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Welcome to money. For the rest of us, this is a personal finance show on money. How it works, how to invest it and how to live without worrying about it. I'm your host, David Stein. Today is episode 562. It's titled how to simplify your portfolio. Over the past couple weeks we've been holding a retirement live portfolio workshop to cohort as we work with 10 individuals who are newly retired and help them structure their investment portfolios and model out retirement outcomes. We're using AI as part of the process and in the discussions because we meet a couple times a week for a total of around three hours per week. It's become clear that a lot of these individuals and individuals that we've worked with in the past, they feel unsettled about their investment portfolios. It's almost as if they're just not satisfied with them. And as I've tried to dig in more, it's almost as if they have some standard that they're holding themselves to that isn't really obtainable. And as we kind of explore, well, what is that standard or what is. Why do they feel that their portfolio isn't simple enough? Obviously there is the concern as they, as they get older, if they have a partner, they, that, that maybe or even as they age, that they're not going to be able to handle the complexity of their portfolio. But it seems to be beyond that. It's almost as if they, you think about outfits, they don't, they just don't like the outfit they're wearing. And the problem with investment portfolios is you just can't change the outfit because there are constraints. And the biggest constraint is taxes. If, if you have, and, and all of us, most of us have some type of taxable portfolio. If we sell taxable holdings will often we've held them a long time, we'll have to realize a gain and pay capital gains tax on that. And so it isn't as simple as just, we'll just get rid of everything and start anew. We have to realize that the portfolios that we have evolved over time, they're based on reasonable decisions that we made over the years. And, and so. Well, in some ways it's just like a wardrobe. Most of us don't go out and buy a new set of clothes, entirely new wardrobe every year we might add a piece or two. Well, if you're a typical American, you might add 50, but ideally we're not doing that. We're buying fewer, better quality pieces and adding them as time goes on. And Then some pieces wear out or they just don't fit anymore and we'll get rid of them. Our investment portfolios are the same way. We don't have to get rid of everything all at once. And usually from an emotional standpoint, it's better to do it incrementally. It's easier to do it incrementally, make changes little by little, as opportunities arise, as risks increase. And that's how I've managed over the decades, both as an institutional portfolio manager, managing my own investment investment assets, and also as I educate individuals, like we're doing in these live portfolio workshops. So let's take a look at kind of the process that we're going through with these 10 individuals, and I'll bring you up to date as to where we are. Here's the five step process that we've been using. And in reality, this is the same process that I used for institutional clients of ours. We would get a new client and the first thing we would do is we would analyze their situations, that they would send us box loads of bank statements with all of their accounts, and then we would create a performance history. But we would also do an asset allocation. What is their current mix among all their accounts, how much in stocks, how much in bonds, how much in private capital, and all the different asset classes. And that's what we've been doing with this workshop. Many individuals haven't really looked at everything comprehensively. All of their Roth IRAs, their regular IRAs, their taxable accounts, their own, maybe their partners. And so they put it all together. We have an asset categorization spreadsheet that we're using. And in many cases they used AI to help them break down and list out every single holding that they have. And which of 30 different asset categories does it fit into? For each of those asset categories, we have an expected return, we have a volatility assumption, and we have correlation assumptions using modern portfolio theory. And at the end of the day, all we're trying to get is an understanding of what are the total investable assets and what's the expected return and what's the volatility as measured by standard deviation. And as we've had discussions, it turns out standard deviation is not a terribly intuitive concept. But what we're measuring is bad things. How far could a portfolio drop? A portfolio with a higher standard deviation potentially can lose more money than one with a lower standard deviation. And so we're going through that process that was step one. Next, we sought to understand the lost capacity. What would happen to these retirees, if their portfolio fell 30%, what's their capacity to sustain those losses that's different from their loss aversion, their emotional weight they feel when they experience losses. And we've gone through a questionnaire that kind of assess well, how did you react during the great financial crisis? I have friends that never returned to the stock market. It so traumatized them. It traumatized me as I was managing assets for institutions. And as a result, I have 20% of my investable assets in stocks. It's diversified among many different types. But I'm not comfortable having 70% in stocks like many retirees are. Before we continue, let me pause and share some words from one of this week's sponsors, DeleteMe. 