Pod Insights The Clark Howard Podcast 05.20.25 Ask An Advisor With Wes Moss About this episode Are We in a Passive Investing Bubble? and Lump Sum Investing vs. Dollar Cost Averaging Is passive investing creating a stock market bubble? Fiduciary financial advisor Wes Moss dives into the rise of index funds, why they became so popular, and the potential concerns. Also, Wes covers a classic investing strategy: Dollar Cost Averaging (DCA). He explains how systematically investing over time can smooth out your cost basis and make investing less daunting, especially with a lump sum. We'll look at how DCA stacks up against investing a lump sum all at once – you might be surprised by the numbers! Plus, Christa shares your #AskWes questions and Wes gives his take. All this and more on the May 20, 2025, Ask an Advisor episode of the Clark Howard podcast. Submit your questions at clark.com/ask. We hope you enjoy our weekly Ask An Advisor episodes, in which Christa and Wes discuss investing and retirement savings in depth. Let us know what you think in the comments! Learn more about Wes: Wes Moss, CFP® Learn more about your ad choices: megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices
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1:05 Speaker 02 Welcome back to Ask an Advisor, where we here at Team Clark go deeper on all things investing. I'm Krista DeBias here with Wes Moss.
1:14 Speaker 03 Investing in financial planning and all of the above. Hi Krista.
1:18 Speaker 02 Hi Wes. So what are you going to talk about today?
1:20 Speaker 03 You know, some of this is sparked by the questions that I've been getting, not only through the families I work with, but from you, from our listeners and our viewers. And the first topic has to do with passive investing, so index-based investing. Is that in itself, because it's become so popular, is that creating a bubble, a stock bubble that could be bad? So we'll talk about that and also, inspired by some of the questions we've had from our listeners and viewers, I wanted to dive into dollar-cost averaging and talk about kind of some of the fundamentals around that today.
1:56 Speaker 02 Great, and I have lots of questions for you as always. And if you have a question, you can go to Clark.com/ask and you can ask a question there for Wes or for Clark.
2:05 Speaker 03 All right, so let's jump into this passive bubble. The other thing is that I've read, I've had folks send me some articles around this. New York Times did a big article about this. Harper's did a big article around this. And then there's lots of other. You start searching, you Google passive bubble and you can find a lot around this. And so first of all, when I say passive, we mean index funds. And I know that Clark's been talking about them for years. Oh, yes. John Bogle from Vanguard really was the pioneer and started index fund investing back in the 1970s. In the very early years, there was a lot of pushback. Well, why would you ever want to just do what the market does when all of these other mutual fund managers are trying to beat the market?
2:49 Speaker 03 And then ultimately, what happened is that it became somewhat or commonly understood that a lot of times active managers don't beat their benchmarks. And that kind of that cadence and that thought became more and more widely known and accepted. And a lot of it is just because passive funds are so inexpensive. And if you look at that ultra low cost versus an active manager that is racking up one or two or three percent charges every year, it kind of makes it so that it's easier for passive funds to win. So it started out as this nascent idea, kind of crazy idea, then it became somewhat accepted. And then I'd say maybe even more recently, it's become almost the default.
3:32 Speaker 03 And one of the worries is that, and just this past year, according to Morningstar, we had, we saw for the first time more money flow into passive indexes, passive index funds than we did active. That's when you started seeing this drumbeat of, wait a minute, maybe this, maybe there's just too much in passive. Well, what could be the problem? Well, remember, and we've, we've had some questions around this. Most indexes are cap weighted so that the top 10 companies are making up, because they're so, so massive, multi, multi trillion dollar companies. They really have a outsized share of what the market does. So, so goes the biggest 10 companies, so goes the whole 500.
4:19 Speaker 03 And the worry here also is with so many people putting money in these cap weighted indexes, is it driving the prices of those companies up? And I think that would be the case. If you look at, sometimes I'll look at these problems and I'll look at them in extremes, right? If we had no, if everything was passive, then I could see that being a problem because you'd have no price discovery. Everyone was just blinding, putting money into the market and the big, biggest stocks continue to get bigger and bigger. So I could see that as a problem and creating a bubble that as soon as people stop putting money in and started pulling money out, you could see these outsized drops. So I could see that as a problem.
