haven’t talked about him in a while, but a lot has happened since the last time you described him to us and we should watch out for.

Wes Moss [00:01:36]:
I’m even more annoyed with FOMO Freddy today.

Christa DiBiase [00:01:39]:
Oh, boy. And then another topic is dry powder that you’ve revisited. And today you’re going to really explain what investments are considered dry powder.

Wes Moss [00:01:49]:
What goes into that formula. And it’s important to note and we’ve gotten a lot of questions over the last half a year on that, so let’s.

Christa DiBiase [00:01:55]:
And you made a pun earlier. You said it’s kind of a dry topic.

Wes Moss [00:01:58]:
FOMO Freddy is kind of a fun topic. Dry powder is. Could be kind of dry. We’ll try to make it interesting here, but we’ll start with FOMO Freddy, which is this character that we all know him and he’s. He’s the guy that is at a party that you don’t really want to talk to, but he kind of always wants to talk to you and he wants to tell you about how well he’s been doing in a certain investment. So that is if this is in 2020, after the pandemic, and I guess maybe we wouldn’t be at parties right in March because the world was kind of shut down. But this is the kind of person that later in the year is talking about. An etf, that’s an innovation fund.

Wes Moss [00:02:38]:
And this is a true story that I remember getting a lot of pressure to put money into. This is a fund that got a lot of press. The, the manager was kind of a star on Wall street because the fund did exceedingly well. And then sometimes what will happen is that you just get this momentum around that this is already doing well. So more people pile in and then it does even more well, and then it totally gets decoupled from fundamentals. But this happens in many different asset classes. If you think about the housing bubble in 2000, it’s really started in early 2000. So 2000, 2, 3, 4, 2005, when things started to really crest, it was super common to hear, well, of course I’ve got a condo down in, in Florida.

Wes Moss [00:03:26]:
And condos, I can buy them for 300, I can sell them for 600. And that pressured more and more people to want to do the same thing because you have this fear of missing out. And that’s who FOMO Freddy is. But FOMO Freddy is the guy that is not only is he the life of the party, but he’s also dangerous to your portfolio because he is dripping on you. And it’s not just Freddy, but it’s the ethos around Freddy that is making you feel like you’re missing out. And the other thing that makes these trends, housing was a good example. Tech stocks in 1999, innovation type ETFs in the year 2020, as they rise, they linger around for a while and they’re the good news about how well they’re doing. Gets reported.

Wes Moss [00:04:11]:
And Freddy at the party is looking at his phone and saying, I mean, look at this chart, look at. And you start thinking, well, why didn’t I. Why don’t I own some of that?

Christa DiBiase [00:04:18]:
Remember Peloton?

Wes Moss [00:04:19]:
Well, maybe I should. Maybe. Is that. That all that went well until Mr. Big fell off the peloton.

Christa DiBiase [00:04:25]:
Oh, is that what did it?

Wes Moss [00:04:26]:
Yeah, well, I know that there was a peloton. Was it a commercial or during one.

Christa DiBiase [00:04:30]:
Of the shows, during the reboot of Sex and the City.

Wes Moss [00:04:32]:
That was bad for Peloton or at least the stock. So what happens is that his commentary brings people together and it then creates even more momentum. So these trends that start to get a little wacky they get even wackier and then they draw even more people in and the assets get big. And then all of a sudden there’s cred behind it. Well, now this fund is multi billions and you start saying yourself, well, maybe I, maybe I should get in only two. As an example here in 2002, this innovation ETF I’m talking about was up 255% and that was in less than a year. And billions of dollars went into this and billions of assets. And then if you Fast forward another six months or so, it went from up 250% plus to negative 10.

Wes Moss [00:05:22]:
So it lost all of those gains and actually ended up down. And I’ve looked at it and it’s now trailed the S&P 500 pretty significantly ever since then. So there is a lot to be said for finding an investment style and really sticking with it. Again, the investment landscape makes this a little hard to do and a little complicated because there are a lot of different overarching styles to investing. There’s just pure indexing, S&P 500. We’ve gotten a lot of questions and maybe even a little pushback this year. And really over the last couple of years, as I’ve talked to investors, because that’s gotten to be really top heavy. It’s really concentrated.

