04.01.25 Ask An Advisor With Wes Moss

Summary

The Clark Howard Podcast: Detailed Summary of Episode 04.01.25 - "Ask An Advisor With Wes Moss"

Release Date: April 1, 2025

In this engaging episode of The Clark Howard Podcast, host Krista Dibias teams up with financial expert Wes Moss to delve into critical personal finance topics. The discussion primarily revolves around retirement strategies, market corrections, and listener-submitted questions. Below is a comprehensive summary of the episode's key points, enriched with notable quotes and timestamps for reference.

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1. The 5% Withdrawal Rate Debate

The episode opens with a heated discussion on the feasibility of withdrawing 5% annually from retirement accounts, challenging the traditionally accepted 4% rule.

• Wes Moss critiques the notion of a 5% withdrawal rate, labeling it as a "financial heresy" (00:56). He emphasizes the uncertainty in financial planning due to variables like lifespan, market returns, and inflation.

  "Running out of money is a very scary thought for anyone. But when you boil down all the variables, the most important is your rate of withdrawal." — Wes Moss [00:57]

• Historical Analysis: Moss references William Bengen's studies, which introduced the 4% rule, and discusses recent insights from Barron's, suggesting that a 5% withdrawal rate might be achievable under certain conditions.

  "If both stocks and bonds perform well, you might be able to pull out more money." — Wes Moss [05:10]

• Flexibility is Key: Moss underscores the importance of flexibility in withdrawal strategies, allowing retirees to adjust their spending based on market performance.

  "Flexibility is the key. You may need to spend a little less during rough stretches and take advantage of good times to spend more." — Wes Moss [08:30]

• Probability and Risk Assessment: He presents data indicating that a 5% withdrawal rate has an 83% success rate of lasting 30 years or more, based on historical data since 1927. However, he cautions about the increased risk of depleting funds faster than anticipated.

  "Money ran out in 12 years was one of the worst outcomes, but 83% of the time, the 5% rule worked." — Wes Moss [08:30]

2. Listener Questions and Expert Advice

The episode features insightful responses to listener-submitted questions, providing tailored financial advice.

a. Social Security Timing

Listener: Chip from Texas
Question: Should he wait until age 70 to take Social Security to maximize benefits, especially considering his wife's inability to earn enough for her own Social Security?

• Wes Moss advises waiting until 70 to take Social Security benefits, especially given the likelihood of longevity in Chip's family.

  "If you wait till 70, the payments increase significantly, and it acts as an income insurance policy for your wife." — Wes Moss [10:59]

• Optimization Over Maximization: Moss emphasizes the importance of optimizing Social Security based on individual circumstances rather than solely aiming to maximize benefits.

  "It's about optimizing for your particular financial situation, not just maximizing." — Wes Moss [11:30]

b. Roth Conversions and Required Minimum Distributions (RMDs)

Listener: Andy from Idaho
Question: Is spreading out Roth conversions over several years the best strategy, or should some funds remain in tax-deferred accounts to utilize standard deductions against RMDs?

• Wes Moss supports spreading out Roth conversions to manage tax burdens effectively, especially before RMDs commence at age 73.

  "It's still about taxes today versus taxes tomorrow." — Wes Moss [14:14]

• Consulting Professionals: He advises consulting with a CPA or tax advisor to navigate the complexities of progressive tax brackets and individual financial situations.

  "Taxes are super complicated, so meet with your CPA and speak with your tax advisor." — Wes Moss [15:00]

c. Donating Company Stock

Listener: Patrick from Massachusetts
Question: Should he wait to donate appreciated company stock to maximize tax benefits, or donate regardless of stock performance?

• Wes Moss recommends donating appreciated stock immediately rather than timing the market, as predicting stock movements is unreliable.

  "I think just donate regardless because we don't know where the stock is going." — Wes Moss [16:52]

• Tax Benefits: He explains the advantages of donating appreciated stock, including avoiding capital gains taxes and receiving deductions based on the stock's full value.

  "You get a deduction for the full value of the stock, subject to IRS limits." — Wes Moss [17:00]

3. Market Corrections and Recovery

A significant portion of the episode is dedicated to understanding market corrections and their aftermath.

• Understanding corrections: Acknowledging the first official correction of 2025, Wes Moss analyzes historical data to gauge future market movements.

  "We've had almost 50 corrections since World War II, and 75% of the time, they did not escalate into bear markets." — Wes Moss [21:19]

• Psychological Impact: Moss discusses the emotional toll of market downturns, noting that the pain of loss is often more intense than the joy of gains.