5:01 Speaker 03 So I understand the worry around it, but I also understand the, and if you start looking up kind of what the globe looks like, remember every time there is a purchase of a stock, there's also a sell of a stock. Sometimes we forget that. It's like, well, I'm going in among, just gonna buy, I'm just buying. Well, somebody's selling it to you. It's not as though the stock is just sitting on the shelf unowned. They're owned by someone.
5:28 Speaker 02 Very true.
5:29 Speaker 03 So even passive investing has price discovery. Somebody's got to let go of that stock in order for you to buy it. So that kind of, I would say it is one counter to that argument that there's no price discovery in passive. There's still price discovery. The second thing is that we are a global stock market and we hear about global companies all the time. We think about the big drug companies that are the weight, the semiglutide or the Ozempic boom. These are, a lot of these big players are European companies. And we hear about companies every day that are from other countries and there's stock trading in those other countries all the time, which means we're a global stock market.
6:12 Speaker 03 Sure, the S and P 500 is the United States, but it's a global market. And globally, we, well, let's start with how much is there in passive funds in the United States? About 15 trillion. That's a big number. So if the whole market was only 15 trillion, I'd be worried. But the US stock market alone is over 30 trillion. And the global equity markets, which that really matters. It's a whole aquarium, not just our little pond, is 100 and almost 145 trillion. So if you start doing the math, 15 on 145, it's a much lower percentage. What is that 10%? So 15 divided by 145 is 10.3%.
6:55 Speaker 03 So the reality here is that passive investing has gotten really large and popular in the United States. But it's still not a giant number relative to stocks and investments around the world. Here's the other point. Americans, humans, are always looking for something better.
7:14 Speaker 02 True.
7:14 Speaker 03 Always looking, how do we do better? And what's interesting is that even though large cap indexes and index funds have a really high beat rate for active managers. So something like over, over a five and 10 year period. Only 7% or so of active large cap managers win against the index over time because they have a higher cost structure. It's not that they're necessarily picking bad stocks. It's that they have higher cost hurdle every year. But some do win. Some active managers do win and even in the large cap category. But here's what's really interesting is that if you look at the whole universe,
7:55 Speaker 03 and this is the year end 2024 Morningstar study that looked at trillions of dollars, something like 70% of the entire market, US markets, a really good sample set. 42% of active managers beat their benchmark and beat passive indexes. Some of the categories, like if you look at real estate or REITs, something like 50 to 60% of active managers win. So you start to see, if you really look at the landscape, passive, it's not as though they're winning 99% of the time. They're winning in some of these other categories. They're winning like 40% of the time, maybe 50% of the time. And as long as active managers have a chance, and the numbers show they have a really
8:38 Speaker 03 good chance, particularly some of these other categories, investors are always going to look to say, well, I'm not going to just do passive, I'm going to consider active. And some investors still only do active, and it can work. So just human nature, I don't think is going to give up on doing better than the average, even though that's a really strong, good strategy, low cost, just getting the market's average. John Bogle is, I've read many of his books over and over the years about it. It makes a ton of sense, but I just don't think active management is going away in my lifetime. So I don't think that this passive bubble gets to the point where it controls all.
9:18 Speaker 02 Okay. We'll go to questions. Akshay in North Carolina says, hi Kristin West, I love the new segment of Ask an Advisor. Thank you for doing this.
9:26 Speaker 03 Well, Akshay, you're on it now. So
9:28 Speaker 02 You are.
9:29 Speaker 03 You're part of it.
9:29 Speaker 02 I'm doing target date index fund for my Roth 401k, maxing out the Roth 401k and doing a backdoor Roth IRA each year. Would it be an okay strategy to invest my Roth IRA in something slightly more risky than a target fund? I'm thinking of splitting up my Roth IRA into all stock index funds such as the S and P 500, mid-cap and small-cap instead of adding bonds, as this is already being done in my Roth 401k. Can you please share your thoughts for or against this approach? Thank you for the amazing work you do.
10:01 Speaker 03 This is a time horizon question, actually, meaning that, so we've got a couple of things that determine what we're comfortable investing in. One is your horizon. So how long do you have to wait, right? Again, let's break this up into extremes. If you know you need money in a week, are you going to invest it in the NASDAQ? The answer is no. If you need money in 40 years, are you going to invest it in an all-stock index? Absolutely. So beyond your own feeling and propensity to handle risk and fluctuation, which is that's totally different for everyone, the biggest variable here is time horizon. So you start to think about, okay, I've got my brokerage accounts. I have a regular retirement account. I've got Roth accounts.
