Over the last 12 years, the stock market has been rising year over year while interest rates have remained low, benefiting many investors’ portfolios immensely. However, with the recent interest rate hikes and uncertainty going on in the political world, many investors are left wondering what the future holds in store and how they should best prepare for what’s to come. Watch Bob Carroll, CPA, CFP®, CDFA™ and expert financial advisor in the Wealthramp Network sit down with our founder Pam Krueger to discuss what to expect in the coming years and simple action items you can implement to help secure your finances going into 2022.

Discussion Recording Transcript

Pam Krueger:

Hi, everybody. I’m Pam Krueger, the founder of Wealthramp and co-host of the Friends Talk Money Podcast on PBS Next Avenue. Welcome to our first Wealth Builders Webcast. It’s a series that we’re starting right now in order to help you get set up to prosper in the new year. Now, for anybody who doesn’t know, Wealthramp is where you go when you’re looking for the right financial advisor. These are advisors who work only and directly for you, not as sales reps for a brokerage firm or insurance company.

When you do decide you’re ready for an advisor, you’ll want to know that that advisor is legally bound to act in your best interest and has been rigorously vetted by me personally. So Wealthramp is the go-to resource for you. By the way, we’re the only platform that does not share your personal information, and that’s a pretty big deal to people.

All right. A good number of us have profited over the last 12 years because the stock market and our savings has been riding a bull market that’s going into its 13th year, and interest rates, at the same time, have stayed low, which makes it easier for people to borrow money and buy houses. But it’s also clear that, looking ahead, there are some headwinds now. So during the next 20 minutes or so, we’re going to give you a deeper dive into a handful of simple things that you can actually do right now to help fortify your finances in the new year.

Right now, I want to introduce our expert. He’s Bob Carroll. He’s a CPA. He’s a personal investment and tax planning advisor, and he’s a partner with Carnegie Wealth Council, that’s based in Cincinnati. Bob is also accessible to each of you through Wealthramp. I want him to share with all of us what he is advising his clients right now. So let’s get started. Hey, Bob.

Bob Carroll:

Hi, Pam. How are you? Thanks for inviting me!

Pam Krueger:

Great. I love kicking off this series with Bob Carroll. Bob, the market has made something like … I know it’s over 50. I think it might be over 70+ new record highs just in the last 12 months. Can you just give us some altitude on this, a very high-level summary of the stock markets overall?

Bob Carroll: Yeah. As you said, it’s been a tremendous run, and 2021’s been no different, boosted a great deal by the vaccines and the reopening, of sorts, of the economy. That’s what makes the current outbreaks of coronavirus somewhat worrying as we head into 2022. But it’s been incredible. Just to put this in perspective, say a company like Apple, for example, everyone owns it by virtue of owning an index of some sort. They were founded in 1976. It took them about 45 years to reach the $1 trillion size in terms of their valuation as a company, and that happened in 2018.

But just to kind of get some perspective on this, two years later, they then doubled in size to two trillion. And one year later, in December, they almost reached three trillion. So it just kind of gives you a sense of scale and magnitude at which the market is advancing, driven largely by these large companies.

Pam Krueger:

And-

Bob Carroll:

But the US stock market … Go ahead.

Pam Krueger:

Yes. Because the way that people can really relate to that, too, that is such a vivid example of what happens when you have money in the market and then it compounds over time. I think that a lot of people who have savings and they’ve reached that point … Maybe they were in 2018 and they had a half a million dollars, not a trillion, but a half million, what the effect is when you have that much money growing at that growth rate.

Bob Carroll:

It plays such an integral role in the investments that many of us have. Many of the indexes that are used, for example, are very heavily weighted with Apple. So as Apple goes, so does your portfolio. But Apple’s not the only story. Fixed income is an important part of the portfolio and the market landscape as well. We’ve got this backdrop and heading into the coming year with economic issues related to perhaps inflation, what is the Federal Reserve going to do about it? How will that impact interest rates?

How will that affect the bond market? How will that affect the stock market? All these things are kind of integrated. When you’ve had the kind of run and success that we’ve had, it forces us all to hit the pause button and think a little bit more strategically because the easy money, to some degree, is over. It’s just not going to be as easy going forward.

Pam Krueger:

That’s a really good point because I’ll tell you that prospective clients who are coming into Wealthramp, they do ask questions. We really encourage people to ask questions from you all to answer. One of the biggest questions right now is that … I’ve just got one yesterday like this, where someone said, “Inflation is here. I don’t think it’s transitory. What do I do now?” Now, this was interesting. Should I change my investment strategy in order to, I guess, react to what’s about to happen? I think this is where sage wisdom comes in.

Bob Carroll:

Yeah, no, I agree. I think there’s a tendency at times to react or do things proactively. I think, at its heart, quality financial planning incorporates these sorts of risks, these sorts of changing landscapes. Inflation, deflation, all these dynamics have been with us over the course of the years. Currently, inflation is definitely reaching a much more focused fever pitch of sorts in the news media, and there’s a lot of articles and a lot of concern about what should I do? What should I do?

