In this episode of the Motley Fool Answers podcast, analyst Abi Malin joins hosts Alison Southwick and Robert Brokamp to answer your questions, including how to separate the wheat from the chaff on your watch list, owning a home versus renting, the deal with dividends, and more.
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This video was recorded on Aug. 27, 2019.
Alison Southwick: This is Motley Fool Answers! I'm Alison Southwick, and I'm joined as always by Robert Brokamp, the Bro, personal finance expert here at The Motley Fool.
Robert Brokamp: Greetings!
Southwick: It's the August mailbag, and Abi Malin, Motley Fool analyst, joins us as we ask the deep philosophical questions like, what if everyone bought and held their stocks? What do we wish we knew when we started investing? And, do dividends suck, or what? All that and more on this week's episode of Motley Fool Answers.
Abi, have you been on the show before? I feel like you have.
Brokamp: Yes, she has.
Abi Malin: I think I've done it once or twice, yeah.
Southwick: It was obviously a super memorable experience for all of us.
Brokamp: I remember it!
Southwick: I know that, for a long time in our planning meetings, we've been like, "I wonder if Abi could do it? What if we can get Abi in?" And we did.
Brokamp: You're kind of our rising star.
Malin: Thanks for having me here!
Southwick: [laughs] The rest of your Foolish career is going to go downhill from here, I'm afraid. This is it. Thank you for joining us! How did you come to The Motley Fool? I don't know if our listeners are going to be familiar.
Malin: I started as an intern. I found it through a professor at school. I was graduating -- I actually had a different job starting in August. I was a finance major, but I was struggling to figure out what I wanted to do with that. I had a job at a traditional financial role. My professor was like, "You're going to like this better. Take his internship. I've already put it in a recommendation. Get your application in by midnight." It was kind of random. I was like, "I'll try it, see if I like." I started and then I never left.
Southwick: Aw! Are you glad that you took this job?
Southwick: We're glad you did, too.
Southwick: Alright, well, we're going to go through... how many questions are we getting through today?
Southwick: 11, alright.
Brokamp: Stranger Things. Not really.
Southwick: Let's do it!
Brokamp: Let's do it!
Southwick: First one. "A company pays out a dividend, and then the stock price goes down by the amount of the dividend. So the dividend is worthless, surely. In fact, you're losing money as you have to pay taxes on the dividend. What am I missing?" That's from Andrea.
Brokamp: Andrea, you make a very good point. Now, I wouldn't say a dividend is worthless, because anything that pays you cash is worth something. Plus, dividends are taxed at lower rates, ordinary income and interest from bonds, and they tend to grow at a rate that exceeds inflation over the years, so they're not worthless. But the main point is valid in that a dividend isn't a free lunch. If you think of a company, it has a certain amount of cash on its balance sheet that's factored into its valuation, then it pays a $500 million dividend, it doesn't have that cash on its balance sheet anymore, so the price does have to adjust downward.
I would think of it this way. Let's say you bought a stock for $50. Then, over the next year, it generated $2 per share in earnings. At the end of that year, it distributed one of those dollars as a dividend. The price will adjust. Say it goes up to $52, pays the dividend, then goes back to $51. You're still ahead of the game, right? The stock price has gone up, you do have that cash. And what most people do with that cash is reinvest it and buy more shares of that stock, so, you're accumulating more shares, which will gradually pay more cash. So I don't think it's worthless, but the price does adjust.
There are people who think dividends are not the best way to use cash. Some people think that buying shares is a more tax efficient way to do it. Like a company will buy back its shares, reducing the share count, therefore increasing earnings per share, which increases the value of the company. And you're not taxed on that because dividends are not very tax efficient. Warren Buffett is a big fan, as we all know, of keeping the cash. Berkshire Hathaway doesn't pay a dividend because he thinks he can use the cash in ways better than just paying out as a dividend.
Personally, I think it makes sense to have a combination of both stocks that don't pay dividends and do pay dividends. Coincidentally, I was looking today at which stocks trade ex-dividend. Ex-dividend means, from that date forward where the next dividend you won't get paid, theoretically, that's the day when the stock price should adjust. A stock that's trading ex-dividend today on August 7th is Starbucks. It's going to pay a $0.36 per share dividend. It's down $0.23 today. The crazy thing is, the market itself is down almost 400 points. So Starbucks has gone down a little bit, but it's not gone down as much as the market.
