Mullooly Asset Podcast #187: Tim & Tom Answer Investopedia Questions – Transcript

Tim: Welcome back to the podcast. This is episode number 187. Today we’re going to do something a little different. This is Tim. I’m here with Tom.

Tom Mullooly: Hello, everyone.

Tim: That’s the same, but today we’re going to do something a little different. We have some questions that come in on usually a weekly basis from Investopedia looking for advisors to answer them. We decided to pick out some of the good questions that we got over the last week and answer them for you.

Tom Mullooly: Right. What we’re doing now is we’re really just kicking around the answers. These are not the formal answers that we would post online, but this is just two people talking. If you were here in our office instead of listening on a podcast, this is the immediate response that you would get, not something that’s been picked over and polished up for a letter or a blog post, but really, it’s just two advisors sitting around talking to someone who’s got some basic investing questions.

Tim: Right. Just answering them off the top of our head. Not getting too bogged down in researching the answer and making sure they’re perfect.

Tom Mullooly: Right, right. We’ve got a handful of questions. I think we’ve got five or six, so let’s …

Tim: We’ll dive right in.

Tom Mullooly: … see how far we can get.

Tim: Sure. First question. “Where can I check the most active stocks during pre-market?” It goes on to say, “I recently learned about pre-market trading. Is there a commonly used resource for how to check trading volume during pre-market, and how can this be interpreted as a potential tool for investment strategy?”

Tom Mullooly: Okay. The first thing I would tell you is if you’re going to be really serious about doing a lot of trading, like the person who wrote this question might be, is invest the money. Spend $2,700 a month and get a Bloomberg terminal.

Tim: Right.

Tom Mullooly: You’re going to get all the information you need. Other than that, there are some … You can go to a lot of these free financial websites or you can get a subscription to the Wall Street Journal or MarketWatch, some of these other sites that you’re going to find online. But just be aware that the volume that is posted is usually stale. It’s not always reported. We find the same thing with exchange traded funds, in that the volume that’s reported may not be the actual traded volume that particular day.

Some of the stuff gets posted late. Some of the stuff doesn’t get posted at all. You have to be a little skeptical of these numbers that you see, especially in pre-market trades. One of the things that I used to caution to clients when they would … When the internet and CNBC really started taking off in the late ’90s, they would talk about how xyz.com, whatever the company was, reported earnings after the market closed, and it’s trading up 15%. I actually had clients that would call me and they’re like, “Can we buy shares of that in the after market?”

At the time … I’m not talking about presently, but at the time, a lot of trades that took place in the after market or pre-market were considered matched sales. Think about that. Matched sales. So you want to sell 1,000 shares of XYZ at $71.25. No such thing as a market order. You want to sell your shares at $71.25. There has to be a buyer at that price, and if it doesn’t happen, no match. No sale. I’m not sure if that’s the way things are posted now, but that’s how the Wild West began. Think about if you had someone on the other end who you knew who was interested in buying what you were selling. You could pick up the phone and say, “Hey, I’m going to unload XYZ. You want to buy some?”

Tim: Right.

Tom Mullooly: I’d be really skeptical. The other thing that you also need to be mindful of is that what happens in the overnight markets or after hours markets is not necessarily going to translate into what’s happening during the trading day. You get a lot more liquidity, a lot more buyers and sellers coming into the market between 9:30 and 4:00. You’re going to get a much truer price during the open market. Don’t know if that answers his question, but I mean, if you’re going to be serious about trading, I would spend the money and get a Bloomberg terminal.

Tim: Right. I would more focus on what’s going on during market hours than pre-market hours as a rule of thumb.

Okay. Next question is, “Is there a place for junk bonds in my portfolio?”

Tom Mullooly: No.

Tim: Next question. Just kidding. My opinion is, if you’re going to own junk bonds, you should just put the money into stocks, because junk bonds, the yields that you’ll get on a bond might be higher than that of a treasury bond, but the risk that you’re taking by owning junk bonds, it’s comparable to the risk that you would take owning a stock. That’s not really a way I would own bonds in my portfolio.

