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What Dentists Want to Know — Listener Q&A #17 – Episode 255


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How are portfolios diversified and why should they be rebalanced periodically? 

On this listener Q&A episode of the Dentist Money™ Show, Ryan and Matt take a look at why rebalancing your investment portfolio is so important. Plus you’ll hear about different strategies for dividing stocks and bonds among various brokerage and retirement accounts.

When you build a portfolio four things are taken into consideration—the level of risk, geography, company size, and the price of the stock. Find out why Dentist Advisors regularly rebalances your portfolio to ensure it continues growing within your original criteria.

 


 

Podcast Transcript

Ryan Isaac:
Hey, Dentist Money Show listeners. Thanks for joining us on another episode. Today, Matt and I talk about the things dentists want to know, questions about portfolios and investments and weird nerdy things called rebalancing and asset location. If you’ve ever wondered these things, tune in, today’s the show for you. If you have any more questions or you’d like to have a question answered on the show, go to dentistadvisors.com/group. Join the group, post the question, we’ll answer it. You’ll get some answers, you’ll have lots of smart dentists chime in. It’s really awesome. Or if you want to chat with an advisor, go to dentistadvisors.com, click the book free consultation link. Thanks for joining us, thanks for all the support. We appreciate it. Enjoy the show.

Announcer:
Consult an advisor or conduct your own due diligence when making financial decisions. General principles discussed during this program do not constitute personal advice. This program is furnished by Dentist Advisors, a registered investment advisor. This is Dentist Money. Now here’s your host, Ryan Isaac.

Ryan Isaac:
And welcome to the Dentist Money Show where we help dentists make smart financial decisions. I’m Ryan Isaac here with the mighty mountain, Matt Mulcock. Thanks for joining us today. A quick reminder the Dentist Money Show is sponsored by Dentist Advisors, a comprehensive fee only financial planning firm just for dentists across the country. Check us out at dentistadvisors.com. Matt, thanks for joining me, man. How you doing today?

Matt Mulcock:
Doing great, Ryan. How are you?

Ryan Isaac:
Solid, solid play. Well done. Welcome back. Here we are.

Matt Mulcock:
Te mighty mountain. I got to hit that for a second. I don’t know about this. We got to narrow down a nickname maybe.

Ryan Isaac:
A strong nickname. It’s a tradition here on the Dentist Money Show to give nicknames. I have been involuntarily called Sir Ryan Isaac for so many years. I’m not sure I can nickname myself as I start the show.

Matt Mulcock:
You’ve been knighted. You’ve been knighted.

Ryan Isaac:
Unofficially knighted today. Today we’ve got things dentists want to know. There’s things on dentists’ minds, burning questions if you will.

Matt Mulcock:
They’ve got thoughts. They’ve got questions.

Ryan Isaac:
Matt, where did these questions come from? Let’s give a little shout out to the origin of these questions because it’s very important.

Matt Mulcock:
I’d say the vast majority of these questions come from the Dentist Advisors Facebook page, which can be found at dentistadvisors.com/group. If you’re not a part of it, you need to be part of it. It’s like all the cool kids are there.

Ryan Isaac:
You need to be there. And that doesn’t include us, but it’s all the rest of everyone else is pretty cool.

Matt Mulcock:
They allow us in to be a part of, to moderate the cool kids, but we are not the cool kids, not even close.

Ryan Isaac:
We pull down the average just a bit, but there’s so many more cool people than just me and you, so it’s fine. What we’re talking about here is, there is, I don’t know, almost a couple thousand people in that group now. And people post questions, things they want to know, and we answer them the best we can. Most of the time we’ll go and type a direct response, we’ll answer them over Facebook lives that are sometimes public, sometimes private just to the group. And sometimes we put them on the show here so more people can check them out. So today, we’re going to pull a few questions from that group. And today we’re talking about rebalancing portfolios and something nerdy called asset location, if you will.

Matt Mulcock:
My nerd brain just blew. It just blew up.

Ryan Isaac:
Exploded.

