Reviewing Your Investment Statements

Then I look at income how much and how tax efficient is the income of receiving ? Then , lastly , I look at taxes , because I want to understand any decisions I have to make that year and how they're going to be affected by taxes .

But I also think that , for individuals , understand how much you made for the prior year , how much you paid in fees to get to that result and then determine where you want to go from there .

I think , understanding those numbers and realizing how much they are when you see your fees get into the $1,000 or more , you start to realize that this is something I can control and something I can manage and ultimately , I think that leads you to a better net result .

I think people talk about returns in a gross sense , meaning with no fees , but we really started going to start to take this to . Let's talk about things in terms of a net Net . To you , what did you make last year ? We tackled investments and personal finance a few weeks ago , but today I think , taking that deeper dive .

When you look at your own assets , how do you evaluate your results and think about them ? I think it can make you feel overwhelmed at first , but we're all responsible for our own results . Let's make financial wellness a priority for 2024 .

So if you're paying an advisor 1% and he's putting 1% mutual fund in your account , that means you're overall paying 2% , and so that is starting to be significant . If the average return of your equities and bonds is 8% and you're paying 2% , 25% is going away to the person who's managing it for you .

That's significant and that's something you should try to change . Level three is where are there any loads on the funds ? Level ? Funds have this fee that is associated with selling their product and therefore you pay that fee as a load , and it can be significant . Some of them are spread over three years , five years or seven years .

And level four are there any commissions ? Most places have eliminated commissions and they're not really a factor anymore . They and I did a study about fees and they said , looking at the returns , the most clear determinant of good returns is lower fees .

So when we look for improving something , we can hear about an advisor or a fund that has great returns , aka ARC . But when you look at it over time and you look at what the fees are paying , it gets harder and harder to justify higher fees .

Obviously , index funds , ETFs that are tracking index funds , have quite low fees , quite low what are called expense ratios or fees , and it strikes me that most people or maybe not most , but a lot of people have already caught on to the fact that their fees are quite low . What do you say to that ?

Mutual funds vary between 50 basis points and 300 basis points . That's 10 times the amount you're paying . They better deliver more results if you're going to pay 10 times more . Etfs are somewhat more than index funds because you have daily liquidity or interday liquidity .

Etfs go between five basis points , but I saw a Bitcoin ETF at 150 basis points 1.5% that's a mutual fund like fee for an ETF , and then loads can add 2% up to 10% to your overall expenses . These are big numbers and you just have to understand what you're paying for .

But that's obviously not the case for everybody . A lot of folks just don't have the time or really the resources to actually do this kind of work themselves . So they're willing to pay some fees . It's just a question of how much those fees are .

There's some , I believe in the Peter Lynch method of kind of in the Charlie Munger knowing what you own making sure you're familiar with it , that's fine . I think that for most people , an index fund with low fees is the right approach . The main thing is look at your assets and try ensure your portfolio is helping you accomplish your goals .

There may be cases where a fund and ETF is beating the benchmark by 100 basis points and it's worth paying the 50 basis point fee , but there's a lot of cyclicality and it may beat them for three years , but five years , seven years , 10 years , it's behind .

That tells you that there's a time and a place for every strategy and , as you mentioned , ARC had its time and its place , but it may not be the right time and place right now . You have to take responsibility for making your assets satisfy your plan .

There's a time to make back your losses if you start early . But a simple formula that some people use is to take your age , subtract it from 110 , and that equals your equity percentage . Some people apply maximums and minimums of a maximum of 90% in equities or risky stock and a minimum of 25% Is real estate , an asset for investing or living .

I think that when you look at your assets , we're talking about your investable assets , but the other things you own car , home and potentially a second home you need to think about how all of those assets are growing and how they affect your overall wealth .

I think that updating your allocation once per year and getting it back in line , maybe in January when you're doing this review of your statements , is a good idea . Looking at it every day or five times during the day not a good idea . I think that when we look at our allocation , we wanna understand how much is in US assets versus non-US .

The world's capitalization is 55% US , 45% non-US , but most people are more comfortable owning things that have a home country bias , meaning they like to own companies that are US companies . Is that a mistake ? It hasn't been , because the US companies tend to have a better operating environment and also a systems and educated workforce .

So people might only wanna put 20% in non-US assets . And the last thing I'd say about asset allocation is there's something in the middle and I'm a middle child so I call it the messy middle . I yield prefers utility or infrastructure reads . I think that there are some characteristics of fixed income , some characteristics of equity .

Therefore they don't easily fit in one of those buckets . But that's where we get into a more complicated decision and I think that all of this is get started , understand , and then we start to get into these next questions about how to allocate more sophisticated way . What would you invest in when you were young , clem ?

But all that has changed and I feel like I can certainly do that now . I wanted to address one or two points I think that you raised when you were just talking . I think that you know the messy middle , some of those things high yield , preferred infrastructure , you know , maybe those things are .

It could be that those things are beyond the reach of some retail investors . There are some nuances to a lot of these asset classes that are complicated or confusing , so I'm not so sure that I would recommend those .

And US versus non-US that's worth the whole podcast in and of itself . So I knew that one would get you excited . I mean , I'll just point out one thing , which is you don't necessarily want to go by market capitalization . You know 40% of the earnings of the S&P 500 companies come from overseas .

