05.20.25 Ask An Advisor With Wes Moss

Summary

Podcast Summary: The Clark Howard Podcast – Episode 05.20.25: Ask An Advisor With Wes Moss

Release Date: May 20, 2025
Hosts: Clark Howard, Krista Dibias, and Wes Moss

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In this engaging episode of The Clark Howard Podcast, Clark Howard teams up with investment advisor Wes Moss and co-host Krista Dibias to delve into critical investment strategies and answer listener-submitted financial questions. The episode, titled "Ask An Advisor With Wes Moss", provides valuable insights into passive investing, dollar cost averaging, Roth IRA strategies, retirement planning, and more. Below is a detailed summary capturing the essence of their discussions, enriched with notable quotes and timestamps for reference.

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1. Exploring Passive Investing and the Potential Passive Bubble

Timestamp: [01:07] – [09:05]

The episode kicks off with Wes Moss addressing a pressing concern among investors: Is the popularity of passive, index-based investing creating an unsustainable bubble in the stock market? He references recent articles from reputable sources like the New York Times and Harper's that question the long-term viability of the current passive investment trend.

Key Points:

• Evolution of Passive Investing: Wes traces the rise of index funds back to John Bogle of Vanguard in the 1970s, highlighting initial skepticism and eventual widespread acceptance due to their low costs compared to actively managed funds.

  "John Bogle from Vanguard really was the pioneer and started index fund investing back in the 1970s." ([01:05])

• Concerns Over a Passive Bubble: With more capital flowing into passive funds than active ones for the first time, Wes discusses fears that excessive passive investing might inflate stock prices, particularly of the largest companies, potentially leading to a market bubble.

  "One of the worries is that... it could drive the prices of those companies up... creating a bubble that could see outsized drops." ([04:30])

• Counterarguments: Wes counters the bubble theory by emphasizing that passive investing still contributes to price discovery since every purchase is matched by a sale. Additionally, he points out that globally, passive investments constitute a smaller portion of the entire market, mitigating the risk of a localized bubble.

  "There is price discovery even with passive investing because someone has to sell for you to buy." ([05:05])

• Active vs. Passive Performance: Wes acknowledges that while passive funds often outperform active managers due to lower fees, a significant percentage of active managers do succeed, especially in specific sectors like real estate.

  "About 42% of active managers beat their benchmark and beat passive indexes." ([07:50])

Conclusion: While acknowledging the concerns surrounding passive investing, Wes Moss remains optimistic, suggesting that active management still holds relevance and that a complete shift to passive funds is unlikely.

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2. Listener Questions and Expert Advice

The bulk of the episode is dedicated to addressing listeners' financial queries. Here’s a breakdown of each question and Wes Moss's expert responses.

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a. Akshay from North Carolina: Roth IRA Allocation

Timestamp: [09:05] – [11:37]

Question:
Akshay in North Carolina asks about investing his Roth IRA in more aggressive assets, such as all-stock index funds (S&P 500, mid-cap, small-cap), while keeping his Roth 401(k) balanced with bonds.

Wes Moss's Response:

• Time Horizon Consideration: Wes emphasizes the importance of aligning investment strategies with time horizons. Since Roth IRAs typically have the longest investment horizon, they are suitable for more aggressive, stock-heavy allocations.

  "Your Roth account... has your longest horizon. So the longest asset should be the most aggressive of all because you're not going to touch it for the longest amount of time." ([10:15])

• Strategy Endorsement: He supports Akshay's approach of allocating his Roth IRA towards stock index funds while maintaining a balanced portfolio in his Roth 401(k).

  "So the short answer is he's thinking about it the right way." ([11:20])

Key Takeaway: Align your Roth IRA with a more aggressive investment strategy if it has a longer time horizon, allowing for greater growth potential while managing risk through more conservative accounts like the Roth 401(k).

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b. Joe from Virginia: IRA Allocation for a Newly Retired Son

Timestamp: [11:37] – [16:48]

Question:
Joe seeks advice on managing his son's recently rolled-over IRA, which currently holds various U.S. stock funds and an international fund. He is contemplating reallocating a significant portion into bonds and REITs for diversification and fixed income.

Wes Moss's Response:

• Current Allocation Assessment: Wes reviews Joe's existing allocations, noting a potentially high-risk profile given the aggressive distribution towards U.S. stocks with minimal bond exposure.

  "It sounds like the overall portfolio is a little too aggressive." ([12:47])

• Diversification Strategies: He recommends increasing exposure to small and mid-cap stocks, bonds (both Treasury and corporate), and alternative income sources like REITs and energy pipelines to enhance diversification and stabilize returns.

  "Don’t forget some of the small and mid-cap areas." ([13:05])

• Alternative Income Areas: Wes suggests exploring sectors such as commodities and energy pipelines for higher income potential, while cautioning against over-reliance on volatile sectors like REITs.