Matt Mulcock:
Yeah, just exploded

Ryan Isaac:
Rebalancing and asset location. Let’s start with-

Matt Mulcock:
We get excited about this stuff. I don’t know how the listeners feel, but we get pumped.

Ryan Isaac:
Well, that’s why they’re here. That’s why they’re here, and thanks for joining us, everybody. We’re really happy about that. Let’s start there. So the question was pretty simple. It was, shout out to Clint, he just said, hey, can you go over how you rebalanced your client portfolios? And then part of that question also was how do you mix an allocation between places in the world? The US, emerging markets, Japan, our neighbors to the North, small countries, big countries, how do you mix that stuff?

Matt Mulcock:
We love our neighbors to the north, shout out.

Ryan Isaac:
We love our neighbors to the north. They’re a little cold, not in personality, they’re extremely warm in personality.

Matt Mulcock:
They really are. They make up for it in the personality.

Ryan Isaac:
Yeah. Very warm. Maybe that’s the thing, you live in a really cold climate, you become an extra warm person.

Matt Mulcock:
It’s got to be.

Ryan Isaac:
You think there’s correlation? I don’t know. Okay. So, part of this question is how do you rebalance a portfolio? And I think to answer that question, we have to back up a little bit and maybe define the second part of that question, which is what is a portfolio. What are the pieces to it in the way that we do it, in the way our philosophy operates. So what are the pieces to this portfolio? And then we can talk about keeping them in balance once they’ve been chosen. So, I’ll throw out a couple of things, Matt, and then maybe you can elaborate a little bit. Some of the pieces to this portfolio are how much risk you take. Risk is a piece of the portfolio. And in really simple terms, risk is determined by what percentage of the portfolio is stocks and what percentage of the portfolio is not stocks. Not stocks meaning bonds or cash or something that’s just not as volatile as stocks.

Ryan Isaac:
Number one thing that we have to choose originally when you build a portfolio and then keep in balance over time, which is the process of rebalancing is risk. And then number two would be allocation. So you have these choices, Clint pointed to this question, or this piece in his question, you have the choice to allocate, which means just spread your money out across the whole world. So, the world’s global stock market. If we’re being honest about the phrase, the market, most people, Matt, when they say the market, what are they talking about?

Matt Mulcock:
They’re talking about US market, specifically, usually the S&P 500, which is 500, I think it’s like 504 to be exact, 504 of the largest companies in the US.

Ryan Isaac:
To be exact.

Matt Mulcock:
To be exact. I believe it’s that. It changes all the time. But it’s about 500 of the largest companies in the US. It is a part of the global market but it is not the global.

Ryan Isaac:
Yeah. So when we’re saying the market, we mean the whole global stock market in which about half of the world’s stocks are here in the United States, and then the rest is outside of the United States, and it’s split up into all the wonderful other countries. And then even further in allocation, which means where you spread your money out, you have types of stocks. So, some are split up by size of companies, you have what are called large cap, mid cap, small cap, micro cap. That’s just the size, when you hear cap, sounds cool.

Matt Mulcock:
It sounds really cool. Sometimes I just walk around and I’ll be like, hey, what’s the market cap of your company?

Ryan Isaac:
What’s market cap. What’s your market cap today? It’s like PSI.

Matt Mulcock:
Sounds cool.

Ryan Isaac:
Yeah, what’s your PSI?

Matt Mulcock:
PSI.

Ryan Isaac:
It’s just like meaningless. So you can diversify across size of companies and different size companies have different returns over long periods of time. And then you can diversify across the price of companies. So you can buy expensive stocks and you can buy cheap stocks, and they all have their pros and cons, and they also return, they have different return patterns and return averages over long periods of time. So, that’s diversification, it’s picking these, let’s call it four different things. It’s risk, geography, size of company and price of company. Those are four pretty broad ways you can diversify a portfolio.

Matt Mulcock:
Can we jump really quick just on the risk? I’m just going to jump just on the risk discussion really quick.

Ryan Isaac:
Kriss Kross will make you jump. Kriss on Kross or whatever.