  "The pain of loss is four times as impactful as the joy of gain." — Wes Moss [22:00]

• Historical Recovery Patterns: He highlights that markets typically recover within a year of a correction, reinforcing the importance of staying invested.

  "Historically, we're up 11-12% a year after a correction." — Wes Moss [25:51]

• Investment Strategy During Corrections: Moss advocates for dollar-cost averaging and maintaining investment discipline during market volatility.

  "When things are low, they're kind of on sale. Keep putting dollar cost averaging, keep investing." — Krista Dibias [25:00]

4. Additional Listener Questions

a. S&P 500 Being Top-Heavy

Listener: Sriram from Washington
Questions:

1. Concerns about the S&P 500 being top-heavy with the top 20 stocks comprising ~50% of its value.
2. Whether passive investing contributes to this imbalance.
3. Expectations for future stock market returns in the context of low Fed interest rates.

• Wes Moss acknowledges the increased concentration in the S&P 500 but attributes it to the naturally growing size of leading companies rather than passive investing alone.

  "The top 10 now make up almost 35%, up from the usual 25%. It's because these companies have incredibly strong businesses." — Wes Moss [29:27]

• Passive Investing Impact: While passive investing may contribute, Moss believes active management still plays a significant role in price discovery and mitigating passive strategies' impact.

  "There's still $135 trillion in active management globally, so it's not creating a bubble necessarily." — Wes Moss [30:00]

• Diversification Strategies: He advises investors to diversify beyond the S&P 500 using various ETFs and index funds to balance the top-heavy nature.

  "There are hundreds of other options out there. Use equal-weighted indexes or other ETFs to diversify." — Wes Moss [32:00]

• Future Returns Outlook: Moss refrains from predicting future market returns but emphasizes reverting to historical averages over the long term.

  "I believe our average returns will still be there as long as we're in the game for long enough." — Wes Moss [33:21]

b. Diversification in Target Date Funds

Listener: Patir from New York
Question: Are target date funds sufficiently diversified, or is funneling 100% of retirement investments into a single fund a bad idea?

• Wes Moss assures that target date funds, especially those targeted far in the future like the Schwab 2055 fund, offer significant diversification by spreading investments across various sectors and asset classes.

  "Any target date fund for someone young, like 35, is appropriate and super diversified." — Wes Moss [34:40]

• Long-Term Suitability: He notes that for long-term investors, target date funds are suitable as they are heavily weighted towards equities, aligning with the need to outpace inflation.

  "If you're out 25-30 years, being 90% equities is appropriate." — Wes Moss [35:00]

• Caution Near Retirement: Moss points out potential issues with target date funds becoming overly conservative as retirement approaches, which might not align with everyone's risk tolerance.

  "They can get overly conservative for most people, but for young investors, they're generally fine." — Wes Moss [35:45]

5. Conclusion

The episode wraps up with Krista Dibias and Wes Moss reiterating the importance of financial education and strategic planning. They encourage listeners to submit further questions via www.clark.com/ask and emphasize the value of personalized financial advice.

"If you're hearing other people having a struggle or question, you can relate and learn from it." — Wes Moss [37:01]

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Key Takeaways:

• Withdrawal Rates: While a 5% withdrawal rate can be feasible, it carries higher risks compared to the traditional 4% rule. Flexibility in spending is crucial.

• Social Security: Optimizing the timing of Social Security benefits based on individual circumstances can enhance long-term financial security.

• Tax Strategies: Strategic Roth conversions and smart donation of appreciated stocks can offer tax advantages.

• Market Corrections: Historically, markets recover within a year post-correction. Maintaining an investment strategy during downturns is essential.

• Diversification: Diversifying beyond top-heavy indices like the S&P 500 can mitigate concentration risks.

• Investment Vehicles: Target date funds are suitable for long-term investors but require careful consideration as retirement approaches.

This episode serves as a valuable resource for listeners aiming to navigate the complexities of personal finance, offering actionable insights and expert advice tailored to various financial scenarios.

Transcript

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[Krista Dibias]

Welcome back to ASK AN Advisor where we go deeper on all things investing. I'm Krista Dibias here with the Wes Moss.

[Wes Moss]

Hi Krista.

[Krista Dibias]

Great to be with you again, Wes. Great to be here. Very much looking forward to today's show. I understand you're going to talk about, first of all, can we withdraw 5% a year from our retirement account?

[Wes Moss]

5%.

[Krista Dibias]

People are like, no way listening right now.

