All right, now let me get to some of your questions. By the way, thank you so much for all of these great questions. I’ve combined them in terms of topic to make things a little bit easier to answer everyone as efficiently as possible. So, here are the answers, in general, to these questions. Of course, I don’t know your particular personal situation, so these answers are generic.
401(k) Contributions And Portfolio Allocations
Q: Mercedes says she currently contributes 15% of her paycheck to her 401k and asks if she should lower her contributions. She’s lost $30,000 so far, as of the writing of this question, and she’s planning on retiring in 17 years. And Lorraine asked me about rebalancing her 401k and Harving just says, “401k?”
A: Unless you’re retiring within the next three years, you should be rebalancing your 401k and increasing your allocation to stocks. Mercedes, you should not lower your 15% deduction from your paycheck. I mean, if you have a steady job and you’re not afraid of losing it, and you have excess money in the form of an emergency fund, keep the 15% deduction. Keep plowing that money into the plan. Lowering your deduction is a classic mistake. Do not do that. You have 17 years until you’ll need the money.
Q: Anne wants to know about rebalancing a portfolio and the frequency of doing so. And Jill asked, “Should I be buying now? Should I be changing my asset allocation?”
A: As far as rebalancing, everybody should be rebalancing now, getting back to whatever the rebalance percentage was—60/40, 80/20—get back to that now because it’ll force you to buy stocks at lower prices. And this is all advice with the idea that you’re thinking long-term with this money. This has nothing to do with short-term money that you might need. That money does not belong in the stock market, it belongs in CDs, money markets, things that hardly yield anything but that are there for a specific purpose.
Possible Negative Interest Rates And Bonds
Q: Robert asks the question, “Please cover negative interest rates for treasury bills, notes, and bonds. How to make money in Treasury securities if interest rates go negative.”
A: Well, Robert, it’s an esoteric question, but the answer is easy. If you buy bonds, you buy Treasury bonds especially, they will do extremely well if rates go negative.
Social Security And Annuities
Q: Talibah asks, “Am I at risk for income loss with retirement funds coming from Social Security?” Or, she went on, from her FRS, which is a pension plan with the state and a medical annuity.
A: Talibah, Social Security will not be in danger. Generally, immediate annuities are very safe. And your pension plan should send you an annual report where you can check to see if they’re adequately funded.
Q: Karen asks about annuities, fixed annuities, variable annuities: “Do you think that this is a good economic climate to invest in those, especially with interest rates falling?”
A: My personal opinion is that investing in fixed annuities now would be a mistake. Rates are just too low, but I also want to make another point, and I have seen this time and time again. When markets get bad, insurance companies start to advertise, promoting safe investments. Buying “safe investments” right now is like closing the barn door after the horse has left the barn. It’s too late.
If you want safety, you would do it when the markets are up very, very, very high, and then you can look for something safe. But right now, you have to ride through this and not get sucked into this idea that you’ve had this terrible decline and now you’re going to sell everything and lock into low rates. It’s a way of selling low. And then in terms of buying the annuity, you’re buying high with the annuity.
You’ll see advertisements for people talking about life insurance, annuities, wanting you to come to a seminar because they are preying on your fear. And by the way, when things are really good, they’re advertising going into the stock market because then they’re preying on your greed.
Q: Ted asks, “Are all managers tax harvesting now?”
A: Tax harvesting is a term meaning they’re taking losses for tax purposes. Well, I don’t know about what most managers are doing, but your advisor should have a plan to do this. And I know a lot of advisors are actually buying more stocks now in order to increase the stock allocation, and they’ve got a whole year to do some tax harvesting. But it’s a good way for you to move to action now if you feel frozen about doing something. Tax harvest, buy something that’s very similar with a different name, or wait 31 days and you can buy the same thing back.
Q: Martin wants to know, “What is my forecast for preferred stock dividends from large US banks?”
A: It’s a good question, Martin. I think large banks are in very good financial shape. However, Jamie Dimon of JPMorgan Chase was quoted the other day that if things got very bad, they would cut the dividend. Now, he was talking about the dividend on the common stock. Preferred stock dividends have preference over that, and it’s very, very rare for companies to cut the preferred stock dividend. So I think the preferred stock dividends from large banks are good, but I would diversify them through buying a mutual fund or an ETF, so I would have many of them in my portfolio in case some of them get into trouble.
Keeping Cash On Hand
Q: Fred asks, “Does Steve believe in having a cash bucket in retirement?”