But in a well-structured portfolio, a well-structured financial plan, there should be maybe some consideration of what to do, but maybe more on the margins than in a core. I think the one danger people make is to react to and with a degree of certainty that, frankly, may not exist. So I would caution people to first thing they should do is reassess where they stand, where there might be some exposure areas, and make some adjustments that are appropriate.

But typically, what we don’t see is the wholesale need for change, that it’s more on the margins rather than this a fundamental or massive change, tacking this way, tacking that way, because I think you find yourself, you’re not following your plan, your long-term goals and objectives. It’s easy to get distracted by these, hopefully, near-term events.

Pam Krueger:

Okay. So the takeaway there, for me, is that I shouldn’t even be asking the question, what should I “do right now,” because inflation might be here to stay. Interest rates may go up. Therefore, really what I need to be asking myself is how do I position myself to bulletproof my portfolio ahead of these things? Because I always like to say, “The best time to buy an umbrella is before it rains.”

So maybe getting fortified ahead of that so that you know you won’t have to react. And then, also, I mean you’ll be looking for, because your clients are positioned that way already, you’re going to be looking for maybe some opportunities on the positive side. So instead of worrying about reacting out of fear, I imagine that you’re positioning yourself so you can see clearly to take advantage of any opportunities that pop up.

Bob Carroll:

Yeah. There’s going to be volatility, and volatility can give rise to opportunity. Oftentimes it strikes fear, but really the fear factor comes from not being prepared, as you said, walking out into that rainstorm without the umbrella. I think we’ve seen a variety of issues and challenges to the economy, to the markets over the years. I think, again, the best defense and the best preparation is to have a clear plan with a well-executed strategy that takes into consideration that not all investments work the same way in every type of market.

So I think being attuned to that and being respectful of the fact that what has worked traditionally may not be your best option going forward. But again, we’re talking about degrees of not huge, massive shifts. But I think keeping, again, the through line of your financial plan and staying true to that, you should be okay.

Pam Krueger:

Yeah. So sometimes the quality of your outcome is wholly dependent upon the quality of the questions that you’re asking.

Bob Carroll:

Correct.

Pam Krueger:

If you’re asking out of fear, “What do I do?” It’s probably not the right question. Just-

Bob Carroll:

Well, but it’s also natural. I get why people are concerned.

Pam Krueger:

Definitely.

Bob Carroll:

I mean it is concerning- I think the other thing to keep in mind, the other perspective I often give people, too, is it depends on where you are in your life stage. So if you are older and finding yourself in the doctor’s office more, inflation in the healthcare sector is quite faster than other aspects of the economy. So it depends on what you’re doing. Are you going to be traveling more, things of that nature?

Certainly, the services sector is starting to see some ramp up in inflation and things of that nature. So I think, over time, this will settle out, but it’s not going to be as transitory or as quick as people thought.

Pam Krueger:

Yeah. We are going to see headlines. We’re going to see a constant bombardment of headlines in financial news. It’s going to be, “What do you do? What do you do now?” Frankly, that’s because they have to write content and come up with stuff that’s going to be getting people thinking. But getting people thinking is not a bad idea either. But a lot of people, Bob, who don’t work with advisors actually talk to me all the time, and they’re on the fence.

They’re coming to me and they’re saying, “Maybe it’s time I work with an advisor. I know I want a certain type of advisor.” But they’ve been managing their money and investing on their own, and they’ve been doing a darn good job. Okay. Okay. Thanks to the market, in great part, but they’ve been doing a good job. They use their own spreadsheets. Many of the people that I talk to who come to Wealthramp right now are asking, looking into 2022.

Can you give me an example of maybe one or two, maybe three or four of the biggest mistakes that you see people who are doing it themselves, do it really well, but what are they missing, if anything at all? I mean what are they not seeing, perhaps?

Bob Carroll:

Yeah. I think you’re right. I think there’s been a lot of good performances that have lifted all the boats up. I think there’s a tendency, what I normally see, for example, is an over complication of redundancy within portfolios. For example, owning the market using broad indexes, somebody might own three or four funds that are doing exactly the same thing. So why are we buying three or four of something when one will do? And you’re not-

Pam Krueger:

Okay. You gave the example of Apple. Okay. People’s 401(k)s or 403(b) plans, that’s a perfect example. How many different ways and how many different funds do you actually own Apple? And by the way, you’re paying different fees to own Apple in all those different accounts.

Bob Carroll:

That’s exactly right. So you’re paying multiple times to have the benefit of owning that same stock. So I think, thinking along those lines, there’s areas of diversification, for example, is another hot topic, and we may touch on that some more. But certainly, diversification of asset mix is very important because you don’t want to have all your eggs in one basket. It has been so strong in terms of performance. The US stock market has vastly outpaced the rest of the world.

I think the mistake would be not to have some, for example, some international and some other asset type classes. Also, there needs to be probably a revisit of fixed income as well. We cannot be all stocks. Most of us can’t be all stocks. So it’s important to say, “What’s my stock to fixed income?” When your stocks are going up by 20% and your fixed income just kind of putts along down here, there’s this natural disproportion, that unbalance starts showing up. That can be a mistake.

Pam Krueger:

Yeah. As you get closer and closer and closer to thinking about retirement, you’ve got that mix that back in the old days when I started as a stock broker, way back, it was when you get to be older, it was supposed to be 40% bonds and what we call fixed income, more stable value kinds of investments.

