Summer is just about over, but we expect most Motley Fool Answers listeners didn't "sell in May and go away" -- you've been keeping up with matters of finance and investing all along...right?

However, if you happened to take a break from thinking about your money during beach season, you might have missed a few of Alison Southwick and Robert Brokamp's monthly mailbag shows. In which case, you wouldn't have noticed that Ross Anderson -- certified financial planner from Motley Fool Wealth Management, a sister company of The Motley Fool, and a regular on the mailbag podcasts this spring -- took a break from his guest hosting duties as well, so that other Fools could get their time in the sun. Now, he's back to help the podcasting duo address another batch of listener queries with topics that range from the best places to allocate your investment assets to retirement rules of thumb to the wrong kind of life insurance.

A full transcript follows the video.

This video was recorded on Aug. 28, 2018.

Alison Southwick: This is Motley Fool Answers! I'm Alison Southwick and I'm joined, as always, by Robert Brokamp, personal finance expert here at The Motley Fool. It's the August Mailbag featuring the musical stylings of Ross Anderson.

Ross Anderson: Hello!

Southwick: This month we'll answer your questions about life insurance, replacing a 529 account, investing in silver and violins, and what's in the S&P 500? All that and more in this week's episode of Motley Fool Answers.

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Southwick: Hey, Ross! How are you doing?

Anderson: I'm doing great!

Southwick: Hey! Thanks for coming back!

Anderson: Absolutely! Thank you for asking!

Southwick: For those who are new to the show and aren't familiar with you, who are you and what do you do here?

Anderson: I am a certified financial planner and I work with the Motley Fool Wealth Management group.

Southwick: A sister company of The Motley Fool.

Anderson: Correct. We are a sister company. We have a personal portfolio service, managed money, as well as financial planning. I'm here to, I guess, riff and chime with you guys, and I don't know what I just said. Those words don't make any sense.

Southwick: I don't know what I'm saying, but I love it!

Robert Brokamp: Riff and chime!

Rick Engdahl: It sounded really cool until you backtracked there.

Brokamp: I really like it!

Anderson: So I'm here just to hang out with you guys and answer some questions for people.

Southwick: All right! Well, let's get into it. The first question is from Linda. "I have a friend who is 61 years old and not where he'd like to be regarding his retirement. He has limited funds and isn't sure how best to invest them. He has a mutual fund, but the fees nearly outpace his earnings. He's considering buying silver but is wondering if it's as good an investment as he's been told. Do you have advice as to what his best plan of action might be?"

Brokamp: Linda, the first thing I would say to your friend is that here at The Motley Fool, when it comes to investing, we tend to recommend what Warren Buffett calls "productive assets." Things that produce cash flow, produce goods and services, and have a flow of income and earnings that generally increases with inflation. In other words -- businesses. And the reason we like that is because historically, as long as you hold on for a long-enough time frame, you're probably going to make money.

Silver does not meet that criteria. First of all, it's a chunk of metal just like gold. Some people value it and some people don't. But over the long term you may not make money. And if you just look at the history of silver, it hit about $50.00 back in the early 1980s and then fell to $5.00 and stayed there for decades. It got back up in the early 2010s to about $50.00 because, as you may remember, people were really afraid of inflation and that the Fed's moves, after the Great Recession, were going to cause all this deflation. It drove up the price of silver and gold. Where is it now? It's dropped from $50.00 down to $15.00.

Over the long term holding onto silver, gold, or many precious metals just doesn't turn out so well, so I would recommend to your friend to avoid silver or gold. I would instead focus on a low-cost mutual fund. If he has a mutual fund that's not working out well for him he should definitely get out of it. But look for a low-cost mutual fund. An index fund is perfectly fine. If he's very behind in his retirement savings, he probably should consider retiring later. Working until probably 70 if not later. That's the best thing he could probably do for his retirement, but definitely avoid gold and silver.

Southwick: Our next question comes to us from Cary. "My husband and I are in our early forties and have three rental properties that earn us $55,000 as reported on Form 1099. I would prefer to not have this income included as taxable income. I heard about freelancers setting up a solo 401(k) where you can contribute 100% of your income up to $18,500, but I'm not sure if we would be considered self-employed. Can you contribute to an employer 401(k) and solo 401(k) in the same year? Also, is there such a thing as a solo Roth 401(k)? We have a Roth 401(k) through an employer but had to stop contributing due to income restrictions."

Anderson: There is a lot to unpack in that question for Cary and a couple of things I just want to make sure we straighten out.

First of all, when you're looking at a Roth IRA, Roth IRAs have an income cap to them where if you're making too much money, they stop allowing you to contribute to them. Roth 401(k)s actually don't suffer from that same thing, so if you have a Roth 401(k) option available to you, you are always able to defer up to the $18,500 that you can into a traditional 401(k) into a Roth 401(k) as long as you've got that option, or the catch-up if you're beyond age 50. That's the first thing. I want to make sure Cary knows that she could still do the Roth 401(k) if she thinks that that's a good option.