  "REITs are just as volatile as the stock market... but they are a good category to think about." ([14:30])

Key Takeaway: A well-diversified IRA should balance U.S. and international stocks with bonds and alternative income sources to mitigate risk and optimize returns, especially for retirement planning.

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c. Sup from Minnesota: Roth IRA Conversion Tax Strategy

Timestamp: [16:48] – [19:41]

Question:
Sup asks whether it is prudent to pay taxes on a Roth IRA conversion using funds from an existing Roth account, especially when lacking sufficient cash reserves.

Wes Moss's Response:

• Tax Implications: Wes explains that using funds from a Roth account to pay taxes on a Roth conversion is generally unwise, particularly for those under 59½, as it triggers taxes and potential penalties.

  "You’re going to pay the tax on it, but you’re also going to pay a penalty on that." ([17:15])

• Optimal Strategy: He recommends having separate cash reserves to cover the tax liability of a conversion, thereby preserving the full amount being rolled into the Roth IRA.

  "You really want to have that money outside of the account." ([17:25])

• Spreading Conversions: For substantial conversions, Wes advises spreading the tax payments over multiple years to manage the tax burden effectively.

  "Maybe you do 50%, then 25%, over multiple years." ([18:05])

Key Takeaway: To maximize the benefits of a Roth IRA conversion, ensure that taxes are paid from outside the account to avoid penalties and preserve the full investment amount.

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d. Dennis from Connecticut: Retirement Withdrawal Strategies

Timestamp: [27:05] – [29:52]

Question:
Dennis, an early retiree planning to withdraw from his retirement accounts, inquires about the optimal timing for withdrawals—specifically whether to withdraw during down or up market years.

Wes Moss's Response:

• Withdrawal Timing Importance: Wes emphasizes withdrawing funds when the market is performing well to avoid selling assets at depressed prices, thus preserving portfolio value during downturns.

  "We do not want to be taking money out of stocks when they are down." ([28:00])

• Safety Assets Utilization: He advocates for maintaining a portion of the portfolio in safety assets (e.g., bonds, cash) to fund withdrawals during market lows, allowing the stock portfolio to recover during subsequent upswings.

  "Use your safety assets when stocks are lower." ([28:15])

• Strategic Drawdowns: During periods of market strength, Wes suggests drawing more from the stock allocation to lock in gains, enhancing long-term portfolio sustainability.

  "You're better off taking when markets have already done well." ([28:45])

Key Takeaway: Implement a strategic withdrawal plan that leverages safety assets during market downturns and capitalizes on strong market performance to sustain retirement funds.

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e. Mark from Florida: Target Date Funds versus Balanced Funds

Timestamp: [29:52] – [32:16]

Question:
Mark asks for advice on investment options for those who find target date funds overwhelming, seeking alternatives that offer simplicity without sacrificing diversification.

Wes Moss's Response:

• Endorsement with Caution: While Wes generally supports target date funds for their ease and automatic diversification, he expresses reservations about them becoming too conservative as investors approach retirement.

  "A lot of target date funds... get way too conservative when you're at retirement age." ([30:26])

• Alternative Strategy – Target Date to Balanced: He proposes a hybrid approach where investors use target date funds during the accumulation phase (younger years) and switch to balanced funds upon retirement to maintain a steady 50/50 stock-bond allocation.

  "From age 20 to 60, use a target fund and from 60 to 100, use a balanced fund." ([30:29])

• Simplicity and Flexibility: This method retains the simplicity of target date funds while preventing excessive conservatism in retirement, ensuring adequate growth potential and risk management.

  "It's just that simple." ([32:10])

Key Takeaway: Combine target date funds with balanced funds to maintain optimal diversification and risk levels throughout different life stages, enhancing both simplicity and effectiveness.

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f. David from Virginia: Reverse Glide Path Strategy

Timestamp: [32:16] – [35:52]

Question:
David inquires about the reverse glide path strategy, which involves maintaining a higher bond allocation at retirement and increasing stock exposure as one ages. He seeks insight into its potential downsides.

Wes Moss's Response:

• Understanding Reverse Glide Path: Wes acknowledges the concept as staying heavily invested in stocks during retirement, reducing bond allocations temporarily, and then increasing stock exposure again in later years.

  "It's the reverse, where you... increase the stock allocation." ([32:36])

• Practical Challenges: He points out the complexities and annual adjustments required for this strategy, making it less practical for most investors compared to more straightforward approaches.

  "You’re going to have to change your allocation every year." ([34:20])

• Comparative Effectiveness: Wes analyzes research indicating that the reverse glide path offers only marginally better outcomes than traditional balanced allocations, without substantial long-term benefits.

  "It doesn't have materially better results... it's a little too complicated." ([35:40])

• Preference for Simplicity: He advocates for maintaining a balanced portfolio throughout retirement, emphasizing ease of management and consistent performance over potentially unreliable complex strategies.

  "I like to make things simple in a very complex world." ([35:45])

Key Takeaway: While the reverse glide path may offer theoretical advantages, its complexity and marginal benefits make traditional balanced allocations a more practical and reliable choice for most retirees.