[Wes Moss]

We're gonna talk about that.

[Krista Dibias]

And then also what happens one year after we have a market correction?

[Wes Moss]

We've had our first official correction of 2025, down 10%. And the question is, where do we go from here historically? What do markets look like?

[Krista Dibias]

And I have a lot of questions for you. If you want to ask a question to either Wes or Clark, you, you can go to clark.com ask and Clark will be back tomorrow with a brand new show. So let's go ahead and start with that 5% rule.

[Wes Moss]

So it's really, it's a financial heresy. 5%, that's a crazy number. And this is the great debate within financial planning. And we'll never know the exact number today because we don't know what the world's going to throw at us. We don't know how long we're going to live. We don't know what our rate of return will be over the course of our retirement or at any point in any period of time. Wouldn't it be nice to know exactly what our rate of return would be, what inflation will be? So when we're doing financial planning, we've got a dozen at least really important variables that make up a cash flow plan, a long term plan to make sure that we're safely not ever worrying about running out of money. It's still a top fear in the United States. Running out of money is a very scary thought for any, anyone. But we go through this long period of time, 20, 30 years of 40 years of saving. But if you were to boil down all those variables. When you're running a financial plan, it comes down to one. I would say the most important variable is your rate of withdrawal, because your rate of withdrawal is saying, okay, how much of the savings that I'd spent 30, 40 years accumulating, how much can I use in any given year? Which means how, how much can I spend? What's my standard of living going to be when I'm in retirement? So that is the crux of all financial planning. What is, for the most part, been agreed upon is this 4% withdrawal rate. William Bengen, the kind of the godfather of the 4% rule, ran a bunch of studies, ran market studies all the way back to the Depression and looked at different withdrawal rates. Because what we're all trying to do, and I think of it this way, is max out without running out. Max out what? We're withdrawing from our portfolios without having the fear of that going down to zero at some point when we still have a lot of years left on this planet. So there's got to be some sort of optimal number. Now, anytime either market returns look as though they're not going to be good. Anytime interest rates are low. Because part of most people's withdrawal strategy needs to be a balanced portfolio. The 4% rule says you've got to have at least 50% in equities. That's the engine that allows us to increase our spending for inflation over time. So if we assume that Bangin's original work, which I've redone his study over and over and over again and kind of brought it up into the 2020s, and it still works, and I actually call it the 4% plus rule. But this past fall, Barron's made a big splash and it came out with an article that said you may be able to do, or really they said, you can do 5%, you can have a 5% withdrawal rate. Now, the counter to that, and there's several financial folks in the financial planning community that'll come out and say, no, no, no, no, if you really want to be safe, just pull out two and a half percent or that's your max withdrawal rate. And when that starts to happen, that, that kind of frustrates me because of course, if you barely take any of your savings out over time, of course you're out. But then what's the point of the savings? So there's got to be this happy medium. So Barron's comes out and says, 5%. You can do that? Well, how do they get to that point? One, they say that recently, some of the big Wall street firms have come out and said because interest rates were higher at the end of last year, that means your bond should produce more over time. Those expectations are higher. The equity market should do 8% a year, according to, I think it was JP Morgan or Morgan Stanley, one of the Wall street firms. So those return assumptions are pretty healthy. And if both sides of your equation, stocks and bonds both do well, well, then maybe you can pull out more money the way Bengen said. And this is from a year or two ago, he said you could give yourself a retirement raise by adding in some small companies that typically have a higher rate of return over time. So he's suggested that 4% is even too low. So I wanted to go back and see what makes this possible. And we ran the numbers. So I'll look historically. I'll share with our listeners and our viewers. What does it look like if we start out with 5% and withdraw 5% plus inflation every year over time, what's our probability of never running out of money? The first point in all of this, whether you subscribe to 4% or 4 and a half or 5 or even higher, is about flexibility. Because in the real world, Krista, we don't turn on our financial spigot from our accounts and say, okay, I'm getting my four and a quarter percent and I'm going to going to perfectly ratchet that up exactly for CPI or inflation every single year until the end of time. That's just not how it works in real life. So flexibility is the key, meaning that we may go through a period of time where markets are really good and they're really strong and they're beyond our expectations. And you can say, gosh, I think I can take out a little bit more money or we can go on an extra trip or two that I hadn't thought I could budget for. Same thing. When we go through a protracted stretch of not great markets and really low interest rates, we want to be able to be flexible to say, well, maybe we spend a little bit less. That's the real world when it comes to managing your withdrawal rate. But what do the numbers say? Our team has run every single calculation that you can think of. 4% with different portfolio allocations, 5%, we've looked at 6%, which money does run out pretty quickly at a higher percentage of stretches. That one I think is probably a little bit too aggressive. But if we're just looking at the numbers and we look at a 5% withdrawal rate now, what's interesting if you look at 5%, your best opportunity to not run out, at least for 30 years, actually looking at an all stock portfolio. Now a balanced portfolio works as well. But here are the numbers. If we're looking at a 30 year period of time, a 5% withdrawal rate plus inflation, using the same metrics of this rule, money still doesn't run out 83% of the time. So 8 out of 10 times you turn on the 5% withdrawal rate and this is going all the way back into 1927. And imagine you retired in any given year over that entire stretch of history. So 8 out of 10 times 5% rule actually works based on history. Now you're going to say, wait a minute, well, I don't want to go into retirement thinking I get an 8 out of 10 chance that I'm going to be okay and not run out of money. So. So it is riskier, but that's where the flexibility comes in. And I think that if you start out with a higher percentage withdrawal rate, you just know you have to be flexible if things turn and we go through really rough stretches. However, here are the scary numbers and why you may not want to subscribe to 5%. Is that there, if you go and look over that almost hundred years of data, you do have some rough outcomes. And there were the worst outcome is money ran out in 12 years. That's no good.

