In this episode of Motley Fool Answers, Alison Southwick is joined by Motley Fool personal finance expert Robert Brokamp and Motley Fool analyst Jason Moser to answer listeners' investment questions. Learn about finding your comfortable investment allocation position, how unemployment affects Social Security and Medicare benefits, and investing in thinly traded stocks.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on July 28, 2020.
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. Hey, Bro.
Robert Brokamp: Well, hello, Alison.
Southwick: It's the July Mailbag, where we answer your questions, and this month, it's with the help of Motley Fool analyst Jason Moser. Should you buy a house now? What is modern portfolio theory? And also hear Jason's thoughts on a lot of stocks. All that and more on this week's episode of Motley Fool Answers.
Southwick: Jason, thanks for coming back.
Jason Moser: You know, I told you, you invite me, I'm going to be here every single time. Thanks for having me back.
Southwick: We appreciate it, because we know you're a busy man, and so we do appreciate that you carve out time for us and our little show.
Moser: Oh, come on, man, I told you, I always, always make time for those important people in my life.
Southwick: Rule No. 1: Make time for Alison and Bro. I love it.
Moser: Sounds like a good one to me. [laughs]
Southwick: Everybody wins. All right. Well, I guess we should just get into it. So the first question comes from Darren. "I've subscribed to The Fool for over a year and I'm really pleased with the service. I would like to know your thoughts about my holdings in Shopify. I've bought several times over the last three years, and it's now over 35% of my portfolio, and I don't know if I should continue holding or trim down; what would you advise?" A good problem to have.
Moser: I was going to say that [laughs] exact same thing; that's a good problem to have. And I'm very glad that you have subscribed to our services and you're really pleased. That's what we aim to do; we aim to please and to help you make money. And so, yeah, this is one of those situations that we will find ourselves in from time to time as investors. A nice problem to have, but something you do need to address at some point, because it is going to be a little bit different for everybody.
And so, coming from the perspective of, I also own Shopify stock, and it's been a wonderful investment. It certainly has taken a bigger part of my portfolio; I'm not at 35% where you are. I think, for me, it really does boil down to that "sleeping at night" test. In other words, you need to be able to go to sleep [laughs] at night without worrying about this kind of stuff. And if you feel like Shopify represents too much of your portfolio, if you feel like you're overly allocated there, then you may need to consider pulling it back a little bit.
Now, I think it's always important to note, it's a big difference between building up a position, buying a position to make it this size, to make it this type of allocation in your portfolio. It's another thing entirely to have a position grow into becoming that size. I mean, that is a little bit of a different dynamic there, so people deal with it in different ways. Sometimes folks will deal with it, just sort of looking at it from the house money concept, where you just sell enough shares to recoup your initial investment and then you let the rest of it go. Some people are perfectly fine with 35%, some people are not; they want to pare it back. So I do think you need to kind of figure out what helps you sleep at night.
I do think that Shopify is a great business. I think the biggest risk in owning Shopify right now is valuation, just because, you know, it's dominating its space, but it's not making any money yet; and it's probably going to be a little while until they do. So that valuation risk is there, but ultimately, yeah.
I think, determine where you feel most comfortable with it, and if you feel it like you need to put a little bit of that money off the table -- I mean, 35% is a lot, it's certainly very understandable if that's something you need to do.
Brokamp: If you do decide to pare it back a little bit, you've made multiple purchases, so you can identify the shares to sell to manage the tax consequence if this is in a brokerage account and not in an IRA.
Southwick: Our next question comes from Steven. "If you were forced into unemployment, you are paying federal income taxes on unemployment payments, you are not contributing to Social Security, nor to Medicare. How does this affect your future calculation of Social Security benefits? And can one contribute to the Social Security fund during unemployment to mitigate any adverse effects on benefits?"
Brokamp: It is a little bit of adding insult to injury, but you do owe federal income taxes on your unemployment benefits. And if your state has a state income tax, you probably have to pay state taxes on that, although there are a handful of states that exempt unemployment benefits, so that's good news. And by the way, you could have taxes withheld from your unemployment benefits you file. This form is called Form W-4V. If you want, they withhold 10%, or you can do quarterly estimated payments if you want to avoid that big tax bill at the end of the year. But if you're strapped for cash, it's probably just better to get the money now and worry about your taxes later.
As Steven notes out, you do not pay payroll taxes. Those are things that go into Social Security and Medicare. So it could result in a lower Social Security benefit. However, keep in mind that Social Security is based on your 35 highest-earning years. So if you entered the workforce at, say, 22 and you work until your mid- to late-60s, that's more than 40 years' worth of working. So hopefully if you miss out -- if this year is not so good, somewhere among those other 45 or so years, you've had 35 really good years, so that this year won't be that big of a deal. So it probably will be OK.
And then to address the last question. Unfortunately, no, you cannot make voluntary contributions to Social Security. There is at least one academic working paper out there that suggests that people could buy into Social Security -- buy, like, extra credits as opposed to contributing to your 401(k) -- but so far that has not been passed by Congress.
Southwick: All right. Our next question comes from Sam. "I heard two stocks discussed on another Fool podcast, and when I read articles about them, it mentions they are thinly traded. I have two questions. One, I'm sure my position would still be quite small, so I think I'd still be able to get in and out, but are there other things I should think about when it's a thinly traded stock? And question No. 2: Is there a certain amount of average daily volume you like to look for when considering a stock foreign investment? What volume do you want to see to not be 'thinly traded' stock?"
