Transcript:
Tom Vaughan: Hello, everybody, welcome to Friday, we’re going to have another session of Go Live with Tom, really excited. We’ve been having a great time doing these actually, it’s been really fun to answer all the questions. We’ve had a lot of great questions that we’ve answered so far. Looking forward to answering some more today. Again, it is easy to send in a question all you do, you can see that right across the bottom there it says asktom@golivewithtom.com, send in any questions, any follow up questions, if you don’t have questions, just watch you know what happens and maybe learn something from somebody else’s question. So when you send in a question you’re gonna be sending out actually to Easan today. Katie, who’s my normal host is out of town today, got called away.
Easan is one of the other advisors here at Retirement Capital Strategies. And so he’ll be able to get your question and kind of asked me that. And again, the whole concept about this is around Investor Education. Our net our concept of our mission statement is to help our clients build and maintain their wealth. And we look at financial planning, tax planning and investment management, those be the areas that we’re covering today. But our fourth piece is Investor Education, which we really take seriously. We put out a video every single day about what’s happening with the market. I always try to incorporate some form of investor education in there.
We have found over the years that the people that know the most about finances, in general, are the ones that have the highest net worths and are able to build their wealth the fastest, building your wealth, the fastest really gives you kind of just a safety net, it just makes sure that if something happens to you or your family, you just have more built up to absorb that particular emergency. So again, we are actively putting things on our YouTube channel here, all kinds of different Investor Education pieces. If you would like to get notification of those new pieces that we’re putting on the YouTube channel, there’s a subscribe button right below the video that you’re watching right here, hit that subscribe button, hit the bell, and you’ll be able to, you know, really see what’s going on. In terms of the you’ll get notification so far, so of what’s happening.
Hang on just one moment. So you might be having some technical problems here. Okay, that looks better. There we go. And so what we have going on all together today is just, you know, kind of question answer, please send in your questions. Why don’t we go ahead and start with the first question, Easan?
Easan Arulanantham:
So the first question is, “This week, there was a change to the models. What does a diversified portfolio look like?”
Tom Vaughan:
That’s a great question. We got this question earlier. So I’ve got some things to show you. But just in general terms, we had a fairly big change to the portfolios. This week, as we’ve kind of developed some different pieces. So really, there’s two main portions of diversified portfolio that I consider. One is just this broad market, owning kind of all of the stocks in the market to a large degree. And you control your risk by how much bond you have versus stock. But then also to kind of enhance rate of return, we look at these kind of investment themes, or what I call these targeted indexes.
And so let me kind of share my current model, and that might be able to help you see what I’m talking about here. So this is the model that we currently have. This is our traditional model as a whole there, this is the stock portion of it, you can see there’s 15 little pieces in this pie chart. And so we just just step you through this, and hopefully you find this interesting and educational. But the first piece here is the vanguard total stock market index. And this is a great index in the fact that it owns almost every stock on the US stock market, it’s almost 3600 different holdings. And so that’s kind of the start spot. So to a certain degree, we own every single stock in the market. And then every other piece is sort of a concentration on certain areas.
So for example, the next piece here is the S&P 500. Now that’s already in the total stock market index these 500 stocks, but this is the theme behind the S&P 500 investment is all about the fact that this particular index is super popular worldwide, and has a really good track record long term. So that’s the second piece. And then the next eight pieces here have to do with the main theme, one of the two main themes that I’m really focusing on right now, which is really just the reopening. And so if you look at the reopening, you want to look at the companies that struggled when we had to close everything down because they’ve cut back on their costs. And so as the rate as the economy reopens, and the vaccine gets out there and what have you, we should see some better gains coming out of these categories.
So the first three pieces here are all what says pure value. And so this is the S&P 500. So it’s that, right, but it’s just the Pure Value stocks. And this is the S&P Midcap 400 Pure Value, S&P SmallCap 600 Pure Value. And so again, these are all in these first two pieces. But what they’ve done here is just segment, in this case, Invesco, has segmented out from the S&P 500, just those companies that are Pure Value stocks. And so again, just to reiterate, Value Stock is something where the price compared to the earnings is fairly inexpensive as compared to say, a Growth Stock, where the price is fairly high compared to the earnings. And Growth Stocks, you’d expect to be able to continue to make money because the company continues to grow really fast, and a Value Stock you’re looking to buy low and hope that it turns around.