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3. Deep Dive into Dollar Cost Averaging (DCA)

Timestamp: [19:41] – [32:10]

After addressing listener questions, Wes Moss and Krista Dibias transition to an in-depth discussion on dollar cost averaging (DCA), a fundamental investment strategy.

Key Points:

• Definition and Analogy: DCA involves systematically investing a fixed amount into a particular investment at regular intervals, regardless of market conditions. Wes likens it to a "safety harness" for investing, allowing investors to manage uncertainty about market movements.

  "It's like a safety harness... you can make the choice to dive in and just adjust immediately." ([22:12])

• Psychological Benefits: DCA makes investing more psychologically manageable, especially when dealing with large sums, by reducing the anxiety associated with timing the market.

  "It's a palatable way to get bigger amounts of money to work as opposed to never jumping in the water." ([25:00])

• Research Insights: Studies indicate that lump-sum investing outperforms DCA approximately 70% of the time in rising markets, as markets generally trend upward over time. However, DCA can mitigate losses in declining markets, offering a more balanced approach.

  "Almost 70% of the time... your rate of return is actually better just putting everything to work right away." ([20:00])

• Strategic Implementation: For those uncomfortable with immediate lump-sum investments, Wes suggests splitting large deposits into smaller, regular contributions to balance potential gains with risk management.

  "Maybe you do 50% now and spread the other 50% over several months." ([27:05])

• Applicability Across Scenarios: While DCA is beneficial in volatile or declining markets, it may underperform in consistently rising markets. Nonetheless, its role in fostering disciplined investing remains invaluable.

Conclusion: Dollar cost averaging serves as an essential strategy for investors seeking to manage market volatility and psychological barriers to investing, despite its occasional underperformance compared to lump-sum investing in bullish markets.

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4. Closing Thoughts and Final Takeaways

Timestamp: [35:52] – End

As the episode wraps up, Wes Moss reinforces the importance of simplicity in financial planning. He echoes John Bogle's sentiment:

"The enemy of a good plan is the dream of a perfect plan." ([35:52])

Key Takeaways:

• Balanced Approaches Over Complexity: Opt for investment strategies that are easy to manage and understand, ensuring consistent application without getting bogged down by overly complex methods.

• Diversification and Risk Management: Maintain a diversified portfolio aligned with time horizons and risk tolerance to optimize growth and mitigate potential downturns.

• Strategic Withdrawals in Retirement: Implement thoughtful withdrawal strategies that leverage safety assets during market lows and capitalize on gains during market highs.

• Consistent Investing Habits: Embrace strategies like dollar cost averaging to foster disciplined investing and reduce the psychological stress associated with market timing.

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Conclusion

In this comprehensive episode, Clark Howard, Krista Dibias, and Wes Moss provide listeners with nuanced perspectives on key investment strategies and practical advice for retirement planning. From dissecting the nuances of passive investing and exploring the merits of dollar cost averaging to navigating the complexities of Roth IRA conversions and retirement withdrawals, the trio offers actionable insights tailored to diverse financial scenarios. Their balanced approach underscores the significance of simplicity, diversification, and strategic planning in achieving long-term financial well-being.

For more personalized advice or to submit your own questions, visit www.clark.com/askclark.

Transcript

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[Krista Dibias]

Welcome back to Ask an Advisor. Where we here at Team Clark go deeper on all things investing. Hi everyone. I'm Krista Dibiaz here with Wes Moss.

[Wes Moss]

Investing in financial planning and all of the above. Hi Krista.

[Krista Dibias]

Hi Wes. So what are you going to talk about today?

[Wes Moss]

You know, some of this is sparked by the questions that I've been getting not only through the families I work with, but from you, from our listeners and our viewers. And the first topic has to do with passive investing. So index based investing, is that in itself because it's become so popular? Is that creating a bubble, a stock bubble that could be bad? So we'll talk about that. And also inspired by some of the questions we've had from our listeners and viewers, I wanted to dive into dollar cost averaging and talk about kind of some of the fundamentals around that today.

[Krista Dibias]

Great. And I have lots of questions for you as always. And if you have a question, you can go to clark.com ask and you can ask a question there for Wes or for Clark.

