DeepSummary
The episode begins with Bo Hanson and Brian Preston discussing a listener question from Mark about whether it's better to have an all-equity portfolio or a diversified portfolio for retirement success based on historical simulations. They explain why diversification is still recommended despite equities often appearing as the top performing asset class historically - mainly due to uncertainty around future performance, risk mitigation through modern portfolio theory, and behavioral factors like fear and greed that diversification can help address.
They then tackle a question from Connor about what to do if his income is approaching the Roth IRA contribution limit. The hosts suggest strategies like increasing 401(k) contributions to reduce taxable income, doing Roth 401(k) contributions which have no income limits, or temporarily investing in a taxable brokerage account until eligibility for backdoor Roth IRA conversions can be determined.
The final question is from Tired Mama, asking if cash is "trash" again now that the Federal Reserve has signaled intent to drop interest rates. Brian explains that while brokerage money market funds will be impacted first, high-yield savings accounts and existing CDs will be impacted later, so a laddered CD strategy could make sense for holding cash needed in 3-5 years. However, maintaining an emergency cash reserve is still crucial regardless of rates.
Key Episodes Takeaways
- Diversification across asset classes is recommended for retirement portfolios despite equities often historically appearing as top performers, due to uncertainty about the future, risk reduction through modern portfolio theory, and behavioral factors.
- Strategies like increasing 401(k) contributions, doing Roth 401(k) if available, or temporarily investing in taxable accounts can help when nearing income limits for Roth IRA contributions.
- Cash should still be held for emergencies regardless of interest rate levels, but products like high-yield savings accounts and CDs can provide decent yields currently.
- Take advantage of employee stock purchase plan discounts but be mindful of overconcentration risk by systematically diversifying out of company stock over time.
- Don't assume historical top-performing asset classes will remain the same - diversify and adjust as conditions change.
- Both fear and greed can derail retirement plans, so diversification helps provide stability to combat behavioral biases.
- Consider tax implications like qualifying/disqualifying dispositions when taking advantage of employee stock plans.
- Market volatility and sequence of returns risk in retirement can be mitigated through proper asset allocation across stocks, bonds and cash reserves.
Top Episodes Quotes
- “And the third thing and this is what I'll be curious to hear you weigh in on, Brian, is that we know that when it comes to personal finance, when it comes to making financial decisions, 80% of it's behavioral. And so one of the things that we have to do as investors is we have to make sure we always curb the two sided coin of behavior, which is fear and greed. And I think diversification can help on both sides of that coin.“ by Bo Hanson
- “If they tell you, hey, you can go ahead and liquidate immediately, there's no holding period. You don't have to make it a qualifying disposition. It's okay to have it be a disqualifying disposition. You still come out ahead on that. Even if you're having to pay income tax on the bargain element that you're receiving on the ESPP, you still are coming out ahead.“ by Bo Hanson
Entities
Organization
Person
Company
Product
Concept
Episode Information
Money Guy Show
Brian Preston and Bo Hanson
2/14/24
Let's talk about stocks vs. diversification - how do you utilize investing methods for retirement success?
We'll walk you through that question and more in today's Q&A episode!
Jump start your journey with our FREE financial resources
Reach your goals faster with our products
Take the relationship to the next level: become a client
Subscribe on YouTube for early access and go beyond the podcast
Connect with us on social media for more content
Bring confidence to your wealth building with simplified strategies from The Money Guy. Learn how to apply financial tactics that go beyond common sense and help you reach your money goals faster. Make your assets do the heavy lifting so you can quit worrying and start living a more fulfilled life.