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We tackle questions including whether you should invest your emergency fund in stocks.

In this episode of Motley Fool Answers, host Alison Southwick is joined by Motley Fool personal finance expert Robert Brokamp and Motley Fool analyst Emily Flippen to tackle your questions, including some about investing with your emergency fund, calculating your savings rate, when to rebalance outsized positions, and more.

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 February 23, 2021.

Alison Southwick: This is Motley Fool Answers. I'm Alison Southwick, and I'm joined as always by Robert, Brrrr, it's cold outside, -- okamp. Hey, Bro.

Robert Brokamp: It is cold. I'm using the space heater in my basement office for the first time in months.

Southwick: Yeah. Well, it's cold because it's February, and that also means that right now is the February Mailbag. Motley Fool analyst Emily Flippen will help answer your questions about rebalancing your winning stocks, how to calculate your savings rate, and investing your emergency fund. All that and much, much more, on this week's episode of Motley Fool Answers. Emily, thanks so much for coming back to the show.

Emily Flippen: Hi, thanks so much for having me, and I will tell you, Bro, you need to upgrade from your space heater to a heated blanket. I recently made that upgrade myself, and not only do I love it, but my cat loves it as well.

Southwick: Also, get a cat. There you go. Emily, I think the last time you were on, it was for our Industry Focus series, and you helped walk us through consumer goods and what to expect in the year and beyond, so it's great to have you back here to also share your other investing knowledge outside of consumer goods.

Flippen: I had almost completely forgotten about that. Yeah, it's great to be back.

Southwick: That was one of the best days of 2020 for me, it was when you came on the show. I can't believe you forgot. That's fine. That's fine. Should we get into it?

Brokamp: Let's do that.

Southwick: Yes. The answer is yes. Our first question comes from David. "I recently started thinking about retirement earlier than planned, in 2+ years when I turned 55. My wife and I could collect about $30,000 in pension income from our employer at that point, plus we'd continue to work self-employed, clearing $20,000. What I'm not sure about is how and when to fill the 'bucket' for cash to spend once retired if the market is down. If we want to raise our cash position from $20,000-$60,000 or more, do we stop putting money into Roth's? Stop paying any extra on our mortgage? Stop equity investing in our brokerage account over the next two years? Selling stocks now to raise cash will be taxed like income, so it seems like that should be avoided."

Brokamp: Well, David, I'll start by defining what you are calling a bucket, but we call an income cushion, and that is three to five years of portfolio provided income in retirement that is protected from the stock market, just stuck in boring old cash and bonds, and you can start building that up as you get closer to retirement. You build that income cushion, then once in your retirement, over the course of one year, you spend one year's worth of that cushion, and at the end of that year, you replenish the cushion unless the market is down. Then you try to live off that cash and not replenish it until the market goes back up, and then you fill the bucket again. That's the foundation of asset allocation for retirees as far as I'm concerned. But then there's a question of just how much someone should have in stocks a decade or so before retirement in general, just as an asset allocation question. Just for an article that I published today in my Rule Your Retirement service, I actually looked at the asset allocations, select target-date funds from 2030 funds and 2025 funds, so people who are within five to 10 years of retirement from the biggest families; American BlackRock, Fidelity, T. Rowe Price, and Vanguard, and this is what I found. On average, the 2030 funds have 67% in stocks, basically two thirds and then another one third in cash and bonds. 2025 funds, so if someone is just a few years from retirement, has 58% in stocks, 41% in bonds, then by retirement, it mixes about 50/50. I should say that target-date funds are geared to moderate to conservative investors. These allocations are much less risky than probably the typical Motley Fool member listener would likely prefer, but it gives you a general starting point.