Tom Mullooly: I agree. I think there’s very few people that I’ve met over 30 years that will own a portfolio of junk bonds for the income. They’re not really buying it for the income. They’re buying it for the income plus. They’re buying it because they think they’re buying some distressed security, so they’re getting them at a bargain, and they also think that they’re going to get some income, some cash flow, while they’re waiting for some of these things to work out, but you’re right in the sense that for all of the risk you’re taking by investing in junk bonds, just buy stocks.

In fact, when we are looking at client portfolios and trying to find what percentage do they have in bonds, what percentage do they have in stocks, a lot of times, we’ll alert the client to remind them that, “Yes. You have this much in junk bonds, but we would rather see that included on the equity side, because that’s really a lot riskier than what most people would consider the fixed income bond side of things.”

Tim: It doesn’t make sense to me. When I think of bonds, you think of safer investments, security …

Tom Mullooly: Things you’re going to hold for the long term.

Tim: Right. A risky bond is kind of an oxymoron, in my opinion. I don’t really think junk bonds justify a place in a portfolio.

Tom Mullooly: You want to take a risk, just buy the stock.

Tim: Right. Okay.

Tom Mullooly: Again, we’re not giving specific investment advice. We’re just two investment advisors sitting around talking to someone as if we met them at the bar and just …

Tim: Right. These are all anonymous questions by the way. We don’t know who asked them. They don’t give any names. They just send us the questions.

Tom Mullooly: Okay. What’s the next one?

Tim: Next question. “Does parental income affect a dependent’s child Roth IRA contribution?”

Tom Mullooly: Okay. So you’ve got parents, and they want to put money into a Roth IRA for their dependent kid.

Tim: Right.

Tom Mullooly: The answer is no. The parent income doesn’t have any impact on it, because you can contribute up to 100% of the child’s income up to $5,500. That’s the threshold for anybody who is under age 50. They’ve got to have the income. That’s the first thing.

Tim: That’s the one thing I would say to them. The parents’ income doesn’t really matter.

Tom Mullooly: It’s not going to really have an impact.

Tim: But the kid does need to have income.

Tom Mullooly: They have to show …

Tim: Otherwise …

Tom Mullooly: They have to have some kind of income.

Tim: Right.

Tom Mullooly: That’s the first thing. Got to have the income, and then you can go up to the threshold. Parents’ income, not going to be a factor.

Tim: Right. This is a good question. “Is it wise to roll over my 401K to an IRA in an attempt to pay off debt?”

Tom Mullooly: There are so many red flags going off in my brain right now, that it’s just like a big red mess. It’s just really … Just go through that again one more time real slow.

Tim: Is it wise to-

Tom Mullooly: No. Go ahead.

Tim: Is it wise … No … to roll over my 401K to an IRA in an attempt to pay off debt?

Tom Mullooly: Okay. We’re just going to take this in little steps. Is it wise to roll over your 401K to an IRA? Let’s just stop right there. We’ve got these Department of Labor regulations that are now in effect. The short answer to that might be no. It might actually be cost-effective for you to leave the money in your 401K plan. Before we talk about the other part of this menagerie, it’s important to understand that if you’re in a 401K plan … Especially for a larger organization. If you work for a big company, they’ve probably negotiated some really low fees on the fund choices in your plan, because they have a fiduciary obligation to make sure that your costs are low. Who’s going to be the plan administrator, if you want to call it that, in the IRA?

Tim: You are.

Tom Mullooly: You are, so it could be your investment advisor-

Tim: You’re going to have to try to negotiate your own low fees.

Tom Mullooly: Good luck with that.

Tim: Odds are the 401K plan has a better shot of getting you lower cost funds.

Tom Mullooly: Yeah. So, of course, you can roll the money from your 401K into an IRA. Of course, you can do that. What we’re saying is you might not want to do that. Right?

Tim: Especially to pay off debt.

Tom Mullooly: That’s the next part.

Tim: Because if you’re going to move the money from a 401K into an IRA just to take the money out of an IRA to pay off the debt, you’re adding too many steps to the process. Just leave the money in the 401K and take a distribution from there.

Tom Mullooly: Do a withdrawal. 401K plans are set up to do withdrawals just like an IRA would be as well. But this kind of sets me off on a little bit of a tangent here, and Brendan and I did a podcast about this a while back about should you be contributing to your 401K at work? I’m going to guess that the person who asked this question is younger. They’re maybe in their 20s or 30s, and now they’ve left a job. They’ve got a 401K balance, and so they’re saying, “Okay. Should I take the money out of the 401K, stick it in an IRA, and then take the money out to pay off debts?” The bigger question that I want to ask this person who wrote this question was, “Did you really need to contribute for a longer-term goal when you were stepping over some shorter-term goals that you really should have tackled first?”