Bob Carroll:

Safe money.

Pam Krueger:

And then so that would be 60%. And then 40% would be stocks. Now, of course, it’s 60/40, because nobody wants to be in CDs and bonds and things that don’t pay any interest. So we’ve really crept over to a real heavy, lopsided 60/40. So heading into this next year, people are kind of wondering and scratching their heads. What’s going to happen to my 60/40?

Bob Carroll:

Well, sometimes zero is better than negative though. Sometimes capital preservation is what you’re looking for. But I think that ties into a critical … This is kind of the self manager, the pitfalls and mistakes that people can make. I don’t mean it strongly as a mistake in the sense that … But I think what’s overlooked sometimes is the focus on liquidity. Where’s my liquidity going to take … Where’s it going to come from? Is it in the right account? Is it in the right investment to earn a little bit until I need to spend it type of thing?

Is it going to be there when I need it, basically? If you do that planning very well, yes, the markets will go up. Markets will go down. But at least you could sleep at night knowing that my liquidity needs for the next 12, 24 months, I’m not going to have to be a forced seller. That’s one of the things we try to emphasize. Whether you manage the money yourself or if you have someone do it for you, you don’t want to be in a spot where you want to be a forced seller. So I think that’s a key part of anybody’s self-managed plan.

Pam Krueger:

Yeah. You know what? You don’t want to have to be forced to sell stocks at a time when the market has dropped and you’re worried about you reacting at that point in time. These are kind of the blind spots that I see in myself. I’ve been managing my own money, and I’ve been at this since I was 24 years old and in the business. But still, I have blind spots. Let’s face it.

Bob Carroll:

We all do.

Pam Krueger:

I have weak areas. Yeah. I think that one of the biggest things that even I don’t talk about enough, even with myself and my own situation, is tax planning. If people could go back when they are 68 and they’re about to retire and they go, “God, I wish I had known then what I have just learned,” it would be probably why didn’t I start tax planning and thinking about tax planning focus that way when I started to think about just my investments? Because this is where retirement and decumulation, this is where tax planning pays off.

Bob Carroll:

No, you’re absolutely right. If you think of it in terms of a Venn diagram, this is that overlap between investments. And then you have this thing called the tax code that we have to navigate through. Because what you grow on the investment side eventually has to come through the tax portal. I call it a toll booth, the tax toll booth.

What do you have left at the end of the day? So I think what that speaks to your question is we talk about diversification and assets. For example, do we have US stocks? Do we have international stocks? Do we have some bonds maybe? But that same concept applies to taxes, meaning do I have some money that’s outside of an IRA or a retirement plan or a 401(k)? Is it ready cash or that it’s just subject to capital gains and only capital gains? Do I have some money that’s tucked away that’s in tax-deferred accounts, such as an IRA or a 401(k), those types of things?

And then you have this special category called a Roth. So the Roth is the best of all worlds where money’s been put in there. It’s never going to get taxed again. So if you have diversity in your tax buckets, it gives you more options as you approach the decisions you’re going to make in retirement. Where do I get my money from? Do I pull my money out of this account, this account, or this account? Maybe it’s all three.

One of the things we do in the planning setting with households and couples is that you want to go through, kind of play that out a little bit. How much do you need when? And then we try to come up with a plan that says, “This would be the most tax efficient way to do that.” So it’s not just doing well in the stock market, but it’s also then being smart about where you pull your money from, and what vehicles you use to save your money.

There’s a lot of ways to save money, and you want to make sure … Do I put it in my Roth 401(k) at work? Or is it going to be more valuable to me to defer my taxes till later? So all those, and it’s going to vary by person. The last thing I would say on the tax front, too, it’s complicated. It’s also subject to a lot of misunderstanding, even for those of us who work in this field, keeping abreast of all the proposed tax changes because a lot of …. But tax changes are hard to implement.

So I think the message I would tell people is don’t necessarily, again, be an action junkie in anticipation of taxes. We’ll have time to react. Be aware. I’m not saying stick your head in the sand. But at the same time, to do it proactively could lead to some bad outcomes.

Pam Krueger:

I’m telling you, if I could fly back in time, I think I would tap myself on the shoulder and say, “Hey, nothing really matters, except after tax returns.” You might really like returns before taxes, but it’s … When you get closer to retirement, you’re pulling the money out after tax returns. Of course, retirees get taxed in, oh, probably about, which we won’t get into in detail, about 10 different ways their income streams can be taxed.

So that’s why it’s this tax planning and this robust and deep look and deep dive into the financial planning in combination with the investment strategy, they all have to come together holistically.

Bob Carroll:

No, you’re absolutely right. I’ve got some clients whose retirement income is higher than their working years. It’s all because of the required distributions from IRAs, things of that nature. So they’re kind of shocked that, all of a sudden, tax planning becomes a bigger part of the conversation. They thought it was supposed to be done with. So no. Taxes, it’s what? Death and taxes that’s going to be with us.

But the good news is that I think with, again, a little bit of planning, integrate … That’s the key part of this. Yes, they’re different topics. Investing and taxes are different. There’s other financial planning topics. But the key to it all is to integrate all those concepts together. It’s one thing to have a great investment portfolio structured a certain way. But if it leaves you with a giant tax bill that you weren’t expecting, then have you really helped yourself?