But whatever allocation you decide is right for you, you should gradually begin building toward that allocation, perhaps within a decade of retirement, and certainly within five years of your target date. How do you do it? Well, you mentioned a few of them. One would be to, perhaps, you could still contribute to your retirement accounts, but instead of investing those contributions in stocks, just put all future contributions, those last few years before retirement, into cash or bonds. You can also stop reinvesting dividends from stocks, instead, let them accumulate in cash or use them to buy bonds. You could also do something called a sell-off method. It was basically inspired by Warren Buffett's 2012 Annual Letter in which explained why Berkshire Hathaway doesn't pay dividends. He recommended a sell-off method, in that you gradually sell some stocks. I think it's a good idea to do it quarterly as you approach retirement, so every quarter you sell a certain percentage of your stocks. That percentage will depend on how far you are from retirement and what allocation you want by the time you retire. But let's just say 10 years before retirement, you decide every quarter to sell off 0.5% of your stock, so you're selling about 2% every year. By the time you reach retirement, you've moved about 20% of that money out of stocks and into cash or bonds.

A couple of other things just that you pointed out in your question, you asked about should you stop paying extra on your mortgage, and that's really up to you. I love the idea of being mortgage-free in retirement, but as we've talked about on previous shows, with interest rates so low, it's less compelling to try to pay down your mortgage sooner. The other only thing I would add is that, as always, I recommend anyone who's within a few years of retirement, or right before retirement, see a fee-only financial planner to make sure that you really are prepared to retire. But just getting from $20,000 cash that you have now to $60,000 as your target, I think you can do that just by taking a few gradual steps, and moving that way over the next couple of years.

Southwick: Our next question comes from Adam. "Thanks for all your hard work. Stock Advisor and your website have made such a positive impact on myself and my family." Oh, that's nice to hear. "My question is about when to rebalance my winners. I've been fortunate to have a couple of big winners over the last 12 months, and while all of my positions started at 5% or less of my portfolio, a few have grown to 12.17%, and in one case, 28%. In all three cases, I still feel strongly about the stock. My investment thesis confidence has only grown, and I would buy all three stocks today. However, I have read it's never a good idea to have that much of your total holdings in one stock. I've taken my cost basis out of two of the stocks, but don't really want to sell more. But I also fear I'm just being greedy. How do you handle this situation?"

Flippen: Well, first of all, I feel like this person should just give themselves a little pat on the back to start, because it's such a good problem to have when you start off with companies that you really love and that you believe in at relatively small portions of your portfolio, and they grow to become something like 20%, 25% or 30%. That means that you did the hardest thing that it is for investors to do, which is not only buy good companies, but hold them for long periods of time. Because the biggest mistake we see when people manage their own investments is panicking and selling. First of all, congrats. As far as what position is too large of a position, that ultimately comes down to a personal decision. It actually comes down to where your other investments are as well. A lot of people, when talking about their portfolio concentration, are maybe just looking at their taxable brokerage accounts, not necessarily looking at their retirement savings that they may have in other accounts.

First of all, ask yourself, when you look at this position, is it a portion of all of the assets that you have invested, or is it a portion of only maybe one account's assets that are invested? That can also help frame up how risky your position is in general. But when providing advice, I tend to look at just my accounts where I'm buying individual companies. What makes me happy, what allows me to sleep at night, may not be the same thing that allows somebody else. I know David Gardner, for instance, has come on to many Motley Fool podcasts and said he's comfortable having a 60%, 70% position, which the vast majority of investors probably aren't. But it comes down to you, your age, your investing horizon, and your risk tolerance. Generally speaking, if you're not worried about these companies, if worrying about their performance doesn't keep you up at night, and if you're able to hold the mentality of regardless of what happens in the future, I'm not going to panic, sell, I'm going to hold this good company for the long term. I generally think that assuming your investment horizon is long enough, you don't need to really worry about a position getting too large until it starts getting up to that maybe 40% or 50% mark, but to each person is their own, and if you find yourself losing sleep worrying, there's no problems in selling down in a company that you like because it allows you to sleep better at night.

Brokamp: I'll just add that it's always good to think about what are the consequences if, say, that stock that's 28% of your portfolio gets cut in half. Now, if you're young and far from retirement and aggressive, and you believe in the company, it's probably no impact at all. It's not going to change your life. If you're within two years of retirement, it's possibly a different story. So just think about the consequences of what would happen if your concentrated holdings don't do quite as well.