And so a lot of the companies what were called Epicenter Stocks, the companies that got affected by the virus are in this value category. And so that’s where that’s why this is here. And then Consumer Discretionary is another area that we’re seeing some really explosive growth come out of. And this is just consumer spending money. And these are the companies that are in that category for consumer spending on a discretionary basis, that are in the S&P 500. There’s 62 of them. So you know, for example, Amazon, you know, reported earnings, they had a 44% increase in revenues, that’s part of the scoop, consumer discretionary, but you got companies like the GAP and Ulta Beauty. And so as people get back to work or get back out into, spending, we’re seeing some pretty good growth in revenues, with a lot of these companies.
Leisure and entertainment has really been shut down travel restaurants would fit into here. Live entertainments, and all those types of things. So theoretically, again, as things reopening, we should see some real good growth here. And then regional banking, as the economy reopens, it pushes interest rates up. And banking does better when interest rates go up like that. And so we’re seeing some good gains here. Transportation, again, as things reopen, we’ll should see higher spending, that means product will move around more. UPS, trains, those types of things. And then people will move around more. And that’s where like Avis and Uber and Lyft and such fit into that. Semiconductor, another area from the reopening as things have come, online here, boy, semiconductors are running flat out, and we actually have a shortage here. So those eight pieces are all part of the reopening play and theme, so to speak. The other pieces that are left here, the other five are really part of kind of the government spending theme that I’m looking at very closely right now.
And so we’ve got money going into infrastructure, cybersecurity is a really big focus right now, with this particular administration. Smart Mobility, this is where you see the electric vehicles and charging stations and those types of things. This is the technology side of infrastructure, so kind of goes here with this. And then we’re seeing a pretty good growth in the exponential technology, really, again, companies that are going to benefit from some of this government spending. So that’s, that’s what’s happening right now, as far as the the mixture goes, and our main themes as far as that goes. So it’s really I’m very excited about that. But the idea behind a diversified portfolio development, is start with kind of the broad market, and then figure out what parts you want to kind of overweight as far as that goes. And that’s where these little theme and targeted indexes come in. So that’s that’s what we’ve got there. What’s the next issue?
Easan Arulanantham:
So going off of that, “There’s some high other themes like Cryptocurrency and Cannabis and China. Why aren’t those in our portfolios right now?”
Tom Vaughan:
Yes, that is a good question. One of the things that I do is I actually keep a list of every theme that I can think of at any point in time, and, there’s constantly new themes coming out. One of the key things like for example, with cryptocurrency, it’s just too volatile. That particular portfolio that I showed you we literally have hundreds of millions of dollars in these portfolios, and I’m dealing with, you know, a client’s life savings. And so, volatility is a huge issue. So I don’t have a lot of straight oil and gas because the volatility is very high. I don’t have a cryptocurrency, again, because the volatility is very high. And there’s some reasons that volatility is high in different areas. Cannabis is another one, high volatility, and it’s not really legal across the US yet.
So there are some some hang ups there. China is very fascinating. It just has had some great runs about not doing that great right now. And so again, It’s not only the theme, I also need to see some proof that that theme is creating some rates of return. And China’s kind of political really situation where we’re going back and forth, are we delisting stocks or not or what have you. So, there’s lots of different themes, and some of those things might end up in the portfolio if they meet the criteria. But that yeah, that’s, that’s part of the screening process. As far as that goes.
Easan Arulanantham:
So, going off of that, you touched upon the infrastructure. “So how does Biden’s plans with increasing taxes, corporate taxes, or capital gains affect my portfolio in the long run?”
Tom Vaughan:
Yeah, well, that’s a big issue right now, because we’ve got this these massive programs that are being suggested the American jobs plan, which is of roughly 2.3 trillion, the Americans family plan, which was just announced this week, which is 1.8 trillion, and they’re trying to find some ways to fund those outflows. And so a couple of things are coming up. Number one, is corporate taxes. So corporate tax rates, the high rate was 35% in 2017, that was moved down to 21%. They’re now looking to move that back up to 28%, to try to fund some of this infrastructure spending, for example. And they’re also looking at the possibility of moving up capital gains rates from the top bracket would be 20%, now to a possible top bracket, a 39.6%. And that’s only for people that have over a million dollars. So let me talk about those individually.