10:46 Speaker 03 What's got the longest horizon out of all those? It's your Roth account because it's the, it's the most valuable tax-related asset that we, most of the time, not 100% of the time, but most of the time, that's the last asset that you're, that's the last pool of money you're going to tap because it's so valuable and it comes with such advantages tax-wise. So it's got your longest horizon. Your brokerage account may have a shorter horizon, your retirement account somewhat shorter, and remember, you have to take money out of that when you hit your RMD age. So very simply, the longest asset should be the, could be, you can make a real argument,
11:31 Speaker 03 that it should be the most aggressive of all because you're not going to touch it for the longest amount of time. So I love that, the way you're thinking about that. Let that be your most aggressive, let that be mostly stock or all stock when some of your other assets are more balanced. So I guess the short answer is he's thinking about it the right way.
11:50 Speaker 02 Joe in Virginia says, "My son retired in November and moved his TSP 401k of $980,000 to an IRA with Schwab. He's 60 years old and has a 10-year time horizon, so wants a moderately aggressive portfolio. We put it in a money market fund while sorting it out. We need your help in choosing investment types and allocating it. So far, I put 23% in an S&P index mutual fund, 13% in US total stock market mutual fund, and 10% in a dividend-paying stock ETF. All are US stocks only. We have 15% in an international fund. With money market rates dropping, I need to move the other 40% out sooner than I thought.
12:33 Speaker 02 I'm thinking of 20% of the remainder split between bonds and REITs." REITs, Real Estate Investment Trust.
12:40 Speaker 03 Real Estate Investment Trust, right.
12:41 Speaker 02 Can you tell me where else to invest the last 20% for more diversification? I'd like to get 4% or more on fixed income. So should I buy bonds and what kind? Or different fixed income? Also, any thoughts and suggestions you may have on my allocation plan would be greatly appreciated.
13:00 Speaker 03 Wow, I love that we've got all these different categories. You asked 23%, 13%, 10%, and then 15% in, I think he said international. There are a couple of areas I didn't hear about. So it sounds like the bond allocation is really low if that other 20% is split between REITs and fixed income. So it sounds, I'm wondering if the overall portfolio is a little too aggressive. But here are some of the areas that you just at least want to consider. Remember, mid and small cap are an important piece of the equation in the United States.
13:38 Speaker 03 And yes, we can get that technically, even if you look at the S and P 500, some of those companies at the bottom are much smaller. But they really do almost nothing to move the meter in one of those indices because it's so dominated by the biggest companies. There's these cap weighted indices. So I think now more than ever, you don't get small cap exposure if everything's just in a broad market US index. It's so weighted to the top. So don't forget some of the small and mid cap areas. That'd be one area I would look at. Secondly, it sounds like you're already looking at bonds. I like treasury bonds because the yields right now are similar to corporate.
14:19 Speaker 03 Corporate bonds are always going to be a little bit higher yield because they're not quote backed by the United States government. But it's good to have both. So I'd be looking at, and this is retirement money, so you don't need to look at municipals here. You don't need to look at municipal or tax free bonds. But I would be looking at corporate and treasuries. So US government and corporate bonds. And then collateralized loan obligations. I know that's a scary sounding word, but it's another bond category that can have really high credit rating. And the yields are. A fair amount higher, not dramatically, but they're higher than treasury bonds right now. So I'd look at that category as well. And then I think of some of these other areas, I call them alternative income areas.
15:03 Speaker 03 I actually think REITs is alternative income. Remember, REITs can be, are just as volatile as the stock market. So just because they're in real estate, they're in publicly traded real estate companies. So they move just like the stock market. But it's a good category to think about and potentially own. Then you've got commodities and energy pipeline areas. So if you're, if you look at commodities, talk about a, should be over time, a good inflation hedge. Some commodity areas like gold, that doesn't pay any sort of dividend. So I have traditionally not really owned a lot of commodity exposure to, when it comes to gold or silver, because it doesn't fit into my, I'd like to get some income mindset.
15:46 Speaker 03 Some of the other areas, the energy space, there's a multi, multi billion dollar industry in the United States. Billion doesn't sound like a lot anymore, does it? But there's a very large industry that is related back to energy pipeline companies, and they do pay a lot of income. So I'd be looking at that as an area. So there's a lot to consider here, but I think as I talk this through, because these major indices, total stock market, S and P 500 are so weighted towards a couple really big names, I think owning not just small caps, but even some of the sectors to get you a little bit more exposure. If you, if you own the S and P 500, your exposure to utilities is almost, is almost nothing.