Matt Mulcock:
We did do the music a podcast recently. So I’m just going to say on the risk side, I think it’s key maybe to spend a few minutes just on hitting, when we talk about risk of a portfolio, when we say that, we talk about, people equate risk with stocks or not having risks with bonds and cash. We’re speaking specifically to market risk, and really what that means is just the likelihood of having ups and downs of your portfolio. The short term volatility, again, just think thinking of ups and downs or range of outcomes. It’s different than the risk we’re talking about with let’s say what risk life insurance is there to mitigate, which is the pure risk of loss of you dying.

Ryan Isaac:
Or starting a business, like you start a hamburger stand.

Matt Mulcock:
Exactly. But there’s also a risk that people don’t necessarily think about, which is the, not necessarily market risk, but it’s the risk of not owning stocks. Risk of inflation, risk of you outliving your money by not owning assets that are growing at the pace of inflation or more so. So I just wanted to hit on that for a second, and just when we talk about risks, sometimes I think we take that for granted, not necessarily us, but I think people out there in general of not really realizing what risk we’re talking about.

Ryan Isaac:
It becomes one sided. You hear risk and you go, oh, the risk of stocks going down, that’s my biggest risk. We’ve said before, when people have a well-diversified portfolio, which is what we’re talking about here, the risk of your entire portfolio, every stock in the whole world becoming zero, and then going to zero and never coming back.

Matt Mulcock:
You got bigger problems on your hands at that point.

Ryan Isaac:
We’re now describing a world where every company, the company that makes the computer I’m doing this on and the microphone I’m using and the phone I’m sitting here looking at and the social media platform that we took these questions from, they don’t exist anymore. The company that owns the mortgage on the house I’m standing in, I mean, we’re talking about a world that those don’t exist anymore.

Matt Mulcock:
The global economy at that point does not exist.

Ryan Isaac:
Every company in the world is out of business. When you’re talking about a diversified portfolio of risk, people often think you’re saying that, oh, stocks can go down, that’s my biggest risk. We see dentists hold way too much cash, be way too conservative in their portfolios at a young age. And that’s as big of a risk as having volatility in your stock.

Matt Mulcock:
Oh, sorry, I was going to say, they add a different risk to their portfolio by sitting on too much cash by trying, and all in the name of avoiding this risk. That is market risk. It’s the only risk they think about. I just wanted to put that in context of that’s not the only risk that you’re actually facing over the course of your life.

Ryan Isaac:
Okay. So now that we’ve defined what a portfolio, kind of how it’s the pieces are on what diversification would be, now we can jump into what it means to rebalance. Let’s take a quick break real fast and we’ll come back and we’ll talk about rebalancing these pieces.

Ryan Isaac:
Hey, Matt, what do you like to drink or snack on when we do our webinars every month?

Matt Mulcock:
Yeah, that’s a good question. I’m usually hitting a Red Bull. But it’s hard because as an evening webinar.

Ryan Isaac:
These evening webinars taking place 6:30 PM Mountain standard time once a month.

Matt Mulcock:
Where do you find it?

Ryan Isaac:
Well, if you’d like to find the webinar or you’d like to register for it, you go to dentistadvisors.com/webinar, or just go to the website and click on webinars under the education tab.

Matt Mulcock:
It’s a good time.

Ryan Isaac:
It’s a great time. What kind of things do we cover in our webinar, Matt?

Matt Mulcock:
So each month we’re going to hit an element. So it’s going to be some component of your financial life. We’re going to dive a little bit deeper than we would like on the Dentist Money Show. We get to draw pictures, there’s live polls, you can ask questions.

Ryan Isaac:
It’s great time.

Matt Mulcock:
Yeah, it’s a good time.

Ryan Isaac:
Well, we’d love to see you in attendance at one of our fantastic webinars. Just go to dentistadvisors.com. Sign up today for the next one. Thank you very much.

Ryan Isaac:
Man, I hope your break was refreshing as mine was.

Matt Mulcock:
So great. I got a stretch in, got some water.