Moser: Yes, very good question. And thinly traded stock, it just refers to either the amount of shares or the dollar volume of shares that would trade on any given market day. And so, with a thinly traded stock, the problem is that you may not necessarily be able to buy and/or sell at the prices you necessarily think you might be able to. In another words, when you look at a stock's price and you're looking through what's going on throughout the day on the market, you'll see that bid-ask spread, which is essentially, the bid-ask spread is, it's what someone is willing to pay for the stock versus what someone is asking to be paid for the stock, because you have a buyer and a seller in every transaction there. And so normally, most cases, this bid-and-ask spread is very tiny, a couple of pennies maybe for most stocks, because they're heavily traded, right; there's plenty of dollar volume.
But there are a lot of smaller companies; small caps in particular and micro caps specifically, that don't necessarily meet these kinds of thresholds, and so you definitely have to be aware of that.
Now, I'll go back in time just a little bit to when we were running the service here at The Fool called Million Dollar Portfolio, a real-money portfolio that we helped manage for members. And it was never really a problem. But we did have a condition in there, we were always looking for at least $10 million in average trading volume, total daily volume. Now understand, I'm not saying the number of shares, I'm saying the amount of money, so basically shares times price. But we were always looking for at least $10 million. That wasn't set in stone. It was an idea for us, it wasn't never really a problem, because we had a very diversified portfolio with a number of different types of companies.
But when you're looking for smaller companies, you want to just keep that in mind that bid-ask spread is something that just because it says the stock is $20, that doesn't necessarily mean you'll pay $20 if there is a big spread there between the bid and the ask. And so I think whenever you're considering stocks that have a lighter trading volume or thinly traded stock, just be sure to use limit orders.
Limit orders will let you stipulate the price that you are willing to pay for or that you're willing to accept, if you're selling. A limit order is just a really good way to protect yourself from any unwanted surprise. Thinly traded stocks, you might not always necessarily get them when you want them, so you might have to leave that limit order in there for a little while, but a limit order is a great way to protect you from any unwanted surprises.
Southwick: Next question comes from Randall. "I'm in my late 30s now, but earlier in my life, I was very, very bad with my money. Collection calls, welfare, and bankruptcy were not strangers to me. I've been at the bottom. Then I met the love of my life and she convinced me to turn things around. Ten and a half years later, and I have done a complete 180. I took control of our finances, rebuilt my credit and started investing and listening to all you fine folks."
"I opened an investing account with the goal of saving and building enough for a down payment on a home, and I'm happy to say, we've now reached that goal. I recently sold at a profit because I didn't want that money tied up in the market if we are close to needing it for a house, but now that we're here, I'm not sure what to do. We currently rent a basement apartment, and our neighbors and general living situation are less than ideal, to put it mildly. So we're champing at the bit to jump into the housing market.
"That being said, the experts have been calling for a drop in the housing market for a while and that was before the pandemic hit. Now I'm worried that if we buy right away, a year or two or three from now, interest rates will spike, and we could be put in a difficult situation. I live near Toronto, Canada, where the housing market is already highly inflated in relation to the rest of the country. Should I be worried?"
Brokamp: Well, Randall, so first of all, congrats on turning your financial life around. Love hearing success stories like that, so good job on that.
So I'll start with my standard answer with the rent-versus-buy decision. And that is, just pull up a spreadsheet and compare the all-in cost of renting, including what you could earn on the money that you'd use for a down payment versus the all-in cost of buying, including the opportunity cost of putting that down payment as opposed to having invested as well as insurance and taxes and maintenance and all that stuff. And project where you might be in 5 to 10 years based on various scenarios on what happens to stocks, if you rent and invest the down payment versus what it would look like depending on where home prices go.
Generally speaking, if mortgage rates go up, that could weigh down on real estate prices. We did see mortgage rates go up for a bit a few years ago, but the housing market did fine. But you could certainly envision a scenario where rates went much, much higher making houses much less affordable, and prices would have to adjust. But I don't expect that to happen anytime soon. I think we're going to have low rates for a while, but beyond that, I don't know. I've given up trying to predict where interest rates are going or even paying attention to people who try to predict where interest rates are going. So who knows.
That said, since you live in Canada, I thought I'd check in where rates are these days, and I got a brief reminder that things are actually different in Canada. So I did a little bit of research and then realized I had to reach out to someone who knows, so I reached out to Canadian and Motley Fool analyst Jim Gillies and he had some thoughts.
So first of all, just for you non-Canadians out there, it is really different. So in America, we get this 30-year mortgage, and we have the same payment for 30 years. It's fixed. They don't have that in Canada. What's the most common is a 25-year loan, but only the first few years are fixed and then it adjusts. So in that context, you can understand why Randall is worried about interest rates going up, because over the next -- depending on which loan he gets, the most popular is a five-year fixed, and then you basically have to go get a new loan probably. So that puts that in context a little more.
But also, Toronto really is crazy expensive. There is a report out of UBS from the end of last year that put it as the most overvalued real estate market in the world behind Munich. And as Jim pointed out in our call, here in the U.S., we had our housing peak in 2006-2007, and then we had what he called a reset, which is basically prices came down significantly. Canada didn't have that. A slight downturn in home prices, but then they just kept on going up. So it really is different there.