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And you can too, take control of your data and keep your private life private by signing up for Deleteme now at a special discount for our listeners. Get 20% off your delete Me plan when you go to join DeleteMe.com David20 and use promo code David20 at checkout. The only way to get 20% off is to go to www.joindeleteme.com David20 and enter code David20 at checkout. That's www.joindeleteme dot com David20 code David20. We also focus on the income style, and I'll show a chart on that in a minute. But we're trying to figure out, well, how do they want to fund their retirement, how much guaranteed income versus a total return approach. And we'll look at that in a minute. So we kind of go through that and there's a questionnaire for the income style. Now they're working on step three. Right now they're modeling different spending rates and different spending approaches, some with guardrails. In other words, if they're using a 4% spending rule where they're spending the 4% of the current balance, increasing that each year, the dollar amount of spending by inflation, we can put some guardrails. Well, we're not going to allow our spending to increase by 5% in a given year or we're not going to allow, we're not going to cut our spending by more than two and a half percent in a given year. And we're using AI for that. And the beauty of using AI versus sort of a more deterministic model is AI is able to do the math. It relies on Python. It's running 10,000 simulations. And you can query and you can ask AI, well, what if we tried it this way? Or what does this mean? Or what. What was the return series that led to this result? And that, and that's not something you can necessarily do with, with some of the other software out there, such as Bold in I, I suspect you'll eventually be able to do that as Jackson Lab and others incorporate AI. But I do like the flexibility of using a large language model to, to do Retirement Planet. And it isn't the part of the model that's sitting there predicting words and hallucinating. What has changed with AI is their ability to use tools that are available, including math and bringing in outside tools. And that's what AI has gotten much better at in terms of understanding which skills should it bring in, how should it go about analyzing. And so our retirees are modeling their outcomes using different spending rates. And then we'll reconvene later this week and we'll talk about what they learned through that process. And then we have step four and five and this is where it gets messy. We're going to talk a little bit about that today. It's determining what changes to make because we all have the portfolio. And I, like I said, the temptation is we'll just throw it all out and start over. But that we, we just can't do that. And so we're going through in the next week or so. Step four and five. Now there are four ways to approach retirement. Sort of the back in the day, the traditional way was just all guaranteed income. You had a, a benefit pension plan, you had Social Security and you just covered your expenses with fixed income. And back back in the 19th century, you read novels, Jane Austen. They. They had a certain amount of money that they spent each year. They didn't really talk about, well, what's the size of our portfolio? It was, how much income are you, are you generating that you're able to live on? And it could have been an annuity, a trust, but that was traditional. Most people don't have access to a defined benefit pension plan. And so for many years, people just relied on a total return approach. They had their retirement nest egg. They used a particular spending rule. Now they eventually started taking Social Security, so they had some guaranteed income. But as I said, we've gone through these questionnaires and one of the things that we can do is we can increase our guaranteed income sources by structuring called buckets and ladders. We can segregate a portion of our portfolio into some conservative buckets. It could be a ladder where we have specific bonds or basket of bonds that mature each year, five years, 10 years, maybe longer. But that's kind of a way of structuring a guaranteed income, a paycheck, if you will, in your retirement. Because one of the biggest challenges when one retires is you don't have the paycheck. And that can be a real challenge or a kind of an emotional weight. And we've talked about that in our workshop. Some have sort of a guaranteed with an upside. So it's some type of insurance product, or it could be a defined outcome or buffer etf. And we've done episodes on that. So we've kind of gone through that process and our cohort members have filled out the questionnaire. But that's something to think about, like, how do I want to fund my retirement? A safety first approach, sort of as Wade FA teaches, it's very much get as much of your guaranteed income as you can through and hopefully covering most of your expenses. And that allows you to take more risk with the remainder of your portfolio. But that doesn't work for everyone. So there's not a right answer when it comes to which style should we use. What then is the approach then to simplify our portfolio? Well, the first is what we've just discussed. Identify the level of guaranteed income that you have or can create by doing some type of bond ladder. The second thing, and we've discussed this a lot, and this can be challenging because the default is sort of, well, every account has the same allocation. So if we're 60, 40, we might be 60, 40, 60% stocks, 40% bonds in our IRA, we might keep the same allocation in our Roth IRA in our taxable account and that leads to undue complexity. We want to look at the overall portfolio and that's why we kind of went through that exercise. And what that allows us to do is to segregate out. And that's part of step three, the asset location which we discussed earlier this year in episode 550 and I'll link to that in the show notes. But there are certain assets that just naturally are better in certain accounts. So our riskiest assets assets are our best stocks in Roth IRA because it's a tax free account. And other assets that generate a lot of income can be better in a regular IRA and then low cost index funds or those that are just generate less ordinary income tax or might be taxed at a favorable rate that goes in a taxable account. Those are rules of thumb. It very much depends if one has structured a bond ladder so they've created additional guaranteed income through a TIPS ladder that generally will go in a taxable account. So that sort of breaking the rule. And that's where we see step four. We let the tax burden guide our decisions both in terms of our structure, our asset