So it’s making sure the right and left hands know what’s going on and that everything is kind of oriented around common goals, which is the goals that you identify for yourself. But it’s applying all these things to those situations.

Pam Krueger:

I like real world examples. You have real clients. When they first come to you before you get into actually helping them and guiding and advising, just give me a couple of examples (I’m catching you off guard here, I know) of some of the bigger mistakes that you’ve seen. It could even be where there’s the spouses or partners, and one doesn’t know what the other’s doing.

But just share with us a couple of the biggest mistakes that you see when prospective clients are coming to you and they think they’ve got it all figured out and what you often find that’s really been a blind spot or been missing or could be a potential landmine.

Bob Carroll:

Yeah. I think some of the key ones would be the time horizon, the planning horizon a little bit, to appreciate how long our expected life expectancy is, and that’s quite a long time. When would they like to retire and at what lifestyle? In some cases, for example, they’re living well below what they could be living their best life. It’s a hard switch to flip to live your whole life saving, saving, saving, saving, go with no income, and then feel comfortable spending.

So I think it can lead to some poor decisions. It’s the vacation not made or pursuit perhaps of a second home or something like that just on a misplaced fear that I’m going to run out of money. I mean I met with a couple recently that has probably close to $5 million, and they’re 87 years old. Wife wants to know if they transition to a continuing care facility, will they run out of money?

Pam Krueger:

Okay. This is a couple who’s in their late 80s who, obviously, didn’t start with 100 million and now they’ve got five million left. Your point is they worked darn hard to accomplish that savings goal.

Bob Carroll:

And then-

Pam Krueger:

And then they probably did not really fully feel comfortable spending. That’s how they ended up with $5 million at 87.

Bob Carroll:

They’re going to have some wealthy kids. I just put my pencil down. I said, “Look, I don’t have to do a single calculation. I can look you in the eye and tell you’re not going to run out of money.”

Pam Krueger:

Did you take a fee for that advice?

Bob Carroll:

What’s that?

Pam Krueger:

Did you take a fee for that advice?

Bob Carroll:

Yeah. Right, right. No. But it’s interesting. I still had to do the math for her. The numbers are daunting. I feel for them in the sense that the buy-in to the community was going to be somewhere 350 to $400,000, and there was going to be this monthly charge, all these things that they’re not used to paying. That feels, to them, like a lot of money. So anyway, but when you start putting all the stuff into context and there’s some other stuff in terms of inter-generational planning with the kids, who are … The kids are in their 60s.

Pam Krueger:

So what’s it?

Bob Carroll:

They’re looking at their retirement.

Pam Krueger:

Okay. That is a really good example of more guidance that you can help people with when they come in, and they’re having a tough time figuring out the timing decisions. When can I actually afford to retire and how much? How can I live well in retirement, but not so well that I’m spending so much that I can’t sleep at night? Because the whole point of this is peace of mind. That’s the whole point of having a relationship with you.

It’s just at the end of the day, just collaborate with me so I know I’m going to have some peace of mind. Give me another example of heading into this coming year, things that you’re hearing that are corrections that you want to help people make who are prospective clients who are walking in the door. Maybe they have been managing their own money. But what are you feeling like is missing for them as a second maybe big watch out for, or be careful not to do this.

Bob Carroll:

Well, I think we touched on it a little bit earlier, and that is the degree of risk that has naturally built up in the portfolio, just having a greater appreciation for that as we enter into 2022. I think the autopilot, hope approach could work, but I think just be prepared for some volatility. I think the volatility that could approach, as things change on the ground economically, could be a little bit more volatile than people are used to. I think we’ve gotten used to portfolios always going up. I mean these last two years have been over 20% up in the S&P 500.

Pam Krueger:

Absolutely.

Bob Carroll:

I don’t want to paint a picture of doom and gloom. We have to remember that the average return in the stock market in any given year since the ’20s has been somewhere in the range of 10%. So I think what we’re experiencing is a little bit unusual. It’s kind of like a real warm day in the middle of December. You’re like, “Huh, this feels great, but are we going to pay for it someday type thing?” So I think we have to be careful that laws of financial physics still apply. I think we just have to be respectful of the fact that there’s just been a lot of things out there in the marketplace.

Cryptocurrencies have garnered a lot of attention. Meme stocks have garnered a lot of attention and things like that. There’s a lot of shiny objects, as I would call them. I would just encourage people to … Fundamentals, generally, work pretty well over time. They’re not sexy. They’re not going to garner a lot of headlines. But I think if you kind of stick to the fundamentals and have a clear-eyed view of what you’re trying to get done, you should be all right.

I think where people start making mistakes is when they start deviating away, start venturing more into the area of speculation. There’s a lot of speculation out there and it comes across versus investing. Investing is, hey, I’m going to put my money into a company that is earning money, earning cash flow, things like that, versus a company that is highly, highly speculative.

Pam Krueger:

Right. I mean investing, just by definition, means staying the course, staying put. I do think it’s fun. I mean I dabble a little bit in crypto. I love the whole-

Bob Carroll:

Oh, sure.

