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You've Got Personal Finance Questions. We've Got Answers.

By Alison Southwick and Robert Brokamp, CFP(R) – Updated Dec 30, 2020 at 7:27AM

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2020 is almost over, but not before our final mailbag of the year.

In this week's Motley Fool Answers, Alison Southwick is joined by Robert Brokamp and Buck Hartzell to answer questions about owning company stock, international exposure in investing, investing for kids, emergency accounts, and so much more. Grab a nog, put your feet by the fire, and get yourself some Answers, Fool!

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.

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This video was recorded on December 22, 2020.

Alison Southwick: This is Motley Fool Answers. I'm Alison Southwick, joined as always by Robert bro-ho-ho Brokamp, personal finance expert here at The Motley Fool. In our last episode of the year, what? It's a mailbag episode with the help of Motley Fool analyst Buck Hartzell. All that and more, on this week's episode of Motley Fool Answers.

Buck, hey, thanks for joining us.

Buck Hartzell: Hi, Alison. Hi, Robert. Thank you for having me. Last show of the year.

Southwick: I know, can you believe it? We take the last week off to be nice to ourselves, and we appreciate you taking time off to join us here amid the holiday season, so we really appreciate it. That's the bottom line. That's what I'm thankful for this year: Buck Hartzell answering all of our [laughs] listeners' questions. I guess we should just get into it.

Robert Brokamp: Let's do it.

Southwick: The first question comes from C. "On a recent episode, you were talking about how one should have exposure to stocks outside the U.S. However, you didn't mention how to do that reasonably other than through ETFs. I was looking through my brokerage, and it seems there are some time restrictions, lot restrictions, and other issues such as taxes and currency settlement. I also couldn't find any info on options. It would be nice to have fuller information on that than just saying we should have exposure."

Hartzell: That's a great question. I think this is right to give people some direction. You don't want to have exposure just to the United States. I think if we look at things right now, there's probably some markets that are a lot cheaper in their countries than they are in the United States. Warren Buffett just bought a bunch of Japanese conglomerates recently. He took a basket approach to doing that. They're all trading at pretty low valuations. The first thing I would recommend to you is to consider looking at Interactive Brokers. This is not a paid endorsement or anything. I would just say for trading in international stocks, for U.S. investors, Interactive Brokers does a really nice job of it. They convert the currency and do all that stuff automatically for you. They're pretty low cost. When it comes to trading in international stocks, I think that's a really good choice for you to consider making.

The other thing I'd say and, I guess, Bro, you guys talking about ETFs prior to this, is I would just be a little careful on some of the ETFs that you select, particularly among Chinese ETFs. People want exposure to the growing middle class in China, but a lot of those ETFs are packed with state-owned enterprises. You really don't have a whole lot of exposure to that growing middle class. It's more of these state-run companies. My personal preference is picking individual stocks, but certainly, there are other countries where there may be ETFs that might be a better solution.

Last thing to consider is trading costs are usually higher, so know that. The last part that I would make is pay more attention to where the revenues are earned in an individual company when you're buying them, as opposed to where the headquarters is domiciled. You can buy a Japanese car company, but they sell a lot of cars in the United States, you're probably not getting the exposure and diversification that you want. Similarly, if you look at companies here in the United States, you can have Coca-Cola, they sell a lot of Coke internationally. You can get some international exposure by owning U.S. companies too, if you pay attention to where they earn their revenues.

Brokamp: I'll just add to that. We don't talk about actively managed funds that often. But I think this is certainly a category where they're worth considering. You might even start with your 401(k), because generally speaking, every 401(k) has an international stock fund. Hopefully, the 401(k) committee is on top of things and they've chosen a good one. That might be an easy way to get some international exposure, where you do have some professional management there, looking into the holdings and choosing what they think are the best companies.

Southwick: All right, our next question comes from Pat. "I have recently started a large home improvement. In addition to paying for a portion of it in cash, I've taken out a HELOC. Additionally, given the sentiment that the market is currently overpriced, I'm also considering taking some money off the table to pay for it by selling some of my holdings. If I should, would you recommend selling the well-performing funds or use this as an opportunity to get rid of the underperforming funds?

Hartzell: First of all, great question. I feel bad for you, having been through several home improvement projects. [laughs]

Brokamp: They were not small. They were big projects.

Hartzell: You never really know what you're getting into. At the end, once you've been through it, you're like, "If I knew what I was getting into, I never would have done that. I just would have bought a new home." But anyhow, good luck to you, and I'd say that's why we invest and we save. We want that money. I think it's actually a good time for people to take some money off the table if they've had some stocks that have done well, and particularly ones that have done poorly.

Your question is, "Should I sell the worst-performing ones or the best-performing ones?" My answer is the combination of both. I think, first of all, you start with some of the losers that maybe you don't like as much or haven't performed as well as you would have expected and if you have some tax losses there, it's a great time to book some of those. If you have some gainers that maybe you're feeling a little bit uncomfortable with, maybe the allocation that they've grown to become, take some gains there to help offset the losses that you just recorded on some of the losers. That'll minimize your tax losses or minimize your tax gains, so I like that idea. Sell some of the winners, some of the losers, and help offset some of those gains.