[Wes Moss]

All right, so let's jump into this passive bubble. The other thing is that I've read, I've had folks send me some articles around this and New York Times did a big article about this. Harper's did a big article around this. And then there's lots of other you start searching, you Google passive bubble and you're going to find a lot around this. First of all, when I say passive, we mean index funds. I know that Clark's been talking about them for years. John Bogle from Vanguard really was the pioneer and started index fund investing back in the 1970s. In the very early years, there was a lot of pushback. Well, why would you ever want to just do what the market does when all of these other mutual fund managers trying to beat the market and then ultimately what happened is that it became somewhat or commonly understood that a lot of times active managers don't beat their benchmarks. And that kind of that cadence and that thought became more and more widely known and accepted. And a lot of it is just because passive funds are so inexpensive. And if you look at that ULTRA Low cost versus an active manager that is racking up 1 or 2 or 3% charges every year, it kind of makes it so that it's easier for passive funds to win. So it started out as this nascent idea, kind of crazy idea, then became somewhat accepted. Then I'd say maybe even more recently, it's become almost the default. And one of the worries is that, and just this past year, according to Morningstar, we saw for the first time more money flow into passive indexes, passive index funds, than we did active. That's when you started seeing this drumbeat of wait a minute, maybe this, maybe there's just too much in passive. What could be the problem? Well, remember, and we've had some questions around this, most indexes are cap weighted so that the top 10 companies are making up because they're so, so massive. Multi, multitrillion dollar companies, they really have an outsized share of what the market does. So so goes the biggest 10 companies, so goes the whole 500. And the worry here also is with so many people putting money in these cap weighted indexes, is it driving the prices of those companies up? And I think that would be the case if you look at, sometimes I'll look at these problems and I'll look at them in extremes. Right. If we had no, if everything was passive, then I could see that being a problem because you'd have no price discovery. Everyone was just blinding, putting money into the market and the big biggest stocks continue to get bigger and bigger. So I could see that as a problem and creating a bubble that as soon as people stop putting money in and started pulling money out, you could see these outsized drops. So I could see that as a problem. So I understand the worry around it, but I also understand the. And if you start looking up kind of what the globe looks like, remember every time there is a purchase of a stock, there's also a sell of a stock. Sometimes we forget that it's like what I'm going in among, just going to buy, I'm just buying. Well, somebody's selling it to you. It's not as though the stockers are sitting on the shelf unowned, they're owned by someone.

[Krista Dibias]

Very true.

[Wes Moss]

So even passive Investing has price discovery. Somebody's got to let go of that stock in order for you to buy it. So that kind of, I would say it is one counter to that argument that there's no price discovery in passive. There's still price discovery. The second thing is that we are a global stock market and we hear about global companies all the time. We think about the big drug companies that are the weight that semi glue tied or the Ozempic boom. These are a lot of these big players are European companies. We hear about companies every day that are from other countries. There's stock trading in those other countries all the time, which means we're a global stock market. Sure, the s and P500 is the United States, but it's a global market globally. Well, let's start with how much is there in passive funds in the United States? About 15 trillion. That's a big number. So if the whole market was only 15 trillion, I'd be worried. But the US stock market alone is over 30 trillion. And the global equity markets, which that really matters, it's the whole aquarium, not just our little pond, is almost 145 trillion. So if you start doing the math 15 on 145, it's a much lower percentage. What is that? 10%. So 15 divided by 145 is 10.3%. So the reality here is that passive investing has gotten really large and popular in the United States. But it's still not a giant number relative to stocks and investments around the world. Here's the other point. Americans, humans are always looking for something better. True, always looking. How do we do better? And what's interesting is that even though large cap indexes and index funds have a really high beat rate for active managers, something like over a five and ten year period, only 7% or so of active large cap managers win against the index over time because they have a higher cost structure. It's not that they're necessarily picking bad stocks, it's that they have higher cost hurl every year. But some do win, some active managers do win, and even in the large cap category. But here's what's really interesting is that if you look at the whole universe and this is the year end 2024 Morningstar study that looked at trillions of dollars, something like 70% of the entire market, US market. So a really good sample set 42% of active managers beat their benchmark and beat passive indexes. Some of the categories like if you look at real estate or REITs, something like 50 to 60% of active managers win. So you start to see if you really look at the landscape, passive. It's not as though they're winning 99% of the time. They're winning in some of these other categories. They're winning like 40% of the time, maybe 50% of the time. And as long as active managers have a chance and the numbers show, they have a really good chance, particularly some of these other categories, investors are always going to look to say, well, I'm not going to just do passive. I'm going to consider active. And some investors still only do active and it can work. So just human nature I don't think is going to give up on doing better than the average, even though that's a really strong, good strategy. Low cost, just getting the market's average. John Bogle is, I've read many of his books over and over the years about it, so it makes a ton of sense. But I just don't think active management is going away in my lifetime. So I don't think that this passive bubble gets to the point where it controls all.

[Krista Dibias]

Okay, we'll go to questions. Akshay in North Carolina says hi, Kristen West. I love the new segment of Ask an Advisor. Thank you for doing this.

[Wes Moss]

Well, actually, you're on it now. So you are, you're part of it.

[Krista Dibias]

I'm doing target date index funds for my Roth 401K, maxing out the Roth 401K and doing a backdoor Roth IRA each year. Would it be an okay strategy to invest my Roth IRA in something slightly more risky than a target fund? I'm thinking of splitting up my Roth IRA into all stock index funds such as the S&P 500, mid cap and small cap, instead of adding bonds, as this is already being done in my Roth 401K. Can you please share your thoughts for or against this approach? Thank you for the amazing work you do.