Wes Moss [00:06:01]:
32 to 35% of the whole S&P 500 is concentrated in its top 10 names. So 10 out of 500. There’s value investing, there’s momentum investing, there’s pure growth investing. These are investors that they’re expecting stocks to go up appreciation wise, not worried about a dividend. The value investor, that’s another style that is very intent on finding companies that can recover in price and maybe paying dividends as well. There’s minimum volatility investing, where you’re finding only companies with low betas. Betas are the measure of volatility of a stock relative to the market. And that’s another style.

Wes Moss [00:06:39]:
So that list is really long. I mean, let’s say there’s dozens of different categories and then there are hundreds if not thousands of funds within each one of those categories in any given year. And this is a fun visual to look at. If you were to track the style of investing that is doing the best versus the worst in any different calendar year, it looks very much like a roller coaster. And I’ll pick a simple example, growth investing, which is kind of the opposite of value or dividend investing. You’ll see if you track it over the last couple of decades, it’ll be the best performing style for a year and then it’ll be the worst performing style and then it’ll be the best performing style and then the worst performing. So it’s very, there’s a lot of undulation within these styles. So it’s natural for us to say, well gosh, I’ve been doing this for an entire year.

Wes Moss [00:07:26]:
And that other way of investing was better, so why wouldn’t I do that? So we end up with this kind of dog chasing tail scenario. It’s a kind of the cousin to market timing. It’s really style timing. And our team went back and did a study and looked at the, the six major styles of investing and to see what $500,000 would turn into, let’s say over the course of. I want to say that we did this over 20 years and what we found is that the styles were very over time. In any given year there was a big difference. So one would be up 20, one would be maybe down 5. But over time, if you were to look at what these did, and I’ll look at, see my timeframe here was we did this from.

Wes Moss [00:08:09]:
Yep, since 2000. So a little over 20. This is a little over 20 years. 500,000 in the quality category was up 8.6%. Momentum was up 8.5%, which is a style of investing you would usually have in a mutual fund or a hedge fund. S&P 500 was close to 8%. Again, annualized return, if you looked at growth was 7.7, value was 7.7, minimum volatility was over 7. But if you, if you were purely FOMO Freddy, and your 500,000 switched at the end of every year to the best style that one did the best, you end up with a rate of return that’s in the 6% range.

Wes Moss [00:08:49]:
In the mid mid sixes, that might sound like a huge difference, but $500,000 could have turned into close to 4 million if you stuck with a style.

Christa DiBiase [00:08:59]:
Wow.

Wes Moss [00:09:00]:
But if you fomo, Freddy, did and are always chasing last year’s best, it was about two and a half. So think almost four million versus two and a half million. That’s a really big difference.

Christa DiBiase [00:09:10]:
That’s compelling.

Wes Moss [00:09:11]:
So I’m a believer in more dividend value investing, but it doesn’t mean that that’s the only way to invest. It’s really a philosophy and a way to think about it. And my experience over let’s say 20 some years of investing is that the investors that do the best, they don’t shift from style to style to style, they get comfortable with a way of investing and they stick to it. And that long term growth creates the shade tree which is your investment portfolio. That should protect you for the rest of retirement.

Christa DiBiase [00:09:43]:
All right, here’s the first question for you. West Donna in Virginia. I’m 64 years old and planning to retire from local government agency with a pension and retirement savings in an IRA and 457 accounts in three years. I’ve hired a financial advisor who’s going to help me navigate this transition. Here’s the catch. One of my IRAs is quite sizable and in a workplace account. My understanding is that when I transfer this money to my new advisor’s firm, the funds will be out of the market for a day or so. Is it possible to expedite the transfer with a small.

Christa DiBiase [00:10:15]:
It is possible to expedite it with a small fee. But even still, I’m terrified of missing one good day in the market. The market currently feels volatile to me, so I’ve been putting off the transfers but wonder when the time will come that I can feel more confident about this move. What do you think?

Wes Moss [00:10:31]:
So, Donna, you are worried about, and you’re taking this literally and I love this, you’re worried about. The study that we’ve talked about and you’ve probably heard about or read about is if you miss just a few of the best days in the market, it dramatically reduces your rate of return. And that is. And if you just 1% of the best days or 5% of the best days, and these are just really small periods of time, these are small windows. So you’re taking that and you’re thinking to yourself, wait a minute, if I’m out for a day or two when this rollover is happening, then that could ruin my returns for the next couple of years. So you’re taking that very, very literally, which I love.