First of all, one thing to keep in mind that as far as I can tell right now, and from what we’ve reading, what they’re asking for, in terms of let’s say, for example, the corporate rate at 28%. I don’t think they’re going to get it, I think it’ll probably be 25%. So we’re not there yet. It’s not done. We don’t know what the actual numbers are. But if it is at 28%, the projections are that you would see about a 5-9% decrease in the earnings for the S&P 500, for example, that’s what I’ve read. And so that would have an impact. I mean, earnings are the ultimate driver long term of the stock market. And so it would certainly at least have a short term impact. Having said that, the rates used to be at 35%. And we had some phenomenal stock market rallies when the rates were that high. So if you look at it, the corporate tax rate is important. And I think it would be an important short term issue. But it’s going to be one of those things, they think once it kind of works its way through.
The other thing that’s very important about this, at least in the short term is that it is attached to a spending bill. So maybe the corporations as a whole get less earnings, but then there’s more government spending coming out, which could increase the economic economy in total, and maybe increase revenues, at least somewhat, so to offset some of that loss in earnings. The capital gains tax is a little bit different, to have a stated issue of saying, “Hey, we don’t want to increase taxation on anybody below $400,000 worth of income.” But if they make a $1 million capital gains tax increase that nearly doubles capital gains at that point in time, it sounds like, hey, a million dollars. Well, I have a lot of clients that have more equity in their home than that right now. And they don’t make $400,000. So if they went and sold their home, we would end up with a situation where somebody making less than $400,000 is going to end up with a potentially higher tax bracket, as far as that goes.
The other fascinating thing about the capital gains I just read, there was a study done by Wharton. And they said that if if if you increase capital gains, and you still allow people to have a step up basis, so what happens is if you pass away, your spouse gets a stepped up basis and could sell that house with no taxes. So if I bought a house for $100,000, that’s worth $2,000,000. And I would sell that house, I would end up with capital gains, but if my spouse passes away before I sell it, it moves up to say 2 million basis. So it eliminates that tax. And Wharton said that if you don’t get rid of the step up, combined with the higher taxation, that the government will actually lose $33 billion, because people will just hold on to it and not sell it and just wait until somebody passes away. And then then they could sell it. But if they include an elimination of the step up and basis, so you never get a step up.
What do you buy the stock for $10 is now worth $100. And it always stays, your basis always stays at $10. Then they will make about $133 billion off of this. So in order for the capital gains tax to actually produce excess revenue to the government, according to Wharton, they will have to include eliminating the step up basis. That’s a pretty big issue with my clients in terms of the step up basis. And again, they would be hitting on people that have less than 400,000 of income. So that’s a really big controversial area, still going to be developed, we’ll have to wait and see.
Having said that, if you look, historically, capital gains rate have very low correlation to stock market performance. It might have some correlation in the short term, because everybody be trying to sell their house at once. If they have more than a million dollars to pay the 20% gain instead of 39.6%. Those types of things are selling their stocks, it might impact those stocks, like let’s say, an Apple or a Facebook or what have you that you know, where it has huge gains, and probably some people out there with more than a million dollars worth of gains, where they might start to sell those. But they also might make it retroactive, which I really disagree with, but theoretically, they could say, hey, this already started in the beginning of 2021, then you couldn’t sell anything, it wouldn’t make any difference as far as that goes.
So very, very fascinating to see kind of how that plays out as far as that goes. But that’s that’s the idea behind that the taxation portion, but really important to consider. Although, I don’t know that it’ll have massive impacts for what they’re talking about right now.
Easan Arulanantham:
So do you think there’ll be like a good short term opportunity that, “I could maybe keep cash on the side? So buy back into the market?”