[Wes Moss]

This is a time horizon question, actually, meaning that. So we've got a couple things that determine what we're comfortable investing in. One is your horizon. So how long do you have to wait? Right. Again, let's break this up into extremes. If you know you need money in a week, are you going to invest it in the NASDAQ? The answer is no. If you need money in 40 years, are you going to invest it in an all stock index? Absolutely. So beyond your own feeling and propensity to handle risk and fluctuation, which is that's totally different for everyone. The biggest variable here is time horizon. So you start to Think about, okay, I've got my brokerage accounts, I have a regular retirement account, I've got Roth accounts. What's got the longest horizon out of all those? It's your Roth account because it's the, it's the most valuable tax related asset that we most of the time, not 100% of the time. Most of the time that's the last asset that you're, that's the last pool of money you're going to tap because it's so valuable and it comes with such advantages tax wise. So it's got your longest horizon. Your brokerage account may have a shorter horizon, your retirement account somewhat shorter. And remember, you have to take money out of that when you hit your RMD age. So very simply, the longest asset should be the. Could be. You can make a real argument that it should be the most aggressive of all because you're not going to touch it for the longest amount of time. So I love that, the way you're thinking about that. Let that be your most aggressive. Let that be mostly stock or all stock when some of your other assets are more balanced. So I guess the short answer is he's thinking about it the right way.

[Krista Dibias]

Awesome. Joe in Virginia says my son retired in November and moved his tsp 401k of $980,000 to an IRA with Schwab. He's 60 years old and has a 10 year time horizon, so wants a moderately aggressive portfolio. We put it in a money market fund. While sorting it out, we need your help in choosing investment types and allocating it. So far I put 23% in S&P index mutual fund, 13% in US total stock market mutual fund and 10% in a dividend paying stock ETF. All are US stocks only. We have 15% in an international fund.

[Wes Moss]

We.

[Krista Dibias]

With money market rates dropping, I need to move the other 40% out sooner than I thought. I'm thinking of 20% of the remainder split between bonds and REITs. REITs? Real Estate Investment trust.

[Wes Moss]

Real estate investment trust. Right.

[Krista Dibias]

Can you tell me where else to invest the last 20% for more diversification? I'd like to get 4% or more on fixed income. So should I buy bonds and what kind or different fixed income? Also any thoughts and suggestions you may have on my allocation plan would be greatly appreciated.

[Wes Moss]

Well, I love that we've got all these different categories. U.S. 23%, 13%, 10% and then 15% in. I think he said international. There are a couple of areas I didn't hear about, so it sounds like the bond allocation is really low if that other 20% is split between rates and fixed income. So it sounds, I'm wondering if the overall portfolio is a little too aggressive. But here are some of the areas that you just at least want to consider. Remember, mid and small cap are an important piece of the equation in the United States. Yes, we can get that. Technically, even if you look at The S&P 500, some of those companies at the bottom are much smaller. But they really do almost nothing to move the meter in one of those indices because it's so dominated by the biggest companies, these cap weighted indices. So I think now more than ever you don't get small cap exposure if everything's just in a broad market US Index, it's so weighted to the top. So don't forget some of the small and mid cap areas. That'd be one area I would look at. Secondly, it sounds like you're already looking at bonds. I like treasury bonds because the yields right now are similar to corporate. Corporate bonds are always going to be a little bit higher yield because they're not quote backed by the United States government. But it's good to have both. So I'd be looking at, and this is retirement money. So you don't need to look at municipals here. You don't need to look at municipal or tax free bonds. But I would be looking at corporate and Treasuries. So US Government and corporate bonds and then collateralized loan obligations. I know that says a scary sounding word, but it's another bond category that can have really high credit rating and the yields are a fair amount higher, not dramatically, but they're higher than treasury bonds. Right now I look at that category as well. Then I think of some of these other areas, I call them alternative income areas. I actually think REITs as alternative income. Remember, REITs are just as volatile as the stock market just because they're in real estate. They're in publicly traded real estate companies. So they move just like the stock market. But it's a good category to think about and potentially own. Then you've got commodities and energy pipeline areas. So if you're, if you look at commodities, talk about a, should be over time a good inflation hedge, some commodity areas like gold that doesn't pay any sort of dividend. So I have traditionally not really owned a lot of commodity exposure to when it comes to gold or silver because it doesn't fit into my, I'd like to get some income mindset. Some of the other areas, the energy space there's a multi. Multi billion dollar industry in the United States. Billing doesn't sound like a lot anymore, does it? But there's a very large industry that is related back to energy pipeline companies, and they do pay a lot of income, so I'd be looking at that as an area. So there's a lot to consider here. But. But I think as I talk this through, because these major indices, total stock market S&P 500, are so weighted towards a couple really big names. I think owning not just small caps, but even some of the sectors to get you a little bit more exposure. If you own the S&P 500, your exposure to utilities is almost. Is almost nothing. It's like one. It's like 2%. So in order to have anything material in some of these underrepresented sectors, just because of cap size, capitalization and size, not cap size, is to look at some of the sectors that are so underrepresented in the big total market indices. So that's a lot to think about. But those are some of the missing areas that, when you're talking about an asset allocation, I would at least look at and consider.