Christa DiBiase [00:11:14]:
And granted we’ve been on a roller.

Wes Moss [00:11:16]:
Coaster, been on a roller coaster and we’ve seen some of this and really just already in 2025 that has played out. There have been a couple of days when let’s say tariffs got put on hold as an example, that the market had this massive sigh of relief. It went up 5, 6, 7% in a day. So yeah, you do not want to miss that. Think about worst case scenario, the market sells off 20%. Your rollover, let’s just say hypothetically takes a week and the market’s up 15% in a week. Now that’s extreme, but it could happen. Any of these things can happen.

Wes Moss [00:11:52]:
Now what I would tell you is that first of all, there is no magic solution to being able to have money if it’s moving from institution to institution and it’s going from funds into cash that needs to be reinvested. Remember, if you’re in a brokerage account or even an IRA and it’s moving to another ira, it can stay exactly invested as it is. So if it’s a transfer you really shouldn’t have, you don’t have to worry about that or you shouldn’t have to worry about that. The problem, and this is anybody doing a 401k or any retirement plan, 403, 401k into an IRA. I don’t know of a time that I haven’t seen this. They’re going to liquidate the assets, you’re going to get cash rolled over and then you’ve got to rebalance. So if there’s going to be a window where you’re kind of in a blackout period, that’s somewhat unavoidable in one of these transactions. So here’s how I would navigate it.

Wes Moss [00:12:44]:
The power of your plan and getting the allocation that you like and you having control and working with Advisor for the long run, that’s a home run that really will work for you, I believe. And it can be a huge benefit for investors in retirement over a long period of time. So don’t let a day or two discount the long term power of that. However, if you were to try to mitigate this, you want to do this in a period of time where the market kind of is back in a more neutral, less crazy zone, if you will. And you can find this out by looking at the vix. So the VIX is published anywhere you see a tracker of the S&P 500 or the Dow, there’s usually a Vix. And in times of great volatility, the Vix is 20 and up in 2025. At one point we get to 55 on the Vix, a quote, normal Vix and the markets are still always volatile.

Wes Moss [00:13:39]:
But a period of time, a Vix from 15 to 20 is when the market is behaving at least somewhat normally. And it’s super rare that you would have a huge update with a VIX that’s that low. So usually the up days are in reaction to giant down days. And we’re in the middle of global turmoil, tariff turmoil is an example, pandemic turmoil. And those giant updates almost historically usually are happening right around the time you’re at a really bad point. Down 15, down 20, down 25%. So if we’re back and I don’t know exactly what day you’re listening to this, but if we’re back to a slightly more normal market, the VIX is behaving, then you run a very low risk that a day or two out of the market would be missing one of those big jumps. The power of you understanding that is that is really not missing a day or two in a transition.

Wes Moss [00:14:37]:
It’s saying I’m going to sit this one out for the next couple of months until things calm down. That’s when people are missing those big recoveries, is when they’re saying I’m on the sidelines and I’m going to be out for a couple of months. That’s how people miss not really in the, in the day or two of.

Christa DiBiase [00:14:52]:
Transition would you recommend I don’t know if this is possible with this type of transfer, but I would think it would be that maybe if she’s very nervous, do like a quarter one month, a quarter the next month, just sort of like move it in more slowly.

Wes Moss [00:15:04]:
You could do that. But I wouldn’t overthink this. I think investing it’s difficult enough to make the transition happen. The reality of you missing out on something really significant in a quote normal market, that’s a day or two, it’s very, very low. I would just make your plan and when as soon as the market is in the remotely calm, get it done.

Christa DiBiase [00:15:25]:
Okay. Barrington, North Carolina says I have around $10,000 in my treasury direct account. What should I do with it? Should I leave it or reinvest it into something else?

Wes Moss [00:15:35]:
Barrington. So the treasury direct account, I would suspect if you have 10,000, maybe you did I bonds. But you could also there’s other investments there. You could do double E bonds, et cetera, tips, treasury inflation protected. I believe in Treasury Direct. So there’s a couple different government securities. Really you’re investing in ultra safe assets. I would say once they stop accruing interest.