So when Jim explained all this to me, the difference in mortgages and the difference in home prices, frankly, he was inclined to say to this guy, "You might want to rent for a while more and see what happens," but he also had the good advice of, like, OK, what if you buy and prices come down 15%, 20%? What if they come down to a point where you're upside-down and you owe more than the home is worth? Are you OK with that? If you're OK with that, maybe it's OK to do that. But it certainly sounds like a dicier situation than if someone were telling me, like, I'm thinking of doing this in, you know, Dubuque, Iowa, or something like that.
A couple of other differences, in case you're curious, about Canada and the U.S. Your mortgage is portable in Canada. So if you get the five-year mortgage, but then you move, you get to take the mortgage with you for the next house. And interest is not tax deductible in Canada.
Southwick: Huh! Look at you, Robert Brokamp, Canadian real estate expert.
Brokamp: There you go. [laughs]
Southwick: Next question comes from Chris. "I was on Twitter the other day and saw that one of your contributors, Brian Feroldi, tweeted that he doesn't believe in a long list of technical trading terms and then modern portfolio theory, MPT. Can you help me understand what not believing in MPT would mean? Does he believe that diversification doesn't reduce risk? Also, every financial advisor I have ever talked to has preached MPT, so I would love to hear the counterargument."
Jason, you're not Brian Feroldi. What do you do when you get this question?
Moser: [laughs] I am not Brian Feroldi. I do get to talk with Brian a pretty good bit, though. I must admit I don't know what he said here in regard to modern portfolio theory and all of these technical trading terms, but I think I can take a guess. Generally speaking, I agree with him. And I think you could sit there and look up modern portfolio theory and read about it as much as you want; just go to google "modern portfolio theory" and you can dig right in there.
But in a nutshell, ultimately what modern portfolio theory is, the intention behind it, it's meant to reduce risk while maximizing returns. It assumes that investors don't like risk; they prefer less risky portfolios to riskier ones in order to achieve a certain level of return.
So right there, you kind of lost me right there, because I don't believe that every investor is risk averse. I think some investors have a very healthy appetite for risk. And frankly, I would say I've got a pretty high tolerance [laughs] for risk when it comes to investing, and maybe that's just because of what I do for a living. But I mean, you know, to me, I like having that trade-off at least, I'm happy to take some risk there if I feel like that upside is going to be potentially worth it.
So with modern portfolio theory, it introduces a lot of fancy math in the form of variances and correlations in order to come up with this quantifiable investing strategy that ultimately helps reduce risk while allowing the investor to achieve certain returns. And maybe it works for some, I mean, I'm not dismissing it. Personally, I don't use it, I don't personally subscribe to it, I don't need it. I think, honestly, for us, and I really do believe this extends to most people in our Foolish universe, is that, as individual investors, I think a more meaningful way to reduce risk is to just extend your timeline, like, invest longer. [laughs] You know what I mean?
So like Tom Gardner said a number of years back, when we were working on Motley Fool ONE, basically take the timeline that you think you'd want to own any individual stock. So you buy shares of Starbucks, and well, I plan on owning it for, you know, five years. OK, well, just double it, plan on owning it for 10. And all of a sudden, right there, you've given yourself more time. Time is one of the biggest advantages we have as individual investors. Money managers don't have that advantage. Wall Street doesn't generally have that advantage either. But if you can be patient and just invest in good businesses, you know, that risk really starts to come down over time, and there are plenty of studies out there that show that risk comes down the longer you hold on to those stocks, which then, to me, just renders modern portfolio theory more or less not useful. I mean, I'm not saying it's not useful for everybody, but it's not useful for me. And based on Chris's question, it sounds like I'd agree with what Brian was saying there.
Brokamp: The only thing that I'll add to that is, I agree that risk is really not that much of a consideration if you are saving for retirement, but once you are in retirement, man, you can't just say like, you know what, the market's down, I'm going to extend my time horizon 10 years, because you need to spend money. In that situation, I think diversification is important, and it is important to have assets that don't always move in the same direction at the same time. For some Fools that's just as simple as keeping any money you need in the next five years in cash, so you can ride out any ups and downs; and that can be fine. But I do think it makes sense to have a mix of investments so that -- you know, right now technology stocks are doing very well, and we hope that continues to do well, but we remember what's happened in 2000 from 2002, and they were down for quite a while. Anyone who retired in 1999 or so was very happy to have some small caps, some value, maybe a little international, some REITs to ride out that storm.
Moser: Yeah, I mean, we do talk about that often, like, recognizing where you are as an investor in life; are you in the grow-your-wealth stage or are you in the protect-your-wealth stage? Because they are two very different strategies. And we're all, hopefully, going to be in both of them at one point or another, right? I, personally, am still in the grow-your-wealth stage; I think we all probably are. But you will, at some point, get to where you need to focus on protecting the wealth that you've made so that you can then have that money to spend. And that definitely will dictate your investment strategy, things that you're invested in and whatnot.
You know, generally speaking, I do like the idea, for people who are just risk averse and have this notion that investing is just too risky. I mean the fact of the matter is not investing is far and away a greater risk, like, not investing, you will never grow your money if you don't invest. So if risk is a problem, I think, generally speaking, along the lines of the diversification idea that Bro was talking about, I mean, just invest in an S&P index fund, something that just follows the broader S&P, you know, you're going to be participating.
And if you look at that over the stretch of time there in 5, 10, 20, 30 years, I mean, that trend does go one way. But clearly, the older you get, the more you need to start focusing on protecting your wealth, and that will change the way you view things.