Brokamp: To the extent that the gains outweigh the losses, just make sure you set some of that cash aside, because you don't want to spend it all on your home improvement and then, tax time comes along, you're like, I'm short of that cash that I now own.

Hartzell: Yeah. Good point.

Southwick: Enjoy the drywall dust, because it's going to get everywhere. [laughs] You're going to find it in your sock drawer a decade from now.

Next question comes from George. "I've maxed out my pre-tax contributions to my employer-sponsored 401(k) plan for 2020 and continued to make after-tax contributions thereafter toward the $57,000 annual max. My employer has also matched my deductible contributions as well. But my expectation is that I will be shy of the $57,000 cap by approximately $6,000 come December 31st." We're getting them their advice right under the wire.

Brokamp: Yeah.

Southwick: George, do not listen to this episode, you're going to be so mad. "Would I be able to contribute the difference to my solo 401(k)? I know I can take the $19,500 deduction once, but the profit-sharing contribution would still be available, no?"

Brokamp: Well, George, first of all, kudos to you for being a super saver. Let's start talking a little bit about 401(k) limits to begin with. For this year, and it's the same for next year, it's $19,500 with an additional $6,500 if you'll be 50 or older, and those are going to stay the same, like I said, next year. But there is this all-in limit that is $57,000 this year, with an additional $6,500 if you'll be 50 or older. That includes your contributions, your employer's contribution could be the match, could be profit sharing.

Then you can put in something called after-tax contributions, which we've talked about on previous episodes. A little more complicated, but that seems to be what George is trying to do. If you have access to more than one 401(k) plan because you have two employers or you have an employer and you're self-employed, those limits apply total to all your accounts. You can't put in $57,000 in one and $57,000 in another. The only exception is if you have access to a 457, which is just limited to a small number of government employees. You can't max out two separate accounts.

I think what George is trying to do will work. In a previous episode, we talked about, if you want to max out your 401(k) this year and you have an employer, chances are you couldn't wait till December 31st because it has to come from your payroll and you have to let them know a couple of days before the final payroll. It's probably too late if you work for someone else. You should always ask your HR department; maybe there's a way to send in a check.

But what George is talking about is a solo 401(k), self-employed, that's his own account and he probably has it with Schwab or Vanguard or Fidelity or something like that. He probably can send in that check and count it as profit sharing. Profit sharing is normally the owner or the boss or the owners of the company decided to share some profits with the employees. But he is both the owner and the employee, so he can decide to share those profits with himself.

I would just say call whoever is the provider of your 401(k) to make sure your plan allows for that, and then how to make sure they get that money before December 31st.

Southwick: Our next question comes from, let me just say that I love an Irish accent. It's one of my favorite accents in the world. Siri is set to being an Irish person. Every evening, he says, "I've set your alarm for 7:30," and it's great. [laughs] This name has one to many consonants for me to be able to pronounce it correctly, so I feel bad. Long time listener from Dublin, Ireland, this question comes from Tadgh.

Brokamp: Spell it.

Southwick: T-A-D-G-H. One or more of those consonants has got to be quiet. Tag or Tad, either way, I love you. [laughs] I can't wait to come visit you. Here we go. "I am currently a subscriber to Motley Fool Stock Advisor, and I have a question. When I reach the optimal 15-stock recommended portfolio, do you recommend that I keep adding monthly savings to those holding, or do you recommend I continue to buy the new recommendations and the top 10 recommended stocks each month and build up a bigger portfolio of stocks with a small holding of each?"

Great question. Lots of good information in Stock Advisor. What are you going to do with it?

Hartzell: I would consider, first of all, that 15 is a minimum number. That's an aspirational thing, and we want people to get the 15 before they add any to those existing 15 that they bought. Don't re-up on those until you get the 15. I would say once you get the 15, that's not an ending number. I would consider going and adding new stocks after that. If however, you feel really strongly, you'd like to add a little bit, go ahead and do that, that's all right. But I would consider adding more stocks, probably around 25 to 35. I think it's where most people end up falling out as far as the number of stocks that are manageable and they like in their portfolio.

The other thing that I'm going to mention is to keep in mind is turnover. Nobody wants 15 stocks and holds those for 30 or 40 years. We love the idea of holding onto stocks. But you need some turnover in your portfolio to make sure that it's relevant. We even see that happening today in the S&P 500. As a matter of fact today, on the 21st of December, Tesla is being added to the S&P 500. Perhaps a day late, an hour short, I don't know. It's been a while here, and it's a pretty big company already. They were placing Apartment Investment and Management Company, which has not fared so well since they announced that they've been leaving the S&P 500.

But the point here is, even the passive indexes need to add companies to keep them relevant. We remember when Amazon went in there and all the stuff, so I would say keep adding new companies, and also don't feel bad about selling off some of your losers after you've held them for a few years, and seeing how things played off. 15 is a starter idea. Next to that is 25 to 35, but if you want to add some more to those existing 15, you can do that.