Pam Krueger:

I love to learn about the blockchain technology, and it’s exciting, but I call it my sandbox money where I might take a really, really infinitesimally small amount of money if I have that itch that I need to scratch where I need to have some money so that I can learn. It’s a way of learning, watching it. I’m going to do that with the Jim Cramer money. Remember, Jim Cramer has a show. I don’t know if he’s even still on.

The name of the show is Mad Money. Now, why do they call it Mad Money? Because it’s not your serious money. So it’s easy to start to think that you can go down these fast lanes faster and change lanes quicker. But there’s been just way too many studies to prove that you’re roadkill at the end of that journey. So that’s probably what most advisors that I talk to in the Wealthramp network of advisors …

Bob, you’re part of this. We get together a lot and share information with each other about best practices and what’s going on. I haven’t met an advisor yet who I have respect for who has said, “Oh yeah, you want to go all in in crypto and meme stocks.”

Bob Carroll:

Right, right, right.

Pam Krueger:

It doesn’t mean you can’t play in the sandbox.

Bob Carroll:

No, absolutely.

Pam Krueger:

Mad money. Mad money.

Bob Carroll:

Yeah. I think, again, you build that into a plan and you have a certain amount that you set aside that you go to Vegas with. What the heck? It’s your money. It could be. But I think that the key I always have to tell people is just let’s recognize it for what it is and have fun. We’ll make sure you don’t hurt yourself too much. But I think there’s a tendency, especially for these dramatic swings in things like crypto and these meme stocks and things like that, is that as long as everyone recognizes it’s pure speculation.

Pam Krueger:

Yep, exactly.

Bob Carroll:

If you’re comfortable, that’s great.

Pam Krueger:

Exactly.

Bob Carroll:

Exactly.

Pam Krueger:

Okay. So speaking of the weather changing, inflation over here, interest rates maybe over here, changes, volatility, the unsung hero of what actually works … I mean you can talk about everything all day long. But at the end of the day, people just want to know, I used to say this on my MoneyTrack show on PBS, what works. What works is one of the basic tenets of investing.

We touched on it a couple times, but I want to hit on it hard right now because in heading into this year, I want you to have this at the forefront of your mind, that diversification-

Bob Carroll:

Yep. The D word.

Pam Krueger:

… is the unsung hero of your investment policy that you’re going to live and die by, hopefully not die, but you’re going to live by and that diversification wins all battles. So I think it’s worth … That’s the umbrella. It’s part of the umbrella.

Bob Carroll:

No, absolutely. I think you hit on a very important point to emphasize. Diversification is something that we hear the term a lot. We hear the word, risk, a lot, things like that. But what diversification is in its simplest form is that if everything performs exactly the same way, then we don’t have diversification. It’s like the example I used earlier, which is you have four or five of the same types of funds. Well, that’s not diversification. Yeah, you have five different names in your portfolio, but they’re doing the exact same thing.

If we just peel back the onion and look at what they own, they all own the same stocks. That’s not diversification. What you want is a mix of assets that don’t look like each other, that don’t perform like each other. So when one is going up, another one may be lagging or perhaps even down a little bit. Not everything has to be going up simultaneously, not that we’re rooting for negative investments. But I think there’s a tendency sometimes to evaluate good versus bad based on the wrong measuring stick.

I think what diversification gives you is eventually the worm turns and the wheel turns and we find ourselves in a new economic situation and environment where what you own that maybe was lagging yesterday is going to be the out-performer next year. So I think that’s where the benefit of diversification comes, that, over time, that diversification will help you manage risk and also bolster your returns over time, not every time.

We want this instant gratification. I want this. Why isn’t this up as much as my Apple stock? Well, I’m sorry. It just doesn’t work that way. Don’t worry. It will do just fine for you over time.

Pam Krueger:

Okay. Couple more quick questions and then a little bit of a recap of what we want to be able to take away heading into the new year. But when people are on the precipice of retiring and they know they’ve done well, they’re acutely aware that the stock market has lifted them and they’re really happy about it, and then they hear you say you’ve got the long run to think about, it’s really hard for us to imagine ourselves living … We don’t think of ourselves 30 years into the future, but it’s likely that we will have to fund that.

Just what’s your best advice for people who are saying, “Look, I’m just not comfortable because the market has done so well, I’ve benefited from it and I do want to make sure I’m going to be fortified for the next 30 years?” But what does that look like, long-term investing for someone who’s 68?

Bob Carroll:

Right. I think a couple things. There’s a risk of being too aggressive, but there’s also a risk of being too conservative. The point is I think, over the long run, stocks have proven to be a very good way to invest your monies. I think not to be fearful, I think it’s important to be respectful of the risk, but not fearful of the risk. It’s the old adage and we all kind of get it intuitively, is we don’t need all this money today, that we need this money over time.

I think how that money gets invested and the long-term return prospects matter more than the current day-to-day gyrations in the market. So I think the point is you’re going to need some growth in your portfolio, but you want smart growth. I think the one mistake that people can innocently, and I think honestly, fall into at times is a risk of being too conservative or trying to time the market.

I had a client, for example, in the fourth quarter, insist on raising a significant amount of cash. They wanted a million dollars of cash in their portfolio. Why? I don’t know. But it was this fear that something bad was about to happen. The point is that volatility happens in the market.

