Answers to Your Questions About Treasury Bills, 529 Plans, Retirement Planning, and More

In this podcast, Motley Fool Senior Analyst Bill Mann discusses:

• The current state of play in the banking industry.
• Risks of trouble spreading to other industries.

Motley Fool host Alison Southwick and Motley Fool personal finance expert Robert Brokamp answer listener questions about asset allocation, company spinoffs, and bond ETFs.

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 March 21, 2023.

Chris Hill: If you're playing a drinking game where you take a drink every time we talk about banks, I've got some bad news. Motley Fool money starts now.

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I'm Chris Hill. Joining me in studio: Motley Fool Senior Analyst Bill Mann. Nice to be across the table from you.

Bill Mann: Hey, Chris. How are you?

Chris Hill: I'm a little agitated, as I think you know, because I've been venting to you a little bit before we started recording here. Because Twitter reminded me of the movie Groundhog Day this morning, because there's the scene in Groundhog Day where Bill Murray, the weatherman, runs into a guy at the local bed and breakfast he's staying at, and he says, do you think it'll be an early spring? He just deadpan says, I'm predicting March 21st, and he walks by the guy. That guy is like, I actually, I think that is the first one.

Bill Mann: You did it.

Chris Hill: Happy first day of spring to everyone. But it's Groundhog Day because we're here with the banks again, and there are a couple of specifics I want to get into with you, but just broadly, tell me where you think we are right now. What is standing out to you as we talk in the middle of the day on...?

Bill Mann: You really don't want to talk about banks, do you? I can tell.

Chris Hill: I would love there to be another dominant story, but there's not. This is, understandably, a crucial story for investors. Even investors like me who aren't all that interested in banks.

Bill Mann: I'm going to talk you through that, because really, honestly, investing in banks is a little bit like being a pilot. It is interminable boredom punctuated by brief moments of sheer terror. That's what's you're feeling, and it's OK. It really is OK. I forgot what question you asked me.

Chris Hill: No.

Bill Mann: I just wanted to give you some validation.

Chris Hill: Moser and I talked about this yesterday. I basically said part of what's unsettling about this is we're not going to know when it's over until it's been over for a while.

Bill Mann: No, that's how it goes. With banks, you ultimately have to remember that they are utilities at their core, and then on top of that is a risk-taking organization. You have the utility, which has a bunch of leverage attached to it. The utility is the deposit-making franchise. And then they loan that money out. It's impossible really to tell, when you talk about the assets of a bank, what they're worth. They will tell you in accounting exactly what they're worth, but that is a best guess.

When you have situations like this, what is happening is that the best guess that they had before was wrong, and it was wrong in a way that impacts the equity value of the bank. That's what ultimately happened at Silicon Valley Bank. They were wrong about the value of their assets. That's what has happened at Credit Suisse. They were wrong about the value of their assets.

Chris Hill: One of the things I'm wondering now more prominently than I was wondering a week ago is, where are the Jamie Dimons and Brian Moynihans and Warren Buffetts in this story? Because I felt like we would have heard from them by now, and I'm wondering what, if anything, you read into their silence?

Bill Mann: Are you looking for like "now is the perfect time to panic"?

Chris Hill: I wasn't looking for that, but I'm wondering where they're clearly paying attention to everything that's happening. You can go back to 2008, where Buffett's stepped in and, both with his actions and his words provided, support and comfort to the investing public. I'm assuming, at least in the case of Jamie Dimon and Brian Moynihan, they're keeping quiet because they are doing their jobs and looking for opportunities for their banks and their shareholders.

Bill Mann: I don't think that there's really... I understand exactly what you're asking, because we would love to see that Warren Buffett "Buy American. I am" article come out for member comments coming out from them.

I think it's really important to note, and Ezra Klein mentioned this the other day, and I think it's exactly right, that the small banks who are the ones that are in the crosshairs right now because you can think, as a logical progression, if everyone has to worry about the safety of their deposits, they're going to move them into larger and larger banks. They may be the ultimate beneficiaries.