Ryan Isaac:
I drank 12 Frescas.

Matt Mulcock:
Very refreshing.

Ryan Isaac:
Yeah, I didn’t. Okay, so, we’ve established what a portfolio kind of looks like. Here’s the moving pieces. Risk and allocation across the world and price and size of stocks. So once you choose those, which is a whole different episode on how to choose those. Look, most dentists like our clients certainly, any given dentist is going to have like half a dozen different types of investment accounts. You might have Roths and regular IRAs and 401ks at work, and then some profit sharing, maybe pension plan, you’ve got brokerage accounts and kids’ accounts. I mean, you got a lot of accounts and not all of them will be built the same. And it would be a mistake to think that they should be.

Ryan Isaac:
So, once we’ve established what those should be for each individual account, for that part of your life and that goal of that account, then the process of rebalancing is kind of intuitive, well, at least that’s the way I think about it. Sounds intuitive. You just want to keep those percentages in balance. So let’s say for example, on the risk side, we chose to put a certain portfolio in 80% stocks and 20% not stocks. Could be bonds and cash, just whatever. So, every single day is stock markets and bond markets and money markets go up and down, that 80-20, that perfect 80-20 that we set on day one, it’s already different on day two. Maybe it’s 81-19 now.

Matt Mulcock:
It’s 79.84.

Ryan Isaac:
Yeah. I wish we could cue up the Highway to the Danger Zone song right now from Top Gun. If you go from an 80 to an 81, you’re like on the danger zone. Riding your motorcycle down a-

Matt Mulcock:
Tom Cruise got the sunglasses on with the white T-shirt and a leather jacket.

Ryan Isaac:
Done the tarmac. You just thumbs up to the jet taking off next to your bike. That’s a thing you can even do.

Matt Mulcock:
Yeah, just drive right by the jet racing it down the tarmac.

Ryan Isaac:
Race a jet. How cool. Some of these things immediately they start going out of balance. Your risk right there will start going out of balance with the fluctuation in the market, and it’s totally normal. So, that’s one thing. Maybe let’s say for sake of argument to keep it simple in your portfolio, you have a US chunk and you’ve got what’s called a developed markets chunk, which is like non-US countries that are pretty developed and advanced. And then you have something called emerging markets, smaller countries still kind of growing in their economies.

Ryan Isaac:
Whatever the allocation that you chose for those three things, those are also immediately out of balance by day two. So now you might have too much or too little stocks than you wanted on day one. You might have too much or too little of US developed in emerging or real estate or whatever else you have in there. And then also, if you diversified across growth stocks and value stocks, that balance is also going to be out of balance by day two.

Ryan Isaac:
Now, this can get really technical and inside of our trading process, we do in-house for all of our clients, we do all the trading and all the rebalancing every single day. It’s a pretty big job, a lot of firms will outsource it because it is a kind of a big job but we like to keep that in house. And it can get tactical. We set parameters that we call them bands sometimes. Is 81 okay if we chose 80% stocks? Can we let it go to 81? Can we let it go to 82? So we’ve got these parameters.

Matt Mulcock:
These are like headbands. They keep the hair in place. That’s pretty much what it is.

Ryan Isaac:
I wish that was a thing that we do, is wear headbands to keep the hair in place. So, it can get really technical, but basically, rebalancing is the process of looking at all these movements and going, okay, at some point, I’m going to get uncomfortable with how far out of the parameters these things have become, and I need to move them back, which means I either need to sell something that’s gotten too high and put it on the thing that’s too low, or I need to add new cash to the portfolio to put it on the thing that’s gotten too low.

Ryan Isaac:
Our preference, and this kind of just is nice, the way that most of our clients work, most of our clients are still working and saving money even though a lot of our clients in retirement are still saving money, which is really cool. Their investments are still kicking off more than they have to spend and they’re still saving money. It’s really cool. But it’s really nice if you’re in that saving accumulating phase of your life because you can just add more money to these portfolios to rebalance instead of having to sell things and create little taxable events in like a brokerage account.

