Transcript:
Tom Vaughan:
Well, hello, everybody, welcome to Friday, another show of Go Live with Tom. My guest host today is Easan. Another one of our advisors here at Retirement Capital Strategies. So this is a fairly simple concept, you can email in questions, you can asktom@golivewithtom.com, just right there on the bottom of the screen. And those questions will come into Easan. And he’ll ask me, and we’ll have a little conversation Easan can do some follow up questions and try to get some depth into the subject as far as that goes. So, these have been really fun, really enjoy them, and what have you. Our objective and mission statement at Retirement Capital Strategies to help our clients build and maintain their wealth. And we really feel like Investor Education is a big piece of that.
So we’ll be focusing on financial planning and tax planning, and investment management depending on what questions come in and such to. And so what we do is this gets posted on our channel, which is what you’re looking at right now. And then we carve this video up into pieces. So if you just want to watch one piece later, that’ll be on our channel. Also, if you’d like to get notice of these different educational videos being posted to our channel, go ahead and subscribe. There’s a little subscribe button there. And if you would like to get email when we post, you can hit the little bell right next to that. And so that’s, that’s the process super simple. We really enjoyed this. We’re having a good time. I think this is our sixth one, we’ll keep doing these Fridays at 12:15PM to One o’clock, Pacific Standard Time. So alright, Easan, why don’t you go ahead, and we’ll start with the first question.
Easan Arulanantham:
So, current news is on inflation came out higher than expected, “What kind of investments do well during a high inflation period?”
Tom Vaughan:
Okay, good. Well, that’s obviously a topical question. This week, as most of you probably know, they reported the CPI, the Consumer Price Index, which was up 4.2% versus the same time last year, and which is a really big number, that’s a huge inflationary number for the US anyway. Now, the year over year comparison is a little bit skewed, because last year, basically in April, things were down. And matter of fact, prices were struggling to, to stay at the same level. And so but if you look at month over month, so March versus April, actually had, depending on what portion of the you look at is up about .9%. And so that’s a big deal, too, that’s a big jump from a one month period. And so we’re seeing, all of these different issues that are coming in creating these problems. And most of it is kind of concentrated in certain areas, like used cars, and travel, and hotels and those types of things. And it’s a very basic concept, you got people that are willing to come out of the shelter in place at a faster rate that businesses have been able to keep up. And you have employees that are actually reluctant to come back into the workplace for a variety of different reasons. So how do you invest in that is basically the question.
So let me share my screen, and I can kind of show you, our current portfolio, and when what I think we should be looking at. And so this is our traditional model, we have two different models, we have a traditional investment model, and then we have an Environmental, Social and Governance model, I’ll use this one just to kind of highlight. There’s this is the stock portion, I’ll show you the bond portion in a minute. And I have kind of an equal weight concept here, 15 different pieces altogether as what I’ve got in the portfolio at the moment. And so basically, I always start with the total stock market index. So this is Vanguard’s version of basically buying the entire US market. And so there’s roughly 3600 stocks in here. And then we just kind of add to that. So here’s the S&P 500. Right, already in this particular piece of the portfolio, but the S&P 500 is very popular. Neither of which is a particularly, spectacular arena for higher inflation, but you don’t know what’s going to happen. And so I always like to have some of the broad market pieces in there. And then this company, Invesco, has three pieces here. They’re called Pure Value, S&P 500 S&P Midcap 400 in S&P Smallcap 600. And what they’re doing is they’re taking the S&P indexes. So this S&P 500 is the same index, but they’re just carving out the value stocks, the the heavy value stocks, and what we’ve seen is that in times of higher inflation, value stocks tend to kind of really do better and they’re usually they’re higher inflation is coming because we have an economy that’s growing quite quickly. And these value stocks are more sensitive to economic growth, which means they hopefully will make more during that period of time. So I really like these.
So far, I’ve been pretty pleased with those. Then I have two more value factors, and so what they’re doing here is they’re applying screens to the overall market to find what they feel is the best value. One is iShares, which is managed by BlackRock. And the other is Vanguard’s Wellington, which is a Wellington is a fairly famous old line value fund manager. And both of these are really exciting to me. And then I have two infrastructure pieces. So again, these aren’t particularly areas that might do spectacular and higher inflation. But there is a big push towards infrastructure because of what’s happening politically in terms of the American Jobs plan. This is a traditional infrastructure, this is more of a technology side of infrastructure. But here materials we have Vanguard’s Material, so this, Vanguard kind of buys all the different material companies. And then here Invesco is taking just the material companies out of the S&P 500, and then weighting them equally. Most of the times, you’re weighting things based on the market capitalization, which is what happens here. So theoretically, materials are going up in price in an inflationary environment, which makes these companies that are making copper and lumber and those types of things make more money during that period of time.