Tom Vaughan:
I don’t know if I play it. Because basically if they decide to make it retroactive, then you might not see softness in the market? Maybe, maybe, but probably not. I mean, I think if you keep cash on the side, what you might be missing out on is reopening trade. I actually feel like this reopening situation is a once in a lifetime chance to possibly have some really good gains. It’s probably going to come in the second half of this year. But if you’re keeping cash on the sidelines to kind of get ready for this taxation situation in the second half of the year, you might be losing out on gains that you could have made so and we don’t know what’s going to happen, I would actually be more, I would be surprised to see if they can get capital gains all the way to 39.6%. Maybe we’d have a 28%. There’s 0%, 10%, 15%, and 20% right now. And maybe they put in a 28% bracket above a million.
I think there’s some more reasonable situations that might happen, once things get negotiated. I think what there is just a negotiation stance, you’d ask for something high, give some room for that to come down. And we’ll see what happens. But it’s got a ways to go before we’re going to find out. So I’d probably continue to buy, based on the reopening trade, which I consider a much more robust opportunity, then the possibility of the capital gains trade.
Easan Arulanantham:
Yeah, that’s good to know. This question comes from George. “What do you think of some of like, the older stocks, companies like Exxon Mobil, or kind of older companies that are not with the trends, you could say, with the trends of going green. What should I do with those? Should I hold them? Or should I sell them and move money? Which can I plan for?”
Tom Vaughan:
Right now, the older companies are the ones that are really the ones that are part what we call the Epicenter Trades. So if you look at what happened last year, right, there’s a bunch of companies that got really hit on average energy companies dropped probably 60%, 70-80% range. And so like Exxon Mobil for is a good example. As things reopen, there’s going to be a lot of interest in energy, because that’s what’s going to be needed. We’re going to be flying more moving more driving more and what have you. And I think companies like that could do very, very well. Clean or green energy is the future, but it’s not here right now. And we’re going to opening right now.
I mean, literally this summer, and I don’t think we’re going to replace all of the Exxon pieces, for example, before this summer. So I’d be holding on to that. I think those are those are the areas we’re actually buying right now. When you look inside that portfolio that I just showed the Pure Value pieces, an Exxon would fit into that category, energy, financials, industrials materials, those are areas that are all part of this Epicenter Trade. So I think we could see some phenomenal gains out of those types of areas before the end of the year, long term. You have to wait and see that a company like Exxon, for example, or some of these older companies, how are they able to morph, and how are they able to change and how are because you never know.
Exxon could get really big on the Clean Energy side. And I know some of these companies are moving that way, for example. And I don’t mean to just say that, oil companies are the only thing to look at there. But in terms of these older companies, that’s what’s being bought right now the rotation from last year where we’re buying everything new. And, all the clean energy and innovative technology, and all those things to the rotation that started in the middle of February is towards older companies right now. They’re the ones that were hit the most, they’re the ones that have the chance to make the big gains here in the least for the next six to 12 months.
Easan Arulanantham: Cool. Um, so the next question is, “How do I avoid a Ponzi scheme? Like, how do I protect myself from I guess, all those financial scams out there that we get? Always, you know, you get those spam emails and all that kind of stuff?”
Tom Vaughan:
That’s a really great question and happens to be something I have thought about and run across a couple situations. So, in basic sense, because I was working in a company called First Investors, there was a lady there in Kentucky, who, working for First Investors, she opened up an account somehow in First Investor’s name, and she was taking in money, and then basically promising a rate of return, and that’s the classic Ponzi scheme, you taking somebody’s money, you give them back 8% every year, or 10%, or 12%, or some other crazy number. And then you just keep taking the money and then you’re spending the rest on your own lifestyle. But one of the keys there is that you have to have some ability, if you’re doing a Ponzi scheme to cash that check, and so that’s where opening his account. But they’re always making phony statements. So she was making phony First Investor statements.
For example, we had another one, the last company I worked with was LPL Financial. Same thing right here in Fremont, actually, gentleman was doing exactly the same thing, taking the money in. And there, he was producing phony statements. And eventually these things all break down, because they can’t keep up with the outflows. And you know, all of these people are in jail. And but one of the ways that you can really protect yourself is to if you have an account at some place, make sure that you open up the digital client portal. So like, for example, TD Ameritrade has a client portal. If you have access to that client portal, and you should, if somebody is making a phony statement, you’ll be able to tell. There won’t be anything in that client portal because making a phony web page that they’re getting access to, and especially if you do it yourself, you go directly to TD or Schwab or Fidelity or wherever it is. I’ve always said that’s one of the best ways to defeat almost every single Ponzi scheme I’ve seen in the investment business, is just open up a digital account because they can make a phony statement. But making a phony web page is much more difficult and probably impossible, to be honest.