Wes Moss [00:15:57]:
So let’s say you’re at the 20 year mark or 30 year mark, depending on which one of the investments you’re in, then you got to get it reinvested or else you’re kind of just sitting there wasting, you’re not getting paid. So if it stops creating interest or it’s matured, if you will, it’s time to find a new vehicle. So you could just reinvest in another, in another one of the products or the same product and buy it again. Or you could take the money out and look at some Other things. Maybe it would help you fund a Roth IRA in any given year if you’ve got wage income, but you don’t necessarily have cash somewhere else to fund this. Maybe you could use the treasury direct money to fund a Roth. There’s a lot of different things you can do with it, but it also can be in your dry powder pouch, if you will, because you’re buying government backed securities which are supposed to have the highest level of safety that we can find.

Christa DiBiase [00:16:54]:
All right. And Brook in Massachusetts says, I’ve been considering market linked notes within a newly converted IRA from 401k for the downside protection. Given the market volatility, the access to liquidity isn’t important. But this part of my diversified portfolio is not important. But I have heard some concerns with the market link notes too. What are your thoughts?

Wes Moss [00:17:17]:
Credit is the first thing that comes to mind, Brooke. I remember back in the Lehman days. Now granted, these are extreme situations that you got to plan for them during the, after the housing, the global financial crisis meltdown, Bear Stewards Lehman, Lehman went out of business. They were a strong name on Wall street and they were huge backers of market link notes. And there are a couple different kinds of these. There’s barrier notes, there are downside protection, buffer, I think they’re called buffer notes, downside protection. And they’re really financial derivative burrito. So the company will take options on an index.

Wes Moss [00:18:03]:
So you’re getting stock exposure by the option. And then they’re usually having some sort of downside protection. Maybe it’s a put. And there’s lots of different ways they can structure this. But who’s backing it? It’s the financial institution. So if you think about what happened to anything, if you have a note from a company that goes under, forget the value of what’s in the note, their credit, they’re backed by the credit of the institution that forms them. So they all went to, I don’t know if they all went to zero, but they went down dramatically and they were supposed to be safe and they were the opposite. So you’ve got to look at the credit of the institution that is producing these financial derivative burritos that are going to be inside of your retirement account.

Wes Moss [00:18:49]:
You mentioned the second biggest issue and it sounds like it’s not a risk for you, which would be liquidity. These are not traded during the day in any given period of time. They are created, they’re bought and they’re held to maturity. Stocks usually, let’s say large stocks are highly liquid. Bonds are pretty Liquid. But a linked note or a financial derivative like this is highly unliquid. So if you change your mind, there’s not a buyer out there. You can maybe sell these, but you get a huge discount on them to sell them.

Wes Moss [00:19:23]:
So just know that liquidity is the major issue beyond credit. And also note that to me, these have always been intriguing to me. I’ve had so many meetings over the years with these market link notes, buffered notes, they just make so much sense on paper. It’s like I’ll give you 50% of the market upside but only 5% downside, or I’ll give you 70% of the upside with only 50% of the downside. So they’re always kind of intriguing formulas, but they’re also only able to do that because the options in the market are already pricing those scenarios in. So there’s really. They’re already being priced in to some extent. And I have ultimately decided over many, many years.

Wes Moss [00:20:13]:
And I still consider these because they’re always intriguing. I just don’t buy the. I don’t buy them. I don’t like them because of illiquidity. If I want to keep money safe and protected, I want to use a safety asset. And if I want to use a safety asset, I don’t want it to be overly complicated and I don’t want it to be illiquid. So I’m not saying it’s not a fit for you. It could be and your advisor may be steering you in the right direction.

Wes Moss [00:20:39]:
But these have always been intriguing to me but is not something that I’ve participated in.

Christa DiBiase [00:20:43]:
Okay, all right, those were great. And coming up straight ahead, do you know what investments are considered dry powder? I know you know Wes, but if.

Wes Moss [00:20:52]:
You stick around, there’s a lot of categories. Yeah, there’s a lot that goes into it.

Christa DiBiase [00:20:55]:
We’ll hear about that next.

Wes Moss [00:21:00]:
Hi, it’s Wes Moss. May’s mayhem is behind us and June is in full bloom. Spring brings milestones like graduations, weddings, and even new homes. It’s also a time when you might be thinking about retirement. If that’s you, visit our team at Capital Investment Advisors. We’ll work with you to craft an income focused portfolio designed to deliver a reliable paycheck in retirement. Get started@your wealth.com. that’s y o u r wealth.com.