So that’s, that’s a good inflation hedge, then consumer discretionary. Again, this is just a play on the reopening as people start to spend more, I saw a presentation today. And they said that American’s savings rates currently at 15%, which comes out to about $6 trillion a year of savings. If you compare that to where it was even before the pandemic, it was about less than $1 trillion. So lots of money that can come out that I think will come into different types of places. Banking is a great hedge against inflation, they do better when interest rates go up, transportation is going to move here, because people are moving and things are moving at a faster rate. And then exponential technology actually is just my one overall technology piece here. And that’s not so much an inflation play. But it is a play for when the growth side of the equation takes off, which is today actually. So these, these two pieces are more my growth SIMS and XT here. And they actually are doing really well right now today as we’ve had a great run in the NASDAQ today. So you know, you want to have different pieces in there. But we’re definitely geared towards this value, really inflation play as far as that goes. And that’s my outlook for the stock piece as far as that goes.
Easan Arulanantham:
“So before you jump over from stock to bonds, could you explain the difference between an equal weight fund versus market cap based fund?”
Tom Vaughan:
Yeah, that’s actually a pretty good question. Because if you look at, say, the S&P 500, it’s market cap weighted, which just means that a company like Apple is going to have a lot more impact on that particular index than a smaller company would. Matter of fact, the top five companies in there, five or six, make up a lot of the movement of the S&P 500. So sometimes you want to get representation on some of those smaller mid sized companies. So if you use equal weight, that just says, all right, we’re just going to say, here’s 60, companies, we’re going to buy the same percentage of all of them. And it gives you a better exposure to some of those smaller mid sized companies that are in that particular index. I like both. And there’s lots of different ways to weight these indexes. They can weight them on revenue, they can weight them on dividends. And so the weighting is something you really have to understand. So you can see what’s going on within those. And I do I have two equal weight pieces in here that I happen to like, as far as that goes, but I like that mixture to I like to have both, market cap weighted and equal weight in that same portfolio. So yeah, that’s good question.
All right, so and then the other piece is the bond side, which I’ll show here real quickly, because this is actually more difficult. This is our current traditional model with just the 100% bond. So bonds do very poorly in an inflationary environment, because when inflation goes up, that drives the yields of bonds up, which means that the price of the bonds are going down, and the price generally goes down faster than the yield comes up. So you can lose money in the bond market in this particular environment. So there’s a couple of ways to try to hedge that or strategize around that. Number one is to stay very short term with your bonds. And that just means that they don’t move up and down in terms of the as much as something that’s longer term. And so here, for example, we got short term government with Vanguard, Short Term TIPS, this has actually been doing very well. A Tip is a Treasury Inflation Protection Security, these are designed by the Treasury to do better in an inflationary environment. And basically what happens is the yield moves up with inflation, so that protects the price. And then high yield is an area that in in an improving market, high yield does better, but if you go with a shorter term, high yield, there’s some questions about how this works. But you are insulated, somewhat by a higher yield as far as that goes, too, so that helps. And then I have two that are inverse, that means they go the opposite direction of the bond market. So in the bond market falls, these might go up. And so I have one, that’s a seven to 10 year Treasury inverse, and another one, that’s a 20 plus year Treasury inverse.
So for example, you know, Monday, Tuesday, Wednesday, when the market was falling apart, and bond yields are going up, these were actually bonds itself were going down, because yields are going up, it’s an inverse relationship. But these went up. And so that’s why those are in there. As far as that goes. And then, you can see the mix. So here’s a 60%, portfolios, I got 40%, in the bond pieces, and 60% in those 15 stock pieces. So that’s, this is actually our most common portfolios and 60/40 mixture. So anyway, that’s what I would be looking at in terms of trying to fight inflation, in my opinion, really trying to make sure that you have pieces in the portfolio that have, less sensitivity to rising interest rates. So your big tech stocks might do, okay, just because for example, Apple reported a 54% increase in revenues in there, which is an unbelievable number for a big company. But your other tech stocks are exponential your tech stocks that are like, what we see in the ARK funds, for example, innovative technology, clean energy genomics, those all ran up so much, when interest rates go up, they tend to really suffer. So you definitely want to rotate, in my opinion, somewhat out of those, maybe not completely, but somewhat out of those and towards these economically sensitive kind of value stocks, transportation, materials, financials, energy, those types of things are things historically, that have done better in in this particular type of market. So we’ll see how that plays out.