Tim: Right. A little bit of planning in the short term for this person could have saved them money that they contributed to the 401K and put away for retirement. Instead, they could have thought ahead a little bit, not added on the debt that they did, taken the money from their paycheck, and used that to pay for whatever the debt came from.

Tom Mullooly: We made some people really unhappy this week when they came in to meet with us, and they wanted to talk about how they were going to retire comfortably. This was a couple in their 30s. The one thing that stood out to me when we built a balance sheet for them was they had $10,000 in savings. I’m like, if you guys get hit with some kind of an emergency or two whacks back to back short-term, you’re going to be back on credit cards. You can’t live your life that way.

We really, Tim and I, we were both in this meeting. We both stressed to these folks that they need to focus first on building that safety net, that cash flow, that pile of money that’s sitting in a money market or a bank account or somewhere, not subject to risk. Something that they can tap into in an emergency so they can avoid going into debt. Credit cars or borrowing money to just fix a problem. These people needed to really focus on that. I think that same advice would carry over to this person asking this question. If they didn’t have that debt, they could just then focus on investing long-term for retirement.

In our podcast … And we probably want to link to that podcast, too … what Brendan and I were talking about was, hey. Maybe it’s best before you go whole hog into your 401K plan at work or putting money into IRAs, that you think about putting money into maybe a Roth IRA or into just building up some kind of savings cushion that you would have before stepping on the gas for retirement. Retirement’s a long-term goal, and it makes sense if you can afford it to start putting money away as soon as you can.

Tim: I think that’s a big thing that you just said. I think the key word in that phrase was, “If you can afford it.”

Tom Mullooly: Right.

Tim: If you can’t afford it, that’s okay. Use the money to make sure that your self right now is good to go, and then worry about retirement. While it’s really important to save for retirement, you’ve got to help yourself out now, too. Make sure you’re all set.

Tom Mullooly: What do they say in the airplanes when they’re backing away from the terminal? Put the air mask … In the event of an emergency, the air masks come own. Put your own air mask on first. Then you can help the people to the left and right of you.

Tim: Got to look out for number one.

Tom Mullooly: Once in a while.

Tim: Then you can worry about future number one later.

Tom Mullooly: Right.

Tim: All right. Got a couple more questions here.

Tom Mullooly: Okay.

Tim: Next one. “Is now a good time to start investing within an IRA?” It goes on to say, “I’m a relatively young investor, mid-30s, and have some money saved up. I want a better interest rate than my bank’s savings account. I’m thinking of starting an investment portfolio in the stock market. I intend to invest maybe $100 a month, perhaps more. Should I do this within an IRA?”

I think the same advice that we gave to the last question could pertain to this person as well. If you’re mid-30s, if you can afford to lock that money up until you’re 59 and a half in an IRA, then go for it.

Tom Mullooly: A couple of numbers I think people need to, if not know, then be able to figure out pretty quickly. If you can pay $450 for a car payment, you can max out an IRA. It could be a Roth IRA. It could be a traditional IRA, depending on your income, but if you can make a car payment, you can do an IRA. It’s $450 a month times 12 months. That gets you to about $5,500, so you can max that out. What was the first question again? Just read that.

Tim: Is now a good time to start investing within an IRA?

Tom Mullooly: Okay. I’m going to ask you a dumb question. What’s the best time to plant a tree?

Tom Mullooly: It’s about 20 years ago. That’s the right answer. The best time to plant a tree was 20 years ago.

Tim: True.

Tom Mullooly: What’s the second best time to plant a tree?

Tim: 19 years ago?

Tom Mullooly: The second best time to plant a tree is today. If you haven’t started, start. Start. Just start. The main thing is to start and to continue funding that account and to continue to put it away. The reason why I made that sound, however, was when you got to the next question that he asked …

Tim: Right. The part about, “I want a better interest rate than my bank’s savings account.”