Southwick: Next question comes from Dylan. "I'm 27 years old and have been investing for over two years now. I've become fairly confident in understanding how the market works and I've bought in fully to the long-term, buy and hold philosophy that David and many other Fools teach, but can't seem to shake an odd thought that is apparently lodged in my head. If the stock price of a company rises and falls based on simple supply and demand principles, wouldn't the entire stock market flatline completely if every investor followed The Foolish philosophy? Put another way, if everyone simply stopped selling their shares and instead became buy and hold investors, wouldn't the market experience a dramatic upturn and then eventually stagnate as all outstanding shares are purchased?"
Malin: I think this is a really good question. The thinking here is correct. Prices are determined by supply, which is selling, and demand, which is buying, activity within the market. But according to a BlackRock study from October 2017, less than 18% of the stock market is owned by index tracking investors. What this tells us is that passive investing plays only a very limited role in equity prices. This includes mutual funds, ETFs, institutional accounts, and private investors that track an index. About 26% of the stock market is owned by actively managed hedge funds, mutual funds, and institutional accounts, and then 57% is held by governments, pension funds, insurers, and corporations. What all of those numbers tell us is that the majority of the market is actually made up of non-retail investors. These players have to manage their funds with alternative incentives that could never actually align with the buy and hold strategy for the long term. Some of those reasons could be clients withdrawing money for education or buying homes, things like that; clients making monthly contributions. Think, every paycheck, you put a little bit in. Also, stipulations about what type of investment they can hold, and the minimum level of returns required. These often shift. So, with companies' quarterly reports, it may or may not then meet requirements, and certain funds are required to sell. Think about a small-cap fund that has to sell a stock when it exceeds a certain market cap, or an index tracking fund that must rebalance to mirror the index it's weighting, things like that.
So, I think, even in the event that everyone invested Foolishly, we would continue to see volatility and price corrections in the market just because the majority of market volume is actually not controlled by retail investors with the ability to make that choice.
Southwick: Yeah. And we talk about buy and hold, we're talking three, five years. We're not necessarily talking, buy a stock and never sell it. That'd be fine. But -- well, I'm maybe not going to look at you, Bro -- but, how often do you sell stocks in your investing career?
Malin: I sell very rarely. Unless there's a big thesis shift, I tend not to sell. I do look at adding to positions or sometimes ignoring positions in certain circumstances. But I don't sell very often.
Southwick: Yeah, I don't think I've ever sold a stock.
Brokamp: But, while we talk about buy and hold, ultimately you're buying a stock today so that you can purchase something in the future. For most of us, it's retirement. But it could be some of the other things you mentioned, going to college and stuff like that. At some point, we're all going to sell something. And that is going on right now today. Right now today, there are retirees who need to sell stocks in order to create some cash so that they can continue to live in retirement. And that's always going to be going on. Plus, the market is set up in such a way that there are specialists and market makers -- you know, those people you see on the floor of the New York Stock Exchange. Their job is to provide liquidity. If everyone is selling, they have to buy. If everyone is buying, they have to sell. Now, they're allowed to adjust their prices so that they make a bit of a profit on the bid-ask spread. But that's their job. They're required to provide liquidity. It's set up that if you want to buy or sell something, there's someone out there who's willing to engage in that transaction.
Southwick: Next question comes from Bijesh. "While somewhat bleak, your episode on home buying was very informative. However, I'd like to hear more about owning vs. renting. For example, if I rent a home for $1,000 vs. making a mortgage payment of $1,000, should I not be coming out ahead if I own the property? If I budget an extra $150, for repairs, after 30 years, I will have either paid $360,000 in rent or $414,000 to own the home, but then I'd have an asset I could sell or live in for free afterwards."
Brokamp: Comparing the long-term costs of renting vs. buying, and factoring the home equity that you build up, is definitely the right way to think about it. So, I think he's on the right track. I would tweak his math a bit. It actually gets complicated. Just on the renting side, you may just have rent, and maybe renters insurance, but that's not a whole lot. But the tricky part is that both of those will go up with inflation, generally speaking, every year. If your rent is $1,000 a month this year, in 10 years, it'll be over $1,200 a month if inflation is 2%. That keeps going up. Owning a home is more complicated. That $1,000 mortgage payment, if it's just principal and interest, that's going to stay fixed, actually. It's going to be $1,000 this month, and 10 years from now, and 20 years, until you pay it off. That's good. Everything else will go up with inflation. That's maintenance, insurance, and property taxes. And then the other factor to conclude just comparing the monthly payments is, if you own a home, you might get some tax benefits. If you itemize, you might be able to deduct your mortgage interest and your property insurance. That's only if you itemize, and these days, only about 12% to 15% of people do that. So, that's how you compare the costs.