Wes Moss [00:21:32]:
so let’s talk about the dry powder principle, which is really, it’s a buffer for in between you and your portfolio. First of all, dry powder, it’s a, I guess it’s A wartime analogy or phrase that soldiers needed to keep their powder dry in order for it to work. And if you’ve got wet powder in the rain, it just doesn’t, doesn’t fire, doesn’t work. So you’re left kind of, you’re left without protection. So you want to keep your powder dry. When it comes to investing, that means safety assets. But there’s a lot of different categories within what is really dry powder. And that’s a fairly long list.

Wes Moss [00:22:13]:
And there’s a lot of iterations within the list. And to me it doesn’t have to be perfectly stringent. If you just say cash or money market is the only thing that’s in dry powder, I think that becomes a little somewhat limiting. It is really, in my opinion on this, just safety assets that you can get to, they’re liquid when you need them. There’s a lot of different reasons we have them. But the dry powder principle is to have enough dry powder at minimum, particularly when you’re in retirement, to pay for three years worth of spending. So if you need 100,000 a year in retirement and 50,000 a year is coming in for Social Security and pensions, you have a $50,000 gap. You take that gap of 50 times three would be 150.

Wes Moss [00:22:57]:
So in the overall pie for you, in the mix of savings the principal would say you need, you want around $150,000 in these safety assets. Now more can be absolutely fine. I’ve worked with families that have, they want 10 years of dry powder, they want 15 years of dry powder. And now you could look at that as kind of extreme. But one of the purposes for this and the reason we say minimum three years is that even really bad bear markets on the stock side. So think about your portfolio. You’ve got your dry powder and safety assets and let’s say the rest happens to be in more volatile assets. Well, even some of the worst bear markets have recovered by a three year period.

Wes Moss [00:23:42]:
So the dry powder is to get you through even these longer bear markets that take a while to recover. And that’s where we get this minimum three year philosophy. More is totally fine. And sometimes I think more is better because it goes back to your propensity of handling risk and volatility. As the numbers get bigger, the dollar changes in your portfolio get bigger. Gains are great. But when you, if you have a 10% decline in $100,000, 401k, you’re down to 90, it’s 10,000, it’s hurts. But imagine when that’s a million dollars and it’s down 10%.

Wes Moss [00:24:17]:
Now you’re down $100,000 and you start saying to yourself, I remember a time where I took, think about how long it took to make $100,000. And that just went away in three months. That’s what makes investing really hard. So that dry powder allows us to say, it’s okay, I have my safety assets. If I need them to use them while the market is down, then I can pull from these because they are not supposed to go down all that much. They’re supposed to be stable or mostly stable, not necessarily perfectly. It gives you a psychological boost. It gives you some psychological armor, Christa, and it gives you some time.

Wes Moss [00:24:55]:
And I think you put that together, that combination, I think it makes us better investors. It certainly helps me knowing I have dry powder. When the stock side of the market is down, it’s okay because I can always use this. I don’t want to sell things when they’re low. So there’s a lot of dynamics to why this is important. The pushback is, well, these will make a lot of money. The money market today is only paying 4% and sometimes your stable value fund is only paying 2 and a half or 3%. And I understand that particularly a couple of years ago when interest rates are really low, stable value was paying virtually nothing.

Wes Moss [00:25:35]:
So it doesn’t feel very good to be paid nothing. But there’s other benefits to it than that. So what goes into that? Number one, the easy one. Here are the easy ones. Anything. Cash in the bank. Absolutely. CD in the bank.

Wes Moss [00:25:47]:
Absolutely. Money market mutual fund. Absolutely. That’s dry powder. Then there’s some other areas that. Well there’s another. Absolutely. Would be an anything that’s treasury direct.

Wes Moss [00:25:57]:
So you’ve got an I bond or a series EE bond. Those have ultra high degrees of safety. Absolutely. Dry powder. Then you move into where we start looking at the timeframe of these fixed income or bond like vehicles. Shorter term Treasuries, one to three months. Absolutely. But even a one to two to three year treasury that’s going to have a little bit of movement.