[Krista Dibias]

Wow.

[Wes Moss]

The fifth worst outcome was that money ran out over 19 years. However, again, 83% of the time, money lasted for 30 years plus, 80% of the time, 35 years plus and 79% greater than 40 years without running out of money. So the way I would look at it historically, looking at market data and making sure you had a portfolio that, that is now in this case, this was a 100% stock portfolio, which is where we typically over time get our best rates of return. I would say it's very possible to do, but it's just a riskier approach to take. If you go to a balanced portfolio, Krista, where you have 60% stocks and 40% bonds and you use a 5% withdrawal rate, it is still 83% of the time. It lasts 30 years plus. And then the percentages drop a little bit as you start making things last even longer, 35 years, it's only a 70% probability that works. And a 45 year period, it's only a 55% probability that it works. So money does run out quicker, obviously because we're starting at a higher withdrawal rate. So the key to me goes back to Flexibility. I still believe 4% is a safer route to take. And it's trying to max out what you're withdrawing without running out. Those probabilities are that's where you get into the 99% probability that you're not going to run out. So it's possible. It's just a little riskier path to take. And it's a debate, by the way, that will be never ending.

[Krista Dibias]

All right, we'll go to questions now. This came in from Chip in Texas. I'm an avid listener and love Clark's approach to saving and spending less than you make. My kids all have benefited from his sage advice. This is probably for Wes. And I love the new dedication to financial information. My wife is two years older than I am and will not earn the 40 quarters needed to get Social Security on her own. I'm not sure how to think about when to take Social Security. I think I've been concentrating too much on when she reaches 70 and I'm 68 that I should take Social Security. If she was my same age, I wouldn't have that thought. So is it still worthwhile to take Social Security when I reach 70 to get my full amount and half of the 67amount for the spousal benefit, or are there other considerations? Our parents lived long into their 90s, so I'm planning to pass the crossover points that seem to be in the 80s.

[Wes Moss]

Longevity, chip, God willing. And I pray that you also have lots of longevity. That's one of the things I think about every day, longevity. I pray for that every day longevity for all of us and everyone around me. So I'm with you on that, Chip. I would say this. When it comes to planning for Social Security, we hear a lot about maximizing Social Security. And that's easier to do because we know. Well, it's not perfectly easy to do because we don't know how long we're going to live. But if you knew you're going to live into your 90s, chip, then the best way to do this is just wait till 70, wait to take for you for 70. And then because hopefully your wife has lots of longevity, she gets a full 50% of that, the highest number you can get. But really, the way I think about Social Security is not about maximizing, it's about optimizing it, meaning that you want it to be the right fit for you and you want to start taking it in the right year. So to me, it's not about maximizing. It's optimizing for your particular financial situation. Now, in your case, and I'm keying in on this, if you're like your parents and you do live in your 80s and 90s, you got a long way to go. Meaning that if you do wait, you should have the years to make up with these now higher payments because you waited for the years that you didn't take Social Security. I think the way you're thinking about this, she can't collect Social Security until you start taking your Social Security. And she'll get 50% of whatever you're getting if you wait till your FRA, the full retirement age. And it sounds like he's already there if he's 68. So, sure, you could go ahead and take it. You hit your fra, she should get 50% of that, but it's 50% of a lower number. So this goes back to. In this case, I would lean towards waiting till 70, because first of all, those numbers get to be really significant. You wait till 70 and I don't know the exact number for you, Chip, but I've seen 3,000, 3,500 over. I've seen people get over $4,000 a month if they're waiting all the way to 70. And then you get half of that. So let's call it you get four, she gets two, you get $6,000 a month, which is really significant. And then the next benefit of waiting and having that higher number, if you do pass away first, she now assumes your higher payment. So the waiting then also benefits her almost as a little bit of an income insurance policy. So it's not the perfect and black and white right answer to say wait till 70. However, I would lean towards that. Knowing the longevity in your family and the situation that your wife is not able to collect social, I'd be leaning towards waiting.