Then you have to compare, basically, the equity or the assets. In favor of renting, you have to think, if you buy a house, you have to put down a down payment. When you put down that down payment, that is money you can no longer invest. Another aspect is, generally speaking, you are paying more per month to own than to rent. This example was $150 more a month that he gave. If you're renting, you could invest that $150 a month in the stock market. That's other ways of building up equity.
When I have ever decided whether I'm going to buy a house or rent a house, I've created a spreadsheet that incorporates all of these things, including the buildup of the equity in the house, which comes from, A, paying off the mortgage gradually, and B, the increase in the home price. Ideally, it goes up. Most home prices do, but not all the time. So, I have done that. Fortunately, there are many calculators out there on the internet as well as free spreadsheets that have all this done for you. If you really want to look at all these details, I highly recommend you use a few of them to do the analysis.
Southwick: Next question comes from Pete. "I'm a new Fool and I'm interested in beginning my journey buying individual stocks now that I've maxed out my retirement savings each month. I recently joined Stock Advisor to assist in picking some stocks to purchase. Right now, I have 14 stocks, all receiving an equal portion of my investment dollars. Is this a good idea, or should I allocate more money to better performers each month? Doing that, however, seems like I'd be buying when a stock is high as opposed to dollar-cost averaging my portfolio. Is my investment strategy too egalitarian?"
Malin: I think this is a good question a lot of people struggle with. When you look online at various resources, a lot of advice will tell you how to manage very large accounts. But there's not a lot of information about how to grow from zero to very large. It's a fair question. The pro to the solution that our listener has chosen here is that you're achieving diversification pretty quickly. 14 stocks is obviously more diversified than buying one at a time. That would be the benefit of this strategy.
But now that you have this base, I would really encourage you to think more about weighting your stocks to reflect your personal conviction levels rather than reflecting the current price. Around The Fool, we talk a lot about how decisions based solely on valuation tend to be wrong. You're either catching a falling knife, which means you're buying something because it's cheap, or you're avoiding high-flying winners. The one that a lot of people talk around here is Amazon. If you ever were concerned about, "I'll buy it on a dip," you almost never bought Amazon, probably. So, I think the better way to frame that question is thinking about future expectations you have for each of your existing holdings, and then asking yourself whether you feel like you've appropriately weighted the risk and return among these 14.
Then, on top of that, I would encourage you to add as many stocks as you feel comfortable holding. Depending on how much you add every month, it could take a couple of months of allocating to get a new position to a size that feels adequate relative to what's already in there. But that's OK. The bottom line here is that there's no wrong answer in how to do this. There's pros and cons to each approach. But now that he has his base, I would encourage him to think a little bit more broadly.
Brokamp: The only thing I'd add is, we've talked before about keeping an investing journal. As you do this, if you're going to say, "I think these three stocks are better this month," next month, another three, write that down, write down the reasons why. Track your performance, and get an idea of whether you have a good knack for this or not. And if it turns out you're not doing such a good job -- and you have to give yourself a good three years or so -- then maybe go back to doing the equal weighting.
Southwick: Alright. Next question comes from Don. "I've read many articles about Social Security and the benefits of waiting until 70 or whatever the full retirement age is for a person vs. taking Social Security earlier at 62. I keep seeing the dollar totals for one retirement age vs. another. My question is this -- does the math include the cost of living adjustments? I feel like this could change the argument a little."
Brokamp: What Don is talking about is basically this -- if you take social security at age 62, you'll get a lower monthly benefit, but you get the money sooner. If you delay, you'll get a bigger benefit, but then you have to wait. Many articles will compare how much you would have at certain ages based on when you claim Social Security benefits, and come up with basically a breakeven age. Generally speaking, that breakeven age between age 62 and 70 claiming, is around 80. The basic idea is, if you die before 80, it was better to take the money sooner, and if you die after 80, it was better to delay. And the point Don is making is that every year, your benefits do go up for inflation. He's wondering whether that is factored into these analyses that he reads about.