Southwick: Our next question comes from Bryce. "For the past four years, my wife and I have maxed out our Roth IRA contributions at the beginning of the year. However, unexpectedly, our combined incomes were over the $206,000 limit last year. What do we do? Also, going forward, we expect to earn right around $205,000 a year plus or minus $15,000 based on overtime opportunities. Does that mean we need to wait until the end of the year to make our contributions to know if we are below the income limit? I hate to miss out on 12 months of growth."

Brokamp: Well, a very good question, Bryce. First of all, the important thing to remember with these income limits on Roth eligibility is, they're not based on gross income; so your salary plus interest, capital gains, dividends, rental income, whatever. It's based on your modified adjusted gross income. Start with your adjusted gross income, and you'll find that on your tax return. Then the modified part is that you add in few deductions, such as student loan interest and half of self-employment taxes most people doesn't apply to. It's important to understand that your adjusted gross income, depending on your situation, could be considerably lower than your gross income. For example, some things that would reduce your adjusted gross income and thus your modified adjusted gross income are contributions to a traditional 401(K), not Roth, but traditional 401(K), contributions to our health savings account, contributions to flexible spending plans. So if you and your wife each contribute $10,000 to a traditional 401(K) and then $2,000 for flexible spending accounts, that drops you to below the limit and you're eligible to contribute to the Roth.

It's also important to know that there's not one single cutoff for the Roth, it is gradual. So you've mentioned $2,000, $6,000, that's for last year, 2020, and you have up until April 15th of this year to contribute to a Roth for 2020. For a married person, it starts phasing out at $196,000 and then gradually goes, if you're totally phased out of a Roth at $206,000. If you're single, it's $124,000-$139,000. Those numbers are a couple of thousand dollars higher for 2021. Chances are that many people who think they aren't eligible for the Roth because they are so close to that limit actually are once you look at your actual modified adjusted gross income. Just do a little research on that to find out what your real modified adjusted gross income is. Now let's say you do that research and find out yes, you're still on the cusp. You can contribute to the Roth, and if it turns out that you've made too much money, you can recharacterize the contribution as a traditional, but you should do it as soon as possible. Here's how to do it straight from the IRS website, "You tell the trustee of the financial institution holding your IRA to transfer the amount of the contribution plus earnings to a different type of IRA, either Roth or traditional in a trustee to trustee transfer, that's important or to a different type of IRA with the same trustee. If this is done by the due date for filing your tax return including extensions, you can treat the contribution as made to the second IRA for that total year" So just make sure if you do the Roth, find out you have made up too much, recharacterize as soon as possible.

Southwick: Next question comes from Tom. "My dad is a retired CFP and deterred me from stock market investing for years with the warning, don't invest any money you aren't willing to lose. My wife and I have an emergency savings account that contains four months worth of spending. We haven't touched the money since the account was established a few years ago. I joined Motley Fool Stock Advisor in August and started a small brokerage account. Since then, that account is up 52%. It pains me to know that I could invest a tiny fraction of what's in our emergency account and make more money in six months than we ever will in savings account interest. Well, it makes sense to take 10%-20% of the emergency account money and invest it to at least keep up with inflation and our growing family."

Flippen: My quick answer is no, and I say that because emergency funds are absolutely critical, but you never know they're critical until you need them the most. So it's really easy when your brokerage account or your taxable accounts, your 401(K), whatever it may be, is doing really well in the market, to think to yourself, man, I have all this money, this cash sitting on the sidelines with interest rates where they are today, you're not making very much money on those savings accounts. It's really easy to be tempted to say I'm going to take even just a small portion of that investment to get better returns, but the problem is that when the market goes down, you're also more likely to get laid off, or that could be the reverse way around. There is a recession, something happens to the general economy, typically the stock market will tank and it's more likely that people get laid off from their jobs, which would mean that that emergency fund that was supposed to be there to support you in case of an emergency, like losing your job, is suddenly much smaller than it was if you had just left it in cash. I know it's painful sometimes to see all that money earning essentially nothing really losing out year-over-year as inflation grows, but again, it's more of a risk measurement tool, and you mentioned there your growing family as well, and I generally think that couples, people with kids, should always be really prudent to make sure they can protect their current lifestyle if something happens, that is an emergency. So my quick answer there is no, don't invest your emergency fund even if it's a small portion.