Southwick: All right. Next question comes from Alex from Alexandria. "If I buy muni bonds from another state in my IRA, is it still taxable?" And Alex ends it with, "Woohoo! we have a Bonchon." And we do have a Bonchon. I know, Alex, I'm super excited about having a Bonchon in Alexandria too. I can't believe I haven't been there, it's like two miles from my house but we still haven't been. Oh, I know why, because there's a global pandemic going on and we don't go out. Okay, that's fine.
Anyway, Alex, if we buy muni bonds from another state in my IRA is it still taxable? Bro, help him out, or her.
Brokamp: All right. So muni bonds. People invest in muni bonds because they're free of federal taxes and, in many cases, if you're buying bonds issued by the place you live, they might be free of state and local taxes, so they can be doubly and triply tax free. That's why people buy them.
There are some times, however, that if you own a muni bond outside of an IRA, you might pay taxes. And this surprises some people. There's something called the de minimis tax. If you buy a muni bond at a discount and then it matures at par. If you buy a distressed muni bond for like, you put in $8,000 and you sell it later for $10,000. That's a capital gain. You will be taxed on that. So there are some times when you would pay taxes on muni bonds.
Now, Alex is asking, what if it's in an IRA? Do I have to worry about paying taxes on interest if it comes from another state? And the answer is, no, you won't have to worry about that. The only thing I would say is, generally speaking, a muni bond already has built-in tax advantages. So you wouldn't keep it in an IRA unless there's the example of the stuff I was saying previously, like, for it's one of those exceptions when a muni bond would result in taxes, then you might want to keep it in IRA. But generally speaking, if you're going to buy a muni bond, keep it out of an IRA.
Southwick: Next question comes from Boone. "I just did my first Roth conversion and looked at that old account for the first time in years. There was the expected dividend-producing fund I remembered, but there was a stock, Chesapeake Energy, that I had completely forgotten about. Since I purchased the stock in 2015, it's down, way down, like, 88.5% off the purchase price. What should I do with it now? It's in a tax-deferred account, so I don't think the loss is realized until I start to pull money out of the account, and that might not be for 15 years. Current value of all my shares will be about 1% of the value of the account after the conversion. Do I just sell and eke out the very little value I had left and depend on E*TRADE to keep up with loss for me? Or should I hold on based on the slim chance the stock will be worth more in the next 10 years? Oil stocks do act unusually on occasion."
Brokamp: And only oil stocks. All the other stocks act usually.
Moser: You know, Chesapeake has been a really interesting story to follow. And frankly, I don't know that I would look at it today as a business that I'd want to own. Listen, you had an idea, it didn't sound like a position you were actively building, you made an investment, it didn't work out. I mean, that happens to all of us, I mean, we don't get them all right. We have the philosophy here at The Fool, a lot of us do that we like to water our flowers and pull the weeds; and that's just a nice way of saying "add to our winners and get rid of the losers."
And this, I think, is more than likely just slated to continue being a loser. I mean, Chesapeake has lost a lot of value, and it does sound like, based on when you purchased it, this thesis is absolutely busted. I mean, there are all sorts of reasons to sell. One of them is if your thesis is busted, and the reason why you invested in the company is no longer the case. And then I would argue that probably is the case here with Chesapeake.
So to me, you know, you could sit there and let it go, but what's the goal? I mean, are you trying to get back to even, or are you trying to get back a couple of bucks? For me, a lot of times, I'll take a little, an opportunity here and there to just go ahead and pull those weeds, sell it, and be done with it. And even though it's just you eke out a little bit of value there, you can still take that money and do something more productive with it.
So yeah, to me, I can't tell you to buy or sell, obviously, but I can certainly understand selling in this case, but you know, as oil and natural gas and energy can turn around, this is going to be one that has a lot of headwinds, and you might be waiting a very long time to get any of this money back. [laughs]
Brokamp: I think I'll point out here that it seems that maybe Boone has a slight misunderstanding of how taxes and IRAs work, because he talked about realizing the loss when he takes the money out and E*TRADE keeping track of the loss for him. It sounds to me that he thinks that he can write the loss off once he takes the money out. That may not be the case. But just to be clear one of the great benefits of an IRA is you don't pay taxes on the gains and interest on dividends from year to year, but one of the drawbacks is, you can't take a capital loss on that as well. So there's really no way to benefit on your tax return from this loss.
Southwick: Next question comes from Benjamin. "You recommend seeing a fee-only financial advisor for a check-in every so often. I know there is the Garrett Planning Network and others to help find an advisor, but what questions do you ask and what answers do you listen for when trying to find one that is worth his or her $150 to $250 per hour?"
Brokamp: So imagine I would say, start first with asking yourself some questions. What are you looking for? You can go for the whole enchilada, where someone is managing your money, analyzing your retirement plan, and helping you save in a 529; maybe even doing your taxes, which some financial planners do; help with estate planning? Are you looking for something more targeted? Do you just want advice about, am I saving enough for retirement, or are you close to retirement, you're like, I just want to make sure that I'm doing right in terms, like, choosing my Medicare plan or claiming Social Security at the right time? So first of all, just be very clear of what you're looking for.
Then, if it involves investments in any way, you want to make sure that you find someone who is at least in the general same area philosophically. And I say this because many financial planners are hardcore indexers, and if you come to them as a Motley Fool listener/member with a lot of individual stocks, they may say, "OK, I'll give you some general asset allocation guidance," or they'll say, "I don't care if you like to pick stocks or not, my advice is sell the stocks and go to index funds." So you want to make sure that if you're going to ask for any sort of investment advice that you want to find someone who's somewhat at least aligned for what you're looking for.