I can't answer each individual analysis for him because I don't know. But I think he's smart in saying that should be factored in. You shouldn't just figure in how much you're getting this year in inflation if you claimed it this year, but make some assumption of how much it'll go up each year for inflation.
All that said, I don't think the breakeven analysis is the way to do it. The Social Security Administration agrees with me, because they used to have a breakeven calculator on their website and then they took it down because it was leading people to make misguided decisions. It's better to get a more sophisticated tool. There are several that are free on the internet. AARP has one. Financial Engines has one. There's also one called Maximize My Social Security. It actually costs $40 but I think it's worth it because it factors in all kinds of scenarios and gives you a range of when you should take your Social Security.
I'll just add, there are other studies that have looked at the ideal age to claim Social Security. There's a recent one that came out from United Income, it's entitled The Retirement Solution Hiding in Plain Sight. Basically looked at 2,000 real-life scenarios of folks, when they should have claimed. They basically found that 57% of all retirees would have been better off if they waited until age 70, and only 8% would have been better off taking between 62 and 64. So, generally speaking, it does pay to delay.
Southwick: Next question comes from David. "Looking back, what are the questions you all would have liked to have asked back when you were just beginning as investors but didn't know enough to think about? I also have a second question. Is there an easy way to involve children in investing and communicating on their level?"
Malin: One of the most valuable tools I have when thinking about companies is breaking down the economics of the business. For me, I like to think about this really simple mathematical equation -- revenues equals price times quantity. This works for all businesses across all industries. Once you start thinking about businesses in these simple terms, you can ask yourself the right insightful follow-up questions -- again, across any industry. What has driven prices up or down in this industry in the past? Do I have reasonable insight or expectations about those factors going forward? Is it reasonable to assume existing customers can buy more quantity? If so, how many? How frequently? Which begs the questions of useful life, things like that.
The reason that this is really helpful is because it's applicable, again, to all industries, everything from oil and gas to consumer goods to anything you want to look at. If we think about Starbucks' revenue, what goes into that, it's the price of an average drink and the number of drinks that they sell. On price, on that side, you're going to see, what's your cost of your inputs? How much does it cost to make a Starbucks drink? What's their margin on that? Can margins go up or down? Are people going to be willing to pay more or less for that? The thing that Starbucks has going for them is that it's highly convenient. That gives you a little bit of space for a higher margin. With that being said, competition is increasing. That can decrease your margin. And then, on the flip side, you have quantity. How many cups of coffee are you selling a day? This is, again, location. How many cups does each location sell? How many cups does your average Starbucks person drink a day? Can you increase that frequency? I would say seen we've all probably seen that go up.
But I think it's really a question of, can that trend continue? Do you feel confident in that? Just being really basic about it. And then, the more you ask those questions, you can dig deeper and deeper.
Southwick: So you're not necessarily grabbing numbers and plugging them into your equation. That's just your framework for how you think about the company. More qualitative, with a bit of quantitative in there.
Southwick: And then, what about involving children in investing? Do you guys have any thoughts about communicating on their level?
Malin: I am a part of our Fool School effort here at The Fool. We have started a program to educate kids K through 12 about investing. We have a website, if you go to foolschool.com, you can see the lesson plans there. But one of the biggest benefits you can do is talking to your kids, and just making them financially literate, familiar with terms like savings and interest and compounding growth. Those are really complex issues. I don't think a lot of kids have exposure to them, necessarily, at an early age because adults assume they won't understand. But then, by the time you're in college, you're taking out loans and you are paying interest, and interest is compounding, and you're not sure what to do with that. The earlier you start speaking to them in a financially literate sense, the better off they're going to be.
Southwick: This is funny, this just happened yesterday. Hannah, our six year old, she goes to Six Flags every Tuesday with her camp. I don't know how they do it, but they do. And this was the last trip to Six Flags, so they were like, "You can give the kids money, we're going to let them buy something," because they've been whining all summer about not being able to buy something when they go to Six Flags. So, my husband's like, "OK, here's $10. I'm giving you $10, Hannah. If you manage to not spend this $10, I will double your money when you get home tomorrow. I will give you $20 if you manage not to spend this money." She was like, "OK." You could see her little cogs turning. She really wanted Dippin' Dots. She's like, "Ugh, OK." And we had to explain to her a few times. She's like, "So, wait, what? If I go and I buy Dippin' Dots and I come back, you're going to give me $20?" We're like, "No, no, no. You can't break these. Come back with these two $5 bills and dad's going to give you $20." Anyway, she goes to Six Flags. I go to pick her up yesterday. And I'm like, "So, what happened?! Did you spend your money?" And it turns out that at six flags, the cash register was broken, so they just gave her Dippin' Dots for free.