location, but also in terms of where we draw from first in our retirement. Generally we're going to spend from our taxable account because we're already paying taxes on it. For example, if we need the money, we're not going to reinvest the dividends automatically. We're going to take that cash flow that we're paying taxes on and we're going to spend it. And then. But it we look at step five, there's other considerations. When we talk about being aware of taxes, we can use those low income years, Perhaps your early 60s when you've left your job, you're not taking Social Security and that's when we can do Roth IRA conversions. Take money from our regular IRA and put it in a Roth. And now even that can be fraught with emotion because in order to get the biggest bang for your buck with that Roth IRA conversion is, is to pay the tax outside of the ira and that reduces your portfolio balance because you pay taxes on it. You feel wealthier when it's in a regular ira. But when you, when you do a Roth conversion, you have less money. But one of the points we've emphasized a lot is successful investing means paying taxes. You don't always have to pay taxes because I mean there's some very low cost basis holdings that we might not want. We just want to not sell at all or give it to charity or let Our beneficiaries inherit that because then you get this the stepped up cost basis and you avoid the big tax hit. So the benefit of having one allocation with constraints based on our need for guaranteed income is to take advantage of what each account is best for. So the tax free account with you want the investments with the highest expected return, the IRA 401k that can be more generating income because it's tax deferred, eventually going to have to pull money out in terms of the required minimum distribution. And that can be a big deal. And that's an important aspect of retirement planning. Particularly if the and it's something I just did the other day I went ahead and calculated okay, if my IRA was its current balance, what would be the required minimum distribution when I turned 75 and 76 and kind of see well how do those numbers pencil out as I consider doing a Roth IRA conversion this year. And then we, we have the brokerage accounts with to handle near term spending. That's also potentially a good spot for non US stocks because you get, you can benefit from the foreign tax credit on dividend or income generated overseas. Before we continue, let me pause and share some words from this week's sponsors. 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I know if our business reached a certain size, we would certainly consider using NetSuite next. And for the first time ever, you can try netsuite Next for free. If your revenues are at least in the seven figures, go to NetSuite AI David. Built for every industry, ready for every boardroom, NetSuite AI David now as part of the simplification, usually the changes we want to make is in the IRA and in our Roth because We're fortunate now that trading costs, just commissions for brokerage firms are zero. It used to be $40 to make a trade back with full service brokers. Now it's free. So what becomes the constraint is the taxes in the taxable account, as I mentioned. And so as we look at one overall asset allocation, we can start making the changes first in that ira. So if we want to reduce our stock exposure where we feel too exposed, then then we can sell stocks there and add in the case of a regular ira, fixed income bonds and I'm going to talk here in a minute. What I see is the most attractive area of the bond market right now. We'll also look at the most attractive area of the stock market. But our first changes as we go to simplify and reduce duplicate holdings would be to do it first in the IRA and the Roth IRA and last in the taxable and then within the taxable, maybe there's some high cost basis investments that, that you can sell and the tax would be minimal. But that's sort of the approach when we think about the constraints and we're using taxes kind of as the guide because that's the burden that we're paying to the government. Recognizing paying taxes is just part of investing. Last week, I spent the week writing our monthly strategy report for subscribers to Asset Camp and members of Money for the rest of us. Plus, July was interesting because we've seen interest rates increase, particularly real interest rates net of inflation. They're increasing. Rates have been going up this year because of the expectation that the Federal Reserve would raise its policy rates. But in July it was the bond market pricing in uncertainty. Particularly because the new Federal Reserve chair Warsh is not willing to communicate as much as prior chairs have. He wants to get unfiltered information from the financial markets. He doesn't want financial markets reacting to what the Federal Reserve is saying now. The reality is they're going to do it anyway. That's just what investors doing. And so, but what has happened is the term premium or the additional compensation that investors demand to hold US Government bonds, that's increased and as a result, and that term premium gets baked in to the real interest rate. So if we look at inflation adjusted bonds, so treasury inflation protection securities, right now 10 year tips are yielding around 2.4%, five year tips at 2.1%. This is a huge change from five years ago. So five years ago if you were going to try to buy an inflation index bond, you would buy a Series I savings bond because it was yielding zero in terms of its base rate, whereas the real yield on TIPS was negative. You couldn't even keep up with inflation with TIPS because you were losing money because of the negative real yields. Now we had last had an opportunity to start adding tips back in 2022 when real yields went positive. And then they have fallen off and now they're back again and they're higher because of this uncertainty. And so as you're trying to simplify your portfolio adding individual tips, you can also add a, a bullet tips ETF. So iShares has some I bonds, tips ETFs that, that mature in a given year. And Those are the two ways that we recommend investing. IShares also has a ladder tips ETF, but you don't want