Once you've got that, then just ask some of the typical stuff that you might expect. So credentials, you know, if they're a certified financial planner, are they a CPA, are they a personal financial specialist? How long have they been in the business? There are lots of people who have not been in the business very long, even though they're not young people. A lot of people choose financial planning as a second career, which I think is great, but just because someone maybe look like they're in their 40s or 50s or 60s, doesn't mean they've been in the business that long.
And you want to see if they've worked with someone like you, right? So maybe you have a large amount of wealth, large income, huge portfolio, you want to make sure that they have experience with dealing with those issues, but on the flip side, too, if you have middle income, decent-size portfolio, but nothing too complicated, you don't want to go to someone who's used to dealing with someone who's wealthier, partly because those people charge a lot more. [laughs] You want to find somebody who's kind of a little more lined up with what you're doing.
Then make appointments with three folks. All of them will do free get-acquainted meetings, and you're just looking for someone who you feel comfortable with.
Since you mentioned Garrett, a big fan of the Garrett Planning Network. Another is NAPFA, the National Association of Personal Financial Advisors. But Garrett, on their website, has a "how to choose an advisor" section. Just google "how to choose an advisor, Garrett Planning Network," it has a great chapter from a Dummies book that they wrote about how to choose an advisor and they have a good questionnaire that you can print out and use asking lots of good questions of financial planner.
Southwick: It's tough choosing a financial planner, like my mom just went through that, Bro, as you know. And she didn't really have a lot of options in Boise, Idaho; [laughs] there were, like, maybe two. And one of them, I don't know, never called her back and never got back to her. And the other one was just so busy, just so busy, and she just never... So it can be rough finding a financial planner.
Brokamp: It can be. I think what we'll see, as one of the consequences of the coronavirus pandemic, just like we are all used to working from home, many financial advisors and financial planners are now working from home. And what they're doing is they're becoming licensed in more states. So if you are more comfortable working with someone over Zoom and remotely, I think you don't have to stick with someone in your area. You can go beyond your location. But you know, some people don't feel comfortable with that. If they're going to have someone managing their life savings, they want to be able to meet them in person, and that's just a personal choice.
Southwick: All right. Next question comes from Twitter? Is that right? from SoleyWhatIHear, OK. "I just listened to the episode mentioning your weakness to shopping carts and T.J. Maxx." Was that me or you, Jason?
Moser: [laughs] I don't think it was me.
Southwick: It must have been me. "Thoughts on the stock. If I had a war on Amazon basket, it would be Costco, T.J. Maxx, Home Depot and Tractor Supply. What would be your basket against online retail?" That's funny.
Moser: Well, OK. And yeah, listen, I wouldn't have a basket against online retail, because online retail is where it's at. The whole idea [laughs] behind the basket approach is to find a long-term trend that you feel like the world is headed toward. And so the war on cash basket, for example, that was always one about people using less cash and more electronic payments.
Now, with that said, I get the spirit of the question, so I'm going to answer it. Because I do like some of these ideas. And I would definitely include Costco in there and Home Depot as well. Home Depot gets a lot of my money. Costco doesn't, but they have a very [laughs] loyal fan base of customers that just are happy to renew year in and year out. So I love those membership models there. So Costco and Home Depot for sure.
You know, I'm going to give a little shout-out to my wife, Robin. I know that she would approve of my adding Target to the mix here. She has been raving about Target's app and ordering on the app and being able to then go to the store and just pick it up right there. And I've talked with Ron Gross on more than one occasion about Target and how that business really has, you know, become a 21st-century retailer, right, they're doing everything online and in physical stores, what they call omnichannel.
And then my fourth -- and I'm going to take this, you probably aren't expecting this one, Alison. I'm going to shock and awe you. Are you ready?
Southwick: Okay, I'm ready.
Moser: Ulta, we're going makeup. I know, an ugly mug like this, what do I know about makeup? I'll tell you what I know about makeup. I've got a house with two daughters and a wife, that's what I know about makeup. There's a lot of it. And Ulta is a really, really good business. They actually have a very nice diversified revenue stream. They've got the salon dynamic to the business, which encourages people to go there. They do have an online business. They have an augmented reality function to their app where you can actually, like, try things on makeup to see how it looks. Mary Dillon, just a phenomenal CEO there at Ulta. So that's my fourth there, Ulta.
But I appreciate the spirit of the question, I like the idea. I'm not saying this is a basket, I'm not tracking this basket, and I'm not backing this basket. But in the spirit of the question, if I had to develop a basket such as this one, then I think I'd go with those four.
Southwick: Yeah, I mean, I guess you just have to think about what retail out there is something that you would still physically go to? Because the actual retail experience is being in the space is the experience, and what you're there for. And I know, I mean, before coronavirus, I would go to Target and just couldn't believe how much money I had spent from walking through a few of the aisles.
Moser: But T.J. Maxx is just a phenomenal business. I mean, what they've done through the years is really capitalized on the nature of the business. The advantage they have in that treasure hunt, kind of, nature. Like, you go to T.J. Maxx, maybe not necessarily looking for something, and then you end up finding a lot of things. And so it can be a little bit lumpy at times, but generally speaking, like, management has done a very good job of running that business, and they know how to exploit the advantage of that experience.