So by investing just in the S&P 500 , you're actually getting a lot of global economic exposure . You're not really limiting yourself in that respect . The reason to invest in in my opinion , the reason to invest in international stocks is to be able to have exposure to stocks that you just can't get in the United States .

You know , if you're going to invest in a US pharmaceutical company and I know we're going to be talking in this round of podcasts about Lilly and Nova Nordisk but if you're going to invest in Lilly , why not invest in Nova Nordisk ? They're both companies . One just happens to be overseas and one just happens to be in the United States .

So what you know , what's the difference ? You know you go where your opportunities are . I agree .

All I'm saying is that there's a spectrum and people will invest on that spectrum , and I think that when I look at retirees and their decision making , it's all about income . Am I getting enough income ? Can I get income from other sources besides bonds ? And that's where some of the interest in preferreds, infrastructure and other utilities stuff comes from .

I'm not saying it's right for everybody . A young person shouldn't be investing in these utilities . They should be focused on growth . So I think that as we age , it should change . There's so many variables here . I'm not trying to come up with anybody's asset allocation .

I just want people to understand it and I think that when it gets to looking at some of these assets , it's not always clear and I think that , like you mentioned the US companies that have great foreign presence , like Coke , 80% of their revenue is coming from overseas . So , yes , is it a US domestic company ? Absolutely .

Is it really a company that only depends upon the US economy ? Absolutely not . So I think that it gets complicated , and that's why we're trying to do this is to try to simplify it for people and give them some good ideas .

So I think that they look to their portfolio to provide additional income and when we look at our two main asset classes risky they'll typically yield between zero and 4% . When we look to safer assets now , they're yielding somewhere between 4% and 7% . So do we put it all in safety or do we still keep a little bit of risky ?

I think the answer is that we're going to have a retirement that will probably last from 65 to 85 . It's a 20 to 30 year period . That period is going to need some growth , so I think you have to mix the two in a way that makes sense for yourself .

Historical returns for risky assets are about 8% , which about 1.5% is going to come from the dividend or the income , but most of it's going to come from the growth and the safe assets 4% , and most of it is going to come from the income . So those two assets are going to do different things for your portfolio and different things for you .

When we think about inflation at 2% eventually , maybe after a few years and fees of 1% to 1% , there's things that are going to eat into those returns . And if you just have a return of all safe assets and you've got inflation at 2% , taking that little way , that's not going to lead you to retaining your spending power . So Buffett had a simple solution .

He said , if he was to die and what he'd tell people to do , he'd say 80% in the S&P 500 and 20% in Treasuries . And if you think about that , the yield , you know the return will be somewhere around 7.2% , with fees somewhere under 10 basis points .

That's a pretty efficient portfolio that's going to have pretty good results and the 7.2% is going to most likely cover inflation and still give you something left over for growth . So when we think about all of these things , we need to start thinking about gross and net . Gross means a total return and then net , net of any taxes , fees or other items .

So I think it's really about understanding your income is something that you don't need to do right away , but as you're a person of time and I know you and I are trying to figure out where is that income going to come from , how are we going to get it and how ?

When we're looking at taxes , we're talking about taxes on gains or losses from the sale of the security in one of your taxable accounts and on income that you receive . So income and capital gains have different tax rates and you need time to understand what they are . As you think about your assets , there are many choices for you to defer or to pay taxes .

Today

You're going to earn more or less next year . Is your job ? Is you or your partner changing jobs ? What are the tax rates going to be over the next five or 10 years ? There's a lot of people who are worried about the amount of debt the United States has and what that means for tax policy .

These are all good points and good things to think about , because some people say , oh , I don't want to pay today's tax rate . In five or 10 years we might look back at 2024 as the golden age to assault securities .

Well , you're pretty optimistic , yeah , so , Steve , I usually well I often am optimistic . I thought you were a skeptic On many things , but not on everything . So , Steve , let's turn to our mailbag . So we have here a question Are index funds the best choice for everybody ?

Again , if you're going to buy individual stocks , they should be stocks that you know something about , not based on who you talk to at a cocktail party or something like that . I think you should really have done some research before you invest in particular stocks and , as you , there's a transition period here too .

There's a long time period between when you're young and when you're older , in which you can gradually move , as your knowledge level increases and your assets increase , from more of an ETF-only approach or a passive-only approach to an approach where you're using all active or active mutual funds or investing in stocks by yourself .

So it can be a transition period as well .

I think that fees are an important part of how you manage your life and the expenses you pay for things . It matters a lot when you talk about the magnitude of the assets you have in your investments . Allocation is your comfort with risk ?

How comfortable are you with you know , when you go to sleep at night and you hear the market was down 3% , does it bother you or does it not bother you Because your time horizon matters ? A couple of assets starts to be more of a factor as you get older and you start to want to use those assets to cover your expenses .

They evolve , your needs evolve and taxes , like fees , can make a difference . So anything else to add , Tom ?

So I'd keep that in mind . I would say safer , I guess , is better , yeah . And then I would say that I would agree entirely with you , steve , about you know , if the market goes down 3% in a day , not to panic and sell . It's really important not to panic and sell .

In fact , if the market goes down 3% , 5% , 10% , that's the time to be buying stock , not a time to be selling stock . And if you're comfortable doing that , then you're somebody who should be investing . But that's you know behavioral , psychological thing that you know that investors should like . You know what's a good entry point .

That's what professional investors call it An entry point for buying . You know , into the market or into individual stocks , you need to be comfortable buying low and selling high and not the opposite .