But from a political standpoint, it's the smaller banks that have a lot more power in Washington with regulators. You can imagine every single congressional district has the pillar of the community who also runs the local community bank. These are what are important. I imagine that some of the fact that they're not speaking is that they recognize that all they could do is destabilize something that is much more politically popular and powerful than they are.

Chris Hill: Sallie Krawcheck, who at one point was the CEO of Merrill Lynch Wealth Management. I believe she's running Ellevest.

Bill Mann: Ellevest, that's right.

Chris Hill: I believe we've had her on this show. She gave an interview on CNBC this morning, and I want to get your reaction to something she said. Referring to the events of the last three weeks, she said, and I'm quoting here, "It's deja vu. These banks are less leveraged than they were in 2008. But you can drown in an ocean or a pond. You don't have to see the equity hit too hard before you're in crisis mode."

Bill Mann: It's an amazing quote. I don't know if she pulled that out or if she'd been drafting something to get ahead of the game so that she could drop that. That's an unbelievable quote.

The thing that you have to remember, for example, people have been talking about the fact that Credit Suisse was bought for $3 billion, that UBS came in and bought them for that. That's not quite true. That's what the equity is worth. The assets are worth in excess of $500 billion, so that's what they paid.

Keep in mind, when you are valuing the assets of a bank, that you're making a lot of guesses. Because the assets are, in every case, so much more valuable than the equity is, because these are leveraged institutions, it really doesn't take much for the equity to be wiped out. In the case of Credit Suisse, for example, it only took them going from 12% equity to assets down to less than 7% for there to be a huge problem. Because all you're talking about is things that you thought were worth something or worth just a little bit less than that, and it eats up the equity in a hurry.

Chris Hill: The image of drowning in an ocean versus a pond aside, what do you think when you look at a day like today, where it's like we still have this underlying situation with the banks? The markets don't fight -- if you're just taking that, if you're just hopping into this story. If you'd been asleep for three weeks, you're like, what's all the fuss about? The market's doing fine.

Bill Mann: I think part of that is that we do have a Fed announcement this afternoon.

Chris Hill: Is it this afternoon or tomorrow afternoon?

Bill Mann: Let's just say it's tomorrow afternoon. Seems to be more accurate.

Chris Hill: Wednesday afternoon, depending on when people are listening. Wednesday afternoon, and we'll get to that in a second, but go on.

Bill Mann: I think at least in part, what we're seeing now that's different from 2008 is there does not seem to be a great deal of infection from one bank to another. There is something to be said for having the herd culled a little bit -- and that's not quite as graphic as drowning in a pond, but it's still graphic that some of the weaker banks being taken out.

Credit Suisse, for example, has been dying, it seems, for as long as I've been an investor. They have been in some level of crisis. The fact that they are finally moving on and being taken over by UBS. That's probably, if you had to make a bet on banks, that was one that you would have made a long time ago. I don't think that the market perceives a huge amount of follow-on effects to the other banks at this moment.

Chris Hill: Regarding the Fed announcement on Wednesday afternoon. Last week on the show, I asked you to read Warren Buffett's mind. Today. I'm going to ask you to read Jay Powell's mind. Do you think he is more focused, in thinking about this decision with interest rates? Do you think he is more focused on this banking drama that has played out over the last three weeks? Or do you think he is more focused on the inflation drama that has played out over the past year and a half?

Bill Mann: I think that he is possibly informed by the banking situation. I think he also is looking at the banks that have melted down and just some ways saying, "I told you. We told you exactly what we were going to do, and we were not lying about that." In some ways, he's thinking, well, you get what you get.

I think without question, they're more interested in and worrying about taming inflation than they are about further problems at the bank. Because by the way, they don't have other real instruments to tame inflation. They do have ways of calming the banks. I think that what we're going to see tomorrow is a statement that almost entirely fails to mention what is happening at these banks.

Chris Hill: This is why I like sitting across the table from Bill Mann. Thanks for being here.

Bill Mann: Thanks, Chris.

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Chris Hill: You've got questions, they've got answers. Robert Brokamp and Alison Southwick take your questions about asset allocation, company spinoffs, and bond ETFs.

Alison Southwick: Our first question comes from Justin. "Can you please talk a bit more about how to choose the right Treasury bill ETFs? Are those ETFs a good place to invest as compared to cash? I want the money to be relatively accessible for future stock purchases."