to invest in just a tips, plain vanilla tips ETF that never matures because then you're going to be negatively impacted if interest rates rise. But if you have a tips ETF that, that matures in 2027, another in 2028 and 2029, you're able to kind of lock in that, that 2% plus yield and you get inflation on top of that. And that's a real advantage right now in terms of the opportunity. So that, that's where I would go if I'm simplifying and trying to reduce equity exposure, I would be adding to my TIPS exposure right now. We have a guide on our website, free that we just updated. It's on investing in inflation index bonds like TIPS and I bonds. And it shows you how to go about buying an individual TIPS if you want to do so with a brokerage firm. And I'll also link to that in the show notes. So that's kind of the opportunity on the bond side in the strategy report, we also looked at the stock side. And in the report we included a chart showing which regions of the market had the cheapest price to earnings ratio, what's called the cyclically adjusted price to earnings ratios. So based on inflation adjusted earnings over the past decade. So we showed the current metric as of the end of July, we compared it to the long term average and then we looked at how many standard deviations it was away from that long term average. And so if it was negative, it meant that it was cheaper than average. And if it was positive, that standard deviation measure, it meant it was more expensive. And the most expensive area in the world right now is US growth stocks. The cyclically adjusted PE is just under 62. The long term average is 30.6. And so it's twice if we look at it on a standard deviation basis, it's two and a half times the standard deviations. So very expensive global stocks overall that include 62% in the US got a cyclically adjusted PE ratio of 30 compared to its long term average of 21. That's now the areas that are, that are cheap. So if you're thinking about, okay, I've done my analysis, I can see my entire portfolio and I have a lot more in in US large cap stocks S&P 500 than I expected. Particularly if I have it in my Roth. I have it in my regular IRA taxable account and I want to reduce that, but I don't necessarily want to reduce my overall stock exposure. And so if you look at the cheapest area of the market and it's been that way for several years now, it's World X U S Small cap value. The cyclically adjusted PE is 18.7. The long term average is 22.2. Outside the US small cap value next is outside of the US small cap, US small cap value is cheaper than its long term average and overall the value style outside of the US Developed markets is cheaper than the long term average. So that's kind of a place that there's an opportunity to rebalance to. Now on money for the rest of us plus we have some model portfolio examples where you can see some of the holdings that we're using on the equity side in WorldX US small cap, we also have example index funds and other ETFs that on AssetCamp. So we provide that on an ongoing basis. So if you're looking for which holding, I mean there are obviously other sources you can ask AI but the ones that we're using as examples, they're on our website. So if you're interested you can try out plus membership for a month and get access to those models. And get access, you can read our latest strategy report. Understand kind of, kind of hard positioning but you get a free copy of that strategy report that includes this chart by going to moneyfor the restofus.comreport and try it out and see what we're doing. See kind of our, our work that's behind the paywall that we've been doing for over 10 years to help thousands of individual investors over time. That ends our conversation on how to simplify your portfolio. Let me, let me go over those steps one more time. If, if you're newly retired or you're thinking about retiring, want to focus on the level of guaranteed income that, that we want now if you're not Retired you don't have to worry about that and you can go on to the next step and that's focus on the overall allocation. Just one allocation and then maybe you have some adjustments within accounts. But look at it as a whole and understand put it all together how much do you have? How are you invested? Focus on asset location. So instead of trying to replicate every holding in every account, just just put the holdings that makes the most sense in each account. And so that you're looking at what's are my overall allocation to stocks at my investable asset level rather than each individual account. And again episode 550s on asset location I use taxes as a guide in terms of your location and your decisions in terms of how you simplify your portfolio focusing on the changes that are easiest in the the non taxable tax deferred or tax free accounts. Obviously you're retired. You want to focus on when do I do some Roth conversions. But we don't have to make all the changes at once. This is incremental is best little at a time. Your portfolio isn't broken. It's decisions you made over time that were reasonable decisions. Don't compare your portfolio to some standard and feel bad about your portfolio. Understand that we all make mistakes and if you have a taxable holding that's a very low cost basis it means you've been incredibly successful and maybe you have to keep holding that and that's all right. If it's an individual stock that's just part of investing. And so we do the best with the portfolio we have. Make incremental changes over time manage our emotions. We provide plenty of resources on our website, both free and paid to kind of help you ground your emotions. And that's what our members say. One of the biggest things we do is we just help them feel calmer about investing while also helping them improve their investing skills. You can learn more about the work we do at moneyfortherestofus.com get our free strategy report at moneyfortherestofus dot com report. Everything I've shared with you in this episode has been for general education. I've not provided investment advice. I've not even considered your specific risk situation. All of it is this is general education on money investing in the economy. Have a great week. It. Sam.