Southwick: Is now also a good time to mention that not all of our recommendations will be winners and we're sorry about that, but that's what it means to be an investor? [laughs]

Hartzell: We've talked about this, ad nauseam, I think, but if you are the best person in the world at this, you're going to be wrong 40% of the time, so there are going to be some losers in there. I'd say our instincts as investors are typically wrong. We hate selling off those losers because it's painful. When you take a loss, it's really hard, and there's this need to lock in the gains of the winners. But I would say the opposite is the best-performing medicine for everyone, to let those great stocks that are doing well run, and sell off those ones that haven't done as well.

Southwick: All right. Our next question comes from Josh. "In a portfolio of individual stocks, what is the optimal strategy over time to deal with position size, addition of cash, and rebalancing? Let's say I want to build a portfolio with 30 positions and plan to target equal weight. Do you add new money to the original target weights, or do you add to the lower weights to try and rebalance without selling? Do you let this portfolio run and simply dollar-cost average at your target weights? Or do you sell your winners and add to losers each year?"

I think you just answered it. Spoiler alert, Buck [...] [laughs] this one.

"Finally, if you already have a large portfolio and want to add a new position, do you focus on building that out by allocating most of your money to it, or do you simply add to your equal-weight list that you buy every month and let it grow over time?"

Hartzell: I'd say the main part here, Josh, is to realize that when you create an equal-weight portfolio, it's only going to be equal weight on day one. [laughs] We love holding stocks for a long time. You can look at any of the scorecards on our Motley Fool services, and there are outliers. The longer you hold your stocks and the longer you're an investor, what happens is a few of those companies tend to dominate the portfolio. If they get to a weighting that is too high for you, you can sell them off. We love the idea of rebalancing with that new money, which you mentioned there.

The one thing I would just caution a little bit about is adding more to your losers all the time. We love adding to winners, which is interesting. But the other thing I would just say is, don't get so caught up on the fact that this has to be perfectly equally weighted.

The longer this portfolio runs, have some stocks that take off. If they get too big for you, you can't sleep at night and you feel uncomfortable, and then a 40% or 50% loss in any one of those stocks would impact the way you live, go ahead by all means, sell some of that down. Some rough guidelines for allocations are no more than 10% in a single position and no more than 30% in an individual sector of stocks, but that's a guideline. You may be very comfortable with a little bit more and have been investing for 20 years, and that's fine too. I would just say those are rough guidelines for people to consider.

But use that new money and rebalance and add to some of the lower positions that you like. It could've done well or not, but we like adding to winners more than losers. Does that make sense?

Brokamp: That makes sense, and I will just add the flip side of this. For people who are retired, it's the other way around. They have to decide what to sell, and certainly, deciding what to sell is a way to rebalance your portfolio. I think if you're retired, having a concentrated portfolio is a little more risky. I love that question that you said, "What's going to happen if the stock or these stocks go down? How does that affect my life?" It's probably a bigger impact for people who are retired. It's just to think about, how do I maintain a certain amount of balance by selling what either has become overweight? Or it's just a great way to prune your portfolio of the stocks you no longer believe in.

Hartzell: I know, Bro, you've talked about this a lot in markets. The market goes up on average about 9% a year, let's say. But in years where there is big market outperformance well above that, we like the idea of selling off a little bit more in those periods, so that when you had a year when the market's down 10% or 15% or 20%, you don't feel like you need to liquidate those stocks when they're not priced as attractive.

Southwick: Next question comes from Nate. "I've been pondering a change in career. I currently have a Roth 401(k) and an employee savings plan that acts like a pension, which I believe becomes stock in the company if you leave. What do I need to know about moving those holdings with me if/when I leave? What questions should I be asking myself and the company about the retirement plans when considering taking a new job?"

Brokamp: Nate, good questions. I'll just say with the employee stock, that's one of those areas that I think it's always important to, first of all, talk to the people at the company who administer the plan so you know all your options, and then talk to a financial planner or an accountant, because company stock can get a little tricky. I'm not going to offer any specific advice other than make sure you seek out the relevant professionals, because each stock plan can be a little different and you want to understand the details of your plan.

In terms of moving over your old account, I would say, first of all, let's start with actual questions for the new plan. You want to know, first of all, what's the match? If you're looking at prospective employers, what's the match? You also want to know what the investment options are. But also, if you have the option of buying individual stocks, only about 10% to 20% of plans allow that, but it's generally pretty important to Motley Fool members, because they want to be able to pick their individual stocks, so I would say that's important to know; and you want to know whether the employer is covering all of the costs. In about 70% of plans, employers expect employees to share at least some of the costs, so you would want to know how much you're going to have to pay.

Then, once you take that new job, your next question is then do you want to roll over your old 401(k) to the new 401(k)? Certainly, it is possible to do that. Most plans allow it. It would depend on whether the new plan is worth it. Generally, I think we recommend that you rolled over to an IRA, because it'll give you more options and probably lower costs. The only thing to consider when rolling over is whether the investments can come over in kind or whether you have to cash out first. Because if you have to cash out first, there will be a period -- one, two weeks, in some cases just a few days -- but that you will be out of the market, you won't be fully invested, so that's something to consider.