Robert Brokamp: Well, Justin, Treasury bill, or T-bill, as the kids say, is a Treasury security that matures in a year or less than what they're getting a lot of attention these days because the highest-yielding Treasuries are T-bills thanks to the inverted yield curve. Right now, a one-month Treasury yields more than a 30-year Treasury, which is just kind of wacky. Plus at T-bills are yielding over 4%, much more than the average savings or brokerage sweep accounts.

Now you can buy them individually, or you can buy an ETF that invests in them. However, T-bills and bond ETFs often decline when interest rates rise. We saw that last year. If you sell a T-bill before maturity, you may be locking in a slight loss, and since ETFs don't have a maturity, you don't actually know how much you'll get when you sell.

If you have a short-term Treasury ETF in mind, see how it performed last year to get an idea how sensitive it might be to interest rates going up.

Also, there are some settlement date issues to be aware of. Treasury transactions generally settle in one business day; stock in ETF trades in two days. This is less of an issue if you have a margin account, but just know that if all your money is fully invested, your broker may not allow you to buy a stock immediately after selling a T-bill or ETF.

An alternative consideration might be a money market fund that invests in government securities like T-bills. They generally try to maintain a share price of $1, and most are currently yielding over 4%, which gives you pretty much all the benefits of T-bills, and the trades settle the same day.

Alison Southwick: Next question comes from Amy. "I want to retire in about five years. Is there a recommended amount of stocks and bonds I should have?"

Robert Brokamp: I would start by thinking about where you want to be on the day you retire and then come up with a plan for getting there over the next five years. For most people, the right allocation to stocks in retirement is somewhere between 50% and 65%. The higher your risk tolerance, the more you can count on income sources like Social Security or pension, the more risk you can take. Once you're five years from retirement, you shouldn't be too far off from where you want to be when you retire.

The foundation of your portfolio in retirement is what we call an income cushion, which is five years' worth of withdrawals that you expect to take from your portfolio out of the stock market and put in something safe, like cash, CDs, T-bills, maybe shorter-term bond funds. When you're five years from retirement, it's time to ramp up creating that cushion so it's fully stuffed by the day you retire. And you could do that by investing future 401(k) and IRA contributions into cash and bonds, not reinvesting your stock and fund dividends and rebalancing your portfolio every year, and maybe a little bit more frequently after a major market move throws off your allocation.

Alison Southwick: Matt from the Philly burbs sent us this John. Did I use that right? I don't care.

"I'm new to investing and was fortunate enough to own some AT&T shares when they spun off Warner Bros. Discovery, ticker WBD. Just before the spinoff, I was watching one of the larger media TV stations, and an analyst said that he sees little opportunity in an already heated competition space of online streaming services, and he recommended just selling WBD. It opened somewhere in the neighborhood of $26 and dropped for weeks. Now trading at around $14. Is it historically better just to sell these spinoffs? How often are they successful or dismal?"

Robert Brokamp: Back in the late '90s and the first decade of the 2000s, several studies found that spinoffs outperformed the market. Joel Greenblatt, who's a hedge fund manager with a very impressive long-term record, published the best-selling book in 1999 entitled You Can Be a Stock Market Genius. One of the strategies was to buy spinoffs.

But then something changed in the second decade of the 2000s, and spinoffs as a group actually didn't do so well. It could be that up until late 2021, anything that wasn't a U.S. large-cap growth stock didn't do as well. Often, a spinoff is a smaller company because it's a piece broken off from a large company. This is also why they tend to be a little bit more volatile.

That's the historical record on spinoffs, but each one is a unique story. I'd evaluate each company on its individual merits.

Unfortunately, I don't follow Warner Bros. Discovery, so I don't have an opinion on whether you should keep or sell it. But I do think you should know that if you do sell it, know that your cost basis is not the price of the stock when it was spun off but rather a portion of your cost basis in the parent company -- in this case, AT&T -- allocated to the spinoff.

It's a complicated calculation. Hopefully, your broker has calculated the cost basis for you. You know that if you do decide to sell, whether you have a capital loss or a capital gain for tax purposes if you're holding the stock in a regular taxable brokerage account.