[Krista Dibias]

This came in from Andy in Idaho. Wes, a couple weeks ago, you suggested to a listener to spread out the Roth conversions over a number of years to minimize the balance in the tax deferred accounts before RMDs kick in. Is that really the best way to go? Sure. Depending on if you have other income streams, the RMD might increase the tax burden, but. But wouldn't it be a benefit to leave some funds in the tax deferred accounts to be able to use the standard deduction for RMD conversion after the age of 73, and if so, how much should be left in the accounts?

[Wes Moss]

Andy's not totally wrong in that thinking. I still say yes, you want to spread out your Roth conversions and it's still about taxes today versus taxes tomorrow. And yes, for a lot of people, RMDs, the required minimum money you have to take out of your IRAs, it does lift people's tax bracket because you're having to take out money. So practically, by the time you're 73, you not only have your Social Security and maybe a pension and your RMDs, you're going to have a fair amount of money coming in. And usually you want to have most of your Roth conversions done by then because now you're being forced to pull money out of your retirement accounts. Now, if you've done most of the job, think about it. If you only have 50,000 or 30,000 left in an IRA by the time you're 73, your RMDs aren't going to be that much anyway, so it's not going to be a huge amount of income. So, and again, I'm going to couch this with, with a little caveat here, is that taxes are super complicated and they're these rolling progressive tax brackets and every bit of income you assume or receive in a year, it's not just a black and white calculation, it's a progressive and rolling calculation. So you've got to run the tax calculation, meet with your CPA and speak with your tax advisor on this. But the way I look at this is when you're doing a Roth conversion, you're creating income. And if you are creating income and it's still at a relatively low amount, then, sure, your standard deduction could work. I know of folks I've sat with people that have done this in lower tax years. Let's say you're a student and you're not making any money or waiting before you really get employed. Well, you've got a pretty easy Roth conversion there, and your standard deduction can really offset a bunch of it. Now, you can't do $100,000 conversion, but if you're doing 15,000 and your standard deduction is 15,000, then sure, there's going to be a really big offset. So, Andy, it's actually a good idea and a good thought that even when you get to 73, if you still have some converting left that you'd like to do, the standard deduction could help.

[Krista Dibias]

Okay. And Patrick in Massachusetts sent you this one. I get shares of my company stock as part of my compensation. I'm not planning on keeping these as part of my investment portfolio. And I typically donate the shares. Does it make sense to wait and see at the end of the year if the shares are up and donate as they will have more value or down and sell using capital losses to offset tax, then donate the cash equivalent or should I just donate regardless?

[Wes Moss]

I think just donate regardless because this we don't know where we're going to be at the end of the year. If you knew that, hey, I'm just going to wait till the end of the year when my shares are higher. Well then we would also we put all of our money into those shares if we really knew they were going to be higher. So that would also require a crystal ball. And if you've got one of those, I'd love to take a look. But he's right. And this is for anybody thinking about donating stock if it's appreciated. So if you paid $10 for stock and even if when you're getting stock from a company, you're still going to have a basis on this and if it's higher, then you are in usually a better situation to donate that. If you're looking to donate money because you don't have to sell, pay taxes on the capital gain and and then donate the cash, you're allowed to donate the appreciated stock and you get the deduction amount for the full value subject to, by the way, 30%. You can only do up to 30% of your adjusted gross income. So if you make $100,000 a year, the max you can do if it's stock is 30%. 30,000, the max you could do for cash. Cash is 60. So if you make 100,000, you can get a deduction up to 60,000. You donate more, Krista, you want to give away more than that. So those are the parameters. 30% for stock appreciated, 60% for cash. But he's totally right. Thinking about if the stock is lower today or if you wait a couple months, then you don't have a capital gain event to sell it and you can actually take the loss. And a loss is an asset because you can offset other gains. You could even on your taxes again consult your tax advisor. But you can take about 3, you can take up to $3,000 of a capital loss against and you can use that on your taxes. So if it's down, you're better off selling it, donating the cash if it's up appreciated stock, better to do it that way. And we don't know where the stock is going. So I usually would just advise if you know you're going to make the donation, then I would do that as soon as it is available to do.