Wes Moss [00:26:23]:
I wouldn’t call it lots of volatility, but certainly the price of that or if you had an ETF that holds relatively short term Treasuries, sure it’s going to move a little bit in relation to rates, prices and rates move inversely. But it’s still there’s a high level of stability. What would not be considered dry powder would be a longer term Treasury Bond, a 10 year, a 20 year, a 30 year Treasury Bond because the further out in the duration of fixed income, the more volatility and those can move in price pretty dramatically. So we want ultra short to shortish term Treasuries and this can go for corporate bonds too. So another category, corporate bonds, Another category, municipal bonds. If those are shorter term, they’re easy to get to, highly liquid, they don’t move all that much. I consider those as part of the dry powder menu. And then finally stable value.

Wes Moss [00:27:15]:
So almost any 401k or retirement plan I’ve seen has a stable value option. That’s their version usually of a money market or an ultra short term bond fund. Sometimes they don’t seem to pay quite as much as the prevailing rate. But what are you now what do you want to compare this or make it relative to the dry powder Categories are going to be predicated on and reflective of whatever the Federal Reserve is doing on their fed funds rate. So the fed funds rate is 2, dry powder is probably going to be around 2, maybe 3, depending on which vehicle we use. If the fed funds rate is 5, prevailing rates are around 5, then so should your dry powder be. It should be around that. That’s a good benchmark.

Wes Moss [00:28:05]:
If it is way under what the federal funds rate is at any given time, then you could be doing better. If it’s much over that, that means you’re taking on some more risk. Maybe it’s credit risk, maybe it is longevity or duration risk. But just know that our dry powder, it’s. These are the safety assets they’re gonna be. They’re gonna be predicated around what the fed funds rate is at any given time. If you’re way below that, you’re kind of leaving money on the table. Way above that.

Wes Moss [00:28:32]:
It might not be dry powder. So let’s keep our dry powder not wet but dry so we can use it when we need it.

Christa DiBiase [00:28:39]:
All right, I’ve got a couple of questions here from Brandon’s to start out with this first one’s from Brandon in Tennessee. This question’s for Wesley about bonds in a Retirement portfolio. I’m 39, married and have three wonderful children. We’ve been investing for a while now and have the weathered different market storms well because we’ve proven out that we can handle market volatility well, I want to move away from our target date fund to be more aggressive with our risk tolerance and also lower international exposure a bit. We are considering a classic three fund portfolio with an allocation of 70% U.S. do you want the fund names?

Wes Moss [00:29:16]:
No.

Christa DiBiase [00:29:17]:
Okay, 20% international and 10% bonds. However, my question is, will it be okay to skip the 10% bonds from our retirement accounts altogether and instead hold our emergency fund in I bonds and continue to buy the max allowed I bonds every year until we ultimately have about three years of dry powder, as you call it, that Brandon.

Wes Moss [00:29:36]:
Brandon, in Tennessee. Yeah. You’re in your 30s, man. I think that when you’re in your 30s, in your 20s and 30s, you can make a really good case that if you’ve got some safety assets in Treasury Direct, in I bonds, that’s your dry powder. I think that absolutely works. You also said that you’ve handled market volatility well. So there’s a lot of things that go into that. It’s your own psyche, how long you’ve been an investor.

Wes Moss [00:30:03]:
So if you have some experience sometimes that you get better at handling volatility, sometimes it gets worse. Really depends. We’re human. But if you’ve proven to understand that markets do eventually recover over time, even though it’s very unpredictable when that will be, then you’ve gone a long way to be able to handle equity fund investing. So can you skip the 10%? Yeah, I think you can. So you would put that back into either the US or international equity piece of the equation. You may want to look at another area. So if you, let’s say you have your 70% in US and 20% in international, maybe that other 10 goes in another category.

Wes Moss [00:30:44]:
So there’s other categories like real estate. You can look at maybe some sectors so that you’re not overly weighted to the S&P 500 within which a lot of funds are. They’re very much like. It’s an interesting exercise when you choose a fund, particularly a US Large cap fund, even though it’s not supposed to be tracking the S&P 500, take a look at it versus the S&P 500. A lot of times they mirror each other more than you might think. So just take a look at that. But I think you’re on a really good track here. In your 30s, you don’t necessarily need bonds.

Wes Moss [00:31:17]:
You can handle market volatility and you’ve got your dry powder with I bonds anyway. So I love that formula.