Pam Krueger:

Yeah, count on it. Count on something bad’s going to happen. Count on it. It might happen five times before I am ready to retire, that I’m actually ready to start pulling money out, or even after I’ve started pulling money out.

Bob Carroll:

And that’s okay. Those things are going to happen. But again, back to our theme, we keep hitting on this, and that is a well-constructed plan will ride you through this. I have done this work through the financial crisis. That’s one-of-a-lifetime type of an event. Unfortunately though, we’ve had more than one-in-a-lifetime event. Now, we’ve had this pandemic. Just since 2011, we’ve had the tech crisis blow up. We had the financial crisis and now this.

Personally, I kind of flipped that fear on its head a little bit. I’m more optimistic. I mean if we could survive that, we can survive what lies ahead.

Pam Krueger:

Bob, if I can paddle my little canoe through those waters from 1999, 2008, you’re right. Let me-

Bob Carroll:

I mean those are big moments.

Pam Krueger:

Yep. Let me hit on one asset class that you haven’t touched on too much. But again, a well-constructed plan is really what we’re talking about here. Just for a quick minute, how do people use real estate in their portfolio to … Lots of people now, there’s a lot of articles out. When I say lots of people, I’m reading in the headlines, “Stocks versus real estate,” because everybody’s conscious of the fact that I don’t want to be in CDs or bonds.

I don’t want to have all my money in the stock market. Hey, how about real estate? So give us just a quick overview, when you think about diversification and how you’re dividing up your assets between different asset classes, where real estate falls in for you in a well-constructed portfolio.

Bob Carroll:

Yeah, no. Real estate, obviously, it’s part of what we would term an alternative class. It is different than a typical company. But yeah, no. Real estate oftentimes is an income-generating asset. Oftentimes, the legal structure of these investments, especially things called REITs, real estate investment trusts, these are organizations that own lots of different types of real estate or similar type of real estate.

But anyway, the income from all that then has to get paid out to its shareholders. So that has a lot of value, especially in the context of an inflationary environment, things of that nature.

Pam Krueger:

Okay. And then that kind of comes into play with diversification that wins all battles. That’s part of the whole diversification plan because real estate may or may not correlate with the market. Sometimes it does. Sometimes it doesn’t.

Bob Carroll:

Yeah, that’s a good point. That’s a very good point. Not all real estate’s the same. I mean some real estate right now is not doing as well. Commercial real estate in the grips of the pandemic, companies are looking to shed their leasing. They’re not trying to add more square footage. They’re trying to reduce it. But there’s lots of areas in real estate. So I think your broader point is a good one in that real estate can serve a good diversification role, but it’s all a degree of proportion, what type.

I got to be careful. I can’t give recommendations. But for example, there are companies. I’ll give you an example. There’s companies that own cell tower real estate that are REITS. So there’s all sorts of-

Pam Krueger:

That any investor can participate in, in other words-

Bob Carroll:

Right, yeah, which is-

Pam Krueger:

… as part of their portfolio. Now, Bob, I promised that we would leave plenty of time for questions.

Bob Carroll:

Okay.

Pam Krueger:

Just before we go, because we have two or three questions I can see right here, before we do that, can you please just maybe recap? I’m putting you on the spot. Recap the three things in bullets that you feel like people can do to buy that umbrella now before the weather changes and fortify their portfolios in keeping with what we’ve just been talking about.

Bob Carroll:

Yeah. Real quickly, I would say review your plan. Pull it out. Put it all on the table, and look at it with a fresh set of eyes, so no time like the present. So do that. Look at the portfolio allocation. If you don’t know how much you have in stock as a percentage of the total, find out that answer. Go asset by asset. Make sure that you’re going to put it in the right bucket, but see what kind of diversification you really have.

There’s good resources out there if you need help with it. Things like Morningstar are a good resource, and they might be able to help you with that sort of thing.

Pam Krueger:

Okay. I’m going to guess your third tip. If I’m wrong, then we got four tips. Don’t forget after tax, after tax, everybody. That’s what matters, after tax returns. Tax planning is key.

Bob Carroll:

Yeah, I was going to say… That could be built in as part of your review of your plan and your assets. How much do I have? Where is it located? What’s it going to be taxed and when? And at what rate? I’ll say the fourth tip would be liquidity. What is your liquidity need? Make sure you know where that’s going to come from, because that is going to be your friend if we start out the year kind of bumpy.

Tune it out. You know where your money’s going to come from. A well-constructed, organized portfolio will do its thing over time. Just make sure that you manage your liquidity appropriately.

Pam Krueger:

Make sure you have enough cash so that you’re not forced to sell when the market is not in the right direction. And then you’ll be depressed.

Bob Carroll:

I don’t believe in Mason jars. I mean there’s ways to make it more productive than sticking it underneath your mattress. I’m not one of those people. But yeah. I think just having a plan, know that it’s safe. It may gyrate a little bit, but so what?

Pam Krueger:

I want some go-to money. Okay. I want to get to a couple questions. All right. The first question, I think I’ve got two or three questions here. Sheree is asking, “Bob …” I knew that Roth IRAs would come up. Somebody’s going to make a conversion. Sheree is saying, “Is there a certain age when the Roth IRA conversion makes the most sense? Is it age or is it a tax bracket that you’re looking at there as a guideline?” It’s a really good question.