However, if she wants to set up a solo(k), or an individual 401(k), or any of the monikers that they go by, they can set that up also as a Roth. You could have a Roth solo(k) if you wanted to. The amount of money that you can contribute to it, though, doesn't necessarily change. You're able to defer $18,500 of your income per year regardless of how many plans that you have.

Now where this gets a little bit complicated is that you could do, as the employer, a profit share. She could do a profit-sharing plan and contribute a percentage of the business earnings. You could also do that in a SEP-IRA, for example. That may be easier and cheaper to set up and administer. The SEP is going to be pre-tax money. You can't do a Roth SEP-IRA.

And now that I've got everybody totally confused, the goal was to do some Roth money and some pre-tax money to defer the income. Cary mentions that she's not wanting to pay the taxes on that rental income, so she maybe consider doing a SEP-IRA for the rental properties as a self-employed person. Easy to administer. Low cost. And going back to the Roth 401(k) through the employer and getting both of those options at the same time.

Brokamp: And she said she'd prefer not to have this income included as taxable income. If she's going to put it into some sort of retirement account, it has to be a traditional because if you put it in a Roth, it is taxable in the year you receive it. The benefit is that the money comes out tax-free as long as you follow the rules.

Anderson: Exactly. Now, the thing on the pre-tax anything is that you're not going to avoid these taxes forever. It feels good to eliminate them now, and the standard thinking is that if you're going to be in retirement when you're taking the money out, you're in a lower tax bracket. That's not always true, so I'm not always a proponent of put everything in pre-tax that you can to get the lowest tax bill this year, but if that's what they're trying to do, a SEP or a traditional will really give you that flexibility.

Brokamp: And I would finally say, Cary, if you have someone who does your taxes who's a CPA, you might want to talk to her or him about that because she can talk through the differences between the SEP and the solo 401(k) and any other options you have.

Anderson: Without a doubt. Before making any of those decisions, a tax professional is recommended.

Southwick: The next question comes to us from Joe in Denver. "My question is about two seemingly conflicting rules of thumb about how much someone should have saved for retirement. The first says that you should have 10 times your salary saved by retirement. The second says your annual withdrawal rate in retirement should be about 4%, which implies you should actually have saved 25x your salary by retirement. That's a huge difference. Am I missing something? Can you straighten this out for me?"

Brokamp: Joe, the "4% rule" is just about how much you can safely withdraw from your portfolio in the first year of retirement, and then you would adjust that dollar amount every year for inflation. It doesn't factor in your other sources of income. It doesn't factor in how much your income needs will drop in retirement. It's just about how much you can take from your portfolio.

If you were to say that you needed $50,000 a year from your portfolio in retirement, you can multiply that by 25 to get $1.25 million, which is a rough goal based on the 4% rule, and I say rough because there are actually some shortcomings with this whole 4% rule which maybe we'll get into one day in this very podcast. For now, it's a good rule of thumb.

Now the "10x your salary" rule of thumb is very different. It factors in how much you'll receive from Social Security as well as how much income needs will actually drop after you retire. Most people can get by on 70-80% of what they needed while they were working largely because [1] you're no longer paying payroll taxes and [2] you're no longer contributing to your 401(k). There might be some business-related or work-related expenses that go away. But basically many experts have analyzed this, put all this together, and come up with this rule of thumb that says you shouldn't retire until you have 10x your household income saved up.

Now other people have looked at it and come up with other numbers. Some put it at 12. That's where T. Rowe Price is, and I think their analysis is pretty good because the amount that you need saved earlier in life is lower, but they expect you to really ramp up your savings later in life, which I think is realistic for people. Regardless, I think shooting for about 10-12 [times] your household is what you should have before you retire.

That said, when it comes to the point when it's actually time for you to decide, don't rely on rule of thumb. Definitely spend the money to see a good, qualified fee-only financial planner to decide whether you are actually ready to retire.

Southwick: The next question comes from Rod. "I've heard Bro say many times that money you're going to need in the next five years should not be in the stock market. Read it in your best lecturing-dad voice." Oh, I'm sorry. "Money you're going to need in the next five years should NOT be in the stock market!"

Brokamp: Is that an impersonation of me or your dad?

Southwick: It's kind of an impersonation of an oldie, tiny man on Wall Street shaking his finger at us all, but I don't know. Was that good?

Brokamp: That was good. Yeah, I liked it.