[Krista Dibias]

Okay, so coming up straight ahead, you're going to talk about what happens a year after a correction in the market.

[Wes Moss]

Let's talk about markets.

[Krista Dibias]

All right. We'll be right back.

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[Wes Moss]

See full [e-mail] welcome back to Ask an Advisor. I'm Wes Moss here on the Clark Howard show with Krista Deviaz. Hey there.

[Krista Dibias]

Hey Wes.

[Wes Moss]

Where are we going? Just right into it.

[Krista Dibias]

Let's get into it. What happens after?

[Wes Moss]

Let me ask you this question. Markets correct? 10%. Scary worries, tariffs, the doge. What's happening to the economy? Recession. What's your worry level when this happens? On a scale of 1 to 10? 10 freaked out ones. Just no care whatsoever. Love it.

[Krista Dibias]

You know, I would say because I've worked with Clark and I've known you for so long, I don't panic. I really don't panic.

[Wes Moss]

What about down 20%?

[Krista Dibias]

I don't because I still feel like I have a long view. I want to work for a long time, but I understand why people get Very, very panicked.

[Wes Moss]

Does your anxiety go up at all or literally just stays flatlined?

[Krista Dibias]

I'm pretty flatlined with it because I just, I don't even look at my accounts when it's like this. I just try to steady as I go, as Clark has always. I mean, I've worked with Clark for almost 28 years and it's, he's taught me that and I've seen a lot of ups and downs and I just try to keep putting my money in every month and trust, trust this process. Yes.

[Wes Moss]

So unlike Christa, if you have human emotion here then. And again, I think it's great because really you've been educated from this and you have a high level of conviction and that's part of why educating and reading markets and market history, it really works. It helps to understand. It's not that you don't have emotion, of course, it's that it doesn't bother you, but it bothers a lot of folks. And that's just called being human. It's just human emotion. It's not enjoyable to see your account value drop. The pain of loss is four times as impactful as the joy of gain. So we win $100, we have a 2 on the excitement meter. We lose $100, we have a negative 8 on the pain meter. That's just how we're wired. So it's important to kind of understand that as we go through market corrections. I think you guys have been really good here on the show of educating over all these years. So a lot of folks may be like, oh, a 10% correction, I get it. However, it does raise eyebrows and it does worry people. And I know that because we get lots, I get lots of emails about this anytime the market has almost any hiccup. So we've had a full blown correction. It's in the books as one of now probably 49 since we've had World War II. So we had, first of all, we had almost 50 corrections of 10% or more since World War II. Happened a lot. And the question is not so much the 10%, it's more, hey, wait a minute, is this going to go to 20? Are we getting into a bear market or remember when we went through the early 2000s, right after the 99 stock market tech bubble, the S&P 500 went down almost 50%. Now that's tough. I think even you might get a little nervous about that.

[Krista Dibias]

Sure I would.

[Wes Moss]

And then that happened again in the great financial crisis. We're down almost 50% for the S&P 500. Now it didn't last long when we got to that level but those hurt. And so the natural question I think is well what happens normally when we do go down 10% and if you pull statistics from if you go all the way back to the 40s we've had call it now these are statistics before the most recent correction but statistically we had 48 of them before this past one and 75% of the time Krista, it did not turn into a bear market. So 75% of the time, three quarters of the time it did not go to the 20% or worse mark. So to me that's a doesn't mean and we're not going to go continue to go further down. It just shows that most of the time 10% corrections just don't turn into full blown bear markets. So that's one data point I think it's interesting and important. Secondly, if you go back again this one goes back to the 1980s and we've had 21 corrections since then. Well where returns six months later, a year later. And I think that's really instructive too. So there's two kinds of corrections. You get a correction that's not accompanied by a recession. So that's just general market fear. Economy's still going every underlying it's still strong but we're just nervous and maybe stocks are overvalued and they pull back. If you look at that type of pullback then a year later stock markets are up 12% up 12% 12 months later. Now if you were to look at all the low from the minus 10% threshold so once you go down 10 and you look at that level, we're up 11 to 12% a year later. Now if you do look at the corrections that are accompanied by a bad economy, by a recession, we're not dramatically higher a year later but we are actually at least a little bit higher. So historically we're up 1 to 2% 12 months later. So that's the data we do recover.