Christa DiBiase [00:31:23]:
Okay, now the second brand in this one’s this brand new brand in Texas for a high earner who is likely to have $10 million in retirement accounts, including after tax benefits, brokerage accounts. What are your thoughts on tax exempt bonds, including VW ALX for retirement planning?

Wes Moss [00:31:39]:
Brandon, in Texas, we’re talking about high he’s asking about high yield munis, high yield municipal bonds. So I’m not going to comment on the fund itself but I know that’s a high yield, I believe that’s a high yield municipal bond fund. And a lot of big fund companies, they have municipal bond options and, and many of them have high yield, high yield municipal bond options. Here’s why anybody. And if you’ve got 10 million in retirement funds, you’re going to have a high income just in RMD eventually is going to be a couple hundred, it’ll be four or five hundred thousand dollars a year. So your income is going to be big forever. That’s one thing to look at. So always, almost always going to be in a high tax bracket.

Wes Moss [00:32:21]:
So why would you want to use municipal bonds? Municipal bonds are tax free at the federal level and they are tax free at the state level if the bond is from the state you live in. So if you’re in Texas and you have a Texas bond, well, Texas doesn’t have any state income tax. What’s a better example, Christa? Pennsylvania. If you’re in the state of Pennsylvania, you have a Pennsylvania bond, the interest is federally tax free and you also don’t have to pay state taxes on the interest either. So it’s double tax free. Now here’s how you relate it back to what overall interest rates are. So if you’re getting a 5% tax free rate, you divide it by 1 minus your tax rate. So if you’re in the 35 bracket federally, 1 minus 35% would be 0.65.

Wes Moss [00:33:08]:
So divided by 0.65, this is the tax equivalent yield, 7.6%. So a 5% tax free bond is, is very similar in relation to a 7.6% taxable bond because we end up with the same after tax. So right out of the gate a lot of these, from what I’ve seen relatively recently, high yield municipal bond funds are going to be more like in the 5% range. So what does that tell you? It means that it’s really paying 7 to 8% which means it’s risky. So these are the, these are technically junk bonds of the administration. Municipal bond market.

Christa DiBiase [00:33:47]:
Wow.

Wes Moss [00:33:48]:
Municipal. Now nobody says junk bonds anymore, right?

Christa DiBiase [00:33:51]:
That’s a term for the 80s, right?

Wes Moss [00:33:53]:
We don’t say that anymore. What do we say? High yield.

Christa DiBiase [00:33:57]:
Okay.

Wes Moss [00:33:57]:
Much nicer to say that, isn’t it?

Christa DiBiase [00:33:59]:
I didn’t realize that was the same thing.

Wes Moss [00:34:00]:
They’re the same thing. Junk bonds are just, they’re the prior name of a, maybe a Better branding for, for junk bonds. Bad credit they’ve got. If you have bad credit, you could just say it’s hopefully improving correctly.

Christa DiBiase [00:34:15]:
Yeah, it’s improving for sure.

Wes Moss [00:34:17]:
Make no mistake, junk bonds got a glow up for sure. Junk bond, they did great branding. These are companies, these are. Well, if you’ve got a low rating, you have bad credit. And the reason they’re paying more just like you pay more if you have a lower credit score because the credit worthiness and the ability for the municipality to pay back their interest and do a full maturity is obviously lower than a AAA rated. So if you look at any of these high yield and I’m generalizing here, no particular fund. You’re going to see a lot of bonds from Puerto Rico. You’re going to see tobacco settlement bonds and you’re going to see a bunch.

Wes Moss [00:34:57]:
You might see some airport bonds that are uninsured. That’s the other thing. Within the municipal bond world, highly rated bonds, AAA rated or double A rated can be. Usually they’re insured by a backer as well. Not the high yield space. So just know you’re taking on credit risk. You’re going to see some real volatility. These are not in the dry powder category but within your overall fixed income, within the bond part of your portfolio.

Wes Moss [00:35:27]:
I don’t mind people having some exposure to the high yield muni space.

Christa DiBiase [00:35:32]:
All right. And this one’s from Justin in New York. I spoke to a financial advisor recently and they said they do not recommend the S&P 500 because it is highly weighed towards tech stocks and tech stocks have already peaked and cannot 10x. They recommended investing with them and they would invest in the same companies as the S&P 500 but use smart weighting technology to better balance my portfolio for a fee of 0.9%. My current approach is to use target date index funds in the S&P 500. I figured this would be the best approach for both me and my wife to manage our finances as long term as we don’t want to be a super hands on. Does this still make sense or should I consider a different approach?