I'm just going to add another question to this that we received from another member. Their question was, "What about a taxable brokerage account? Will I be able to, if I switch brokers, move over the investments in kind, because otherwise, if they have to be sold, the person would have to recognize some significant capital gains?"

I would say, generally, you are as long as it's just regular old funds, ETF stocks or stuff like that. But before you move over from one broker to another, make sure that you record all your cost basis information. These days, cost basis info is legally supposed to be carried over. But if you've had stocks that you've held a really, really long time, that information may not come over. Plus, sometimes when stuff goes from one broker to another, information gets lost, so always make sure that you get your cost basis info before you switch brokers.

Southwick: Next question comes from Brian. "For the past several years, I've always kept a 50-50 mix of dividend payers and growth stocks in my taxable brokerage account but always had to pay taxes on those dividend payouts. Since March, I've exclusively purchased only non-dividend-paying growth stocks for my taxable account. It's my plan moving forward. I'm a buy-and-hold investor, so whenever I do sell, if ever, it will be at the long-term capital gains rate. In my Roth, I only buy blue-chip dividend payers. I love the fact that all my dividends will grow tax-free in my Roth. Do you feel this is a strong, Foolish strategy?"

Hartzell: Brian, my brother from Lancaster County. Yeah. This is why I picked this question. I always feel good about answering questions from Lancaster County, because that's where I'm from.

Yeah. I think your strategy is sound, Brian, the only thing that I would add in there -- and Bro knows a lot about this and more than I do as well -- is that, ideally, if you had known which stocks are going to go up a lot, I would probably put them in my Roth. So some of those growth stocks that may be a 10-bagger or a 20-bagger or do really well for you, you'd probably want to shield those gains by putting them in a Roth.

But I think you're smart about putting the dividend payers in a tax-deferred account. That makes sense to me. I've learned from my own mistakes and successes, that I spread it around a little bit, because as much as I like to think I know which one we're going to do the best, it doesn't always work out that way. So I put a little bit of each stock in each account. That way, I do have some high growers in my tax-deferred accounts as well as some dividend payers. But keeping those dividends tax deferred is a good idea.

Brokamp: Yeah. Brian does raise a good point. Even if you're reinvesting the dividends, you will be taxed if it's in a taxable account.

Now, I have a question for you, Buck, do you automatically reinvest your dividends or do you let them accumulate in cash and then be more deliberate with your purchases?

Hartzell: I don't. I don't automatically reinvest my dividends, and I think most people do not. As far as some of the research that I've read there. I'm perfectly capable of making bad investments with that dividend money on my own instead of reinvesting it. I'm a little bit of a control freak. I do reinvest it, but I don't always reinvest it in the place that it came from.

Brokamp: Yeah. That's another way to maintain balance in your portfolio, to let the dividends accumulate in cash rather than automatically reinvest them. It's a great way to build up a cash cushion when you're getting close to retirement. Just basically within five years of retirement, just don't reinvest them, just build up the cash cushion. So you've built up a gradual margin of safety as you get closer to the big day.

Southwick: Next question comes from Brandon. "My 13-year-old son is interested in investing. He's asked me for advice, but I'm not sure what resources are available and where to start. My initial comment was to invest in 'good companies that you like.' Can you help me? One, what are five stocks I can give him as starter stocks? Two, what resources are available that are applicable to a 13-year-old? For the record, he's willing to hustle, as he already buys and sells shoes and apparel for profit."

Hartzell: As far as five starter stocks, I would consider things that Brandon likes. What would he spend if he's out there hustling, he's making money? That's the big step. That's the first step. But think about what he would spend this discretionary money on if he had a chance. If he had $20 or $40, what would he buy? If he likes video games, think about Electronic Arts and Activision Blizzard and that kind of stuff. But I would say this first five stocks should be good stocks. If he likes watching Mandalorian on Disney+, go and get him some Disney. Get him stuff that he can relate to. I have three children, and that's one of the things that I've tried to do with the stock purchases that we made, is buy stocks that they're interested in, and that they know when they go buy something from that company, a little tiny piece of it is coming back to them as also being owner of the business. That's what I would recommend as far as starting up and which stocks to buy.

Brokamp: We've done that with our kids as well, but also each of them have just index ETFs. U.S. total market, international market, just a couple of shares, just so that they see what it's like to own an index fund and just experience the ups and downs of the overall stock market.

The other thing I will add is, because this young fellow is making money, he technically could contribute to a Roth IRA. Now, there's some tax issues with that, you would have to document the income. You might want to talk to a tax professional. But then he could contribute to the Roth IRA, which is great because the earnings will go tax-free, and with a Roth IRA, if you need the contributions before age 59 1/2, they can come out tax and penalty free, so it's not locked in forever. That's just another consideration.

Hartzell: I'll add one more thing, Brandon, and it might be a good idea. Since he's already showing initiative and earning money on his own, one of the things that we did for our kids is, we did a matching program. Whatever money they earn on their own throughout the year, we would match that dollar for dollar. On their birthdays, actually, we would count out that money, and that will go into their stock account, and they could buy more stocks with it.