Southwick: "I'm guessing that's because he believes the risk of a market downturn outweighs the reward of a surging market. Well, Bro, I currently have $600,000 in a brokerage account that I plan to use in four-and-a-half years to buy a condo after I retire. If I take the money out of the market now, I will owe the state 5% in capital gains taxes. However, if I wait until after I retire, I will owe 0% in state taxes because I'll be moving to Nevada, which doesn't tax capital gains. So, in my case do the rewards of leaving my money in the market outweigh the risks since I'll automatically gain 5%?"

Brokamp: Well, let's have Ross answer that first to see what he thinks.

Anderson: Let's first start on this question by talking about why we have that five-year rule, or why we talk about wanting to wait five years or not have any money at risk that you're going to need in the next five years. That is because inside five years you have a pretty high level of uncertainty in terms of what your outcome is going to be in the stock market.

If you're willing to invest for 20 years long [and we're just talking about the S&P 500 US large-cap stock market returns], over 20 years your range of outcomes is between 7% annually in gains and 17% annually in gains. There's never been a 20-year period in our history that stocks have lost money over that period.

If you get to 10 years, that range actually expands, and so you had as much as 19% annually over a [10-year] period, or a loss of 1% annually. So even over a 10-year period there has historically been a small chance that you could lose money, but the odds are very much in your favor that you won't.

By the time you get to five [years], it could be as high as 28% or as low as [3%], and so as you get to one [year], and this is the really important one, over a one-year period invested in stocks you could make as much as 47% or lose as much as [39%]. That's what we've historically seen.

So what you're doing is you're basically betting that [in order to save] 5% in taxes the market won't go through one of those losing periods between now and then. I don't know that I'm comfortable with that. 5% is a healthy amount that you could save in taxes, but it's not a lot compared to what you could potentially lose if we actually saw a big correction or a downdraft in the stock market over that time period.

I wouldn't necessarily have you do that. I would start to at least take some of that risk off the table. It doesn't have to be all at once and it doesn't have to be immediate, but in four-and-a-half years a lot of things could happen in the stock market.

And the question I would ask yourself is if something happens in that time frame are you flexible with when you buy a condo? If waiting two years is no big deal then maybe the answer changes, because that could be a moving target for your time horizon. But if it's got to be four-and-a-half years on the dot and you're moving [it's going to happen], I would start taking some of that risk down because I don't think 5% is worth it.

Brokamp: There's always this question, too. If you have enough for your goal, why take more risk? If his overall finances are in good shape -- if he has a good-sized portfolio and maybe he'll get a pension or something like that, and he has enough to buy the condo already -- why take the risk?

I should say, by the way, that the five-year rule I always use is pretty conservative. You look at other Motley Fool analysts, here, who will say, "I'm fine with investing in the stock market if I just have a three-year time frame." In the end, I think it comes down to risk tolerance and, as Ross said, what are the consequences if the market does tank and does not recover by the time that four-and-a-half years are gone. If you're going to be fine and you don't mind the risk, OK. If that would be devastating to you and you have the money saved, why not just reduce your risk?

Anderson: If we're looking at the most recent big crash -- if you were right now standing on the peak of 2007 US stocks and looking over the edge with perfect 20/20 vision -- it took until 2012 to get back to even. That was a full five-year window and that's an abnormal period. That's not what we see every time and that shouldn't be happening once a decade. But it has happened. It's happened in pretty recent history. Try to keep that in the front of your mind if you're making that sort of a choice.

Southwick: The next question comes from Rita. "My husband started playing violin in January 2018 and he's completely smitten. He's taking lessons on Skype. He's gone to a workshop in Italy. He's gotten four music-related tattoos. He had no tattoos before." I love it! "He's decided he wants to become a luthier once he retires in three years. He's 58 years old. Now he wants to take out a loan from his 401(k) to 'invest' in a really good violin. I think it's wonderful that he's found something he's so passionate about, but what do you think about investing in musical instruments?"

Brokamp: First of all, I also think it's wonderful that he's found this whole new hobby and that he has this second career in mind. That's pretty cool. That said, I'm less excited about taking out a 401(k) loan to buy a violin.

The first thing you need to understand with a 401(k) loan is that they do have to be paid back and pretty much immediately you have to start making payments. It depends on your plan. It could be quarterly or monthly. It's often taken out of your paycheck. Just know that you don't get to keep that money out forever. You have to pay it back. If you don't, it's considered a distribution and you pay taxes and penalties if you're not yet 59 and a half.

Southwick: He's almost, though. He's 58.

Brokamp: Right, so he's almost there. The other thing about it is despite my daughter playing violin in the school orchestra, I don't really know anything about the future appreciation value of a violin, but I do know that, generally speaking, when you look at the investment value of collectibles [and there are whole indexes based on collectible wine, stamps and things like that], it's very erratic. He's clearly not an expert because he's relatively new at this. I'm not sure that he has great insight into the investment value of a violin, either, so that also gives me pause.