Now, there are other types of Ponzi schemes. And I can tell you a couple stories. So in one case, I was actually managing a portion of a union pension here for bus drivers, and called the Amalgamated Transit Union. And I was working with one of the managers and I’m meeting with them on a regular basis talking about what we’re doing for our portion. And right as I’m leaving one of the meetings, he he pulls me aside right at the doorway, and he pulls out these two little nuts actually out of his pocket. And he’s talking to me about Brazilian Rubber Nuts. And he has this company that he ran into that was offering a 50% rate of return. And what they did supposedly was go in and buy things that they could get at a big discount, and then resell them including Brazilian Rubber Nuts. As well as airline, so Malaysia had an airplane, and they would sell it to South Korea or what have you. It was a total scam, the guy ended up, you know, getting fired after investing in that thing. So but that’s another thing I would think about is don’t invest in things where you can’t go to the digital portal.
Another example I had a client, a real estate agent lost $380,000. He had a friend at the Rotary Club right here in Los Altos. And that was called Century Medallion, the company, very famous case in our local area here, and $100 million dollars that that this gentleman stole, and what he was doing was phony second deeds. So for example, if I had some money and I wanted to invest in a second deed of trust, he would sell that to me for in this case, this gentleman was $380,000 and I would get some rate of return, 12%. But the real issue was that there was no second deed, the guy was just making these up. And my client who was a real estate agent thought okay, I’m gonna, I’m going to make sure that says okay, he drove by the property, just to take a look at it, but he never knocked on the door and asked the people if they were actually taking out a loan, and they weren’t And so, again, that’s why one of those things that you know, is very hard to check. And so that’s why I would stay away from those types of investments where you cannot go to the client portal, so to speak, because that really does, I think, protect you as far as that goes.
It’s a really interesting area altogether. I think that if people think about a little bit. There are other types of scams, I read some article with a lady in Hong Kong, who was scammed out, over the phone at of $32 million, that sort of a different deal. So just you know who you’re dealing with. But I really like that concept of the electronic portal, that makes it much more difficult for somebody to fake statements.
Easan Arulanantham:
That’s good to know. Um, so going off real estate, “Interest rates are kind of all time low. Where do you see them going over the next year? And should I try and get her refinance my mortgage? Or should I wait a little longer?”
Tom Vaughan:
Good question. Actually, this has come up several times. Now, actually, this I have something prepared for this, I’ll show you. Let me share the screen real quickly. And I’ll kind of just demonstrate what I think is happening with interest rates. And hopefully you can see this well here. So this is a super long term chart from Yahoo Finance of the 10 year Treasury yield, going back to 1961. And you can see here, this big giant run up, right, amazing. And many people in the audience probably can remember way back when mortgages were, you know, 15 to 18%. And that’s because the high point right here was almost 16%, on the 10 year Treasury. But if you look from 1981, there till now, we’ve had just this unbelievable decrease in the yield on the 10 year Treasury, I mean, historic. Matter of fact, it got all the way down 2.57% here last August.
So all the way through here, we’ve been refinancing, as because the 10 year Treasury and mortgage rates are fairly tied together, you probably could add 2 or 3% to the 10 year Treasury and probably be pretty close to what mortgage rate might be when you go to do a refinance, or new purchase. And so I’ve seen several different situations where people have asked me, what they should do. Here’s what I see right now, though, we’ve come from a half percent, almost all the way up to, if you look right now is 1.63%, just in a really short period, that literally since August. And the pressure on price increases right now is really unprecedented. There’s trillions of dollars of pent up demand that’s going to be released into the economy here. You throw in the stimulus, you throw in the infrastructure plan, you throw on the American Families plan, I mean, just unbelievable amount of pressure on prices, because there’s so much money coming into the system. And what that means is that usually rates go up. And if you look here, the 10 year Treasury was 3%. Back in, 2000, the end of 2018.