That's something that I think there's a couple of things interesting about it. One is, during the year, they have to decide when they want to buy something. They have to really want it. If you're paying $40 for a baseball mitt, it's really costing you $80 if you buy it before your birthday, because you're going to lose that match on that $40, because it's all about not only earning the money, but also saving it.

Then the other thing is it adds little incentive for them. Sure, it's 100% matched, that's a big number, but we're starting off a small base. I imagine he's not earning a ton of money doing this, and what they see is it starts the snowball working, where after three or five or seven years, they realize, "Wow, look how this is going." It lights the fire on the importance of the most important thing that they can do is to save. That's one of the lessons that you want to get across to your children.

Southwick: One of the best things for me when I was first learning how to invest after I got the job here at The Motley Fool was listening to Market Foolery every day. It's a short podcast, it's like, what, 20 minutes maybe, and they just talk about the headlines, and they talk about investing, and they goof off, and they have some fun. That might actually be -- I would recommend just a nice thing that you two could do together while you're doing dishes. Or I don't know what people do these days, but we're always doing dishes. There you go, help out Mom, and you guys do the dishes every night and listen to Market Foolery and then talk about what we talked about on the show. Everybody wins.

Hartzell: That's right. Here we go.

Southwick: Next question comes from David G., but not the David G. we usually think about here at The Motley Fool, not David Gardner, I assume. "I enjoy your podcast on the increase of the safe withdrawal rate from 4% to 4.5% to 5%. One thing I have never seen discussed is, when does it make sense to increase the amount over the original plus inflation rate? As I recall from studies, some outcomes would have resulted in a large portfolio after 30 years, meaning one could've spent more. I figure that anytime the 4% of the balance is greater than the original plus inflation, then you could bump it up to 4% of that new balance. I think a good solution might be in another of your articles on what MIT does for its endowment. I need to tweak as much, as I do not think I will live forever."

Wow, Bro. I think you've found a kindred spirit on safe withdrawal rate. You guys can even start a club.

Brokamp: I think this is the same Dave who wrote us a while back when he started his job in the Army, his training officer told him, "When you get a raise, bank half the raise," and by the time he's in his 50s, he's saving 42% of his income and was able to retire early. Yes --

Southwick: You and Dave are long-distance best buddies. You don't know it yet.

Brokamp: That's right. Okay. Safe withdrawal rate. Yes. What we had talked about previously on the show, people have heard the 4% rule, came from a guy named Bill Bengen, retired financial planner. Now, he's retired. He was a financial planner at the time. Started out at 4%, then he bumped it up to 4.5%. Now, in a recent article published in October, he says it's 5%.

But Dave G. here is pointing out something important and that safe withdrawal rate is a worst-case scenario withdrawal rate. In the vast majority of situations, if you start with that withdrawal rate, you actually will die 30 years later with more money than you started your retirement with. So you can theoretically increase withdrawal rate as long as your portfolio goes well.

One simple way to do that is just every few years, just restart. If you've decided that 5% was the right withdrawal rate for you at age 65, at age 68, go ahead and do 4.5% of the current value of your portfolio, especially if it's gone up.

Dave is also referencing MIT and he's playing off an article I published a couple of years ago in that I suggested that people could do a withdrawal rate similar to what colleges and universities do with their endowment, which is basically the basic rule of thumb. It's just to take out 5% of the value every year. In great years, it's up. In bad years, it's down.

The problem is, from the university's perspective, that's a lot of volatility in year-to-year spending. What most colleges do is their annual withdrawal rate from their endowments is a mix of a fixed percentage, a fixed amount, dollar amount, increased by inflation every year. Then a part that is variable. Since he mentioned MIT's, this is MIT's formula. Each year, they take out of their endowment, 80% of it comes from the previous year's distribution increased by inflation. But then 20% of it is 5.1% of the value of the endowment. Again, there's some smooth, some bit of predictability from year to year. But some of it also goes up and down with the market, which is probably what you should do. If the market is down, you probably shouldn't take out as much. I actually think the whole endowment way of doing it probably makes more sense, but it does require that you have a certain level of flexibility in your budget so that if your distribution is down from one year to the next, that you could handle that.

Southwick: Next question comes from Matt. "I'm currently saving up to start my investing journey and would like your thoughts on stock options through work. I'm a big fan of my company's stock, Home Depot, and can essentially have my employer withhold X% of my paycheck and buy stock on two set dates a year at 15% off the market value on those dates. It's a great deal on a great stock, to be sure, but my question is, how much of my available funds should be dedicated to the company I work for, and how much should go to the self-directed account?"

Hartzell: That's an awesome offer. There's not too many people that get this offer from their company, and I will say something that's maybe a little controversial and then I'll let Bro step in and be a little bit more conservative than me. I would say I use opportunity costs. So when I go out and look for stocks, I can look everywhere. I try to find the best place to put my money that I can. You're basically saying that through your work, you can buy a dollar's worth of stock in a good company -- Home Depot has not been a bad company, it's been a good company. The stock has done well over long periods of time. It's one of the leaders in their space, if not the leader. And you can buy a dollar worth of that stock for $0.85.