Brokamp: I think it's fascinating that he said his dad is a retired CFP and deterred him from investing in the stock market. My question for the dad would be, how did you retire if you didn't invest in stocks? Have you been just investing in cash and bonds or did you have a pension from the company you worked for? Because I think that's very difficult. I also think it's a bit misleading to say, the dad said, don't invest any money you aren't willing to lose. I'm more inclined to say that if it's about an individual stock because any company can go belly up, or even good companies can lose 90% and rebound, but if you're going to invest in, let's say, in an S&P 500 index fund, the worst years is that goes down 30%, 40%, 50% and rebounds. S&P 500 loses all at the value we're in a lot of trouble. So I would hate for people to follow that precept when it comes to their investing decisions.

Southwick: Our next question comes from Richard. "I accept that some inflation is inevitable, but why does the Federal Reserve treat inflation as desirable? In the late 1960s, when I started work for slightly less than the $1.65 minimum wage, a decent new car cost $2,000 and middle-class houses could be bought for $12,000-$20,000. As I understand the consumer price index, it takes about $7.50 now to match the purchasing power of a dollar in 1967. Aside from bracket creep, that moves many people into higher marginal income tax brackets. What is the purpose of planned inflation?"

Brokamp: So, Richard, I have to say that when you talk about inflation, it's an economics discussion. I'm getting a little out of my depth with economics, but I'm going to take a stab at your question, and I'm going to say, first of all, I'm going to basically try to explain why inflation is desirable by pointing out why deflation by the opposite is not desirable. We saw this in the great depression and it's part of what made it worse. When you have deflation, you have prices going down. When prices are going down, people put off spending money, because why would you buy something today, if you can wait a few weeks and it's cheaper in the future? So what happens is people don't spend and the economy slows down because the economy is two-thirds driven by consumer spending, and so it's this unvirtuous cycle as you were when it comes to deflation. That's why, for example, during the great recession and during this current recession, I'm sure we're technically out of it right now, although it hasn't been declared. Ben Bernanke and then Jerome Powell, when they happen, they look at the great depression and they say "We do not want deflation, so we will do whatever we can to encourage people to spend money." Having a little bit of inflation is a sign that the economy is growing and it is certainly preferable to deflation. Some people also say the government wants inflation because of all the debt that we have. Debt is expressed in nominal terms, and one way to pay off your debt is to inflate your income, so you make more money and you have more money than to pay off the debt that has not been inflated. I would say that it's not the stated purpose of why the government wants it, but it could play into it.

Just a couple of other things that you mentioned in your question. You mentioned something basically about tax bracket creep. The actual rates for each tax bracket don't change for inflation that can only be changed by Congress, but the amount of money it takes to move into a higher tax bracket is adjusted every year roughly for inflation. One item of taxation that doesn't change, however, is how much you have to earn to have your social security subject to taxes. Those ranges have been the same essentially since 1983, I think, so every year more and more social security income is taxed. Then just finally, a note of technical interest possibly is that you mentioned the CPI, which is the measure of inflation that you're most often hear about, but the Fed actually looks at the personal consumption expenditures index, the PCE, and that tends to trail the CPI by a third of 1% or so.

Southwick: Geeking out with Bro on economics. How do you feel flexing those muscles?

Brokamp: Well, if you really want to read about it, the Federal Reserve, Bank of Minneapolis has a great article entitled I say CPI, you say PCE. Highly recommended.

Southwick: Next question comes from Robert. "I have been told that since pot is illegal on the U.S. federal front, pot companies can't use U.S.-based banks for their money, is this true, and if so, where do pot companies keep their money? Should this have any bearing on pot company investment decisions?"

Southwick: Pot, pot, pot. I haven't said pot that many times in a sentence since college.