Ryan Isaac:
So, doing this on a periodic basis, Matt, what do you think is normal for people who manage their own money rebalancing? What do you think people do, what’s your experience that you’ve seen, do they do it, do they do it like once a year?

Matt Mulcock:
Yeah, I was going to say, if they even do it. I’d say someone that’s pretty active with their process, someone that’s above average. I’d say the average person that’s just like a set it and forget it type person, maybe they got someone to help them set up their original allocation, their original mix of stocks and bonds and all the different holdings. Yeah, I’d say more times than not, people are leaving it. I’d say if you’re pretty active, you’re doing it once a year most likely as a do it yourself investor. I know there’s probably people out there that are yelling at their speaker or they’re in their car right now being like, how dare you, I’m doing this quarterly. But I’d say on average, once a year is probably pretty normal for a pretty active person with their investments.

Ryan Isaac:
Yeah. I think most people don’t rebalance that much.

Matt Mulcock:
Yeah, that’s probably true. I was trying to give them some credit.

Ryan Isaac:
You gave credit where it was due. I just think, and this is just anecdotal, no studies here to back this up, but just-

Matt Mulcock:
No study barn.

Ryan Isaac:
No study barn. Glad you brought that up. So many people I’ve met over the years who were good savers, man. They’ve been doing it for decade plus of their career or more. But the US for example is now like 98% of their portfolio and it used to be 60 or 70. It’s all just the S&P 500. It just kind of grew and never rebalanced because rebalancing is kind of hard. And here’s the thing that’s hard about rebalancing if we’re being, I was going to say if we’re being honest, but we’re always honest. It’s such a [inaudible 00:18:03] phrase.

Matt Mulcock:
We’re always. For being candid.

Ryan Isaac:
If I’m honest here.

Matt Mulcock:
Candid, straightforward.

Ryan Isaac:
This is the real situation is when you’re rebalancing, what you’re really doing is you’re selling your winners and you’re buying your losers constantly.

Matt Mulcock:
Feels good.

Ryan Isaac:
It’s terrible. Yeah. I mean, think about that. I wonder if that’s, A, it’s technical, it’s kind of not something you really think about that often in your daily life I’m sure unless you’re just a huge nerd like us. But B, I think it’s just, it’s mentally hard to do because you have to go to your portfolio and you got to look at your, let’s say your US holdings and go, man, these things are crushing it, but now I’m 10% out of my balance of what I originally picked. I got to sell this thing that’s on a tear and then I got to buy this stuff that’s not doing very well.

Matt Mulcock:
But if you think about it, the main kind of premise of that and the main kind of core premise of any investment strategy is buy low, sell high. It’s like the oldest term in investing.

Ryan Isaac:
That nobody does.

Matt Mulcock:
But nobody does, but the goal is-

Ryan Isaac:
Rebalancing can do that for you.

Matt Mulcock:
Exactly. Rebalancing is a proactive process in place, whether it be with new cash flows, like you said, or whether it be statically, you don’t have new money coming in, but you’re constantly rebalancing. Really what it is an ongoing process, a systematic way of buying low and selling high, which in the end over time over, you give it enough time, it’s going to hopefully mitigate risk and keep risk within a box that you’re comfortable with. And it’s hopefully going to optimize returns if you’re doing it right.

Ryan Isaac:
Well, and that’s the cool thing, it’s hard to do but you’re totally right, man. That’s exactly what’s happening is everyone knows that, buy low, sell high.

Matt Mulcock:
Everyone’s rolling their eyes right now.

Ryan Isaac:
Yeah, yeah. Everyone knows that but it’s near impossible to try to predict how to do that perfectly. But rebalancing is kind of like the boring secret to buying low, selling high because that’s exactly what you’re doing. And like you said, if new cash is hitting the portfolio, you don’t even have to sell it, you can just keep buying the cheap stuff.

Matt Mulcock:
That’s the ideal way to do it, that’s the ideal way to do it.