That's a guaranteed 15% return right off the bat when the stock market over long periods of time has done about 9%. To me as an investor, I get a little greedy when I hear things like that. I'm like, that's a good thing, and I'll take more of it.

Now, you have to consider, you work for Home Depot. If something goes bad there and something happens to your job and you also have a lot of your worth tied up into the company, you have to consider that. So there's going to be limits. But I would put a lot in there, just because I think it's a great offer, and I wouldn't feel bad about that.

But just recognize that you work there. I also think by working at the company, you probably have better insights into Home Depot and how the business is doing than those of us who are just looking in from the outside. You're there every day. You see the people like your services and what's going well and what's not working and how COVID's impacting the business and all that kind of stuff. So I'd say if I can get $1 for $0.85, I'd get a lot of it. That's just me.

Southwick: All right Bro, now bring them down.

Hartzell: Hey, Bro.

Brokamp: Oh, no, I'm not going to bring them down at all. I would say it's true. You have some extra insights of the company, and it's just that it's a tough deal to pass up, especially with Home Depot, and I say I'm biased because I've owned the stock for, at this point, I think almost 20 years, if not more.

But yes, there is that limit of how much you should have in one stock, and you would technically even lower it a little bit more if it's also your employer. The other factor to consider is, with many of these plans, you can't generally buy the stock $0.85 on the $1 and then turn around and sell for a dollar. There's usually a holding period involved, and you generally have to be employed by that company for that period. So you have to figure that in too. It's not exactly quite as liquid as if you bought a stock in your brokerage today and decided to sell it a week later.

Southwick: Our next question comes from Patrick. "Did you know we're in an index bubble? The internet says so. In all seriousness, I was planning on using a Vanguard ETF as a pillar in my portfolio until I saw this bit of news. Is it anything to be concerned about? Also, should I be concerned about ETF liquidity? Are there certain characteristics of an ETF I should be looking for that might affect its liquidity?"

Hartzell: Yeah. Patrick, here's the thing. I don't know if we're in an index bubble. I do know that stocks are very expensive relative to their historical rates. We know that. I'm not as interested in owning an index at these prices, just personally, but I'd say it depends on how long you plan on owning that asset. We like the idea of index funds at a low cost; you get broad exposure to a wide swap of individual businesses, which is great. I tend to like the equally weighted indexes better than the market cap-weighted indexes like the S&P 500 from Vanguard. But I would say, if you're 20 years old and you're just starting out and you have a job, don't worry about the bubble. You're going to be investing for a long period of time.

On the other hand, if you're 55 or 60 and you're getting closer to retirement, I wouldn't be as excited about adding that index. So I think it just all depends on the time of where you're at.

But it is expensive from a historical standpoint, and it's that way because interest rates are near zero everywhere across the world. So the multiples on earnings, even for the S&P 500, is very high from what it's been historically. But interest rates could stay low for a long time. Look at Japan and some of these other places. I'm not great at forecasting that. I just know it's unlikely that we're going to see a big multiple expansion on earnings or anything else and that the growth rates for the S&P 500 have not been really high recently, and I'm not talking about the price of the stocks. I'm talking about the growth of earnings within the S&P 500 and that kind of stuff.

Brokamp: I'll just say that with index funds, when people talk about the index fund bubble, they really are generally talking about the S&P 500 index funds, which is the most popular way that people index. Part of that is because the index has become so concentrated in the biggest 5 to 10 companies, and they tend to be tech companies, whereas if you were to look at a small-cap value index fund, that's probably not so pricey. So if you were looking for a way to get exposure to some other asset classes, I think an index fund is a good way to do it.

The other part of his question was the liquidity concerns. I would say, for the most part, you don't have to worry about that, especially if you are looking at Vanguard ETFs, because they are generally very large, they invest in very liquid assets. Some of the more, I would say, obscure ETFs that focus on more thinly traded stocks, like micro-cap ETFs for example, those might have more liquidity concerns. But ETFs, like stocks, have a bid-ask spread. You can look at a quote provider like Yahoo! Finance. There's the bid, there's the ask. Most of those, the difference will be one or two pennies. If it's larger than that, especially if it's over $1 or something like that, then you do have a question of where maybe that ETF is not as actively traded.

Hartzell: I'll add in, Alison, since I said I probably wouldn't be as interested in S&P 500 right now, I will offer an alternative to that, and that is an ETF. It's the equally weighted Nasdaq 100. QQQE is the ticker for that. I like that a little bit better. Those stocks are going to grow much faster than the average of the S&P 500. These tend to be tech-heavy companies in there who are also equally weighted. So you don't have those big ones in the top dominating. It's just 1% in each of the 100 companies, and that has outperformed the S&P 500 over a lot of different periods. So if I had to choose an index to average into right now, I would choose the Nasdaq 100 equal weight.