Here again, in end of 2013. So, you’re looking at kind of a 5% mortgage, five and a half percent mortgage rates, in those timeframes, most likely. It’s pretty likely that we kind of move towards that, it does get a little bit more complicated when you really think about all the things that are happening, that are driving interest rates, because here in the US, we’re reopening fairly quickly, and we’re seeing fantastic earnings and revenue growth, but it’s not happening all around the world. And that makes a difference, because if you’re in Germany right now, they’re having some problems with the virus, mainly because the vaccine hasn’t been coming out as fast. And their 10 year Treasury right now is -.3%, you actually have to pay them to hold on to your money. So if you have a choice between a German 10 year Treasury or a US 10 year Treasury, I would choose the US Treasury because it’s paying 1.6%. Japan is at .1% on their 10 year Treasury, same issue. So really to see sustained growth inside of these yields, you need to see some growth in the yields around the world, which really probably means we need a better distribution of the vaccine.
The situation that’s happening in India really is an eye opener. So that would keep rates down as far as that goes. But then we have all the stimulus coming in on the other side, and they have to issue new bonds, which makes rates go up. So I suspect with the pressure of reopening and the pressure stimulus and the reopening that will start to happen, by the end of this year, you’re going to see higher interest rates, and that means higher mortgage rates. So if you’re going to refinance or buy a house, I would really be looking at trying to do that before September, October before things start to get pretty hot, and maybe even earlier than that, but that’s what I’d be watching is this 10 year Treasury just to kind of get an idea of what might be happening. And again, we are at historic lows and very close to that. Even still, even after this movement up, and so we have a chance that we’re going to see mortgages come up. So if you do want to refinance, now’s the time they just come down a little bit too. So could be could be a good chance.
Easan Arulanantham:
That’s awesome to hear. So next question comes from Jean. And it’s about the US infrastructure bill, “Do you think that the US could have a manufacturing renaissance in the near future with all the money that’s being planned?”
Tom Vaughan:
Yes, I do, with some caveats. So for example, when you really look at kind of what is being planned? The answer is yes, I mean, they’re going to put $50 billion into trying to get semiconductors up and running. They’re trying to get at, one of the things we definitely learned from the pandemic, is that some of these things need to be made here in this country, somehow, some way. The PPE equipment and those types of things that are out there, semiconductors are one of those pieces too. And so with the money coming in, and with the kind of the path and the things that we’ve learned from the pandemic, we could definitely see a Renaissance and kind of the manufacturing portion of the economy.
Having said that, the government, it doesn’t always work, right?I mean, one of the issues that does happen, it’s sometimes just throwing money at things, and then having these these massive issues that you’re trying to deal with. And so they’re very complex, does it work? You know, does it work to have the government pushing things out? At the moment, you’re seeing movement in the price, right? So the stock market is feeling good about the possibility. And so that is important, the stock market can be a really good harbinger of what’s going to happen going forward, but it’s not right every time. So that is why we’ve actually started to move towards some of those stocks, because we are seeing some motion coming from there. And so I do feel like that’s a strong possibility. But, I would keep that on a bit of a short leash to see what actually happens, and watch the price. These manufacturing companies are as a whole, even semiconductors, and those types of things, what happens to price, how’s it doing, if they all start to fall apart then again.
The market is 12 to 24 months ahead of what actually ends up happening most of the time, and so that that would be a good way to really track. And right now, that market is telling us things are gonna get a lot better in that category. So that could be could be a great area. This is a really interesting time for a lot of the things that are going on.
Easan Arulanantham:
That’s good to hear. So our next question is, “I can take Social Security between 62 and 70. What are the pros and cons taking early versus late?”
Tom Vaughan:
I actually do an entire seminar on Social Security maximization, and it’s really interesting. So, if you take it at 62, just to take the extremes, obviously, you take, you get a lot less. So what they call Full Retirement Age, FRA, is the term that they use all the time. For a lot of people that it’s between 66 and 67 now. So if you’re taking that 62, you’re going to get a less, quite a bit less. And so the disadvantage, there would be obviously, if you live a long time, you’re actually going to get less than total. And so that’s the big disadvantage to taking it early is just exactly that the advantage of taking it early is that, if you don’t live a long time, then at least you got something.