So she's got her little Ziploc bag with two $5 bills in it. And she's like, "Do you think dad is still going to give me the $20?" I was like, "I don't know. You're going to have the talk to him." So, this morning, I was overhearing them. She was giving him the news. She shows him her bag, and it's got the two $5 bills. And Ron was proud. He's like, "You didn't spend the money! Wow, that's so great!" And I'm pretty sure she debated in her head. "Do I tell him I got Dippin' Dots for free or not?" And I didn't hear that part of the conversation. I don't know if she fessed up to getting free Dippin' Dots.
Malin: That's amazing!
Brokamp: That is so funny!
Southwick: She has her savings account. And every time she gets her statement, Ron sits down with her and says, "Look, you made $0.50. That's $0.50 that you made." And she still doesn't quite get what's going on there. But at least they're exposed to it, and talk about it a lot. And we talk about how we get paid money for our jobs, and that's how we get money to buy her nice things. We just try to talk about money a lot. I don't know.
Brokamp: That's probably the most important thing you can do, just so they're aware of it.
Malin: It's also not the most intuitive. My family wasn't like that. We never talked about money growing up.
Southwick: Yeah, you're just not supposed to. I don't know if they do in other cultures, but in America, you just don't talk about money. It's so gauche to talk about money.
Southwick: It's also gauche to say gauche.
Rick Engdahl: You can also talk about companies like, "Hey, you love those toys. Who made that?" I find my kids respond a lot to the idea that you can own a little piece of that company. Isn't that fun?
Southwick: Your kids are older, right?
Engdahl: I started around nine years old, talking about this stuff.
Southwick: Hannah's still a bit too young at six to understand that you can own a little piece of a company. I tried once, that was rough. [laughs]
Engdahl: I started just by going to Starbucks, and, "You know, I own Starbucks." You can have fun with it a little bit early on. Then they start asking questions, and you can go from there.
Brokamp: Yep. The other thing I'll add is, David, we did a whole episode on this almost exactly a year ago. Go back to the August 21st, 2018 episode, Share the Love of Investing. We had a couple of folks talk about how they taught their kids about money. Very instructive.
Southwick: We also had Jason Moser on, too. If you google Jason Moser and kids, you'll find a lot of stuff. He's talked about getting them into investing.
Engdahl: Also, if you jump back to, I think it was November of last year, Rule Breakers had two very solid episodes on starting your kids investing. If you go to the RBI podcasts, there's great information there as well.
Southwick: Cool! Alright, next question comes from Brett. "You almost never hear 'save up your money and buy a home with cash.' I understand with mortgage interest rates around 4%, you can usually do better by investing in the stock market long-term, which I currently do. But one thought I had was to trade my current bond exposure in my retirement accounts for stock exposure. I would then sell an equivalent amount of stock in my retail account and apply that to the home loan. In essence, I would replace the bond portion of my portfolio for home equity and a guaranteed 4% return by paying down the loan. I would take a risk-free 4% return vs. bond exposure any day, and my portfolio would still have the same overall exposure to the stock market. Thoughts?"
Brokamp: Well, Brad, I like your general thinking here, which is, basically, why have money in low-returning, safer assets like cash or bonds that are yielding 1%, 2%, 3%, and then pay a loan that's charging you 4%? Why not use those low-returning assets to reduce the debt? It's certainly my goal to be debt free by retirement. I've talked before about when you go into retirement with debt, that increases your expenses, which means you have to take more from your retirement accounts, increases the chances you'll run out of money, and increases your tax bill. So, my wife and I do send an extra payment each month to our bank so that we pay off the loan sooner.