Ryan Isaac:
And really, that’s what’s happening with all of our clients. We run rebalancing, we scan every account. This is how nerdy we are. This is like multiple hours across a few people every single day. We scan every account in the firm to see if there’s enough new money to buy something.

Matt Mulcock:
Ryan sits in a dark room, there’s about 50 screens on the wall, and he is just typing away.

Ryan Isaac:
A plug [inaudible 00:20:38] in my bald head right in the back.

Matt Mulcock:
You just plug into the back of his head like the matrix and he’s just locked in for like five hours a day.

Ryan Isaac:
And little minority reports. I got these gloves and [inaudible 00:20:49] on the screen.

Matt Mulcock:
Hopefully we’re giving you a visual

Ryan Isaac:
This is exactly what happened. So we scan every account every single day and we look for any account that has enough cash to buy something in their portfolio. And when there is, and that could be from new savings or it could be from dividends or interest being kicked off. And the bigger your portfolio gets, the more frequently you’ll have the chance to rebalance with new cash, which is cool. There’s a lot of larger accounts from our clients who are getting rebalanced multiple times per month, which is really cool. So, we scan it and then we buy whatever’s the cheapest we can, and we just repeat that every single day. So, there’s the process of rebalancing. Do you think we did that adequate due process, diligence, love, respect?

Matt Mulcock:
I feel like you did a fantastic job describing how you sit in a dark room and rebalance portfolios. And we forgot to mention that you usually do it while you’re squatting, right?

Ryan Isaac:
In a squat stance.

Matt Mulcock:
Holding a squat stance.

Ryan Isaac:
[inaudible 00:21:42] two hours. Well, hopefully that did justice to the question. Again, if you want to dig on this a little bit deeper, you can always go post another question in the Dentist Advisors discussion group, you can find it on Facebook. Or go to our website and book a consultation with an advisor and ask them questions. Dentistadvisors.com. Let’s take a quick break and then we’ll come back, we’ll hit the question about asset location when we come back.

Ryan Isaac:
As you’ve listened to our podcast, maybe there’s a question about your finances you’ve wanted to ask. It’s easy to get an answer. All you do is just pick up that phone, give us a call at 833-DDS plan to set up a consultation. Or if you don’t want to call us, you can just go to the website at dentistadvisors.com, click the book free consultation button and set it up. It’s free, do it today.

Ryan Isaac:
Every time we go on a break now, I always think of the episode that we did about the story about the Superbowl, first Superbowl, the quarterback smoking a cigarette and drinking a Fresca.

Matt Mulcock:
Yeah. Basically what I do every time. I just take a smoke/Fresca break.

Ryan Isaac:
Yeah, just choke it down really fast and get it done. So, now there’s this question that’s pretty related to rebalancing, also came in on the Facebook group, shout at the Scott, which was this question of asset location. I feel like we could go like two hours, this could be a whole webinar. Matt, how about you describe for everyone listening, what does asset location mean? What’s the argument there?

Matt Mulcock:
So, basically, different accounts are treated in different ways based around taxes. So for an example, an IRA is treated differently than a brokerage account from a tax perspective. So when we talk about asset location, it’s placing different types of assets strategically within these different types of accounts based on how they’re treated for taxes, because just like accounts are treated differently for taxes, different investments have different tax treatment as well.

Matt Mulcock:
So for example, a REIT, like a real estate investment trust potentially will have different tax consequences than an index fund, or a bond fund is going to have potentially different tax consequences than a stock fund. And so it’s again, strategically placing those different types of assets in different types of accounts based on their tax treatment.

Ryan Isaac:
Yeah. Would you say that this question of asset location or the strategy of asset location is a tax first strategy over, like it prioritizes taxes over ideal investment strategy?

Matt Mulcock:
Yes. It’s definitely, again, I wouldn’t say you want to just forget it and not think about it ever, but it certainly should not be, it’s kind of one of those things we’ve said before, it’s the tax tail wagging the investment dog. It’s not the core part of any strategy. It’s more of like a, call it an optimizer, if you will. It’s a nice sort of thing to add, a sub category, but it shouldn’t be a core strategy. It wouldn’t be spending all your time and energy figuring out what’s the optimal asset location strategy, especially if you’re more of a, someone using more index type of approach to investing, it doesn’t mean as much in that respect than if you’re using more actively traded funds as well. So it depends on the person.