Or you could invest the difference, having to take it at 62 instead of 66, or 70, or whatever. And I’m just going to invest the difference, which you can make a valid argument for that also. Although, what we do is we run all these calculators and you can put that in there, you can say, “Okay, I want to invest, I’m going to make this much in my rate of return is going to be X.” And it’ll tell you what your breakeven point is.
So let’s say, I don’t invest, I’m just going to spend it my breakeven point is age 77. That just means Hey, if I live to 78 or beyond, I’m actually better off waiting to take social security. If I invest it, maybe my breakeven point is 82. So you have to think about how long do you think you might live and those types of things as far as that taking it early. Taking it later, the big advantage is, there’s a couple of big ones. First of all, you get more than what you would get at Full Retirement Age. It grows at 8% a year after Full Retirement Age, plus any cost of living increases. So literally last year, people made I believe was 9.6% on their on their money, basically guaranteed by the government in that case. And so that’s a big deal.
You get a lot more by waiting till age 70 then you might, certainly at age 62. The other thing is to if you’re if you’re married and you’ve got a couple, the bigger one, whoever is going to get the most Social Security, having that grow, and waiting till age 70 on that, might be a really big deal. Because when one person passes away, essentially what happens is the smaller Social Security disappears. And so you basically can make sure that the couple as a whole is taken care of in a better fashion by waiting as long as possible for the big one to take the money from and that would ensure that the success, or help the success of the one of the survivor.
Easan Arulanantham:
Cool. So I guess for Social Security, if you’re taking now that’s good. But for someone my age, “Is Social Security, should I even have that in my plan? Should I be worried about that or thinking about that, or should I just eliminate it and just plan for life without it?”
Tom Vaughan:
It’s kind of funny, I get asked a lot about from younger clients, when I’m working on their financial plan. Here, I don’t want to count Social Security, what have you. But Social Security is actually a really, really important for those people that are retired, they realize how important income source it is, and how valuable it is. So here’s the thing, if you can go back to the 1940s. And Social Security has been going out of business since then. I mean, there’s, when I go to a class, or at least I used to go to a class before the pandemic, once a year, and they kind of lock us in a room, eight hours a day, three days, and all we do is learn about Social Security and Medicare. And, that’s one of the things we talk about all the time, the viability of security. And one of the classes, they had all of these headlines, Time magazine and everything going all the way back, like I say to the 40s. And Social Security’s been going out of business forever, and it’s still here. And part of the reason that it kind of needs to be here, is because it is this really important safety net.
For a lot of retirees, it’s really the only income they’ve got. And so, what they are doing is adjusting it, people are living longer. I mean, my parents, could get their maximum, full Social Security age was 65. Mine is 67. They’ve already moved it back two years. And maybe for my kids, it’s age 69, or something along those lines. I think that’s fair. People do live longer now and what have you to? So I think that works out. Okay. So I think yes, although I would look at possibly modifying it for some reduced benefit, or having to wait a little bit longer to get the full benefit. Because I do think that that’s a pattern that they’ll continue to do. It’s not that hard to keep Social Security going.
They just changed the rules, and there’s a lot of different ways they can do it with the cost of living increase, or the age that you get full retirement benefits and those types of things. I think it’ll be here. We’ve looked at it a lot. And I think it’s solid. And it’ll be here for even for you, Easan. It just might be, a smaller amount than what somebody is getting that to retired now, at least at the same ages. And that’s fair enough, because you might live to 100. So you know, who knows?
Easan Arulanantham:
So this question comes from Michael, “What’s the difference between the Dow Jones, S&P 500, the NASDAQ. There’s all these different indexes. What do they mean?”
Tom Vaughan:
So what they’re their baskets of stocks. So the S&P 500 is a basket of 500 stocks. S&P stands for Standard and Poor’s, that’s a company. They choose those 500 stocks. They have a screening methodology that they use that companies have to meet at least a minimum, and then they choose those 500 stocks. And so like Tesla just got added to the S&P 500. So that was a big deal, for example. And then the Dow right, that’s the oldest one, I think that goes back to 1883. But it’s only 30 stocks, mainly because back in 1883, 30 stocks was a lot of stocks.