Southwick: Next question comes from Andrew. "I have stock accounts for my six- and three-year-olds, both accounts holding three Fool picks each. Recently, their grandparents gave them a nice gift. Should I continue to grow their stock accounts or set up a 529 for college? My thinking is I, with the Fool's advice, can outperform the 529 with stock picks. Granted, I will need to pay the taxes. But with the time horizon of at least 12 years, will the profits in a general account outweigh the 529 and the taxes?

"I personally am an older father who turned 50 this year. When the kids go to college, I will be in a good place financially as we currently have a few millions in our retirement account now. I plan to pay for their college, so odds are I probably won't even use the kids' money for college. But if I did need the money from my kids' accounts, I assume since they are dependents, it will get taxed at my tax rate. Or if they are 18, can it be in their tax bracket? Suspecting they will be in the lowest tax bracket.

"If you suggest the 529, would you go with the best state plans and pay the out-of-state fee or stay in your current state plan?"

Brokamp: Well, Andrew, there's a lot of good questions in there. Just to start with the 529, as you suggest, the benefit of the 529 is that the growth is tax-free as long as the money is used for qualified education expenses, mostly higher education. But these days, you could actually use it for up to $10,000 a year in qualified elementary and secondary school expenses.

The problem with the 529 is that you don't have many investment options. It's like a 401(k) in that you just have choices among a handful of mutual funds, and you can only generally make two trades a year. So a lot of people, especially Motley Fool listeners and readers who are experienced in picking individual stocks, feel like, "Yeah, the tax breaks are great, but I can do better just buying regular old stocks and selling them." I think that's very possible. So if you are considering that, one thing I would say is to look at the Coverdell Education Savings Account, which does allow you to pick individual stocks.

The limits are low, only $2,000 per year, but you have until April 15th to make a contribution for 2020. So you could actually contribute $2,000 now for 2020 or up to April 15th and then do another $2,000 for 2021. So you can at least get that $4,000 in there.

The other thing that's interesting about your situation is that you're saying that you may not need the money for college because you have money elsewhere. That is an important consideration, because with these accounts, the money that you put in, if the money is not used for school, it will come out tax and penalty-free. You don't have to worry about that money. It's the growth that will be taxed and penalized 10% if it's not used for qualified higher education expenses. Now, you can always transfer to other relatives. So if for some reason you don't use the money for your kids, you could actually generally leave the money in the 529s for your grandkids eventually, and goodness gracious, how big will those accounts be by that time. Coverdells are different. Coverdells, the money does have to be used by age 30.

The other thing I would point out here is that you have three stocks for each kid, as we've talked about already in the show. But it's probably better for a higher number than that. I wouldn't want my kids' college depending on three stocks. So if you decide to go the stock route, I would certainly consider expanding your portfolio to beyond those three.

Then finally if you do decide to go the route of 529, two great sites that rate plans are Morningstar and You can see which are the best plans and to see what benefits your state's plan offers, to see whether it's worth sticking with your state's plan, but as you suggest, you don't have to stick with your state's plan. If your state's plan is not very good and there are no benefits to residents, you can choose another state's plan.

Southwick: Our next question comes from Emil. "If you have six months of living costs set aside in an emergency fund, it's highly unlikely you're going to need the whole pot at once. Is it defendable to have one-third invested in a lower-risk large cap, dividend-paying stock, and sell off only if needed? I'm 40 years old and aim for the following allocations: 10% emergency fund, 20% cash, 10% set aside on significant investment opportunities in watch-list or market correction, 60% in stocks. I find it hard to separate cash to pay for living expenses, opportunity funds, cash for investing, and the emergency funds. Should they be kept separate when overall allocating?"

Hartzell: Yeah. Emil, I like this. I like what you're thinking. It's a short answer. You're getting a little greedy. So I'm going to say no. We have emergency funds set aside for emergencies, and I don't want them in anything but cash. I've realized cash earning nothing now, pretty much when you're trying to get a little bit of yield out of that emergency fund. It sounds like that to me, but I would say let it alone. It's set aside in cash for a reason, because as we have seen in March, stocks can go down 30% in less than 30 days. Things can happen to it, so to the extent you have an emergency fund, that should be in cash in my view. Bro may differ with maybe tips or laddering something, but I like them just in cash. You're not getting much in tips or any of that stuff these days anyhow.

Now, the other one that you talked about was your opportunity fund for stocks. I like how you're thinking about that. I would have that in cash, because when you find something you like, you don't know when it's going to strike. So that would be an addition to the six months' living expenses that you set aside. You can put them in separate accounts, which is fine. I would keep that in my brokerage account, and so I would see that's cash so that I could spend on socks anytime I want. The other cash would probably be in a bank account somewhere where I'm not going to have a savings account where you're earning less than 1%, but I'm not going to touch that.

Southwick: Everyone resents their emergency fund so much right now, don't they? [laughs] I'm thinking for those who actually ended up needing to tap it.

Hartzell: Yeah, right.