Southwick: Yeah. I think their online game, though, I think they could probably get something up and going with online, and they just have not yet, and so. I mean, I bet since coronavirus, for example, I haven't spent a single dollar there, but I continue to still shop at Home Depot. Yeah, we're still shopping at Home Depot, because we're doing -- you know, you got to buy lumber somewhere.
And I know my in-laws out in rural Virginia, they love Tractor Supply store, but that's not where we live, but I don't know.
Moser: Building you a deck at the house there, Alison?
Southwick: Oh, no, I mean, you see we have a big exposed beam behind me and some drywall work that needs to happen. We have lots of drywall work that needs to happen.
Moser: Don't we all?
Southwick: [laughs] Yeah. Anyway, get to that. All right, the next question comes from Matthew. "I just got married to my amazing wife nine days ago in a small COVID-19 wedding in our front yard after we postponed it from its original date in April. It was definitely different but still very special. My question is in relation to this wonderful event. My salary has been at a level that has allowed me to fund a Roth IRA. I love the optionality of it. But after marrying my badass wife, our combined salaries are now over the limit that would allow me to fund a Roth IRA. Does this effect occur immediately? Do I need to now open up a traditional IRA and begin funding it or do I have until the end of the year?"
Matthew wants a Roth bachelor party. One last hurrah!
Brokamp: [laughs] Well, Matthew, I have bad news for you. When it comes to most things in taxes, your status and your age and things like that depend on where you are on the last day of the year. So if you are married on the last day of the year, you are considered married for the whole year. So that means, if you started contributing to a Roth IRA for 2020, you need to call up your brokerage firm and recharacterize that as a traditional.
Now, if you don't have any other traditional IRAs, it's very easy to do the backdoor Roth, which we've talked about before. You can just google it, or even when you call the brokerage, just say "I want to do the backdoor Roth," and they'll tell you what to do.
If you have other traditional IRAs, you can still do it, it just becomes more complicated and you'll probably pay more taxes. But you may not be totally out of luck, and I should say, that's only if you have a traditional IRA; it doesn't matter if your wife has traditional IRAs.
One exception, by the way, of what I just said in terms of tax status and last day of the year is, distributions from retirement accounts before age 59.5: You actually have to be age 59.5 to avoid that 10% early distribution penalty unless some of the many exceptions that are out there exist.
Southwick: All right. Next question comes from Warren. Warren Buffett maybe? I don't know.
Brokamp: That's what I was thinking, he's asking about Coke, [Coca-Cola] so maybe Warren Buffett wants JMo's opinion on Coke.
Southwick: [laughs] Yeah, that's the question, buy, sell or hold, Coca-Cola? Warren Buffett wants to know.
Moser: Oh, yeah. I'd give Buffett and I'd give Warren Kiesel the same advice, and I would say, listen, I'm not buying it, I'm not buying it. I'm not holding it if I own it. So I guess that means sell it.
Brokamp: Even from an Atlanta, Georgia, person like you?
Moser: I feel like it's almost sacrilege. I am pretty close to probably not being ever even invited back. But the facts are the facts, OK? I mean, you do have to look at, the stock itself has been a bad stock to own over the last five years. I mean, I do understand why. When you look at what they do. I mean, they have 400 master brands, and less than 50% of them are the big global brands that are actually responsible for almost all of their revenue. When I say almost all, I mean 98%. So it's a business that's very reliant on, you know, a small portfolio of really successful brands.
The biggest problem is now... You know, we've always talked about Coca-Cola being such a great distribution story, and that's true, they've got a distribution network that's just phenomenal, but the problem is, now, what they're distributing is being seen as not so good for you. And so, you're seeing them having to essentially pivot away from what brought them all of the success for all of these years, in soda. And that's not going to change. I mean, you're always going to have people that drink soda, but people are not going to be drinking as much soda going forward. And the numbers, they've just kind of shown that through the quarters and the years with Coca-Cola.
And, you know, Pepsi. [PepsiCo] Pepsi has the salty snacks division, which I've always been very impressed by. I mean, I love a good Cheeto, so I mean, any time you can throw a bag of those Cheetos in my pantry, I'm not going to turn it down. Coca-Cola didn't have that...
Southwick: Not to interrupt you, but I think this is also a very important point. Have you ever tried the jalapeno white cheddar crunchy Cheetos?
Moser: The white cheddar. So I've tried the jalapeno ones, but I've not seen the white cheddar.
Southwick: White cheddar jalapeno crunchy Cheetos. Don't get the puffy, the poofy ones are not as good, but the crunchy white cheddar jalapeno Cheetos, if you see them, buy them, they're amazing. That's all I have to say about that.
Moser: I mean, you had me at jalapeno, but yeah, I mean, I'll get those next time, I promise.
Southwick: Again, don't get the poofy, only the crunchy ones.
Moser: [laughs] Okay, the poofy ones. The puffy ones, so that people don't -- you're not saying, poopy, you're saying poofy. Yeah, got you, OK.
Southwick: Poofy. Puffy ...
Moser: Okay. Coca-Cola didn't have that dynamic to their business, they don't have that dynamic to their business, and they've suffered from that. Pepsi has outperformed Coca-Cola over the last several years. It's not to say Pepsi or Coca-Cola can't get it back. I'm sure they probably can. But what I am saying is, I think there are a lot of better ideas out there. And so, I wouldn't be putting in new money into Coca-Cola, and frankly, if I did own it, I probably would look at selling. And if you got to own a beverage company, maybe own Starbucks. It seems like science is coming out in support of coffee, right. It's coming out and telling you that these sodas are going to make you fat, but coffee, you know, it could extend your life, it could help you live longer.