Flippen: I failed at least three separate economics classes throughout my life so the last question I was not qualified at all to answer, but this is one that is straight up my alley, so it's actually a really interesting question, Robert. When you look at U.S.-based cannabis companies, they're operating in this two-tiered environment where on a state level, a lot of them are operating legally, so their state governments, their state localities recognize their business, but on the federal level, the federal government says that there's still involved in the trafficking of a schedule one illegal substance, and it's made banking really strange. You're about 50% accurate in what you've been told, which is that these cannabis companies that operate legally on a state level have a really hard time accessing banking services. The big issue is when it comes to federal banks, banks that are doing business across state lines, these big banks don't want to take any money from cannabis companies because they could be perceived to also be engaging in the laundering of this federally illegal business, whereas state banks, so local banks, banks that don't do business outside of the state in which they are incorporated, they are the ones that are most likely to do business and manage these cannabis companies revenues.

The money they bring in, because they don't actually transport that money across state lines and on their perceptions, it is extremely unlikely that the federal government is going to come in and come after a state bank that is doing business that's legal in their state. It's not impossible for cannabis companies to get access to banking services, but it is very hard and it also is extremely expensive because the banks that are willing to work with cannabis companies know that they are a select few options that these businesses have. Now, it should be a factor when you look at potentially investing and pureplay cannabis businesses, because this is a very real and tangible issue that's representative of the regulatory challenges that are going to continue to persist for U.S.-based cannabis companies for the foreseeable future.

While we're seeing some momentum come up on the decriminalization, legalization, even banking reform aspects through Congress, especially heading into 2021 and future years, it will still take many years for the government to really figure out what regulations for the cannabis industry looks like. You should expect these troubles, not just banking, but troubles with every aspect of cannabis businesses to continue to persist. I like to say, if you're investing in cannabis businesses, do not sell those investments for at least the next five to seven years, because that's how long it's going to take for regulations to truly play out in this space.

Brokamp: All I say is that the answer was dope. Thank you.

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Southwick: Next question comes from Ross. "I'm wondering if you could talk a bit about some guidelines for people with a pension who want to make sure they are saving an appropriate additional amount for retirement. My wife and I will receive a pension of 82.5% of our highest annual salary and I feel relatively confident in the strength of the pension as it has a ratcheting mechanism that auto kicks in if it were to become underfunded, as written into our state constitution. How much do people like me save? We are 33 years old and 20 to 25 years away from retirement.

Brokamp: Ross, there's no question that if you're covered by a pension, you theoretically don't have to save as much for retirement. Of course, it depends on your situation, so you should run your own numbers or hire a pro to do it and all that good stuff. But generally on the show, I've often recommended that people save 15% of their income for retirement and that could include a match that the employer puts in the 401(K), but if you're covered by a pension, I could see that going down to 10% or even less. Here's the challenge though, so first of all, it sounds like it's a safe pension and you're very smart to look at that, and anyone who is going to be covered by a pension should investigate the safety of the pension, that said, according to our state constitution, it will be well funded, but constitutions can change, voters can change their minds about how generous they want to be with state employers or employees and it's the same with companies, well-funded punch in today could be in a different situation 20 years from now.

Also, you're young and for the pension to really pay off, you have to stick with the company for a long time. That's your current plan? You indicate that you plan to stay in this job, I'm going to assume you're a teacher of some kind or maybe a cop or fire person, something like that, you assume you're going to do that for 20-25 years, but 10 years from now you may change your mind, I actually don't want to do this job anymore. Being a generally play it safe type of guy, I would still aim to save at least 10% of your salary, and then if the pension seems to be in trouble at some point in the future or you leave that job and you're no longer covered, you certainly should ratchet your savings back up.

Southwick: Next question comes from Esa. "I'm a recent member of Rule Breakers and Stock Advisor. I have a portfolio of individual stocks, but most of my investments are in diversified ETF portfolios managed by Wealthfront and Betterment. These portfolios have under-performed the S&P over the past two to four years. Is this because to consider a different portfolio manager or is the diversification offered by these ETFs, most money is in VTI, for example, a better long-term diversified investment strategy? Also, my investment seemed to trail the S&P if I look at time-weighted returns, however, if I look at money-weighted returns, these portfolios are more competitive. Which calculation method is more appropriate to judge and compare performance relative to other indexes?"