16:30 Speaker 03 It's like one, it's like 2%. So in order to have anything material in some of these underrepresented sectors, just because of cap size, capitalization and size, not cap size, is, is to look at some of the sectors that are so underrepresented in the big.
16:53 Speaker 03 Total market indices. So I just don't have to think about, but those are some of the missing areas that when, when you're talking about an asset allocation, I would at least look at and consider.
17:02 Speaker 02 Okay. And sup in Minnesota says,
17:04 Speaker 03 Who?
17:04 Speaker 02 Sup?
17:05 Speaker 03 Sup! As in like, what's up?
17:07 Speaker 02 Yes. I hope I'm saying that right. If I do an IRA rollover and I don't have the cash to pay the taxes, is it silly to pay the tax out of a Roth account?
17:17 Speaker 03 Whoa, whoa, whoa, whoa. An IRA rollover, an IRA to a Roth, IRA conversion?
17:23 Speaker 02 It says IRA rollover, but probably it is a Roth conversion because you're paying taxes. It must be.
17:29 Speaker 03 Yeah, I think sup's meaning it's going into a Roth, but we can answer both ways.
17:33 Speaker 02 So if sup doesn't have the cash, is it silly to pay the tax out of a Roth account that I have? If I roll over a hundred thousand dollars, oh, it is into a Roth?
17:42 Speaker 03 Yeah.
17:43 Speaker 02 And I get the full $100,000 rolled into the Roth, is this idea smart or silly? I hope Wes is wearing the reddish vest today. Thanks, guys. And you are.
17:54 Speaker 03 That's why you picked that question. That's why.
17:57 Speaker 02 Well, you know.
17:58 Speaker 03 That's about the best you can describe this. Red-ish.
18:02 Speaker 02 Yep. If you don't watch the YouTube show, Wes often wears a vest almost every week.
18:06 Speaker 03 I haven't worn it for a while.
18:07 Speaker 02 Okay, but you have a gray one too?
18:09 Speaker 03 Yeah, this is burgundy.
18:11 Speaker 02 Okay.
18:11 Speaker 03 I would call it red-ish. Alright, so I would say, yes. The short answer is if you're gonna do a conversion and you're under the age of 59 and a half, so let's say you're 40, then when you're converting money into a Roth from an IRA, if you're taking money out of the IRA to pay the taxes to get the money into the Roth, not only do you pay the tax on it, but you're gonna pay a penalty on that. So that counts as a distribution if you're under the age of 59 and a half. So you really, in order to do a conversion, you really want to have that money outside of the account. So just in a brokerage account. You gotta also worry about that because if you have a brokerage account, you have all these gains in stocks and you have to sell those gains, sell companies at a gain
18:56 Speaker 03 in order to pay the taxes. So technically you want to just use cash. There's no taxes to get to it. Otherwise, you've effectively now taken what could be a hundred thousand dollar conversion. And you now have $75,000 in a Roth because you had to use some of the money in order to pay the taxes to get it there. And that kind of defeats, somewhat defeats the purpose, even though that is the reality of a Roth conversion. And that's why, you know, we've had lots of questions around Roths. Some people love them. Some people say, wait a minute, do I have to do Roth conversion? It's like the only path? And it's not always the only path. And so I would say if it's too big of a tax bill to do it in one year, a hundred
19:41 Speaker 03 thousand's a lot, then maybe you do 50,000 for two years or 25,000 over four years. And really, most people need to spread out when they're converting their Roth because the taxes are a lot to pay.
19:53 Speaker 02 For sure. Okay. And as promised, straight ahead, you're going to talk about dollar cost averaging.
19:58 Speaker 03 Doesn't sound like an amazingly exciting topic, but it's such a fundamental part of how we invest. We've got to talk about it.
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22:18 Speaker 03 Welcome back to Ask an Advisor. I'm Wes Moss along with Krista DeBS. Hey Krista.
22:24 Speaker 02 Happy Tuesday Wes.
22:25 Speaker 03 Happy Tuesday. Where are we headed here? DCA?
22:29 Speaker 02 Yeah, dollar cost averaging.
22:31 Speaker 03 Sounds like an airport.
22:31 Speaker 02 It is an airport, Washington Reagan.
22:34 Speaker 03 Oh, DCA is one?
22:34 Speaker 02 It is, yeah.