Brokamp: Makes you smart, makes you good-looking. They say this is a Starbucks ...
Southwick: That sounds like a study from the Coffee Roasters of America Institute.
Moser: It was something that Chris Hill sent me the other day. [laughs]
Southwick: Yeah, that's how we sleep at night.
Rick Engdahl: I'm glad I've been drinking coffee as long as I have. God knows what I would look like otherwise.
Moser: That's right.
Brokamp: [laughs] Oh, you're a good-looking man, Rick; good-looking man.
Southwick: Next question comes from Dune. "I'm trying to save money for my kid's college fund, while the 529 is a great option, I'm limited to investing in mutual funds, which means, at best, I'm going to get what the market gets, assuming I do some sort of low-cost index fund. And I, being a Fool investor, have been doing much better than the market in the last three years of being a member of Stock Advisor and Rule Breakers. Even during this pandemic mess, by listening to every Fool podcast and following David and Tom's and yours and everyone else's in the Fool universe, my portfolio of about 100 stocks is up year to date 30% to the market's down 5% as of today, weighed down by three sluggish 529 plans that are also down 5% each.
"I feel like I'm throwing away money by using the 529 and not being allowed to select my own great companies in which to invest. What's more, my understanding is that the 529 does not count as an asset for the kid when applying for student aid, but the Coverdell does.
"So I come to you with a simple question: Can I have my cake and eat it too? What if I wanted to use the Coverdell to buy individual stocks until the child is nearing college, at which point, I then convert it to a 529. This allows me to get better returns and avoid it being an asset for financial aid and get the favorable tax benefits?"
Brokamp: So I chose this question, because first of all, Dune does a good job explaining the benefits of the Coverdell over the 529. You can buy individual stocks, you can buy and sell them all day long -- not that we recommend that, but you can. Whereas with the 529, you can only make two changes to the investments a year, and it's all mutual funds. So he did a good job of explaining that.
I will point out, with the Coverdell, it's got a low contribution limit of only $2,000/year. So for some people, they want to save more for college, but they can max out the Coverdell, but then put the rest in a 529.
One thing that Dune does not have quite right is the financial aid treatment. The financial aid treatment for Coverdells and 529s is identical. They're treated as assets of the parent, not the kid. That is favorable from a financial aid perspective, it's not negligible, it doesn't mean it doesn't have any effect on financial aid, but it's better than an asset that is owned by the kid.
He can, if he wants, transfer money from the Coverdell to the 529. If for some reason, he decides to do that -- but you can't transfer it the other way around. So we're convincing you to tryout the Coverdell and you have money in a 529, you can't move it from the 529 to the Coverdell.
One other interesting thing that he pointed out is that he is doing very well with his investments and he owns about 100 stocks. And we get this question a lot, either on the show or on the Fool Live that we run every day for members of Fool services. And that is, "How many stocks should I own, and if I own too many, aren't I just owning an index fund, aren't I watering down my returns?" But here's an example of someone who owns 100 stocks and is still crushing the market.
Southwick: All right. Our last question comes from Cameron. "Thoughts on the valuation of StoneCo in light of the coronavirus? For a fragile country like Brazil, this could be the tipping point after so many other headwinds. But how does that affect StoneCo's business?"
Jason, I don't even know what StoneCo is. What is StoneCo's business?
Moser: Yeah, StoneCo is a payments company that's focused on Latin American markets and Brazil in particular. And so, I guess, you can draw a parallel with Square or PayPal or something like that. But generally speaking, it's a payments company focused on Latin America, primarily Brazil is the big money-making market, kind of like MercadoLibre there. And it's a neat opportunity. I mean, it gained a lot of headlines recently when it was seen that Berkshire Hathaway, Warren Buffett's company Berkshire Hathaway, has taken a 5% position in the company, which is pretty considerable.
You know, I think in the near term, you have to acknowledge the fact that there are going to be some real headwinds in Brazil, particularly because of the pandemic. I mean, the flip side of that is, we're all in the same boat, kind of, in that regard, right. The entire world is dealing with it. So it's not specifically -- you know, it's not particular to one economy or one country, some countries are getting hit harder than others. But I do feel like Brazil will be in a place where they can recover from this, given some of the other businesses in the area. I mean, that I think is, who knows [laughs] ultimately how that's going to shake out. But generally speaking, I think the move away from cash toward cashless transactions and financial software, I mean, that's not stopping. If anything, this hastens that, which is what I think Cameron is talking about there.
And for a company like StoneCo... I mean, there are other companies in the space, PagSeguro and MercadoLibre too. But, you know, moving money around is a big, big market opportunity, and there's nothing that says they won't be able to expand well beyond the Latin American markets too. So I'd say I'm cautiously optimistic. I mean, I could see some near-term challenges, but I think StoneCo is still a good company.
Southwick: Jason, that's it for today. Thank you so much for helping us. Oh, you know what, I need to do the disclaimer. Before you go, I have to do the disclaimer.
Moser: The disclo-Moser.