A couple of things about your particular strategy, though. If you're going to sell stocks in your regular retail brokerage account, that will likely have tax consequences. The bigger those tax consequences, the less I like this strategy, because you are going to have to give up some of that money. Also, you're swapping basically the equity exposure that you have in your brokerage account, which I assume is mostly individual stocks, for the equity exposure in your 401(k), which for most 401(k)s, they're just stock funds. Some 401(k)s do allow you to buy individual stocks like we do here at The Fool, but the majority don't. So, you have to decide, is it worth giving up those investments that I can get in my brokerage account for the funds that I have in my 401(k)? And that's just a decision you'll have to make based on what your options are there. But generally speaking, I like the idea.
Finally, a note about bonds in general. I know nobody likes them. We've talked about why they are low-returning assets generally speaking. But let's look at the performance of stocks vs. bonds over the trailing 12 months, as of the close of market on August 6th. Over the last year, S&P 500 has returned 3.1%. That might be surprising to people because they think the stock market has done so well this year, and it has. But you may remember that the end of 2018, it didn't do well. The Vanguard Total Bond Market index fund has returned 9.5%. So, over the past year, bonds have actually significantly outperformed stocks because the stock market has been up and down. As for the bond market, interest rates have come down considerably. A year ago, the 10 year Treasury was almost at 3%. Now it's at 1.7%. When rates go down, the prices of bonds go up.
Southwick: Alright, next question comes from Isaac. "The recent market volatility has created a good problem for me. Several stocks on my watch list have dropped significantly. The problem is that I have little cash on the sidelines to take advantage at the moment. I want to purchase one of these stocks in my IRA. I'm 24 years old. I have a long timeline. What is the best way to separate the wheat from the chaff?" Then, Isaac goes on to list a number of stocks that he's interested in.
Malin: The first and major point I want to make is, good on you for having a watch list. This is one of the most useful tools for investors, especially at the beginning of careers. I keep one. I have a lot of stocks on mine. This is my job. I look at companies all day. Obviously, there's only limited capital that you can put in every month. This is a really good strategy for doing that.
There are three main questions you want to ask yourself before you think about adding any of these. The first is, what does your portfolio look like right now? You want to think about exposure to one industry, either over-exposure or under-exposure to an industry. If you're lacking, do any of your watch list stocks fill that void to create a little bit of diversification, reduce your overall volatility exposure?
The second question you want to ask is, how do these companies stand in comparison to current economic outlook? For example, right now, markets are very high, debt is extremely cheap, the labor market is extremely tight. If any of these factors were to change, which of these companies would do better, and which would do worse? I would encourage you to buy the ones that you think stand to benefit from a reversal of current economic trends, because those are the companies that are going to retain value in the inverse of today's situation.
And then my third question you should ask yourself is, how are each of these companies performing, ignoring market conditions? One of those stocks on there was a biotech. A good question to ask is, is this company about to release something that could cure cancer, and thus make the overall outlook and growth of stock much higher in the future? Or, has the company experienced a transition in management, maybe adding to market doubts and depressing current stock prices? Any of those factors can make something bubble up to immediate priority vs. remaining on a watch list.
Once you evaluate each stock by these three questions, you should prioritize your list. Obviously, priorities change as conditions change. But keeping a prioritized list is one level up from just a watch list.
Southwick: Our next question comes from Twitter. Looks like Dr. Hulzie. "My wife has a rollover IRA that came from a previous 401(k). We knew she could combine it with a traditional IRA, but recently learned she can combine it with her current 401(k). Does that have any benefits?"
Brokamp: The first thing I would say is not every 401(k) allows you to do this. It depends on your plan and whether they will accept rollovers from a previous plan or rollovers from a traditional IRA. The benefits of doing so are, you might have a 401(k) that has extraordinarily good investments or extraordinarily low costs. In many ways, 401(k)s, because they are bigger, they have access to lower-cost funds. The other benefit is that you have everything in one account, it's a lot easier to keep an eye on it.
The reason why you wouldn't do that is if the 401(k) that you currently have is not a particularly good plan, you're not all that excited about the investments themselves, or if you want to invest in things that are not offered in the 401(k). Generally speaking, it's individual stocks. Like I said previously, most 401(k)s don't allow you to do that. You might like other types of mutual funds that are not available in your 401(k). You have a lot more flexibility by just keeping it in an IRA.
Southwick: Alright, next question comes from John. "My family bought me Coke stock when I was about six months old, set it to reinvest the dividends and left it there. After 23 years, it has grown to quite a large position. I've been investing for a few years now with my own saved up money, but I have never known what to do with this massive position that has a very low cost basis. Do I sell some of it and put it to work elsewhere? Let it sit and continue to reinvest? There isn't a ton of growth opportunity, but it pays a nice dividend each quarter."