Bob Carroll:

Yeah. No, it really is. There’s a lot of subtlety to it, so I’ll answer it this way. It’s kind of a function of both. Typically speaking, the younger you are, the more advantageous it is. Because simply speaking, in a Roth conversion or putting money into a Roth, you’re choosing to pay your taxes earlier than you otherwise would. So by virtue of bringing your tax bill forward, you need to make that up. You need to make that up in your investments, and that takes time.

That’s why the time element is important. I think the first thing I talk to people that bring up the Roth conversion or we discuss it in the context of their plan is what is our goal in doing this Roth conversion? Just doing a Roth conversion by itself may not be your best move. It may be-

Pam Krueger:

Yeah. Because if I’m in a 24, 25% tax bracket when I’m 65, then I’m looking at, wait a second. Is this really a big benefit?

Bob Carroll:

Well, I’ll give you a real-life example. I mean back to my 87-year-old couple, I’ve got an adult son who’s now retired, income is under 100,000. He’s saying, “Hey, I’ve been talking with my advisor. I should be doing Roths.” Keep in mind, his income is under 100,000 in retirement. He’s got Social Security, and that’s about it, maybe some investment. So he’s looking at Mom and Dad saying, “Hey, should they be doing Roth conversions?”

They’re 87. Okay. I don’t wish ill on these folks, but their life expectancy would suggest it’s shorter, not longer. So anyway, the long and the short of it is they were going to have probably at least $200,000 of required distributions from the IRA. Why would we put another amount on top of that in the form of a Roth conversion to be taxed at that rate? We’d be better off, tax-wise, if it passes to adult children through their estate. And then it’ll be taxed at their lower tax rate than Mom and Dad. That’s an example where a Roth wouldn’t work. In other cases, it does work-

Pam Krueger:

Okay. I get it. So the takeaway from that is that even though there’s a lot of attention on the Roth conversion and all the benefits, what you’re really saying is it’s not for everybody under every circumstance.

Bob Carroll:

Bingo.

Pam Krueger:

So Sheree, the answer to the question is it depends.

Bob Carroll:

It depends, right.

Pam Krueger:

I hate giving that answer. I’m the girl who wants to give you definitive steps, but I hear what you’re saying, Bob. You’ve got to look at the context.

Bob Carroll:

It’s tax rate now versus tax rate in the future, whoever’s going to be paying it.

Pam Krueger:

Gotcha. Okay. That’s good to know. Okay. Bob B. is asking, he wrote-

Bob Carroll:

Oh, Bob.

Pam Krueger:

I have to put my glasses on. It says that, “You are a fee-only advisor, and I’ve been looking for and reading about fiduciary fee-only advisors. So what I want to know is how does your fee arrangement really work in the real world?”

Bob Carroll:

Sure, sure. Good question. It’s a question I don’t think gets asked nearly enough. It’s important to be a good advocate and understand how, because this is an industry that has not been known for its transparency as a general rule. So what a fee-only advisor means is that 100% of the compensation we would receive in working with our clients comes directly from the client exclusively. So any recommendation that’s made regarding an investment or an insurance policy or something along those lines, we get zero compensation for.

So the advice that you’re receiving is coming to you with no strings attached. So you get purely objective advice. That’s what a fee-only is. It’s a fiduciary, meaning you have to put the needs of the client first at all times and recommend what’s in their best interest.

Pam Krueger:

Okay. Now Margaret’s following onto that. She says, “What if I just want to pay for …” I guess what she means is by the hour for just financial planning.

Bob Carroll:

Yeah. Yeah.

Pam Krueger:

How does that work? Because, Bob, what you do is you offer both the comprehensive financial planning … You’re not going to see anybody unless you’re going to provide that because you don’t know enough about them until you do that financial planning. And then you provide for them, if they elect, to have you manage and execute and rebalance and tax loss harvest. I call that the gardening and the maintenance.

But I think that this is a really good question. A lot of people are like Margaret. They want to know, “Well, how do I pay you? Do I pay by the hour?” How’s that work?

Bob Carroll:

Yeah. Again, good question. There’s really two different routes that happen. It could be a situation where you’re looking just for some consulting services, that you’re mostly an independent self-manager of your money and you’re looking for a sounding board or you need some general planning advice. That usually can be acquired through a financial planning firm, and there’s usually a fee of some kind. It could be stated as a fixed fee for a financial plan, and financial plans can range from $2,000 to 5,000 or more, depending on the complexity of the situation and the scope of work to be done.

But then there’s also the option, at times, to … Most of our clients work under a fee for managing assets is how our fee is derived. And then with that comes financial planning in addition to the investment management services. So it’s kind of a combination of both the financial planning and investment services.

Pam Krueger:

Okay. But at the end of the day, the spoiler alert to the movie is no matter how you get there, even if someone’s charging by the hour or a retainer, a flat fee, or they make an arrangement with you to manage the money and they’ll take a percentage, usually that’s 1% or under, 1% of the total assets. So if you’re managing someone’s half-million-dollar portfolio, it might be $5,000 a year, and that might include the planning.