Ryan Isaac:
Okay. So, let’s give some examples here. And you’ll see this argument a lot on personal finance blogs and people who are advocating to kind of self-manage or DIY your investment strategy. So you’ll see this argued on personal finance blogs. We’ll give an example. So let’s say the argument would be stocks don’t kick off a lot of dividends or interest income. So therefore, it’s okay to hold those in after-tax brokerage accounts because most of the return you get from those are capital gains, it’s growth over time. So, go ahead-

Matt Mulcock:
You only get taxed if you sell.

Ryan Isaac:
Yeah, when you sell, later, whenever you sell. So, go ahead and hold all of your stocks in brokerage accounts. But let’s say your risk tolerance, kind of back to our first question, let’s say your risk tolerance isn’t to hold 100% stocks, let’s see you need like 70% stocks and the rest needs to be bonds. So the argument would be, the 70% of your portfolio that’s stocks, hold it in brokerage accounts. And the 30% that would be cash or bonds, hold that in IRAs and 401ks and tax advantaged accounts that don’t get taxed every year because bonds kick off income or dividends and interest. And so, that income will not be taxed as long as they’re sitting in IRAs and 401ks.

Ryan Isaac:
It seems like a pretty good argument. Yeah, why wouldn’t you do that? The problem is, if you start thinking about the limits on these tax-deferred accounts, an IRA has got a $6,000 limit a year, a 401k has got an almost $20,000 limit a year so it’s a lot bigger. If you had profit sharing or a pension plan, it could be even bigger than that. But that’s all fine and dandy when your account’s like your entire portfolio, all your money is like 50 grand because you can hold your 30% bonds in your IRA that’s only a $6,000 limit or whatever.

Ryan Isaac:
But when your account is six figures or when all of your liquid investible assets are six figures or seven figures, that would be near impossible to regulate. That’d be so tough. What you’d end up having is an allocation that’s basically extremely stock heavy, more aggressive, which might fit your situation, but it might not, as you’re only allowed to fit a certain amount of money in your tax-deferred accounts every year that make up your bonds, and the rest have to be stocks in the after-tax brokerage accounts. You would just end up with an extremely aggressive portfolio. That violates our first rule of picking the appropriate risk allocation for your situation per account, not just overall, but by the account goals and timelines and rebalancing to that over time, keeping it there as it fluctuates.

Ryan Isaac:
As soon as the accounts get big, I just don’t see how the average dentist, maybe this advice applies to not dentists who don’t make that much money. I don’t know, does that apply with just a person who just made less money and had smaller?

Matt Mulcock:
Yeah. I think it could. And again, I think-

Ryan Isaac:
More simplified than a dentist, maybe just average working person, not a dentist?

Matt Mulcock:
Yeah. I just think this is one of those situations where people, for whatever reason, whatever the driver is, they want to over-complicate things. I’m not saying that this is not something to consider or think about, and just completely throwing it by the wayside, but it certainly is not something I’d spend a lot of time and energy on. It’s not going to be a deal breaker in my opinion. And it certainly, I mean, the way you just described it, I’m sitting here thinking like, man, this could just overly complicate someone’s situation so unnecessarily. And it’s not going to be the main driver of success in someone’s wealth building plans and goals.

Ryan Isaac:
Your entire risk allocation is going to be thrown off as soon as that thing’s like 100 grand. It’s going to be just not what you want it to be especially as it grows. The other that’s hard, think about when you might need money from a brokerage account or you need to rebalance. So, if someone comes to us and says, hey, I need 50 grand for down payment or I need 100 grand for this building I’m going to build, we can go to their brokerage accounts so we can strategically sell things to minimize the tax impact, or we can strategically sell things to hold on to other things we don’t want to sell at the moment. Maybe you don’t want to lock in losses or maybe we don’t want to take capital gains, we can decide at the moment.