[Krista Dibias]

Okay. And. Sup in Minnesota. Says who? Sup, I believe.

[Wes Moss]

Sup as in, like, what's up?

[Krista Dibias]

Yes.

[Wes Moss]

Sup.

[Krista Dibias]

I hope I'm saying that right. If I do an IRA rollover and I don't have the cash to pay the taxes, is it silly to pay the tax out of a Roth account?

[Wes Moss]

Whoa, whoa, whoa, whoa, whoa, whoa. An IRA rollover or an IRA to a Roth IRA conversion?

[Krista Dibias]

It says IRA rollover, but probably it is a Roth conversion because you're paying taxes. It must be.

[Wes Moss]

Yeah, I think supp's meaning it's going into a Roth, but we can answer both ways.

[Krista Dibias]

So if sup doesn't have the cash, is it silly to pay the tax out of a Roth account that I have? If I roll over $100,000. Oh, it is. Into a Roth, and I get the full $100,000 rolled into the Roth. Is this idea smart or silly? I hope Wes is wearing the reddish vest today. Thanks, guys. And you are?

[Wes Moss]

That's why you picked that question? That's why.

[Krista Dibias]

Well, you know, that's about the best.

[Wes Moss]

You can describe this red. Ish.

[Krista Dibias]

Yep. If you don't watch the YouTube show, Wes often wears a vest. Not almost every week.

[Wes Moss]

I haven't worn it for a while.

[Krista Dibias]

Okay, but you have a gray one too.

[Wes Moss]

Yeah, this is burgundy.

[Krista Dibias]

Okay.

[Wes Moss]

I would call it reddish. All right, so I would say yes. The short answer is if you're going to do a conversion and you're under the age of 59 and a half. So let's say you're 40. Then when you're converting money into a Roth from an ira, if you're taking money out of the IRA to pay the taxes to get the money into the Roth, not only do you pay the tax on it, but you're going to pay a penalty on that. So that counts as a distribution if you're under the age of 59 and a half. So you really, in order to do a conversion, you really want to have that money outside of the the account. So just in a brokerage account, you got to also worry about that. Because if you have a brokerage account, you have all these gains in stocks and you have to sell those gains, sell companies at a gain in order to pay the taxes. So technically you want to just use cash. There's no taxes to get to it. Otherwise you've effectively now taken what could be a $100,000 conversion and you now have $75,000 in a Roth because you had to use some of the money in order to pay the taxes to get it there. And that kind of defeats somewhat defeats the purpose, even though that is the reality of a Roth conversion. And that's why we've had lots of questions around Roths. Some people love them, some people say, wait a minute, do I have to do a Roth conversion? It's like the only path, and it's not always the only path. And sup, I would say if it's too big of a tax bill to do it in one year, 100,000 is a lot, then maybe you do 50,000 for two years or 25,000 over four years. Really, most people need to spread out when they're converting their Roth because the taxes are a lot to pay, for sure.

[Krista Dibias]

As promised, straight ahead, you're going to talk about dollar cost averaging.

[Wes Moss]

Doesn't sound like an amazingly exciting topic, but it's such a fundamental part of how we invest. We've got to talk about it.

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[Wes Moss]

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[Wes Moss]

To Ask an Advisor. I'm Wes Moss along with Krista Dibias. Hey Krista.

[Krista Dibias]

Happy Tuesday, Wes.

[Wes Moss]

Happy Tuesday. Where are we headed here? Dca.

[Krista Dibias]

Yeah. Dollar cost averaging sounds like an airport. It is an airport. Washington.

[Wes Moss]

Reagan. DCA is one.

[Krista Dibias]

It is.

[Wes Moss]

Yeah. We were naming our airport after dollar cost averaging.

[Krista Dibias]

Clark would love that.

[Wes Moss]