Alison Southwick: Next question comes from Anna. "We have a 529 plan set up for our son with about $75,000 in it. However, he might not end up going to college. Is there anything we can do with that money?"

Robert Brokamp: You have several choices. Starting with, you can just take the money out. You'd pay taxes and a 10% penalty as the money isn't used for qualified education expenses. But those are only assessed on the growth and not the amount you invested. It may not be as bad as you think. That said, if you've got a state tax deduction on the contributions there may be what they call a recapture if you don't use the money for school.

However, no one likes to pay taxes and penalties, so you probably should consider some other options, including transferring the money to a 529 for a qualifying relative, which can be siblings, cousins, aunts, uncles, or even you, if you plan to go back to school.

Or you could just leave the money in the account in case your son decides to change his mind later on. And if he doesn't, the money can be transferred to the accounts of any grandchildren you have down the road. And just imagine how much that money could be worth by the time your grandkids go to college.

A final option will be available just starting next year. That's transferring unused 529 money to a Roth IRA for your son with some limitations, such as the account has to have been open for 15 years. Any contributions and earnings for the past five years aren't eligible, and the amount transferred in a single year can't exceed the annual IRA limits. This is a relatively new option. If you're intrigued, do some more research over the next several months as the exact details and rules get worked out.

Alison Southwick: Our next question comes from Will. "Instead of a focus on an individual stock's performance, what strategies or guidance do you have for an overall investing thesis such as changing asset allocations based on certain macro indicators or sell signals to hold to? Special thanks to Alison Southwick" -- Oh, hey, that's me! -- "and Robert Brokamp" -- That's you! -- "for the years of personal finance podcast advice."

You're welcome.

Robert Brokamp: You are welcome, and thank you, Will. I'll just emphasize that we here at the Fool tend to be business-focused investors. That means we buy stocks in businesses in which we plan to be long-term co-owners. The sell signals really are based on changes in the business that make us think that it's no longer a promising long-term investment. Now depending on the business macro factors may come into play, especially when assessing potential risks, but they're usually not the major factors in buy or sell decisions.

All that said, a large amount of money that I have in my portfolio is invested in index funds. How I allocate that money could be based somewhat on macro-like factors, such as the valuations of different segments of the market. Or if interest rates are rising, I might favor cash and short-term bonds over intermediate-term bonds.

I certainly rebalance my portfolio once every few years, which involves selling what has done really well and buying what may be more attractively priced. But all that really is mostly just on the edges.

I think the way most of us Fools invest could be summed up by something I heard in November during a panel discussion. That's a notable investor gave for the analysts here at the Fool. The quote came from Bill Nygren, who's the long-term manager of the Oakmark Fund. He was asked for his economic outlook, and Nygren said, "We're very long-term thinkers. We buy companies that we think are undervalued on a five- to seven-year basis. Our economic forecast is always that the economy will be normal five to seven years from now." End of quote.

And that's pretty much how I invest, and it's why I play it safe with the money I need in the next five or so years.

Alison Southwick: Our last question comes from Harris in Tennessee. "The CEO of my company announced that because of ties to Silicon Valley Bank, our 401(k) matching will be paused for an unspecified time. Should we expect to have this made up for once things have leveled out? Do these pauses usually become permanent?"

Robert Brokamp: Harris, I'm sorry to hear about that, and I hope that the general resolution of the Silicon Valley Bank issues will get your CEO to change her or his mind very soon. But if not soon, it likely will happen eventually, assuming your company's in decent shape.

During the pandemic panic that began in February of 2020, somewhere between 10% and 20% of employers reduced or suspended their matches, depending on who you ask. But something like a third of those had reinstated the match by December, and I'm willing to bet that almost all of them had by the end of 2021.

But it will depend on the health of your company. If the SVB issue is turning out to be just a blip and your company is solidly profitable, then I think the match will likely get reinstated pretty quickly. Survey after survey shows that employees put a 401(k) match among the most valued employer benefits. But if things are slowing down for your company, and especially if it's doing things like cutting other benefits and even laying people off, then it may take a while.

Chris Hill: As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.