Flippen: This is really a two-part question. To address that first question, which is, well, I have these portfolios that are passive investments that seem to have trailed the S&P 500, should I change my investment strategy? Well, it's hard to say without knowing all the details of any one person's asset allocations. When you look at any short period of time, and two to four years is a relatively short period of time, you have to ask yourself, how is this investment doing long term? Longer than two to four years, and how is it different from the benchmark that I'm comparing it to? Typically, when it comes to passive investments, you can expect that type of fund to under-perform its benchmark by the ratio of its expenses, so each fund will have some ratio of net or gross expenses that's being passed on to you as an investor in the fund. Is this true for Wealthfront Betterment and VTI? It's true for all of them. Understand that every single year you can expect to under-perform your benchmark by however much you're paying in fees that's understandable. But also ask yourself, while you're comparing what is a really diversified fund, presumably, against the S&P 500, which is a market-cap-weighted index of the 500 largest companies in the United States with some other metrics in there, but it's not necessarily a one to one comparison. While the last two to four years may have been great for the S&P 500, maybe the next two to four years are great for the New York Stock Exchange or the Nasdaq. I mean, there's no predicting which benchmark is going to outperform another benchmark over any short time horizon.

Generally speaking, the more diversified you are, the better. I like to recommend that investors don't purely invest in the S&P 500 fund because it is more narrowly defined than something like VTI, which is a total stock market index fund. I like the total stock market index funds better, but that's an individual choice. Do some research into which type of benchmark you would prefer to be invested in, and then find the lowest fee way to invest in that benchmark.

Then, as it comes to that second question, which is looking at time-weighted versus money-weighted rate of returns, this is really actually interesting, so time-weighted rate of returns are more complicated to calculate than a money-weighted rate of return. Without getting into the technicalities, essentially, the asset management industry uses time-weighted as its industry standard because they don't control the outflow and inflow of money, which can lead to different calculations. Money-weighted rate of return is really good for individual investors because we have control over when we put the money in the market and take money out of the market. However, since most institutional asset managers use a time-weighted rate of return when judging the performance of their investments, if you're comparing your own investment performance against that of an asset manager, you'll want to use time-weighted rate of return so you're comparing them apples to apples, whereas if you're just looking at your individual portfolio, you want to know how you did last year, not relative to any benchmark, just an absolute terms, money-weighted is probably better.

Southwick: Our next question comes from Bill. "Recently, I've become very concerned with the political direction of the country. Even though the market is near an all-time high, I have very little confidence in the American market due to our huge federal debt, deficits, future tax rates, low interest rates, and looming inflation. Presently, I've been moving 50% cash into Fidelity ZERO International Index Fund, and 50% into Fidelity Select Gold. Do you think this is a wise strategy and do you have any other suggestions?"

Brokamp: I would certainly say you are right to be concerned about many of the issues you cited. I don't really frame it so much as political, because I think both parties have contributed to the situation that we are in. But there's no question that the government spends more money than it takes in, and we have significantly underfunded liabilities in the future if things like Medicare, Social Security, things like that. One way to hedge against the risk of that, the risks there, of course, is that taxes are going to go up in the future, in fact, they are going to go up, according to current law in 2025, the way to hedge against that is to have more assets in Roth accounts. If you're not eligible for the Roth IRA to your income if you have a Roth 401(K), use that. Anyone can contribute to a Roth 401(K) regardless of income. You could do Roth conversions just a little bit each year, of course, it depends on your tax bracket. If you're in a really high tax bracket today, it may not be worth it, but it's something to consider. International investing makes sense as well. I had mentioned previously a little survey I did of target date funds. I would say, on average, when you look at the stock allocation of target date funds, about a third of the assets are in international stocks. That's less than what you're currently suggesting.

One problem is that many countries are in just about a shape as you ask or worse. If you are investing overseas because you were looking for countries that are in better fiscal shape, you've got to be picky because a lot of other countries are in the same boat as we are. As for gold, I own gold now for the first time really ever. I think I bought it maybe a year ago, not quite a year ago, because I think there is a risk of higher than expected inflation. I don't mean super inflation like the '70s and early '80s, but higher than what most people are predicting. I have a very small part in gold. The problem with gold is, and we borrowed so many things from Warren Buffett, is that we like to invest in companies. Companies that produce income, produce earnings, they can innovate, they can increase market share, things like that. Gold is just a hunk of metal, and it only has a value based on what other folks are deeming it to be. You have to hope that more people value gold in the future than today. If you look at the long-term history of gold, it has a history of going up and down but actually not really increasing for inflation. While I don't think it's a bad idea to have some gold putting 50% in gold, it's far too much for my taste.