[Krista Dibias]

I have to say also Wes, just a note like Clark always likes to say, well when things are low they're kind of on sale and so you keep putting dollar cost averaging, you put your money in, you're buying at a lower price. And I remember during a big correction when my kids were really little I had some cash and I decided to put it in their 529 accounts when markets were down. And it really benefited me over time since especially because my daughter went to a very expensive college there's a quote.

[Wes Moss]

I like about this period of time which is about corrections is that the stock market is the only store that people run to the exits when prices go down. Right. But our natural intuition is not that prices are on sale, it's that they're going to keep going lower. I think that's really, that's really the fear. Here's another. If you go back over economic history, we actually have not had a period of time where we've had three bear markets. So again, we're worried. Most people are. We're dealing with 10% correction. But is it going to get to a bear market? Is it going to get worse? And the reality is over the past, going all the way back to the 50s, we have not had 3 minus 20% within five years. So again, it would be improbable because we had one in 2020, we had a bear market. Then we had another bear Market in 2022. So to have another one here in 2025, again, history doesn't point to that. And then probably, Krista, the I think which is the most practical part about looking at these corrections and why we don't want to sell out and go to cash. If you look over the course of economic stock market history and you were to do a tiny little dot for every day, whether we're up or down and go back, you look at a 80 or 100 year period almost every single time you find a big down day or a big heavy correction that happens quickly. It almost always lines up within days or weeks or certainly within months that we have a big snapback. So almost every really bad down day or down week is accompanied in close proximity by a really big up day. That just goes to show that the speed of declines and this was the fifth fastest 10% correction we've had in history, really happened quickly. And I think that also worried people. But over the course of stock market history, the faster the decline, usually the faster recovery. Which just goes to the fact that it's almost impossible to be able to time getting out and then getting right back in to get these stat backs. So we can't really time it. It's almost impossible to do so. So we have to have your perspective, Krista, which is conviction that over time markets will do well because the American economy is hard to stop. I think of it as the army of American productivity. A, the army of American productivity doesn't panic and B, it just keeps marching forward.

[Krista Dibias]

All right, and now we'll go to some questions. This one came in from sriram in Washington. One, what is your opinion about the S&P 500 being top heavy? Top 20 stocks make up about 50% of the total value, which is unprecedented historically. How can investors protect their portfolio in this scenario? Two, is passive investing the reason for the top heavy market? And he links to an article. And three, do you expect the future stock market returns to be comparable to historical returns? How does the low Fed interest rate affect returns?

[Wes Moss]

Okay, there have been a lot of articles about this recently. So first of all, if you go back over the last couple of years, you're absolutely right that we've had more concentration in the top 10 and 20 names than we've seen historically. Now it is not Rare to have 20, 25% concentrated in the top 10 names. That's pretty normal because the S&P 500 is cap weighted. It's weighted by size. And the biggest companies at the top typically do take up 25%. The top, just those 10. What's happened is it's got even more concentrated. So that was a big story over the last couple of years that the mega cap companies were now are getting 30%, 32%. Where are we today? Almost 35%. Is it because of passive investing? I don't think it is. I can see how you could make an argument that yeah, passive investing is pushing up the top 10 names. I don't think that's the case. I think that the companies that have emerged to be the biggest have gotten there because they have such incredibly strong businesses that investors have flocked to that now. It hasn't hurt that more people have been putting money into passive indexes and strategies that continue to feed that. But it's not that new of a phenomenon. I'd say it's just it is even more so the case concentration at the top. But again, a lot of that is because of the properties of the companies. The second thought here is, is that a problem? Is passive investing a problem and is it creating this imbalance? And my opinion there is that it's important to know this is that we think, oh, The S&P 500, it's super diversified, which it is. But is it that diversified when 35% of it or 50% is really only 20 names? So I think it is important for investors to know that and understand that I don't think it's a problem. There is some commentary out there that it's creating a bubble that will take down the stock market. But if you look and there's no perfect answer here, we have $30 trillion in investment assets in the U.S. and almost, you could make the case that almost half of that is in some sort of passive vehicle. But there's $145 trillion in assets under management around the globe and only about 15 trillion that's index fund passive here in the United States. So really that's only 10%, which means there are millions and millions of people and trades and trillions and trillions of dollars that are still active managers looking for price discovery and we're getting to a price that investors are agreeing upon. I don't think the passive movement, which has been around now for three decades, I don't think that's creating a bubble necessarily. However, this is a very important point. By only doing, let's call it the s and P500, you should know that half of your money really is in 20 stocks. Which leads us to saying, okay, how do you diversify around that? The short answer here is it's super easy to do. There are hundreds and thousands of other options out there, other ETFs, other low cost funds that are not indexed to the S&P 500, and they're not overly top heavy. In fact, you can find equal weighted indexes or ETFs, equal sector ETFs. You can buy individual ETFs that don't have as big of an exposure in the S&P 500. So I do like to have, even though I do own some S&P 500, I like to have other ETFs that make it so that I have a better balance knowing that that index is top heavy.