Easan Arulanantham:
So, follow up question from in about that is, “How long do you see like this higher inflation continuing for?”
Tom Vaughan:
Well, what happens, of course, is that you’ve got this shockingly fast delivery of a vaccine, really, historically, very, very fast. I read an article once and said the fastest vaccine development in history was 4 3/4 years, the average was 10 1/4. And we were actually giving people shots of this new vaccine within nine months after, starting the development. So that’s, that’s a modern day miracle. And then it’s been rolled out fairly quickly. And so here in the US, especially, we’re seeing a reopening come very quickly. And you’ve got companies that really couldn’t keep up there. And they shouldn’t, right. I mean, why would you have millions of rental cars in your rental car company, if nobody was going to use them. And then all of a sudden, you need millions of rental cars, and now you’re running around the rental car companies are actually buying cars on the used car market, because they’re running out of cars. And so what normally happens, though, is that there’s just so much profit. So if you were renting a car for $60, and now you can get 500. All of a sudden you find new cars you go out. And so once a supply starts to kind of match the demand, but the demand in my opinion is going to exponentially grow here. I think this summer is going to be really hot. But you have to take a look at the whole world, not just the US when you really want to see a situation that gets super tight. You need to look at the whole world. Because what we’ve seen is every time we have this inflationary fear that comes in, the yields on the bonds come up, the market struggles in that environment. But then we see a lot of buying coming into those US bonds.
So when the US Treasury 10 years at 1.7%. And the German equivalent of that is that -.12, and the Japanese equivalent to that is at .1, people are gonna buy US bonds. But eventually as all of these countries start to experience more reopening, that will continue. So we’re going to see kind of phases here in the US and then other countries as they start to roll through this vaccine. I wouldn’t be surprised if this doesn’t last a year, some things will be different, like we’re already seeing some pullback in lumber prices, they went up four times the value in total. And so you know, if you can get four times more money for lumber, you’re going to desperately if you sell lumber, you’re going to desperately try to find more. And eventually you will. Because, just so profitable. And then of course, that supply starts to come online, and starts to drop those prices down. And so we’ve seen lumber come down, I don’t know where it ended up today yet, but it was down today, when I looked earlier, four days in a row, the price of lumber has come back down some so. And that’s true of all of these things, when there’s this huge price, all of a sudden companies find some supply, and they really push hard because it’s just massive profits, potential. So we have, I suspect, that this will go on for a while. Having said that, I think that there’s a chance here that inflation fits sort of in this Goldilocks window where it’s not too high, and it’s not too low. And we might be able to see a stock market that does okay, because inflation means higher profits and higher revenues. I mean, it’s a growing economy. And the weirdest part about inflationary problems is that you can have an economy that’s too good, which makes the market you know struggle, mainly because they’re worried that the Fed is going to come in earlier than expected, and start to ease off on their bond purchases and start to raise their interest rates. So yeah, it really kind of depends on the situation, but I suspect that in 12 months wouldn’t surprise me at all.
Easan Arulanantham:
Cool. Um, so going back to last week’s conversation about crypto, “So what’s the effect on the market as a whole if you know, crypto currency crashes? And what should my worry be as an investor that doesn’t hold any crypto?”
Tom Vaughan:
Yeah, so here’s my outlook on crypto, I think that it’s a little early to tell exactly what might happen. But it is a competitive asset class to stocks. So if money is being taken away from the stock market, and even people selling stocks, that was one of my things I talked about last week was that people seem to be selling off, the ARK funds and the clean energy and those types of things that did so well last last year. And all of a sudden, we’re seeing, Robinhood crash trying to do all the crypto currency trades to me, that means that there’s money going from one place to another. And so it is a competitive asset class. So as anything, whether it’s real estate, or bonds, or CDs at the bank, or cryptocurrencies, all of those can draw money away from the stock market. I mean, they didn’t get 10% CD a lot of people are going to do that instead of buying stock. So if you think you can get rich by in crypto, people are doing that right now. So they’re, at least in the short term, we’re seeing I think, kind of an inverse relationship as cryptocurrencies go up, the stock market could kind of just not do as well as that good. That’s for sure. And like yesterday, which was a great day for the stock market, cryptocurrencies in general came down, so, I don’t know.