Brokamp: Yeah. I think Emil brings up a good point in that when you have these different cash needs, and then which part of your cash goes to this? Which part of the cash goes to that? I think it definitely makes sense for your emergency fund to be in another savings account. I'm going to say a high-yield savings account, but I say that knowing that there's really no such thing anymore. But you can go to The Ascent, which is a Motley Fool company and a website where you look for at least somewhat higher yields. I just think it's better to have that in a separate account so you don't think of it, so that when you look at your regular checking account, you're not seeing that money and, in the back of your mind, thinking that you could spend it.

It's better to be separate and you can do it for other goals too, if you're saving for a car, saving for a house, saving for Christmas, you can save a little bit each month up until Christmas. So that's stashed away somewhere separate and it's not mingled with your other stuff, you almost forget about it.

Hartzell: The last thing I will add too, Emil, is you're 40 years old. You're pretty young and you're right, you're probably not going to tap it all at once. Once you get that six months of savings set aside, you don't have to add to that emergency account. The only thing I would add to that is, if you have children or something else happens, you may want to build up 9 or 12 months. When we have young kids, I want a little bit more of a cushion there in case something happens. But if you're 40 years old and you don't have any obligations, once you get that six months of living expenses set aside, you don't have to add to that anymore.

Southwick: Our last question -- this has been a pretty epic mailbag here to finish off the year. Our last question comes from Tom. "I am sold on the idea of having a fee-only financial planner after listening to your show for some time. I use Vanguard for my investing. They offer financial advice, but at a fee of 0.3% of the portfolio. I would like to find a financial planner and pay them a flat rate for their time. Where do I find a fee-only fiduciary financial planner? Does Robert Brokamp do this?"

Bro, you got a client.

Brokamp: Thanks. [laughs]

Southwick: "If not, would you recommend a financial planner with similar values and styles as his?"

Well, unfortunately, there's only one Robert Brokamp. So what's the second best?

Brokamp: [laughs] I'm not legally allowed to provide financial advice, but let me tell you, Tom, it just makes me feel so good. It's like, you would want me to manage your money. I'm just so honored.

But I will suggest a couple of other places to look. We've mentioned them before, but I'll mention them again, because I think the beginning of the year, which we're coming up on here, is a great time to reevaluate your finances, see how things are going. As I've said before on the show, I think everyone, even if you're doing it yourself, you should get a professional second opinion every 5 to 10 years and certainly as you get closer to retirement.

So the two places I always recommend are the Garrett Planning Network. That's G-A-R-R-E-T-T. I know many of the Garrett planners, I've been to their conference many times. Solid, solid people. Then NAPFA, the National Association of Personal Financial Advisors. Many Garrett folks belonged to NAPFA, and I've been to NAPFA conferences as well. You just want to make sure that you find someone who is going to provide what you want on your terms. It sounds to me like you want to pay by the hour or by the project. You just got to find someone who'll do that. Some people will, some people won't.

One of the interesting things about this pandemic is that many more professionals, including financial planners, are comfortable working over Zoom, over email, and if you're comfortable with that, you're no longer just limited to the people in your area. You could find someone else as long as they are licensed in your state. So go to the websites of those networks, put in your zip code, see who is in your area or is at least licensed in the area. Read their websites, see who you feel like is a kindred spirit with you and works on your terms. Interview about three of them, and then choose one to go with.

Southwick: Well, there you go. Wow, you guys, high five. That's a ton of questions there to finish off the year. I guess I should probably do some disclaimer, since I think we talked about some stocks.

As always, the Motley Fool may have recommendations for or against the stocks we talked about. Don't buy and sell stocks based solely on what you heard here. I know Bro and Buck sound great, but do your own research, right? Yes. Buck, thank you so much for joining us.

Hartzell: Thank you and Happy Holidays, you guys. I look forward to seeing you in person sometime in 2021.

Brokamp: Oh my goodness, I hope so.

Southwick: In 2021, someday. So yes, this is the last episode of the year. What is this? Five years that we've been doing this show? Four years? I don't know, Bro.

Brokamp: Six.

Southwick: Six. Oh, my God.

Brokamp: Six. December 14th, I think, was our sixth-year anniversary.

Southwick: Over 300 episodes of this.

Brokamp: It's an awful lot of answers, folks. Tons and tons of answers.

Southwick: Well, let's keep it going on in 2021. Sound good?

Brokamp: Sounds good.

Southwick: All right. As always, this show is edited faithfully by Rick Engdahl. Our email is [email protected]. For Robert Brokamp, I'm Alison Southwick. Stay Foolish, everybody!

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Alison Southwick owns shares of Amazon and Walt Disney. Buck Hartzell owns shares of Activision Blizzard and Walt Disney. Robert Brokamp, CFP owns shares of Home Depot, Tesla, and Walt Disney. The Motley Fool owns shares of and recommends Activision Blizzard, Amazon, Home Depot, Tesla, and Walt Disney. The Motley Fool recommends Electronic Arts and Interactive Brokers and recommends the following options: short January 2021 $135 calls on Walt Disney, long January 2022 $1920 calls on Amazon, long January 2021 $60 calls on Walt Disney, and short January 2022 $1940 calls on Amazon. The Motley Fool has a disclosure policy.

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