Malin: This is a great problem.
Southwick: [laughs] Yeah. "Oh, I've got a ton of money! Rrr, so frustrating!"
Malin: I think you have to answer how big your personal risk tolerance is. My personal standard is that I don't want any one position to be greater than 20% of my portfolio. Even for a relatively stable, blue chip company like Coca-Cola, there is inherent risk in having one stock account for so much of your personal wealth. But that is a personal estimate that you have to figure out. From there, you have to think about what your goals are. Are you looking for high returns? Are you looking for low volatility? Are you looking for just market performance? You can get a sense of expected returns from Coca-Cola based on growth expectations plus your dividend return.
Then I would suggest trimming your position down to better fit your overall return goals. Again, I can't know that for you. But I would suggest not selling it all, but rather thinking about trimming over time, assuming you have a better use for that capital, [like] other stocks that maybe better fit your defined goal.
I do think it's worth mentioning that you could make the case that you take no action on it. If you're continuing to add money to your portfolio and not adding to Coca-Cola, it will eventually decline as a percentage of your overall portfolio. Personally, that probably wouldn't be my choice, but that would be a viable strategy.
Brokamp: He talked about how it has a very low cost basis, which is basically implying, you don't want to trim it because you're going to have to pay taxes on it. Taxes should always be factored in to that, but as Abi said, if it gets too big of a part of your portfolio, I wouldn't let taxes stop me from doing that. It's important to realize that we are at very, very low tax rates right now. Given your particular tax bracket, it actually may not be that big of a deal to pay those taxes.
And the final thing is, you've been reinvesting those dividends. Every time you reinvest those dividends, you have some shares with a different cost basis. So, if you do want to trim it, but you don't want to pay a lot of taxes this year, you can identify the shares that you bought more recently that have a higher cost basis. That way, you won't pay as much in taxes.
Southwick: Alright, and the last question comes from Brandon. "I had the investor shares of the Vanguard 500 fund, ticker VFIX, but they were automatically converted to a different share class, ticker VFIAX. I have no idea why. Do you know why this happened?"
Brokamp: This is just Vanguard being Vanguard. Basically, the difference between investment shares and the other shares, which are known as their Admiral shares is, their Admiral shares are lower cost. It used to be that you had to have a certain amount of money either in that fund or with Vanguard to get these lower-cost shares. But then Vanguard recently decided, "We want more people to have these lower-cost shares," so they automatically moved people from the higher-cost shares -- and even the higher-cost ones were just 14 basis points -- to these lower-cost shares, which are now four basis points.
It's crazy low. Again, Vanguard is constantly doing all it can to keep costs low for its shareholders. I will say, as a Vanguard shareholder, and this may have been my own fault, I'm not sure they communicated this particularly well. It came as a surprise to me. Again, maybe it was my fault and I just missed the email or something like that. That's why I brought this up, because I think it's happened to a lot of people and they didn't even know it happened.
Southwick: It's such a nice surprise, though. Do you think they'd want to make a big deal out of it?
Brokamp: Exactly. And the other question people have about it, is that a taxable event, if they're moving from one fund to another? The answer is no. When they're just putting you in different share classes, it is not a taxable event.
Southwick: Abi, thank you so much for joining us!
Malin: Thanks for having me!
Southwick: Man, come back!
Malin: This was fun!
Southwick: Was it?
Brokamp: [laughs] Alison's not so convinced it was fun, but we're glad you enjoyed it!
Southwick: No, no. It was, it was fun! We have fun! Abi, thank you again! Please come back!
Southwick: Alright, let's head to the postcards, shall we?
Brokamp: Let's do it! Alright, Eddie, as we know, is doing a 50-state tour. Did we talk about this? Eddie from Hawaii?
Southwick: Yeah, Eddie from Hawaii. He's doing it, him and his family. At least his wife. I'm not sure if he's also -- like, I know he has a daughter. They are driving across America. And they might be coming by to say hi to us at some point!
Brokamp: Wouldn't that be wonderful?
Southwick: I know! Wouldn't that be great? So, he sent, one, two, three, four, five, six, seven, eight postcards!
Brokamp: [laughs] Oh, my gosh!