I think I think we will see an inverse correlation, when you see cryptocurrencies going up, you might see the market kind of slowing down, and when you see cryptocurrencies going down, and so we’ll see that’s something I’m looking for. I think the biggest concern I have is it’s an unregulated industry. Now they’re working on that, but right now, it’s completely unregulated. And you can do leverage, so you can borrow on margin and buy cryptocurrency at very, very high rates of margin, like 100 to one. And if that happens, that’s where you kind of can see some problems. Where if cryptocurrency crashed, and there was a lot of it on margin, and a bunch of people had to sell other things that you and I own in order to pay off those margin debts. That could be a pretty big impact to the market. But again, it’s a fairly private, unregulated industry, it’s hard to tell how much margin is being used. Generally speaking, in my experience, people get a little carried away, right? I mean, Tulipmania is a human condition. And so that does mean that once people make a little bit of money, they think, oh, if I borrow money I could make even more until they get into sucked into this hole where they end up losing their fortune but so that’s what I see with cryptocurrency. I think it is something to watch. Definitely. There’s something we’re watching. As far as that goes. At the moment. I think it’s probably okay and maybe just making things a little softer, but otherwise, I think it’s fine.
Easan Arulanantham:
So, you say it’s like an unregulated industry right now, kind of, and in a sense, “Do you believe like celebrities and big voices in the market can make major shifts in the market. So Elon Musk on Saturday Night Live or the Tesla no longer accepting Bitcoin, you know, how can this affect like the long term nature of cryptocurrency?”
Tom Vaughan:
Well, I suspect that once they get tighter regulations, it’ll make it a lot harder for these people to say some of the things that they’re saying. Because I don’t really like that personally, where somebody can say something that is impacting the market directly, and you don’t really know why they’re saying it, or what they have to benefit from it. And so if you look at kind of what is under the SEC, right now, that’s a lot more difficult. Matter of fact, Elon Musk even got in trouble with for some of his tweets about Tesla. And again, there are certain things that you just can’t do, because it manipulates the price. Right now, it’s kind of the Wild West in the cryptocurrency. So I do suspect. Matter of fact, I’ve read a lot of articles that they’re looking at the regulation side of cryptocurrency, so I think that’ll make it a bit more stable, and maybe those situations with the celebrities will happen less. But yeah, right now, it’s just Yeah, it’s definitely a big piece of the puzzle. I mean, what was it just yesterday, Elon Musk talked about Dogecoin, and then went up 30%. So, does he have a lot of Dogecoin? You know, I mean, is this something he’s making money on? And he makes comments one way or another? I doubt it, he seems okay. But that’s the problem with with those scenarios, is just the fact that there’s a potential for manipulation that shouldn’t be there, in my opinion.
Easan Arulanantham:
So our next question comes from Jessica, “My house is now worth $3 million. Should I take advantage of a home equity loan? If I need some cash, you know, whether it be temporary? Or is there any like negatives to this?”
Tom Vaughan:
Yeah. So you got the equity, right. And you can get a home equity credit line right now, for a fairly low cost. Some of those you can even lock in once you borrow, you can turn it into a five or 10 or 15 year loan. So you don’t, because one of the problems with the Home Equity Credit Line is that, generally speaking, it’s a variable rate, and the rate will just go up as the rates go up. And I expect rates to go up here. So, if you can somehow lock in that rate in some form, or fashion that would make some sense, I guess the bigger question is, do you really need to borrow against your house? You know, what other alternatives do you have to borrowing as your house and ending up with debt on your home and a payment that you have to make? So it’d be more of a totality looking at your asset structure as to what you can do. So a lot of times people have other assets that they could look at as a possibility, if they needed money for something, if the house was the only thing, and he really needed the money, then obviously, that’s not a bad way to go. But I would really be concerned with trying to make sure that somehow, some way I could lock in that interest rate, because a lot of these have big caps. So you might be borrowing money right now, three, or 4%, but it has a cap at 9%. So if rates go way up, all of a sudden, you could be paying, you know, three times more interest on that loan, that would be my biggest concern with with a traditional equity credit line. A lot of them, you can take the money out, call the bank back and say, Okay, I want to make this a five year fixed, and they’ll give you a rate. And so, there’s different things you can do there. But I don’t know that I’d go there first, I don’t really like to have a payment that you have to make. Unless there’s some valid reason for that.