And finally, I don't know the whole situation, but if you have to take out a loan against your 401(k) to be able to buy the violin, that is a hint to me that maybe your overall finances aren't completely solid, yet. You might want to work on that, first.

Anderson: I'm still paying for my wife's tuba...

Southwick: Tell me more!

Anderson: My wife studied music education and we have a tuba in our house that probably hasn't been touched in many years.

Southwick: How much is a tuba, if you don't mind me asking? Or is it if you have to ask, forget about it.

Anderson: This is sort of lumped into all of the student loans, but I believe it was a five-figure price tag on the tuba.

Brokamp: And has it gone up in value? Have you been following the prices of the tuba market?

Anderson: I doubt it. I don't follow the tuba market well, but if we were able to get back a percentage of that value I'd be quite happy, but I don't think she can sell it. I don't think she could part ways with it, which is really the tough thing. You don't buy a beautiful, collectible high-end instrument because you want to sell it later. You're buying it because you want to love it and play it and enjoy it with your passion. To think of it as an investment, I think you're justifying paying for a really nice instrument that's probably not really being treated like an investment.

[...]

Southwick: The next question comes to us from Guarav. "I'm 33 years old and have a two-month-old daughter. Could you please share your thoughts on variable universal life insurance? It has been recommended to me that I should buy a VUL policy rather than contribute to a 529, since the money from the policy can be used for any needs that come up. I've tried to research VULs, but I can't find a simple-enough explanation on the logistics of it."

Anderson: I think that he's probably been talking to an insurance salesman. Very few other people are going to be talking about the benefits of the VUL product like that. This is two things kind of matched together. You've got a life insurance policy and you've got an investing account that's attached to it. And the way that it's supposed to work is that let's say your cost of insurance -- so that you can protect your income and future livelihood -- is $50 a month. But instead of paying $50 a month, you're going to pay $250 a month, and that extra $200 is going to go into this account. It's going to become invested and it's going to do wonderful things for you.

The way that they're sold is often talking about two benefits. One is that the withdrawals are going to be tax-free and what they're really saying is that you can take a loan against the money that's accumulating in this policy and that that will be tax-free. Now, that's kind of a "gotcha" because no loans are taxable. You don't take a mortgage out on your house and then pay taxes on the loan, so that's always an interesting little spot that insurance folks like to talk about. But the other problem with those is that if you don't have a lot of money in that side account that's accumulated, you can actually put the insurance at risk when you start to take some of that money out.

My preference is if it's an investment, treat it like an investment. If you need insurance treat it like insurance. I think you're much better off if you need insurance looking at a term life policy that is low cost, very straightforward, and then continuing to save into another vehicle. Now whether that's the 529 or if you just want to save into a taxable brokerage account -- if having that flexibility is really important to you -- you don't have to use the 529. You do get a tax benefit because it is meant for education and that now includes some free higher education. So you can use that money now toward some expenses before college, even. So the 529 has gotten a little bit more flexible. I very much don't like the idea of VUL or variable life policy for education funding. I don't think it's the best tool for that.

Brokamp: First of all, I think he's doing two very important and smart things. He's looking at life insurance, which is what you should do once you have a kid and looking at saving for college. Good for you for doing that! The benefit of the 529, of course, is that the money comes out of the account tax-free if you use it for qualified expenses. What the insurance salesman might be saying is, "Well, if you need it for something else, you're going to have to pay taxes and penalties." That's actually only on the growth. Any money that you put in yourself you get to take out tax and penalty free. So it's not as bad as some people say. And, if for some reason, your daughter doesn't go to college, it can always be transferred to other relatives, yourself included, if you want to go back to school later. It's actually got a lot of flexibility to it.

Southwick: Our next question comes from [MaryAnn]. "I am a 35-year-old single woman who has worked in the non-profit sector for my entire career [read, low salary]. I have no debt and currently have about $9,000 in a 403(b) with no employer match; $1,000 in a Roth IRA, and $5,000 in a traditional savings account. My precious grandmother passed away earlier this year and I just learned that she has left me $10,000.

"I'm not convinced that I should be a homeowner in the next five years as I enjoy the lifestyle that renting affords. I'm very encouraged by Bro's stance that home ownership does not have to be part of a successful retirement plan, but I'm also starting to freak out about how little I have saved so far. I'm contemplating what kind of account I should invest this money in. How would you approach this situation? Also, I assume I will need to pay taxes on this income. How can I minimize that?" Aw, MaryAnn, you're 35 and worrying about your money. You're great!

Brokamp: She is great!

Southwick: I feel like I want to tell her straight out, "Hey, the fact that you're worrying about this at 35 is a good sign."