Southwick: Our next question comes from Dustin. "I hear TMFers, we prefer to be called Fools. Talk about having 10% in cash or maybe building a little bit more like 15% cash as a portion of their portfolio. I am wondering what the term portfolio entails here. Personal brokerage accounts, taxable IRAs only, or both personal brokerage accounts and 401(K) employer-sponsored accounts too. I'm probably planning on taking the perspective of thinking about my allocation within my personal brokerage accounts and letting my 401(K) be its own thing, but we'd be interested to hear what you and the Motley Fool analysts are referring to when they say portfolio?"

Flippen: I love this question because I don't think I have an answer and I'll give how I think about it. I'm interested how Bro, for instance, how you think about your portfolios, but when I talk about having a cash position on my portfolio, I'm only talking about the accounts in which I pick individual stocks. These are actively managed accounts. I don't consider any of my passively managed accounts, which are largely my retirement funds, which I have all in index funds, which are 100% invested at all times. That's a completely passive way for me to invest. When I talk about having a cash position, I'm talking about the active decision that I'm making and I only apply that to the accounts in which I am making those active decisions. I can't make a great argument for why I do that from an asset allocation standpoint, because all of that money is invested in the market. I think on an individual level, when it comes down to my perception of risk, given how much riskier my individual stock accounts are, my taxable accounts versus maybe my 401(K), I get a sense of peace from understanding my cash position there. Man, it's a hard question and I don't have a great answer. Bro, what about you?

Brokamp: Well, I would say I am a big fan, especially for people who have multiple accounts, of determining your overall asset allocation across all your accounts. You can do that if you have most of your accounts with one broker, they often will provide this 30,000 foot level of view of your asset allocation. You can use a tool like Morningstar's Instant X-ray or mentor personal capital or a lot of people just use their own spreadsheets. If you Google asset allocation spreadsheet template, you'll come up with all things that other people have created as a way to look at their overall asset allocation on their own. It does depend on what the purpose of that 10% cash is. If that purpose of the 10% cash is so that you have dry powder to use when the market goes down, or to purchase stock ideas as they become available, I think it totally makes sense to do what Emily is doing and that's you factor it just in that one brokerage account or your stock buying brokerage account because that's dry powder. If instead you're looking at your cash allocation as a way to limit your overall portfolio risk, especially if you're getting closer to retirement, then I think it makes more sense to look at it and all your portfolios and make sure you have enough on the side to protect your retirement in case the market goes down.

Flippen: Of course, Bro has a great answer there.

Brokamp: Well, thank you very much.

Southwick: I think a lot of our investors and a lot of our members too, they have their accounts that are, I don't want to say play money, but they have their actively managed accounts. That's their Motley Fool money. That's their, "I'm going to buy this stock. I'm going to do this with this rack. I'm going to need my dry powder, and then they're like, I have a wealth manager who deals with all my other money. It's over here," kind of thing. I think a lot of our members probably think about it in two separate spaces of their brain as well.

Brokamp: I think that makes total sense because you might want to follow different investment strategies. Like Emily has a portfolio, that's just index funds because it's tough to beat the index funds. That said, you also like to have an account where you try to pick stocks, and depending on your interest in doing that and your experience of beating the market, that can be a big account or just a small little side account. I do know many Motley Fool members who manage their own money with one part of the portfolio, but do higher wealth managers for the other part, whether it's a real life person or wealth front or better mentor or anything of that. I think that's fine because you're hedging your investment advisor risk and you are one of your own investment advisors.

Southwick: All right. Our last question comes from Colin. "What is included in a savings rate calculation? I consider money I put away in my savings account and retirement accounts. Do I include my payments to my mortgage since it's building equity and a predominantly appreciating asset? All these basic questions that have so complicated answers.