So I want to talk about dollar cost averaging. Krista. First of all, we've gotten a some questions about it and I think of it as an investment safety harness. I think of it this way, you're going to get into the water but you have no idea what the temperature of the water is. So let's say you're in Florida or maybe you're in Finland and you're about to get in the water. Well, it could be a hot spring and in Finland might be fine and easy to jump in. Or it could be a cold pool of water. In Florida you just don't know, so you, you can make the choice to dive in and just adjust immediately and you kind of take the good with the bad. Sometimes it'd be better to do it that way or you could wade in. And that's what dollar cost averaging is to me. So I think we all know the definition. Systematically investing money in a market or an index or really any investment over the course of time. And you do it over and over and over again. So it's a hundred dollars every single month on the 15th, and you're doing the same security or the same ETF or the same fund, and it smooths out your cost basis. You're going to be buying no matter if the market's up or it's down or it's up or it's down. So it smooths out your cost basis is one way to think about it. Secondly, secondly, and most importantly, it is a psychological way to make investing more palatable, particularly if you have a lump sum. Imagine all of a sudden you've accumulated a million dollars over the years and you're ready for retirement and you sell a business and now you have another million dollars in cash. Well, you've gradually invested this other million. Now you've got to figure out, what do I do with the next million? Seems like for a lot of people it's hard to just put it all to work right away. Now let's look at the research. What over time does better putting money to work as a lump sum or dollar cost averaging in over 3, 6, 12 months? Well, almost 70% of the time, 7 out of 10, because markets on average tend to go higher over time. Almost 70% of the time, you, at your rate of return is actually better just putting everything to work right away. So dollar cost averaging in a, in a rising market, which the market rises more than it falls or the longer periods. And that's why the studies suggest if you're just playing the odds, you are better just to go ahead and jump in the water and not wade in. But going back to my example, you've got a big lump sum. It might just be too psychologically unsettling to do it that way and just to jump right in. But you also don't want to be paralyzed and never get in the water. What's a happy medium is to wade in. And dollar cost averaging that can do that. So it's systematically putting money to work in any one particular security or a whole diversified basket of securities. You say, look, here's my allocation, this is my strategy, and I'm going To get a million dollars into this, but I'm going to take 10 months to do it. I'm going to do 10% every month for the next 10 months and we get to 100%. And you've now smoothed out your entry point. Where does it work? Well, of course you end up with more money. If your dollar cost averaging over a year, that's a really bad for the stock market market. So if you think about it, go back to 2008, the market was down what, 30, let's call it 40%. If you chose to do a lump sum investing at the beginning of the year, your $100,000 turned into 60 at one point. If you dollar cost averaged into the market over that entire year, your kind of worst case scenario is down 15 or 20%. So dollar cost averaging, if you're looking at your overall rate of return a couple of years down the line in a falling market, it's better to DCA in, in a rising market, it's better to put a lump sum in right away. So because we don't know if the next three, six, nine months are going to be up or down, there is no right answer. All we can do is play the odds. The odds are that markets go up over time. So it makes sense to to not wait too long. Even if you look over long periods of time, putting money to work over the first year and versus right away at the end of the 20 years in both scenarios it's very close either way. So I think the reason I like DCA1, we almost all have, we just have to do it and we get a every single month in our paycheck. If it's going to a 401 or a 403B, it's just part of the deal. So fundamentally we need to use dca. I think of it as a palatable way to get bigger amounts of money to work as opposed to never jumping in the water to begin with. And that's an even bigger problem.

[Krista Dibias]

But maybe a strategy could be if you are someone who maybe gets paid on a bonus or you get some commission or whatever, maybe it's a good idea to consider putting a percentage of that lump sum in.

[Wes Moss]

There's a million ways to slice it right, but that is a really good and I'd say practically I've seen it work that way too. For people to say like, hey, let's do 50% of it now and we'll spread the other 50% over the course of several months.

[Krista Dibias]

Okay, we'll go to questions. This one's in from Dennis in Connecticut. As a result of paying attention to my spending and saving and living with monthly budgets since being in my 20s, I'm now planning to retire next year at 61 years old.

[Wes Moss]

Early retiree Dennis I was listening to.

[Krista Dibias]

Wes the other week and he mentioned something about when taking money out in retirement we should try and withdraw it in a down market year and not an uptick market year. And if I heard that correctly, I would love to hear more about why. I guess I always thought that I would take money out of my safe money pile when the market was down and wait until the market corrected itself before taking it out of my 401k. Thanks to the whole team for bringing us such great content.

[Wes Moss]

Dennis, thank you for the question. And yeah, that is the right way to think about it. So no, you do not want to be taking money out of stocks when they are down. And that's the whole purpose of dry powder. Or you can think of it as a bucket approach or think of it as an allocation where you have a certain percentage in safety assets that are meant to not go down when stocks go down and maybe even go up in an uncorrelated way. I'm talking about using that the safety money that doesn't go down. That's where you want to draw from when stocks are lower. So think of it this way. Any sort of financial plan assumes that markets are going to go up and down. You never get to take very rarely can you ever take money from your stock account at the perfect all time high because there's only a few times during the year if we ever get all time highs. Right? But you're on the right track. We want to be drawing from stocks when they're up, but stocks are rarely ever at their pinnacle. So if stocks are, let's call it meh and they're doing okay or doing not great, then you can still draw from stocks. It's just when stocks are way down In a down 15, 20, 25% scenario, we absolutely do not want to draw from them if we don't have to and use our safety assets. The reverse is true. The stock market is rocking and way ahead of schedule. So you've planned for a 5% rate of return over time and you get three years where stocks are up 15, 15 and 20. Well, that's when you want to withdraw potentially even more. A you lock in some of those gains and historically you're better off taking when markets have already done well. So your intuition was exactly right. I don't Know, if you heard me wrong, maybe I was wrong, maybe I said it backwards, I don't know. But either way, you're on the right track.