Brokamp: Yes, I think so, too. First of all, the good news is that you likely won't pay any taxes on the inheritance. If your grandmother's estate owed taxes, it's paid by the estate and not by the beneficiary. There are some states [I think it's only six] that actually do have an inheritance tax that beneficiaries have to pay, but they're high-exemption amounts on that, so generally speaking you probably won't have to pay any taxes. You may want to check to see the laws of your state in the state in which your grandmother lived, but you're probably fine.

And it's great that you're thinking about your retirement at age 35. I mentioned earlier some of these studies that say that you need 10x to 12x your salary before you retire. For people who are 35, you should have accumulated about 1x or 2x your salary. That's a lot, though. It's asking a lot, so don't be overly freaked out about that. You still have at least 30 years until you retire, but I would definitely say the place for this money that you've inherited is for retirement. I would start by maxing out a Roth IRA this year. The maximum amount is $5,500 and then just put the rest in a cash account until January 1st and then put the rest in the Roth IRA.

You could max out the Roth this year and then put the rest in your 403(b). The problem is that the average 403(b) stinks. You might have a good one, so if you have a good one, you could put money in there, but I just know from experience that the average 403(b) is not very good. I think it's better just to have it on the side and then put the whole thing in a Roth.

The other good thing about that is if you ever need the money before retirement, you can take the contributions to a Roth IRA out tax and penalty-free. Not the earnings, but the contributions. In case you ever have an emergency, or you decide to buy a house, or you decide to get married and have to pay for the wedding, you have more flexibility than if you put the money in a 403(b).

Southwick: The next question comes to us from Clark. "I'm 22 years old and graduated from college in 2017. I just reached the six-month mark at my current company and I'm now eligible to benefit from the 401(k) match." Hooray! "I have been subscribed to Rule Breakers and Stock Advisor for almost a year and put as much as I can of my paycheck into a brokerage account." Oh, that's awesome! "I also have an emergency fund, per the advice from this podcast." Hey!

Brokamp: I know! That's nice!

Southwick: High-five, Bro! "With the help of Motley Fool, in my first year of investing I have an overall return of about 19%." Wow! "My question is should I contribute to my 401(k) just enough to receive the match and then continue investing in my brokerage account, or should I transition to aggressively contributing to my 401(k) and invest on my own less?"

Anderson: First of all, Clark, congratulations!

Brokamp: Yes, absolutely!

Southwick: Way to go, Clark!

Anderson: At 22, to be asking the question and to be thinking the way that you are, I love it! You're on the right track. The first thing I would tell you is that certainly you should contribute enough to the 401(k) to receive the match. It's free money. Take it. Don't let them leave that on the table.

Beyond that my instinct [and I don't know your salary or anything like that] would be that you should be looking at a Roth IRA first and then to the brokerage account. And I say that for two reasons. No. 1, at 22 you're likely going to have a lot of goals that come up between now and retirement; things that you're going to want to use some of those investment dollars for like a down payment on a home. Like anything else that comes up along the way.

Southwick: A tuba!

Anderson: Right. It could be a tuba. Probably not. But you're going to have a lot of things that you're going to ultimately want to invest for, even if you don't see them immediately on your horizon. The 401(k) is just not going to give you the flexibility to get to those funds.

The Roth IRA, for example, has a provision where you can take that money out as a first-time home buyer or a portion of that money out as a first-time home buyer, so it gives you a little bit more room to work. It's going to give you, also, tax-free growth and tax-free withdrawals assuming we wait until retirement or use one of those exceptions. And you're probably at 22 [again, I no idea what your salary or income is], at the front end of your earnings career. Your salary is probably going to rise making some of those pre tax deferrals like the 401(k) more beneficial to you later in life. So I'd say Roth IRA probably first and then the taxable account because it's going to give you the most flexibility for the things that I think you're going to use the money for.

Southwick: The next question comes from Gene and Becky. "I'm 72 and my wife is 71. I have a question about Bro's report on the status of Social Security from the July 17th episode. He reported that the program will run out of full funding by about 2034 if not before. He said something to the effect that those in their 50s and approaching retirement could count on getting only about 75% of their benefits. My question is what about those of us already in Social Security? Presuming we will still be around in 2034, in addition to facing creeping inflation, could we also be facing a benefits cut?"

Brokamp: He is referring to when I talked about the Annual Trustees Report from the Social Security Administration. They basically said the trust funds will be depleted by, I guess, it was 2034. The year moves around every year, but it's always around there. And at that point, Social Security will be paid for by incoming payroll taxes and it will only be enough to cover about three-quarters of projected benefits. I think actually anyone in their fifties or younger should expect to plan on getting less. Hopefully that will not be the case, but I think it's just a prudent assumption.

I have not heard any sort of discussions that involve improving and enhancing the Social Security program that cuts benefits to people already receiving it. I think anyone who is receiving benefits is probably going to be spared any change that happens. There has to be change at some point, but I think anyone who's receiving benefits are probably OK.