Easan Arulanantham:
So our next question is, “I have a large stock position with some massive capital gains. How do I manage this in my retirement portfolio?”
Tom Vaughan:
Yeah. Okay. So, we’re in Silicon Valley. So one of the things we’ve seen is large stock positions with large capital gains, either somebody that worked at the company, and accumulated stock through stock option purchase program, or what have you are issues, or they, you know, just new people. I mean, for example, for me, my sister was graduating from college, she had two job offers, one for HP, and one for this little company called Cisco had about 250 people in at the time. And she asked me, with my background to do some research on the companies, what was the viability and how did the stock look and those types of things. And so I looked into Cisco, and I was really impressed with what they were doing, and they were growing like wildfire. And I actually recommended that she go there and she did end up going there. And I bought some and part of the proceeds to pay for my house came from from that Cisco stock purchase. And so we’ve seen this a lot in our area. So I actually do have some strategy. Let me share a screen here and I’ll share let’s look at like Apple for example here. Yeah, here we go.
Okay, so here’s, here’s the stock I run into all the time. You know, fantastic run, this is a daily chart for five years, right? So you can see what it did. I mean, really amazing kind of been running sideways since last September here, but great, great run. And so I have a couple of strategies here. Number one, I’m not a really big fan of like selling a bunch of it to diversify, just because I have seen the wealth creation that these pieces can do. And now a lot of advisors are running around, say selling it, but there’s also a conflict of interest, they want you to sell it so they can move it into something that they make money on. So I’d be very careful with that. What I try to take a look at is like, Hey, this is like a fruit tree, right? So this is a tree that can produce for you. If you treat it right and handle it right, it can, it can continue to do that. And what you do want to do though, is maybe pick some of the fruit off and harvest some of that fruit really every year. And so a couple of strategies. But first and foremost, when I’m dealing with a client like this, I need them to understand that even though Apple is fantastic, it just had a 54% increase in revenue, it is one of the greatest companies on the planet, it doesn’t mean that it will always be the greatest company on the planet.
So let me give you an example here, let me pull up GE. I’ve had a lot of GE clients over the year, because they had a presence here the plant where near by where I live here in Willow Glen is was a GE plant. So this is GE over the last five years. And you can see it’s actually had a little bit of a run here. But you know, the high was $33 and the lowest $5. This one of the greatest companies on Earth, one of the first DOW components going back to the 1880s. And if GE can fall apart and have that type of a downturn, so can Apple. So basically, that’s, that’s something I need people to understand right away, if possible, is just understand that Apple could fall apart. And it is possible, and you probably don’t want to ride that all the way down, especially in your retirement and what have you. So I’ve got Apple back up here, let me zoom in just pick a one year period. And I’ll show you one of the strategies. So one of the things that I would think about doing here is really just kind of selling small parts, harvest this fruit off of this tree, we’re going to keep this tree, keep letting it do that. And it depends on how much this is what’s the total value, how much is it of your total net worth, but you know, maybe you’re selling 1% of it a year, or 5% or 10% kind of depends on your situation, your outlook. But the way to do this, in my opinion, is we do what’s called a covered call. And so a cover call is a really fascinating concept. Basically, you go out and you sell a call, which means that you get money. So let’s just say for example, I sell a call here at Apple and I get $1,000. So I get to keep that. And I have to pay taxes on it, which we’ll talk about but but I get $1,000. Now, I might buy one every 30 days. And let’s just say that I sell a covered call at $140. I’ll put an alert in here. So you can kind of see, you know what I’m talking about?
Easan Arulanantham:
Let me quickly stop you right there. “What’s the cover call? You know, can you explain how that works?”