But the bottom line is that it depends on time and complexity. So when-

Bob Carroll:

Yeah, I think so.

Pam Krueger:

… y’all are figuring out what your bill’s going to be that you’re going to be billing your client, no matter how it gets paid with the assets under management or hourly, it’s still going to come down to how much time and how much complexity. How much of the team’s time did I have to pull in? In other words, you have an estate-planning expert that’s in the office. Some clients might need more of that than less of it.

Other clients might need really heavy-duty tax planning because they’re on their second marriage, and they’ve got four kids. They’ve got all this complexity, and they own real estate, rental properties. I always think of it, and tell me if I’m wrong, but I always think of it as it just really boils down to how much time and how complex.

Bob Carroll:

Right. You hit it on the head. I think that’s important. It’s a great way to start a relationship. I mean I think, realistically, if you’ve never worked with a financial planner before, an advisor, that it’s a great way to kind of see if you’re going to connect well. Typically, most advisors can also transition from a project=based approach, consultative approach, very smoothly into investment management.

I would say the majority of my relationships in my client base, we start just with planning. I need to know them. Before I can give advice on what to do, we need to understand this picture, right?

Pam Krueger:

Yeah. Yeah.

Bob Carroll:

And then you sort it out together, and you figure out what the scope is together. What I would say though, for people entertaining engaging with an advisor, is also don’t have unrealistic expectations. If you’re going to hire someone to do a financial plan, it’s typically a one-time financial plan. It’s not something that we do in the spring and say, “Hey, what you did back then and you rearranged my portfolio, that was great. It worked out beautifully.” Now, come fall, “Hey, can we do that again?” That starts becoming realistically more management. What you’re asking for is kind of incongruent with just general planning.

Pam Krueger:

Well, financial planning is life. So life is dynamic. If the planning is not dynamic, then it’s literally trying to take a series of snapshots and turn it into a video when really it has to be fluid. I think the best planning is ongoing, but that’s an individual choice. I mean people could choose.

Bob Carroll:

Oh, absolutely.

Pam Krueger:

That’s why we have different types of advisors. I’m going to wrap up here in just a second, but one thing I want to say about what I like about working with you so much, and I don’t think I’ve ever told you this, is I really admire and respect the fact that you’re a lifelong learner and a lifelong student, as well as a teacher.

Bob Carroll:

Yes.

Pam Krueger:

I love the fact that so many of the advisors that are in this network, you guys talk to each other. It’s wonderful.

Bob Carroll:

I enjoy that aspect. I’ve been affiliated with Wealthramp on the platform now for about three years. In that time, I’ve been able to meet and engage with others of similar mindset. What I like about it, there’s a lot of information sharing. People that practice fiduciary, true fiduciary, financial planning, investment advisory, go into this field with a desire to orient themselves to the client. So from that comes a sharing of information, good ideas, and it’s been a pleasure being affiliated with folks of similar mind through the Wealthramp process.

Pam Krueger:

Well, you’re one of my favorites. Don’t tell anybody, but I just did.

Bob Carroll:

Yeah. It’ll just be our little secret. Yeah

Pam Krueger:

But it’s so important. I mean I’ve learned, and I’ve already been in this business since I was 24. I mean to understand the distinction between sales and brokerage firm, and we won’t get into all this because this is a whole different webcast, but all I can say is that by getting to know you all much more deeply, it really starts to play out, the difference between somebody who’s trying to sell you something and somebody who’s truly getting paid by you to be their advocate to give them advice. It makes a huge difference. On that note … Oh, sorry. Go ahead.

Bob Carroll:

No, I was just going to say you hit it on the head. It’s not a function of sales. It’s finding out would you have a good working relationship? Do they understand you? I have nothing to sell. It’s either you identify with what the plan is or you don’t, and that’s okay, too.

Pam Krueger:

That’s right. I say, do all the homework on the front end and don’t make a mistake on this when you’re choosing someone. But that is a webcast for another day. I did promise to wrap up in under an hour, and I’m slightly under that. But Bob, these are really-

Bob Carroll:

Blame me.

Pam Krueger:

These are really valuable insights, and you’re helping everybody kind of calm down and tune out the noise and focus on what works heading into the new year with all these different things that may be happening around us. I want to thank everybody who is participating today and for asking really great questions. Keep them coming. So you guys, as you see this and you watch this and things occur to you, we have over 200 advisors in this network, and you have access to them through me. Just send us a note at wealthramp.com.

But we are so thrilled, Bob, to have you a part of this network, and you are accessible. I want to remind everybody that I’m not going to tell you that you need an advisor. I don’t know that. But I’m going to tell you that when you do decide you’re ready to hire an advisor or to start talking with an advisor, we’re right here. Wealthramp is here for you. So we look forward to talking to you and, Bob, we’ll see you in the new year.

Bob Carroll:

Happy New Year, everybody.

Pam Krueger:

Happy New Year, too.

Bob Carroll:

Take care.

Pam Krueger:

Thanks.

Bob Carroll:

Thanks, Pam. Appreciate it.

---

Finding the right financial advisor can be challenging. Let Wealthramp help you find the right advisor who will help you with your personal financial needs and situation.