But the bigger issue is something you touched on and that is inflation. Every year Social Security is adjusted for inflation...

Anderson: Sort of.

Brokamp: Sort of. The inflation you usually hear about in the news is the CPI for Urban Consumers or CPI-U. It's actually different for Social Security. It's the CPI-W. Some years it lags CPI-U. It's been actually going a little faster. This year it's currently at 3.2%. In fact, in 2019 it might be the first time Social Security gets an adjustment of 3% or more since 2012. The problem is that many of the things that senior citizens spend money on actually grows at a rate faster, namely healthcare. So you do have to pay attention to how your overall income stream is going to keep up with inflation, because Social Security is probably not going to do that.

Southwick: The next question comes to us from Mike. "There seems to be a lot of rhetoric in today's financial reporting about management fees from mutual funds. I get it. Higher fees mean the consumer pays more and has less in savings. However, I feel that a fund's total return is what counts. As an example, if the total return of an actively managed mutual fund is 12% annualized and a passively managed index fund's total is 10.5%, the higher fees for the actively managed fund are justified. As you know, 12% vs. 10.5% annualized can make a big difference over an investor's lifetime. Am I thinking about this correctly?"

Anderson: I think Mike is thinking about this correctly. Really, the net-of-fee return [the amount that your account goes up] is really what's important. In Motley Fool Wealth Management we run a personal portfolio's program. We manage money for people, so you can paint me with that bias, but that is what we're trying to do, as well, is to deliver on a net-of-fee basis to our clients at a level that's comfortable for their risk. I think he's looking at it the correct way.

The tough thing, when you're looking at a manager, is trying to figure out where that manager's edge is coming from. How are they delivering the outperformance? Is it through taking exorbitant amounts of risk? Is it through discipline? Is it looking at their track record? How long have they been a part of that fund? Whether it's somebody that just opened a brand new product, or they've just changed the manager; those things are really important because a mutual fund, for example, doesn't have to go away if the person that was leading the charge gets fired, or leaves, or makes another choice.

So understanding what's under the hood of that fund [how high is their turnover, are they investing in a way that's consistent with your goals] I think is what's most important, but those net-of-fee returns is what you should be measuring.

Southwick: The next question comes from Amar. "Why do we follow the S&P 500? Why not the S&P 400 or the S&P 600? I do own SPY." Is that the ETF or the SPDR index?

Brokamp: Yes. It's the ETF that follows the S&P 500.

Southwick: "Which, if I understand it right, is an index of the top 500 companies, but who manages the fund and how often is it updated?"

Brokamp: Amar, let's start with a little history. The S&P 500 started out in life as the S&P Composite in 1923 and it was really just a small handful of stocks. Then it was expanded to 90 stocks in 1926 and then 500 in 1957. Why 500? Because it was a combination of S&P's industrial index, which was 425 stocks and the utility index, which had 50 stocks and the retail index, which had 25. All of this is according to Wikipedia. And if it's on Wikipedia...

Southwick: You know it's true!

Brokamp: You know it's true. So nowadays, though, the 500 stocks in the index are determined by the S&P Index Committee. That's who determines what's in the index. And it's not necessarily the 500 biggest companies, but that's mostly the case. So the committee follows certain criteria. Berkshire Hathaway, for example, wasn't part of the index until 2010 because of liquidity issues. Its shares were so expensive it wasn't able to join the index until it had that 50 to 1 split of its fee shares.

Nowadays perhaps the biggest-name stock that's not in the S&P 500 is Tesla, because it doesn't meet S&P's "financial viability criteria." In other words, it hasn't been consistently...

Anderson: Shots fired.

Brokamp: Exactly. It hasn't been consistently profitable. So while the S&P 500 has come to represent the market, it's actually not the entire stock market. It's all large-cap stocks. Just recently Vanguard, which is the first company to offer a publicly available S&P 500 index fund, removed it from their 401(k) and replaced it with the total stock market fund because they believe that's more representative of the overall US stock market.

This brings us to Amar's question about the S&P 400 and the S&P 600. Those are actual indexes that exist -- that track midcap stocks and small-cap stocks respectively. If you own the S&P 500, via SPY or any other index fund, adding the S&P 400 and the S&P 600, which you can do very easily through all kinds of ETFs, is actually, I think, a pretty good idea. In fact, we on The Motley Fool's 401(k) committee are now looking at an S&P 600 index fund and looking at adding that to our plan, so I think that makes total sense.

Finally, he asked about who manages SPY and how often it's updated. It's managed by State Street Global Advisors and it's updated throughout the day because they put in a lot of time to make sure that it very closely tracks the S&P 500. And just as a fun fact, it was the very first exchange-traded fund listed in the US becoming available in 1993. And it has nine basis points which, at the time, was very low. Nowadays there are a handful of ETFs at even lower expenses. Not that you should sell this one, but there are even lower cost options out there.