Tom Vaughan:
Yeah, it is what you’re doing is selling the right to somebody else to buy your shares at a certain price. And so let’s just say this is around $140, right? Apple right now is at $127. You can see it’s flashing. And so what I’m saying to that person essentially is I’m going to let you have, let’s say 100 shares or 1000 shares whatever it is at $140. And so if Apple climbs in this 30 day period, for example, before this covered call expires, they’re going to what’s called “call it away.” So I get $140 a share plus i get let’s say that $1,000 or whatever it might be from selling the call. And I’m okay because I’m trying to prune or harvest some of the fruit off of this tree, I just got $140 when it was worth $127, right. And if it doesn’t get to $140, I just get the $1,000. And I can go do it again the next month. And so I can keep doing covered calls, covered calls, covered calls. And if it never gets to $140 I’m just collecting income off of that piece. Now this is just a small piece right of the total. I’m not trying to sell the whole thing. I’m just trying to gather some fruit off in this tree. And so that’s a cover call is just a way for you to generate income. But really what it does for me is it sets a price above where you are right now where you’re going to sell it. And so you know, with the client, I kind of determine, hey, you know, when it gets to $140 let’s you know sell a little bit of it. And instead of just putting in an order to do it, I’m going to keep selling these covered calls so I can make money while I’m waiting for it to get there.
If it doesn’t get there just keep making money as far as that goes. So I do like covered calls, the one risk to a cover call is if what if you know, during that one month, Apple goes crazy and it goes to $160, you’re still going to get $140 out of that sale. So that’s, that’s a disadvantage. But if I had a sale order in at $140, I’m only going to get $140 anyway. So you know that, and I’m only selling a small portion. So the other thing I would do, though, just in case is I would have that same number of shares, where I put in a stop loss, and the stop loss is designed to sell at some price. And so let’s just say looking at this chart right here, I might put a stop loss right down here. And again this is a bit more complicated than it looks. So I want at or below. And now I’ve got kind of this bottom piece here. So because I don’t want this thing to go falling apart, I want to harvest that fruit someplace in this range. If it jumps above $140, good, we’ll take it, if it goes below, it looks like $120, $115 here, give or take, Okay, good, we’ll take that too because we don’t want to get too greedy, we don’t want that to turn into $90 or things can happen.
And so anyway, that’s a way on a very occasional basis once a year, twice a year, three times a year, where you can kind of harvest some of the fruit and generate a little bit of income, during the period of time that that you’re waiting for that price to happen, that you’re interested in selling at. So now you got to pay up real capital gain on that. But, you know, I had some clients that rode that GE all the way to the bottom, and they ended up with losses. So you just got to be careful, one of the things that does happen is people fall in love with their stocks, for obvious reasons you put in a small amount, and it turns into a large amount you love that. But you just gotta be a little careful mentally not to get too attached. Because it can really impact your retirement, especially if it’s a big, big piece of your retirement. So that’s so that’s how I would handle it.
Easan Arulanantham:
“So how was the income from recovery called taxed compared to like selling the shares?”
Tom Vaughan:
Yeah, okay. So if you sell the shares, and you’ve owned them for more than a year, even if they’re called away by the covered calls, that’s gonna be a long term capital gain, which has a maximum tax of 20%. If you sell a call, so each month that you’re selling a call, you’re getting some money, and it’s different amount, depending on how close you are to the price and what stock it is. But that’s going to be taxed as just ordinary income. So if you got $1,000, you just add it to your other ordinary income, and that’s just part of your taxes. So you’re going to lose some of it to tax but, you know,I mean, you’re never going to get that $1,000 before. So it’s sort of found money. I mean, even if you get to keep you know, $700 of it or something, that’s still a pretty good deal.
Easan Arulanantham:
“So, earlier, you mentioned FAANG stocks, what is that?”
Tom Vaughan:
FAANG is what (F) Facebook, Apple, (A) Amazon, (G)Alphabet. Now Google is the G part of that, but it’s because they changed her name. (N) Netflix is in there now. And so these are the big companies that are the tech companies as a whole, there’s a whole bunch of other ones that are pretty close to that. But you know, FANG, often, it’s just the, you know, the first letter of the of the name of several of these different stocks. And they’re the some of the biggest companies in the world. And they really drive these markets, because a lot of these indexes that we’re looking at, like the S&P 500, for example, are market cap weighted. So company, again, like Apple, which is so large is going and then you add all of those together. It just has a huge impact on the overall index itself. And so that’s what they’re talking about, you’ll hear FANG all the time, at least in our business.