Ryan Isaac:
But if you employed the strategy of asset location, you can only go to your brokerage account, which means you’d only go there to sell your stocks because you only hold stocks in your brokerage accounts. And that might not be always to your best advantage to sell stocks. You might either be taking big capital gains to pull any liquidity out, or you might be locking in losses that would be, let’s say you had to get money out and it’s March of 2020, and your stocks are down 40% or 35%, but your bonds are fine.

Ryan Isaac:
But you need [inaudible 00:30:42] 50 grand, you can’t even get them because you did asset location as a priority and they’re all sitting in 401ks and IRAs now. So you have to go sell your stocks in the middle of March, 2020. I mean, it’s just an example but those kinds of things could happen where if it was set up different way, if you had the option to take out or sell something that wasn’t locking in a loss, you wouldn’t do it. You wouldn’t choose to lock in a loss in your stocks. You’d be like, I’m 35, I’m not going to lock in these losses right now.

Ryan Isaac:
So, yeah, it’s kind of one of those things, it sounds sexy on blog posts.

Matt Mulcock:
It sounds really sexy.

Ryan Isaac:
It sounds great. But it’s just, practically, and to execute that thing in real life, it’s just not feasible. It’s just not a reasonable thing that’s going to be sustainable for the average dentist for very long. Again, you could probably pull it off for small accounts, but then it’s just like, what’s the point? The tax savings on tiny accounts isn’t that big anyway.

Matt Mulcock:
The last thing too, Ryan, and you were describing holding the bonds in an IRA or tax-deferred account, 401k, I know this is just hypothetical, but that is something somewhat-

Ryan Isaac:
We like the hypothetical.

Matt Mulcock:
Yeah, we like hypothetical. And that is something someone would argue, is keeping those “more inefficient” investments in those tax-deferred accounts. The other problem with that is, the main power of a tax-deferred account like an IRA, a 401k, is long-term tax deferral on gains.

Ryan Isaac:
Boom, so glad you brought that up.

Matt Mulcock:
The idea is that we want those things to grow and defer as long as possible. Ideally not until your minimum required distributions happen, 70 and a half.

Ryan Isaac:
You’re just saying normally we want these, you don’t want a dentist to touch their 401ks, IRAs, simple IRAs, Profit-sharing pensions until they’re in their 70s if we can.

Matt Mulcock:
Yeah.

Ryan Isaac:
Which gives us the longest time horizon out of all the accounts.

Matt Mulcock:
Exactly. Longest time horizon. Which would mean what? We want to hold stocks in those things, the most aggressive thing. We want those things to grow.

Ryan Isaac:
Take the most risk in there.

Matt Mulcock:
Yeah. Compounding is only like, the investments we hold in those accounts should be growth-oriented. Again, coming back-

Ryan Isaac:
For the longest time.

Matt Mulcock:
For the longest. Exactly. That’s the power of those accounts. That’s taking full advantage. It’s like, if you were just a hold “tax inefficient” bonds in those accounts, you’re basically minimizing the power of those accounts in the first place. Again, you’re letting the tax tail wag the investment dog.

Ryan Isaac:
Tails and wags, wags and tails, dogs and tails, tails and dogs. Man, I’m so glad you brought that up. That slipped my mind, but that is a massive flaw in that strategy. So, all right, man, well, I think that about covers it. And again, thanks to everyone who submitted questions in the Dentist Advisors Facebook discussion group. If you’re not a part of that, join it. If you have any questions for us directly and you want to chat with a, I’m just going to say it, a very friendly, very knowledgeable dental specific financial advisor.

Matt Mulcock:
We might as well live in cold climates because our personalities are so warm.

Ryan Isaac:
See how we brought that back? Well done, Matt, good, strong showing, good form. Go to dentistadvisors.com, click on the book free consultation button and schedule a free chat with one of our advisors anytime you like. So, thanks for joining us, everyone. We really appreciate the support and we’ll catch you next time. Carry on.

 

Investing

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