Obviously now, there’s a lot more stocks out there than there was back then. And, and so that, again, is chosen, and those companies kind of come and go, but at the basket of 30 stocks, and the NASDAQ is 1000 stocks. So it’s the broadest of the three big indexes. And they all have a little bit differences. So for example, the Dow tends to be more of kind of these older companies to a certain degree, kind of more of these Value Stocks. The Nasdaq tends to be more tech oriented, as far as that goes, because a lot of tech companies list on the NASDAQ and then, the S&P is kind of a mixture of those. But one of the other key differentials is that how they weight them. So the S&P is weighted based on the size of the company, the what’s called the market cap.
So the number of shares times the price is what’s called the market cap. And so bigger companies have more impact. NASDAQ has that same thing. It’s market cap weighted, so you’ll see really what they call the FANG stocks, Facebook and Amazon and Google and etc., or Alphabet, really. Anyway, are are all dominant on those two indexes, whereas the Dow is actually, this goes way back, but it’s based on the price. It’s weighted based on the price, which is a very strange way, nobody really does that anymore. But though those are the differences between them, but essentially, they’re just baskets of stocks, and they’re meant to kind of represent what’s happening in total.
In my opinion, you really got to look at a lot more indexes to really see what’s happening, because they’re just so many stocks out there, and I’m just talking about the US. So I would include the Russell 2000, in that group of things that I might watch. That’s 2000, small ish, cap stocks, and you might have a better idea, if you watch all four of those have kind of what’s happening. Because day by day, things can be quite different with one index doing better than another, to get a better idea, you need to see some more of the broad based indexes that are out there.
Easan Arulanantham:
So, going off of that, you talked about Small Cap. “But what Small Cap? And is there certain criteria it has to be? And what are the other caps, I guess?”
Tom Vaughan:
Generally speaking, and when you talk, there’s for capitalization categories: Large, Mid, Small, and Micro Cap. And again, all of them are based on the number of shares they have outstanding, times the current price. And so that’s what’s called the market capitalization. So you’re really big companies like Apple and Facebook, and what have you are your Large Cap. And so as you move down, the actual dividing lines of what small and what’s large is a little bit all over the place. It depends on what system you’re looking at. And so like, Vanguard has a very specific methodology that they use to determine what is Large, Mid and Small, but it might be different than another company’s. The S&P 500, which is supposedly a big company index, actually has a lot of Mid Cap companies, if you look at what Morningstar how they categorize. So, it’s not a uniform process to figure out which one’s which, in those areas. But it’s not a bad way of looking at the markets to see what is happening. Understanding market capitalization, I think is important, yeah.
Easan Arulanantham:
Okay, for the last question of the day, yeah, it comes from John, “What age should I start thinking about retirement? Is there ever too early of a time?”
Tom Vaughan:
Oh, no, you can never start too early. To do true retirement plans, like Roth or a 401k or IRA, you actually have to have earnings. You have to have a job, because they won’t allow you to put money into those you can save and other vehicles. But for like my daughter got a job at a pizza place, and made some money. And so that qualified her to put some of that if she wanted, even at age 18. No, it really comes down to, money. So, the average person really doesn’t start saving for retirement until age 50. It really in their 50s. And there’s a lot of reasons for that, they just you’re as you’re trying to build up yourself you got to buy things, you got to buy a house, maybe or, or pay rent, and then get furniture for that apartment. Then you have kids, and pay for kids, and you have to pay for mortgage. And a lot of times it is until your age 50s that you really have enough money to save aggressively. And then people are much more motivated than if, hey, if I’m going to retire at 65, I’m really going to go for it.
What happens is, if you start late, it just costs a lot more money. If you put money away at 18, or 20, or 22, or 25, I mean, that money will have so much time to grow. When you look at the power of compounding. And you really see what could happen long term. You can fund your retirement with a lot less money by starting much, much early. So there is no period in time where you will not have, you can’t start too early, that’s for sure. And I’ve seen some people really do some great things that did start early.
So, I want to thank everybody so much for coming to Go Live with Tom today. Really enjoyed it. Great, great questions all together. And I hope everybody learned something today that they can take again. We’ll be back next Friday. Please join us and really look forward to seeing you then. Thank you very much!