Easan Arulanantham:
So our next question is from John, “I’m a new parent. And I’m starting to think about some life insurance for myself. What’s the difference between a whole life versus term life insurance and which is better for a newer parent?”
Tom Vaughan:
Yeah, so generally speaking, as a newer parent, you could make a pretty good argument for a term life. Term Life is a lot less expensive than Whole Life. Because it’s only for a term 5, 10, 20, 30 years, you pick a term. The longer the term, the more expensive it is, and the more you need an insurance, the more expensive and the worse your health the more expensive so you go the other way, it was all less expensive, but Term Insurance is meant for In my opinion, kind of term problems. So, when my kids were born, I had a mortgage. I had a business. I had, you know the possibility of school and college for my kids. And so I wanted to make sure that if something happened to me that my wife and children, had the ability to handle all of those still have my kids go to college and still have the mortgage be able to be paid and those types of things. So, get a 20, 30 year term policy it’s going to cover the timeframe that I’m looking at, eventually, hopefully, your kids get through college. And I have two in college now, so I’m still waiting.
Anyway, that that aspect, they’ll start to take care of themselves. And maybe you don’t need as much insurance, as far as that goes. Whole Life insurance is a lot more expensive. And because it doesn’t have a term, it just keeps going for as long as you can pay for it. Sometimes they have what’s called a paid up policy where your cash value can start to pay your premiums as you build up. So oftentimes, in a Whole Life, there’s a cash value. So people look at that in lots of different ways where you don’t have a cash value in term insurance. But generally speaking, the Whole Life is used for really for estate planning purposes. And where you have an estate that maybe going to be taxable, or you have an estate, that’s not that liquid, like a lot of real estate. And so a Whole Life policy would come in and pay the estate taxes or pay off different things that might be there. And so the the challenge with the Whole Life policy is that oftentimes you really don’t have an estate till you’re older. And then it’s a lot more expensive to get the insurance.
So there’s a lot of pieces there, you could also make an argument for having a Whole Life policy fairly young, at least some, just because, oftentimes you don’t have medical conditions that you might have as you get older as far as that goes. So there for different scenarios. And again, what I’m saying is probably somewhat controversial, in some, some circles, to be honest. Because I’ve run into a lot of people that think Whole Life is perfect for everything or term is perfect for everything, so but that’s how I look at it really term is for a term problem. And Whole Life is for a lifelong issue, which would most likely be an estate planning issue or or liquidity issue. But yeah, anyway, they’re there. Those are the differences.
Easan Arulanantham:
So go into some more current news, “As the Israeli and Palestinian conflict kind of heats up. Do you see this having a possible effect on the market?”
Tom Vaughan:
Historically, no. If you look at all the different things in Afghanistan and Iraq and Kuwait we had two versions of Iraq. And those are ones we were involved in directly. And if you look at what’s happening there now, historically, armed conflicts, I mean, as crazy as it seems on January 6, when the insurrection was happening in the storm, storming the capital, the market went up. Because at least if you look very closely, and you look at that conflict, and you say okay, what economic impact will this have? So sometimes there’s some right? Interruption of supply chains and different things that happens, but usually in a regional conflict, you’re not talking about a significant economic impact. And ironically, or unfortunately, actually, it’s a stimulative situation, within a tremendous amount of defense mechanisms being spent all of these weapons and ammunitions. And what have you are being used, which means they’re probably going to be repurchased, which the industrial complex there will profit from.
And so that’s that, ironically, in most cases, we actually see the markets do better. And these are complex scenarios. But historically, no, there hasn’t been a big, big issue. You know, we’re not talking about a World War here at this point. And it depends on how far it really gets going. But there has to be some component of of economic issue. And so there was oil in the Iraq situation, for example, that was in play, and there was a lot of concern, but bam, once they started to invade, the market just went straight up. And so I don’t I don’t see a huge issue with that. And you won’t see the market paying much attention to that. Right now. It’s very, very, very focused on inflationary issues. And even maybe even the vaccine and masking so like the markets been running really hard ever since the CDC came out and said that you would don’t have to wear masks, if you’re vaccinated. And again, I think that’s more important than what’s happening there. Unfortunately, it’s an important area, but in terms of market gains or losses, I’m not sure that I don’t think so.