[Krista Dibias]

And the third part of that, do you expect the future stock market returns to be comparable to historical returns?

[Wes Moss]

No, I can't answer that. I don't know.

[Krista Dibias]

Crystal ball.

[Wes Moss]

We had a question earlier that maybe he had a crystal ball. Nobody can tell you that. Nobody knows where we're going to be in a year from now. But if you're a student of market history and the US economy, we know we push forward. So I'm a big believer of reversion to the mean, meaning that what we've seen over 100 years will continue to play out over time. So I don't know if the market will be up 9 or 10% in any given year. But I still believe over time, and this is why I still invest. And what believe in it is that I think our average returns will still be there as long as we're in the game for long enough.

[Krista Dibias]

How many times a day do you get that question from clients?

[Wes Moss]

Most people do ask that. Well, how are we going to do this year?

[Krista Dibias]

Yeah, yeah. Okay. This one came in from Patir in New York. Question for Wes. I'm 35, married and we both started maxing out our Roth 401k contributions this year. We also max out our annual HSA contributions. Invest the funds. Both the Roth 401k and HSA investments go entirely towards a target date fund. Schwab Target date fund, the 2055 5.

[Wes Moss]

That's way out there.

[Krista Dibias]

Is the diversification in these funds enough to keep us covered as we save towards retirement? Or is funneling 100% of our retirement investments into a single target date fund a bad idea?

[Wes Moss]

The short answer is it's totally fine. I think it's a good solution for a lot of folks. I'm not saying this particular fund, but like most target date funds, this one, if you're going out 25 year or 30 years, 2055, the target date fund will be heavily weighted towards stocks. I think the Schwab one is probably 90, 93% in equities and the rest is in fixed income. So it's just a small amount. So we have a little bit of dry powder, but mostly towards equities. And he's 35 and it's US and it's international, it's small cap. I believe there's different sectors actually. I think the way these work, these target date funds are funds of different ETFs for the different sectors. So it's almost like a fund of low cost ETFs. So I'm not commenting whether it's a good or a bad investment. I'm just saying that any target, almost any target date fund for somebody that young at 35, that's appropriate. It's appropriate. It's super diversified. It's the. If you look and see just any one of those individual ETFs that are stock based are super broad, 3, 4, 5, 700 different positions. So we have a lot of diversification within each sliver of that overall pie chart. Now the only time I really have problems with target date funds or my main issue is that if you were to be in one of these target date funds, that's a 2025, the this year that we're in and this is your retirement year. Many of them are 60% in bonds. So you're starting out this retirement journey which God willing is another 30 years. I think way too few with too little exposure to equity markets which are really our inflation fighting elixir bonds can keep up with inflation, and they should over time. Equities are there to outpace pace inflation, so we can give ourselves a raise. So in these early stages, you want to be mostly equities anyway, if you have the risk tolerance for it. But I run into issues with target date funds when I'm getting close to that retirement date. I think they can get overly conservative for. For most people, not everyone.

[Krista Dibias]

All right, that does it for.

[Wes Moss]

That was a three parter.

[Krista Dibias]

That was a three parter.

[Wes Moss]

No, the one before.

[Krista Dibias]

One before. It was. Yep.

[Wes Moss]

They're all really cool questions. The reason I've always liked doing this, Chris, is that even though you don't have the question and you're listening, it might pertain to you in some way. And I think when you're hearing other people that are having a struggle or question or you're in a financial quandary and we're working through that, I think people can relate to that and I think that's why these can be helpful.

[Krista Dibias]

Absolutely. And again, if you have a question, go to clark.comask and thank you for joining us today. We hope you have a great rest of your day and we'll see you on next week's Ask An Advisor.