Southwick: From Yellowstone, which is where I'm going to be in a couple of weeks. Here is somewhere in Glacier. Sedona. Sequoia National Park. The Idaho Potato Museum in Blackfoot, Idaho. I've been there. Not to that museum, but I have been to Blackfoot, Idaho. Nevada. And another card from Montana.
Here's the thing. Eddie, our address is 2000 Duke St. And I know you put these in the mail before I corrected you on the last episode. But whoever is at 200 Duke street is getting real angry because they keep on doing more and more exclamation points and circling, "2000 Duke St.!!!" Anyway, I feel like I need to go to 200 Duke Street and apologize.
Brokamp: I wonder who that is.
Southwick: They're just jealous because they don't have someone sending them postcards all the time.
Brokamp: That's true!
Southwick: We also have a postcard from Brett from Kalispell, Montana. It's a big Montana month here on the show. He sent a card that came from his family trip to France. He drives a semi in Montana and he says that we make him laugh out loud as he drives, and he's sending us sassy smokers, big hair, shoulder pads, loofahs, and special hugs. Kevin sent a card from the Calaveras County Fair & Jumping Frog Jubilee.
Southwick: Did you know that was a real thing?!
Brokamp: I didn't.
Southwick: Apparently, the longest jump was set in 1986 of 21 feet.
Brokamp: 21 feet?!
Southwick: Yeah, I don't know. Frogs, I don't know.
Southwick: I have no context. I assume that's big.
Brokamp: Oh, now that I see this, I remember this.
Southwick: Mark Twain. But I imagine Mark Twain's version didn't take place in California. Right?
Brokamp: It might have. He was a miner out there for a while.
Southwick: There you go! Also have one from... how do you say Thad?
Brokamp: I say Thad.
Southwick: Alright, Thad. Thad sent us a lovely card, great big card from the Caymans, so pretty. Wanted to thank us again for the events life series, particularly the one on Death and Planning for the Inevitable.
The Rinaldi family send a couple of cards from Italy. Stocks! They went to Cinque Terre and Rome. I've never really been to Italy. I've been to Sicily, but that was it. I need to go someday.
Brokamp: It's beautiful!
Southwick: It's beautiful. Then, also, David sent a card from Scotland. The Isle of Harris. That's pretty!
Brokamp: Have you been to Scotland?
Southwick: I have. I went to school in England for a year, and for one of the breaks, about four girls and I hopped on a bus and went up to Edinburgh.
Brokamp: Could you understand what they were saying? I had so much trouble [laughs] understanding what they were saying. It wasn't English!
Brokamp: [laughs] Exactly!
Southwick: You can't say that!
Brokamp: He can say whatever he wants when he says it that way.
Southwick: Yeah, I guess that's true. No, I don't remember having a hard time, but I had already been in England for a while. Maybe that helped get my ear a little ready. I once had a really hard time understanding a guy from New Zealand in Mexico. I literally couldn't understand a single thing he said. That was hard. He was a sheepherder. I was like, right. Cattle rancher. Right on brand. So on brand.
Anyway, getting back to David in Scotland. He writes, "Greetings from the Outer Hebrides." He's a big fan and a former teacher of David G.
Brokamp: Oh, wow!
Southwick: I have a feeling David G was a really good student.
Brokamp: [laughs] I'm sure he was a very good student.
Southwick: I bet he doesn't have any good stuff stories about David G from school.
Brokamp: At least sassy or scandalous. Nothing along those lines, that's for sure.
Brokamp: No. He's a good guy, that David G.
Southwick: A little too good. Alright, that's the show! Wow, summer is drawing to an end. But of course, we'll take your postcards all year round. Our address is 2000 -- 2000, Eddie! The person at 200 Duke St is going to come right to our door. Yeah, so, 2000 Duke St., Alexandria, Virginia, 22314. Also, if you have a question you want answered on the show, send it to [email protected]. The show is edited...
Engdahl: I think the guy should at least send one postcard to whoever is at 200 Duke St.
Southwick: And be like, "This is not for Bro and Alison. This is for you." I need to look up who's at 200 Duke St.
Brokamp: We should look that up and go visit them, send them a little something.
Southwick: Yeah. The show is edited... we've just said sassy twice in the last five minutes. I don't think we've ever said sassy once on the show. So, we're going to say the show's edited sassily by Rick Engdahl. For Robert Brokamp, I'm Alison Southwick. Stay Foolish, everybody!