Anderson: Just to clarify, Bro said the S&P 400 doesn't just mean it's a small subset of the S&P 500.

Brokamp: Exactly.

Anderson: It's not like the better 400. It's a different 400 companies that you're looking at under a different criteria.

Southwick: I think they argued over it and are now like, "You know what? Can't we just add 100 more to this S&P 500? Yeah! We'll call it the S&P 600." No, they're totally different stocks. The final question comes from Joe Knoll over on Twitter. "I have as much in my Roth with two stocks as I do in my 401(k) -- about $1.3 million each. Is that too much?" Is one of those Amazon? I have a feeling one of those is Amazon.

Anderson: And the other is Netflix?

Southwick: Maybe.

Brokamp: Maybe if he's a Motley Fool subscriber. This is a really interesting one. If you were to look at the wealthiest people in the world, you're going to see people like Warren Buffett, Bill Gates, Jeff Bezos. In fact just this July it was determined by Bloomberg that Jeff Bezos is now the richest man in modern history, because now he's worth $150 billion. These folks got rich by just buying one stock.

Southwick: They're over concentrated.

Brokamp: They're very concentrated and if at any point along the way someone came along and told these guys, "You know, you should diversify. You shouldn't have more than 10% of your portfolio in any of these companies," they would not be as wealthy as they are.

That said, they are "survival of the richest." It's not something that most people should do. I know there are many people here at The Motley Fool who have portfolios that are significantly concentrated in Amazon, in Netflix, and a lot of these companies and they're very comfortable with that and they know the risks involved. I don't think it's the best way for the average person, but I'm going to let Joe determine for himself whether that's right. Any financial planner that you went to would say that's way too much.

Southwick: Any? Ross, what do you say? That's way too much?

Anderson: I maybe even said these exact words, because I say this a lot to folks. But the industry, as a whole, seems to come from a position of why take any more risk than you would have to? If you've already achieved everything that you need to; if you could sit in cash and take zero risk whatsoever and still meet your needs and never run out of money, why wouldn't you do that?

I think The Fool and Foolish investors tend to come at it from the other side, which is if you've taken care of those needs and if we've got our next five years' worth of needs in cash or something very safe, why not earn more? And that's kind of what's he's asking. I don't really know the underlying situation. I don't know how much Joe needs for retirement or how much of his needs are represented by that portfolio, but by staying concentrated he could earn exponentially more as an investor, but he's opening himself up to a lot of risk. The individual risk in a single company is very high.

So most of us are trying to find that right level between being over diversified and just turning our portfolios into global mush, and the right number of securities [two may be right for him] but may be too few for most people.

Southwick: So the answer is Joe needs to just check his gut.

Anderson: A resounding we don't know.

Brokamp: If it were me, that would be too much for me. For every story you have about a Jeff Bezos or a Bill Gates, you're going to find people who had 90% of their portfolio in Lucent. In AIG. In Enron. I mean, there are all these other stories of these types of things.

Earlier you had a question about whether the guy who's going to retire should sell now or wait so he can avoid the 5% capital gains tax. I remember a story of a guy, Phil Marti, who used to be a tax expert on our discussion boards. He very sadly passed away a few years ago, but he had something like 50% of his portfolio in Cisco right before the .com bubble. And he didn't sell because he wanted to avoid the capital gains. And he said, "Well, the market took care of that. Then the stock went down so much I didn't have any more capital gains."

Anderson: That will make sure there's no taxes.

Brokamp: Exactly. It's just a tough call. But good for you, Joe...

Southwick: It's a fun problem to have. I've heard of worse problems. Good luck, Joe! All right, Ross. That's it! We covered all the questions.

Anderson: We did it!

Southwick: Let's go to the Mailbag. I've got a little bit of feedback, actually less feedback from people telling me I did stuff wrong than on previous episodes, so that's exciting. Rob over on Twitter wanted to let me know, "I'm sure you'll hear this a bunch, but Mackinac [Mack-i-naw]" -- I pronounced it Mackinac in an episode -- "is a French word pronounced Mack-i-naw. The city nearby is a transliteration anglicization of a Mack-i-naw pronunciation..."

Brokamp: Goodness gracious!

Southwick: "Mackinac is a type of turtle that the island gets its name from for whatever reason." So sorry. I will never mispronounce Mack-in-ac ever again. Mack-i-naw. Mack-i-naw. It's a French word so I need to blow out a puff of smoke.

Anderson: Le Mackinaw.

Southwick: Le Mackinaugh! Look at all these postcards!

Brokamp: Yay, postcards!

Southwick: Yay! It's so awesome! The front desk woman swears that they just get held back and then all of a sudden, we get them all.