A: Fred, yes, I do believe in having enough cash or bonds to see you through a serious recession—generally, 12 to 24 months of living expenses after you consider the other sources of income like social security.
Q: Donna posed some good questions: “What is the best course of action for those already in retirement in this unusual situation? I have a cash position that will hold for about three years. When the markets begin to bounce back, should I invest that cash back into the market or maintain my cash position, and if the answer is to invest in equities, which area would be best?”
A: Well, Donna, these are very good questions, and ones that should be answered by your financial advisor who knows your personal situation well. But generally, if you’re conservative, I would continue to keep 12 to 24 months of living expenses available to support you. If you have excess funds greater than that 24 months, then you can start putting money back into the market. As far as what to invest in, I’m surely not going to give you investment advice. Talk to your advisor about that.
Banks And Investing
Q: Tom says, “I know very little about investing because money matters intimidate me. I rely on my bank to do the right thing with my money. In other words, I expect them to act in my best interest. The question is, can banks be trusted?”
A: Part of my answer is that, generally, banks are not investment advisors, so they are not subject to the fiduciary rules. Fiduciary rules require an agent to act in the best interests of the client, so you should realize that first.
But getting beyond that, the answer for banks is yes and no. Banks are in the financial services business, and they’re in the business of selling products. They sell mortgages, they sell CDs. Those are products that earn commissions for the bank. So, when you meet with an advisor at a bank, they will want to put you into a product. That’s not bad in itself, but there is a conflict of interest if one product pays them more than another. I would ask them about that before taking their advice. And make sure you get a straight answer with a dollar number. Don’t let them say, “You’re not paying the commission. The insurance company is paying it” or some other product manufacturer is paying it. Believe me, you’re paying it, so you need to get a straight answer as to what the commission is and how much the bank will earn, and this will help you make a good decision.
Life Insurance Is Not A Retirement Vehicle
Q: Sandra says, “I went to a financial planning BUS.”—(I’m not sure what that is. Maybe a seminar)—”and the advice was to invest in a life insurance policy and withdraw that during retirement. There is a reduced tax load on such an investment. Is that better than other pre-tax retirement accounts?”
A: Well, Sandra, life insurance is not a retirement vehicle. It is never a retirement vehicle. Don’t let anyone convince you otherwise. They are not better than pre-tax retirement accounts. You have to borrow money out of the plans in order to get the money that has built up, and it takes many, many years because of the high commissions. Plus, borrowing that money puts that policy in a more precarious position. It’s just not a retirement vehicle.
Sheltering From Volatility
Q: Charles asks, “If you didn’t take action early to shelter your money from volatility, is it too late now?”
A: Well, Charles, it is a little too late, I think. If you don’t need the money in the next few years, wait until the market rebounds before lowering your exposure to volatility. That time should come. But really take a close look at the kind of return that you need to get and the kind of portfolio allocation that could give you the possibility of those returns. That’s what you should stick with. But again, you don’t want to take action after the horse has left the barn.
Q: Harvey asks, “As someone who needs current income and the fear of companies cutting dividends, how can I get the 4% return I need?”
A: Well, Harvey, S&P 500 dividends are currently at two and a quarter percent. If you’re looking for 4%, you need capital appreciation in the amount of another one and three quarters. That shouldn’t be very hard to get. And, hopefully, if you’re counting on 4% income from dividends, you have something other than stocks because stocks don’t pay you the 4%. Maybe you have bonds in the portfolio. Maybe you have the kinds of stocks that pay a higher rate than the average of the S&P—utility stocks, the Verizon and AT&T types of stocks that pay higher dividends. All I can say is make sure that your money managers are doing a good job there, that they’re looking at those kinds of stocks and making the calculations to make sure that the S&P gives you enough diversification to protect you, but I think you should be patient and have faith. If you have a diversified portfolio, I don’t think you should worry too much.
Paying Down Debt And Keeping Cash Safe
Q: Jaclyn asks, “Should I continue to pay extra toward my credit card or my car loan debts or sit on cash that earns zero interest or do a bit of both?”
A: Jaclyn, that is a great question because any reasonable person looks at the yields on these money markets and thinks, “Couldn’t I be doing something better?” My answer to you is that if you don’t need the money to live on, keep paying down your debt, especially if you have a job that’s secure. Now, if you think you may need it, keep your money in a money market fund. If something bad happens, you will be less interested in the return ON your money than the return OF your money, so that’s the reason to keep it in a safe place.
All right, well, that’s all the questions, folks. That wraps up today’s call. I hope I’ve given you some perspective for making better decisions in today’s topsy-turvy market environment.
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