Tom Mullooly: Yikes. I just have such a problem with this, because we talk to a lot of people who don’t have great experience investing, and they come in, and they’re like, “We’ve got this money in the IRA over at the bank, and it’s not doing anything. Should I just take that out and put it in a savings account?” I think a lot of people, there are still a lot of people out there that don’t understand. If you have an IRA at a bank … If you have an IRA anywhere, but if you have an IRA at a bank, the bank is only going to be able to offer you their products. So what’s a six-month CD pay? What’s a 12-month CD pay? What’s a money market? A two-year CD pay? That’s all you’re going to have to choose from.

If you invest it in a brokerage account, you get a lot more choices, and things can really go crazy, but I think a lot of people just miss that point. Again, like you said, it ties in with the previous question in that if you’ve got a safety net, and you’ve got three, four, five, six months of expenses … Maybe you feel more comfortable with 12 months of expenses … in the bank, then yeah, you should be talking about investing for the long-term. Until then …

Tim: If you’re in your mid-30s, and you don’t plan on taking the money early out of an IRA, the biggest benefit you have on your side is time, so …

Tom Mullooly: Right. It can compound for a very long time.

Tim: … now is always a good time.

Tom Mullooly: Yeah. Good.

Tim: Two more. “What is the best type of methodology for retirement planning?” It goes on to say-

Tom Mullooly: I shouldn’t laugh.

Tim: It goes on to say, “I’m looking at having a fee-based financial planner help me design a plan for retirement in 15 to 20 years. I know there are numerous methods, goal-based, cash flow-based, and dynamic programming. Is one better than the other when planning for retirement?”

Tom Mullooly: I’m going to need a nap.

Tim: I think there was one video that we did, and the little teaser in the beginning of the episode was we’re going to talk about an acronym KISS. Keep it simple, stupid. That could … I’m not calling this person stupid, but that analogy could fit here. Like you said, there are numerous methods, but I think this person is making it too complicated.

Tom Mullooly: Way too complicated.

Tim: When it comes to retirement planning, there’s really just …

Tom Mullooly: One word.

Tim: To break it down to the basics … Right. There’s one word. Save.

Tom Mullooly: Save. That’s it. Just save. Just don’t worry about what method. Just get started.

Tim: Right.

Tom Mullooly: That’s really the main thing that we can tell people. What is it? Done is better than perfect.

Tim: Right.

Tom Mullooly: Don’t try to make it perfect. Just get her going.

Tim: Yeah. It’s just like we said in the last question. Now is always a good time.

Tom Mullooly: Right. Yeah.

Tim: Okay. Last question for this episode. “What is the best way to utilize some of our extra savings?”

Tom Mullooly: The best way to utilize some of our extra savings. I really think that once you’ve got whatever that number is, that three months of your expenses, six months of expenses, 12 months of expenses, we don’t care. Whatever that number is that makes you comfortable, then I would start thinking about how you want to invest the money for the long-term. That’s really a case-by-case basis, because some people are coming in in their 50s, and they’re asking us this question. Well, you know what? We may not talk about Roth IRAs for those folks. Other people are coming in in their 20s, and they’re just getting started, but yet they have additional cash flow, and instead of going out for Cosmos, $19 Cosmos, they’re saying, “Hey, we could actually sock a little more money away.” It doesn’t matter what you get started with. We have people that put 25 bucks a week away. Some people put $50 a month away, but the idea is to get into the routine of putting money away and letting it work for you. Pretty good questions.

Tim: Yeah. They consistently roll in on a weekly basis, so like I said, that was the last question, so we are out of questions for today. We’ll certainly have more for you in the future.

Tom Mullooly: This has been fun, because they’re anonymous.

Tim: Right.

Tom Mullooly: It really-

Tim: If you’re listening and we answered one of your questions …

Tom Mullooly: Congratulations. Hopefully, we didn’t insult you.

Tim: Yeah, right. I didn’t mean to call you stupid.

Tom Mullooly: Yeah. I think that there’s a lot of stuff out there. In our line of work, there’s a lot of people who want to make things really complicated, and it doesn’t need to be that way.

Tim: Right.

Tom Mullooly: Tune in to future podcasts where we answer more questions like these and give you some straight talk.

Tim: Right.

Tom Mullooly: See you on the next episode. Thanks for listening.

Now Go Talk About It!