[Krista Dibias]

Okay, Mark in Florida says. Wes, I've thoroughly enjoyed your Tuesdays On Clark's podcast. My question, you say you do not like target date funds. However, many of us are overwhelmed because we are not in the industry like you. Clark has shared, if you don't understand or know what to do to put your money in a target date fund, what would your recommendation be for somebody who's overwhelmed or doesn't understand the investment world? I'd love to know your opinion.

[Wes Moss]

Look, I mostly agree with Clark. Clark likes targeting.

[Krista Dibias]

He loves them. Yeah, he loves them.

[Wes Moss]

I would say I like them, so I don't dislike them.

[Krista Dibias]

He loves them for this purpose, so someone can set it and target them.

[Wes Moss]

I totally agree with Clark on this one, is that they really were a great innovation and what they helped with was people never jumping into the water. Right. It's like I'm putting money into a 401k and it's money market and money market and it's hard to get started because I'm nervous to get going in an investment. So the target fund immediately says, come on in, you're already diversified. And oh, by the way, we're going to get more conservative when you get closer to retirement. All that is a pretty darn good idea. It's not the perfect idea, but it's a better idea than not getting invested. So I like, or I'd say even I really like target date funds. I just don't love them only because I think they get way too conservative when you're at retirement age. A lot of target date funds, if you'll look out into the future and it'll show you by the time you hit your date, your year, they're like 65, 70% in bonds, 75% in some cases. And that to me just gets too conservative. So I think they're great when you're younger. So maybe here's an easy way to remember this. So what else could you do? And remember to do the 4% withdrawal rule, one of the parameters is to have at least 50% in stocks. So how do you answer this? Well, maybe from age 20 to age 60, use a targeted fund and from 60 to 100, you use a balanced fund. Because remember, a balanced fund is always going to stick and rebalance to half in stocks and half in bonds. So maybe it's just that simple. Is that use a target date fund for your first 40 years and then use the balance fund for your next 40 years.

[Krista Dibias]

Sounds great to me. Okay.

[Wes Moss]

A new rule of thumb. I don't know what would call that target date to balance. I don't know.

[Krista Dibias]

Okay. David in Virginia says for Wes to reduce the risk of sequence of return risk for the. The reverse glide path is gaining popularity. You go to 70, 30 bonds stocks when first retiring and then when you start collecting Social Security you increase the stock allocation. Are there downsides to this reverse glide path?

[Wes Moss]

All right, Dave, I had not heard of the reverse glide path until this question. So I went, I looked at, I watched some videos on this. Dave. I read the Michael Kitces article. He's a super well known financial advisor, cfp, very technically oriented minded and does lots of financial planning research. And so I kind of dove into the reverse glide path. So for those listening, you think traditionally we think of retirement like we would use a. Our allocation would be like a target date fund starts out mostly equities and gets more conservative over time. The problem with target date funds is it gets way too conservative. What the reverse glide path or equity glide path essentially says is stay heavy stocks. Then five years before retirement get really conservative. Five years after retirement stay really conservative. And then once you're in your five years in then you get more aggressive and your allocation in equities goes way up. Okay, sounds like a lot to do, right? So if you look at the heat map, when you're looking at withdrawal rates, look at a heat map. The red areas are the bad scenarios and the green areas when money lasts a really long time. Even from the KITC study, which is somewhat advocating to think about or use this a scenario that started out 30% in bonds and rose to 70 in stocks. Basically at a 95% success rate over 30 years. Okay, that's pretty good. Just having a 50% stock, 50% bond allocation over that whole period of time, it's 94.1. So you get to pretty much the same place through simplicity and just using a balance versus this have really heavy inequities, then reduce them for a short period of time and then get into retirement, keep that low and then increase that and then you're in your 80s and you're ratcheting up your equity position. Like what? That's not good. It might work on paper but for a lot of financial planning is solving for what works in real life, what you're going to actually do. So you're going to change your allocation every year and go high equities down to super conservative and back up and then when you're in your 80s, you're going to get to be 80, 75%. I just don't think practically it works. So I don't discount it and I think the math behind it makes some sense. But it also doesn't have materially better results. And I've watched full videos on this and some of the results are somewhat better, but it's also all historical anyway, so there's no way to know if it will work into the future. So I like to make things simple in a very complex world. It's kind of one of main pillars of my financial planning, creed and life because if it's not simple, people are not going to do it or they won't do it and follow all the way through. So I like it, but I wouldn't bank my retirement on it because it's a little too complicated. What does John Bogle say? The enemy of a good plan is the dream of a perfect plan.

[Krista Dibias]

Ah, yes, that's a great quote. Lots of John Bogle, a lot of Bogle princes. The Bogleheads would be loving it. That's awesome. All right, well, that does it for this episode of Asking Advisor. Thanks for being with us. Remember, you can send in your questions clark.com asking.