Easan Arulanantham:
“So I’ve started to compare like index funds and found that there are fees, vary some times quite widely. You know, why is this and is having, expense or expense ratio higher? Does that mean the performance will be lower for the fund, or better?”
Tom Vaughan:
Yeah, actually, historically, if you look across all funds, the ones that are the least expensive, have outperformed the ones that are the most expensive in most markets. And it’s why Vanguard is one of the largest money managers in the world. And so the differential in fee, internal costs, is really what we’re talking about. It has a lot to do with what you’re dealing with, is there a fund manager there that they have to pay, or is it a passive index? So one is going to passive index is going to be cheaper. Is there, what’s the structure of the firm, so Vanguard structured as a nonprofit, and so they’re able to, they’re my opinion, they’re the lowest out there in terms of overall fee. So we use them a lot, you saw that actually in that chart. Now, I will use other things besides Vanguard that are at a higher fee, just because I feel like the structure of let’s say, an equal weight, portfolio is important to me. And I think we’re going to make up the difference. So if I have one portfolio that’s one index or one ETF that’s at .1%, and the other ones that .4%. You know, to me, that’s not enough differential to make a huge, big difference as far as that goes.
Now, there are some out there that are at 1, 2, 3%, I just don’t see how anybody can make up that kind of cost on a regular basis. So, generally speaking, if you stay kind of in that .5% or less. I think the ARK funds are at .75%, those are a bit higher than most, at least in my world. Yet, they made probably 100 to 300%, after that fee last year. So again, if you want Cathie Wood, if you want those particular types of things might be worth paying .75% versus going to Vanguard and not getting Cathie Wood, with her expertise and her team. So sometimes you pay a little bit more for some of these things. And sometimes, it’s worth just really hunkering down. When the markets get more normal, fee becomes even more important, where you just want to kind of buy the whole market and then usually, honestly, that’s at Vanguard. BlackRock has done a good job with that. Schwab and Fidelity have some pretty inexpensive pieces, as well as State Street now, in certain areas, especially in the broad market area. So there, it is a it’s a really important piece of the whole puzzle.
Easan Arulanantham:
“So following up on Wednesday’s daily video, do you ever advise your clients to borrow on margin?”
Tom Vaughan:
No, no, I’d never do margin personally, and it’s pretty popular. You know, so the thought process, just so you understand how it works is, let’s say I want to buy $1,000 worth of stock. In today’s world, I can put up $500 and borrow the other $500, and by $1,000 worth of stock. So theoretically, if it turns into $2,000, right, I pay off the $500, I make $1500 on my $500 investment, so it magnifies my returns, but it also magnifies your losses. And they can do what’s called a margin call. So let’s say you have that $1,000. And it doesn’t go the way you thought and it actually goes down and all of a sudden you have $750, they might have a margin call where you have to put more money in. And so that can be really dramatic, because it’s very quick, you have to do it right away. The brokerage firm is, trying to protect themselves.
And it’s really, you magnify that times, millions of different investors, that’s where you that’s where the market gets in trouble. A matter of fact, that’s why they only have 50% margin in the market right now, whereas they allowed 90% margin back in the good right before the Great Depression. That was one of the things that they now change, they can still go to 90%, but at least in my entire career, it’s been at 50% margin. But again, if you look at what happens right now, with the cryptocurrencies, for example, that’s, that’s a huge issue. You can go 100 to one, it’s not regulated. So that’s a recipe for disaster for that particular investor if it goes the wrong direction. So yeah, I’d be a little bit cautious with margin. We don’t use it. And we would maybe use it in some really strange scenario where somebody had something super temporary, where they needed money. But generally speaking, we don’t do it. Yeah, it’s not part of our doesn’t doesn’t make sense to me with these with these clients.
All right, well, that’s our bell, the market just closed. It’s one o’clock, I want to thank everybody so much for coming. And again, feel free to subscribe. That really is, great way to continue to get this information. We are going to we are super committed, as you can probably tell, we’re putting out a video every single day, on the market update, and that’s partly educational. And we’re doing these, every single week and then carving them up. So we’re really trying hard to increase the education for investors as a whole for our clients and what have you too. So I want to thank you very, very much for joining and I look forward to seeing you next Friday.