Brokamp: It's so true and I love that he's thinking about savings rates. I love calculating my own, personally. One guideline that we have mentioned in the past that I know has resonated with people as a guideline, I think, first proposed by Elizabeth Warren back when she was a Harvard professor, and that was 20% to savings, 50% to fixed must-pay expenses like your mortgage, and then 30% toward discretionary expenses. What I really like is that you should probably calculate a savings rate for each individual goal, because no two families should have the same savings rate. A family who's saving for retirement and college should have a higher savings rate than a family who doesn't have kids or they want their kids to be on their own for college and they don't have to worry about their kids, whatever. I've mentioned before, I think 15% is a good savings rate for retirement, for college, for a second home, building an emergency fund, whatever goals you have. I would calculate a separate savings rate for each of those, and I would factor in only the accounts and assets that will contribute to that goal. If I figure out a savings rate for college for my kids, I would only factor in, for example, my 529 recovered L accounts because those are the assets that are going just to college.

Mortgage is tougher because Colin is absolutely right, that he is building up equity and it's an appreciating asset. The question is, will you use that asset to accomplish your goal? If you're paying off your mortgage and you're going to stay in your current house for the rest of your life, you don't plan on downsizing, you don't plan on doing a reverse mortgage or anything like that, I would say not factor it in. In fact, that's what most people would say: don't factor in your mortgage. Now, you will find people who think you should, but man, once you start digging into how to factor your mortgage in your savings, there's all kinds of discussions about how to do it. For example, every mortgage is only a portion of principal and interest, so some people will say, "Well, you should only factor in the principal as part of your savings rate, not the interest," but that changes every month. So, you have to figure out each month, how much is going to principal, how much is going to interest? I would say to keep it simple, probably not. If you do plan on your home factoring largely into retirement, maybe because you have a house in New England that's over $600,000 and right before retirement, you're going to move to Florida where you can buy a house for $300,000 and you're going to realize $300,000 in lump sum that you can invest, then I might be more inclined to include my mortgage into the savings rate.

Southwick: No simple answer, Bro.

Brokamp: No.

Southwick: Sorry, Colin.

Brokamp: Well, if you're looking for a simple answer, I would say just ignore your mortgage, but if you want a more complicated and possibly more accurate answer, go for it.

Southwick: Well, that's the show. Emily, thank you so much for joining us.

Flippen: Thank you so much for having me. This was such a treat. I really enjoy these and I always come out of it, knowing so much more than I came in with. I brought the pot of knowledge and Bro brought everything else.

Brokamp: That sounds like a party to me.

Southwick: I don't know that I want to go to that party necessarily.

Brokamp: I say this to someone who's never smoking pot. Let's just make that clear. Anyway, this is a fun joke.

Southwick: Emily, what was that great quote that we used to laugh about, because you did that interview. We should tell listeners that you lead one of our services focused on the cannabis industry. That's why you're an expert here, not because of personal interest in it, necessarily. I don't know what you do in your own time, your own business. What was that quote that we used to always laugh about that it was like, do you remember there was a quote like a marketplace or something when you did an interview? It wasn't like Emily Flippen really likes marijuana, but it was cool. It was always like that.

Flippen: Oh my gosh. It was something along those lines. Emily Flippen has a lot of personal knowledge about cannabis. It was obviously trying to get out the fact that I had been studying the industry for so many years, but it definitely read as Emily Flippen has personal knowledge on cannabis.

Southwick: She spent a lot of time on couches and in the basement, a lot of time. We appreciate you coming on the show and, of course, we'd love to have you back sooner rather than later. Emily, thanks again.

Flippen: Thanks.

Southwick: All right. Well, like I said, that's the show. I don't know. Did we mention any specific stocks? I'll just do the disclaimer anyway. The Motley Fool may have formal recommendations for or against the stocks we maybe did or didn't talk about on the show. Don't buy or sell stocks based solely on what you heard here. The show is edited drear-ily -- man, it's dreary outside -- by Rock Engdahl, our email is answers@fool.com. For Robert Brokamp, I'm Alison Southwick. Stay Foolish, everybody!

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