Robert went to Rochester, New York [or the ROC, as we call it in my husband's family]. Zack went to the SPAM Museum in Austin, Minnesota and also sent us a fridge magnet.

Brokamp: Oh, nice!

Anderson: Do they eat a lot of Spam in Minnesota?

Brokamp: I don't think so.

Southwick: I think that's meant to be the Spam factory. I don't know. You can read all about it on the back.

Anderson: I'll do that.

Southwick: Although Bro's on his way to Hawaii soon, so you're going to see lots of Spam. They're really big on Spam in Hawaii.

Brokamp: Really?

Southwick: Yeah. It goes back to World War II.

Anderson: That's where I always think of it from is as a Hawaiian thing, but maybe not.

Brokamp: Well, I didn't know.

Southwick: When you go to a grocery store in Hawaii, head to the Spam aisle and you're going to see all these options of Spam. There's going to be a lot of Spam. Good Old Shoots sent us a card from... I'm going to guess it's pronounced Bell Fourche, South Dakota, but I'm just guessing that's the pronunciation. Melanie sent us a card from the eBay Open Conference in Las Vegas. We actually have two people that sent us postcards from Alabama because I guess on the previous show I said, "I've never gotten a card from Alabama." So you guys heard, including... Do you remember we met Kevin and Karen when we were at the Happy Hour in D.C.?

Brokamp: Oh, yeah!

Southwick: They sent us a card...

Brokamp: Oh, hello!

Southwick: Hello card! And then we also got a card from Paul, who sent us a card from the Unclaimed Baggage Center which is located in Scottsboro, Alabama.

Brokamp: Who knew?

Southwick: Who knew? We also got a card from the Cutler family which went on a road trip from Pennsylvania to Utah, so they sent a card from Arches National Park.

Brokamp: Beautiful.

Southwick: We have a card from Texas -- "Don't Mess With Texas" -- thanks to Rich. We also have a card from Ogden. You guys have been going to Utah a lot! We have a card from Ogden, Utah thanks to Stephen. He is out there doing the Spartan Sprint Obstacle Course race, and he placed third in his division.

So congrats! That's no joke! And then we also have [this is pretty magical, here], a postcard from Mark from Caldwell, Idaho which is where I went to high school.

Brokamp: Oh! Look at that!

Southwick: I know.

Brokamp: Do you know this person? Oh, look at that. It's Christmas. This does my heart good.

Southwick: Yeah.

Brokamp: Do you know this person?

Southwick: No.

Brokamp: Is it like a friend of yours or just a total coincidence that they sent it to you from Caldwell?

Southwick: It's a total coincidence that they sent it from Caldwell, Idaho and that their handwriting looks exactly like my best friend's from high school. That is [Theresa's] handwriting right there.

Brokamp: A former guest on the show.

Southwick: And former guest on the show. And she has a new book coming out soon!

Brokamp: I didn't know that.

Southwick: It's going to be about raising kids. That was all of them?! That was all the postcards!

Brokamp: Thank you, everybody!

Southwick: Doesn't that warm your heart to see all these postcards from listeners?

Anderson: People love you guys!

Southwick: Well, you're a part of it, too!

Brokamp: You're a part of the family.

Southwick: You're part of the Motley Fool Answers family.

Anderson: I can be part of both groups, because I'm part of the group that loves you guys if I'm here... and I'm part of the show today.

Southwick: Oh! Thanks, man!

Brokamp: Thank you!

Southwick: And thank you to you guys for sending us your postcards from everywhere! If you are a listener and would like to send us a postcard, we are still accepting them gladly. Our address is Motley Fool, 2000 Duke St., Alexandria, VA 22314. Ross, I want to thank you again for coming on the show and helping us tackle these questions!

Anderson: Always a pleasure!

Southwick: It is always a pleasure! I'm glad you agree. The show is edited Spamingly by Rick Engdahl. Our email is Answers@Fool.com. You can also find us on Facebook and Twitter and places like that if you want to get us your questions for next month's Mailbag episode. Doo doo doo dooo! For Robert Brokamp, I'm Alison Southwick. Stay Foolish everybody!

Ross Anderson is an employee of Motley Fool Wealth Management, a separate, sister company of The Motley Fool, LLC. The information provided is intended to be educational only, and should not be construed as individualized advice. For individualized advice, please consult a financial professional. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Alison Southwick owns shares of AMZN. Rick Engdahl owns shares of AMZN, BRK-B, FB, NFLX, and TSLA. Robert Brokamp, CFP owns shares of BRK-B, FB, and TSLA. Ross Anderson owns shares of AMZN and FB. The Motley Fool owns shares of and recommends AMZN, FB, NFLX, TSLA, and TWTR. The Motley Fool recommends BRK-B and EBAY. The Motley Fool has a disclosure policy.