Southwick: As always, The Motley Fool, and Jason Moser, might have formal recommendations for or against the stocks we talked about here. Don't buy and sell stocks based solely on what you heard on this show. I haven't actually read that disclaimer in a while, so I was trying to do that off the top of my head. I think I got it good enough for legal. I think that's CYA enough here.
All right, Jason, thank you again for joining us. Please come back.
Moser: Thank you so much for having me, and I will come back here every single time you ask.
Brokamp: That is so nice to hear.
Southwick: Okay, it's time to head to my part of the mailbag where we read your comments and, yeah, that's really it, your comments.
So a number of you wrote in about our recent episode on scams with some scams that you've been encountering. So Rob, in North Carolina, wrote in to say that "In April my parents were called by a scammer claiming to be their "grandson," no name given, just, "Hi, this is your grandson. I'm at college and they've closed the school due to coronavirus and I've been kicked out of my dorm and have no way to get home, can you send money?
"Thankfully they didn't fall for this. Not using any proper name was a big red flag. I think they tried to ask questions, like, what is your name or what school are you at. I don't recall exactly now, but they hung up on them eventually."
So this also is a great piece of advice here from Ron and their parents. When in doubt, if you're actually talking to the person that they're saying they are, just ask them a couple of questions, and their story will fall apart pretty quickly.
Reed from Minnesota wrote in to say that I was listening to our scams and hacks and ID theft episode, and his phone literally rang with a person on the other end, while he was listening to our show, someone called him claiming that they were from the Social Security office and wanted to talk about his number. He immediately knew it was a scam, not just from our podcast but from all the voices in the background. He said it almost sounded as if there was a call center for scammers was what they were calling from.
His wife also almost got scammed, because she got a call about having to appear in court as a result of a subpoena. And what finally tipped her off is that he instructed her to go to the bank with two envelopes and stamps and send $1,300 to one address and $1,800 [laughs] to another address before coming to the station, as that was the only thing to keep her out of jail.
So anyway, just a couple of more fun scams to think about.
Brokamp: I am the executor of a relative who passed away earlier this year, and I was going through the paperwork, and I knew that he was falling for scams left and right. That was his personality anyhow, but it became worse as he got older. But found, you know, an official-looking document that says you've won $450,000, and all you need to do is send us $2,000 to release the money, and he did it. Other checks to various sweepstakes. A check made out to Lady Rowena, don't know who she is, but I'm pretty sure it was a scam.
Southwick: Oh! That's just heartbreaking, just heartbreaking. I mean, thousands and thousands of dollars, I assume, have gone just out the door.
Brokamp: Tens of thousands, tens of thousands.
Southwick: Oh! Here's a quick congrats to listener Rich, who had his first spiffy-pop. Yay!
Southwick: Way to go. I don't think I've ever actually had a spiffy-pop. My husband and I were talking about that the other day, which just makes me feel sad. Rick, do you remember your first spiffy-pop?
Engdahl: I'm just thinking you might want to define that. [laughs]
Brokamp: Yeah, I was going to say, you probably should tell people what spiffy-pop is.
Southwick: Okay. So a spiffy-pop ...
Engdahl: All I know so far is that you and your husband haven't had one. [laughs]
Brokamp: [laughs] And they're still married.
Southwick: [laughs] We were just joking about it the other day, you know, I've never had a spiffy-pop; me neither.
Brokamp: [laughs] You can see a counselor about that.
Southwick: We talked about it. I mean, David Gardner talks about it all the time.
Brokamp: Yeah, so it is ... [laughs]
Southwick: So of course, a spiffy-pop, I believe it was coined by David Gardner, is when, if I get this -- correct me if I'm wrong, it's when a stock rises more in one day than what your original cost-basis was for that stock. So it rises more in one day than what you originally paid for that stock. Is that right?
Brokamp: Yes. And I think he put it out to his community to choose the name, if I remember correctly, which is a very David Gardner thing to do.
Southwick: A lot of you wrote in to say that you enjoyed the kids' episode, so thanks for that. And you also wrote in and shared, a number of you wrote in and shared what you've been doing with your kids. So Nathan writes that "We give our kids an allowance on each Sunday, $1 for each year of their age and they divide up their money into different buckets in piggy banks, 10% for God/church offering, and the rest divided between saving, spending, plus some for charitable giving in a proportion they choose. The kids like making choices about how to spend and give away their discretionary money, and I showed them a graph about the time value of money if they invest some of their savings periodically in index funds."
And Diana writes, "I was excited to hear that my husband and I did many things right in this area from the time our kids were in preschool. They've had their own savings account since elementary school, and both have had their own businesses. Our son also chose to use his profits to invest in mutual funds starting in the fourth grade." That's adorable. "Now in high school, he listens to your podcast with me sometimes and he is interested in researching stocks and investing in the stock market." That's awesome.
James, John, Stephen, and Jennifer sent in some t-shirt ideas, including, "What's up, Bro?" Tranches, just something about tranches. Awfulizer and the classic Stocks!
So thanks, everyone, for writing in, it's nice to hear from you, even though, I don't know, maybe listeners are still sending in postcards. We wouldn't know, because we haven't been in the office in months and months and months. Bro! Maybe there's a whole stack of postcards just waiting for us at the office.
Brokamp: That would be wonderful. That would be like a Christmas tradition.
Southwick: All right. Well, that's the show. So again, thanks, everyone, for writing in with your comments and questions. Our email is [email protected] The show was edited spiffily by Rick Engdahl. For Robert Brokamp, I'm Alison Southwick. Stay Foolish, everybody.