Wes Moss [00:36:14]:
Justin, only you will know when it’s the right time to work with an advisor. That is a personal decision that you usually arrive at either if you’re really hands off and you don’t like dealing with investments, you may end up being comfortable saying look I’m okay with this target date set up and an index fund and it’s super low cost. Could be. Now a lot of targeted funds by the way are that I’ve seen are half a percent a year. So it’s not like they’re free. Now some of the vanguard ones should be less than that. But there’s a lot of other fund families that people use that are not super, super low cost. So make no mistake, sometimes you’ve got some real fees in these targeted funds.

Wes Moss [00:36:59]:
But if, if your hands off and you don’t want to deal with it and you like your investments and maybe you don’t need an advisor if you’re really hands off and you don’t like talking about the investments and checking up every quarter, every half a year or even every year, it may actually be really good to have an advisor. My dad’s actually a little bit like this. He just doesn’t want to talk about investments or money ever. It’s almost as though it’s like you’re putting him through like a. For him it’s like a meat grinder. He’s like, I don’t want to talk. But a little bit of information, a little bit of planning can go a really long way. So it’s a piece and say I don’t even need to talk about that.

Wes Moss [00:37:42]:
So there is some real advantage to have an advisor for certain people, particularly at certain stages in your life. So it might work. The reality here is that you have advisor, an advisor saying S&P 500 tech stocks have peaked and they can’t go. They’re not going to keep going up again. Now I understand. I think what he’s saying is that they can’t go up 10x again but we’re still going to invest in the S&P 500 which again is. It may be in different percentages but those it’s still full of technology stocks. They’re a huge part of the economy.

Wes Moss [00:38:11]:
They’re a huge part of the market. If you know for sure tech stocks can’t go up as much as other stocks, then what you’re saying is that you’re just going to go buy other things. I don’t know if that works either. So I’m sure there’s some method to this and we’ve talked a lot about. I think there’s some real value in equal weighting things and not having 40 or 50% in tech, maybe having 20 or 30% and having exposure into the other sectors of the market. So I think there’s some real, there could be some real value there. You pay for it with an advisor. But there’s a point when that could really be valuable to you over time and is it a whole lot more if you looked at the internal costs within some of these target date funds that you’re looking at.

Wes Moss [00:38:55]:
So only you will know when it’s time to move. But I don’t totally disagree that we want more exposure outside of that really concentrated technology focused S&P 500. So I think you’re getting close and.

Christa DiBiase [00:39:08]:
I have to assume that Justin’s using a fiduciary financial advisor.

Wes Moss [00:39:12]:
I would think so if it’s fee only or yeah, it’s only a percentage and there’s no other commissions that would go back to the advisor. There really should be on the same side of the table as you. They do they really want your portfolio to grow as their revenue.

Christa DiBiase [00:39:28]:
Same goals. Yeah.

Wes Moss [00:39:29]:
And your goals are aligned, right? Chris, I love having you here. I love these questions. So thank you as always for being in studio. Send us more questions@yourwealth.com contact. Have a wonderful rest of your day.

Mallory Boggs (Disclaimer) [00:39:46]:
Hey y’ all, this is Mallory with the Retire Sooner team. Please be sure to rate and subscribe to this podcast and share it with a friend. If you have any questions you can find us at wesmoss.com, that’s W-E-S-M-O-S-S.com youm can also follow us on Instagram and YouTube. You’ll find us under the handle Retire Sooner podcast. And now for our show’s Disclosure this is provided as a resource for informational purposes and is not to be viewed as investment advice or recommendations. This information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. The mention of any company is provided to you for informational purposes and as an example only, and is not to be considered investment advice or recommendation or an endorsement of any particular company. Past performance is not indicative of future results.

Mallory Boggs (Disclaimer) [00:40:35]:
Investing involves risk, including possible loss of principal. There is no guarantee offered that investment, return, yield, or performance will be achieved. The information provided is strictly an opinion and for informational purposes only, and it is not known whether the strategies will be successful. There are many aspects and criteria that must be examined and considered before investing. This information is not intended to and should not form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment, tax, estate or financial planning considerations or decisions. Investment decisions should not be made solely based on information contained herein.