22:35 Speaker 03 We were naming our airport after dollar cost averaging.
22:39 Speaker 02 Clark would love that.
22:41 Speaker 03 So I want to talk about dollar cost averaging Krista. First of all, we've gotten some questions about it. And I think of it as an investment safety harness. I think of it this way, you're gonna get into the water, but you have no idea what the temperature of the water is. So let's say you're in Florida, or maybe you're in Finland, and you're about to get in the water. Well, it could be a hot spring in Finland. It might be fine and easy to jump in, or it could be a cold pool of water in Florida. You just don't know. So you can make the choice. Do you dive in and just adjust immediately? And you kind of take the good with the bad. Sometimes it'd be better to do it that way. Or you could wait in. And that's what dollar cost averaging is to me. So I think we all know the definition. Systematically investing money
23:26 Speaker 03 in a market or an index, or really any investment over the course of time. And you do it over and over and over again. So it's $100 every single month on the 15th. And you're doing the same security or the same ETF or the same fund. And it smooths out your cost basis. You're gonna be buying no matter if the market's up, or it's down, or it's up or it's down. So it smooths out your cost basis. Is one way to think about it. Secondly, secondly, and most importantly, it is a psychological way to make investing more palatable, particularly if you have a lump sum. Imagine all of a sudden you've accumulated a million dollars over the years and you're
24:08 Speaker 03 ready for retirement and you sell a business and now you have another million dollars in cash. Well, you've gradually invested this other million. Now you've got to figure out what do I do with the next million? Seems like for a lot of people, it's hard to just put it all to work right away. Now, let's look at the research. What over time does better? Putting money to work as a lump sum or dollar cost averaging in over three, six, 12 months? Well, almost 70% of the time, seven out of 10, because markets on average tend to go higher over time, it's almost 70% of the time, you at your rate of return is actually better just putting everything to work right away.
24:49 Speaker 03 So dollar cost averaging in a, in a rising market, which the market rises more than it falls, or there are longer periods. And that's why this study suggests if you're just playing the odds, you are better just to go ahead and jump in the water and not wade in. But going back to my example, you've got a big lump sum. It might just be too psychologically unsettling to, to do it that way and just to jump right in. But you also don't want to be paralyzed and never get in the water. So what's a happy medium is to wade in and dollar cost averaging that can do that. So it's systematically putting money to work in any one particular security or a whole diversified basket of securities. You say, look, here's my allocation.
25:33 Speaker 03 This is my strategy and I'm going to get a million dollars into this, but I'm going to take 10 months to do it. I'm going to do 10% every month for the next 10 months and we get to 100%. And you've now smoothed out your entry point.
25:47 Speaker 03 Where does it work? Well, of course, you end up with more money if you're dollar cost averaging over a year. That's a really bad for the stock market. So if you think about it, go back to 2008, the market was down about 30. Let's call it 40%. If you chose to do a lump sum investing at the beginning of the year, your $100,000 turned into 60 at one point. If you dollar cost averaged into the market over that entire year, your kind of worst case scenario was down 15 or 20%. So dollar cost averaging, if you're looking at your overall rate of return, a couple of years down the line, in a falling market, it's better to DCA in. In a rising market, it's better to put a lump sum in right away.
26:31 Speaker 03 So because we don't know if the next three, six, nine months are going to be up or down, there is no right answer. All we can do is play the odds. The odds are that markets go up over time. So it makes sense to not wait too long. Even if you look over long periods of time, putting money to work over the first year and versus right away, at the end of the 20 years in both scenarios, it's very close either way. So I think the reason I like DCA, one, we almost all have, we just have to do it. And we get a, every single month in our paycheck, if it's going to a 401k or 403B, it's just part of the deal. So fundamentally, we need to use DCA.
27:13 Speaker 03 I think of it as a palatable way to get bigger amounts of money to work. As opposed to never jumping in the water to begin with. And that's an even bigger problem.
27:22 Speaker 02 But maybe a strategy could be, if you are someone who maybe gets paid on a bonus or you get some commission or whatever, maybe it's a good idea to consider putting a percentage of that lump sum in.
27:35 Speaker 03 There's a million ways to slice it. But that is a really good, and I'd say practically, I've seen it work that way too, for people to say like, hey, let's do 50% of it now. And we'll spread the other 50% over the course of several months.
27:49 Speaker 02 Okay, we'll go to questions. This one's in from Dennis in Connecticut. As a result of paying attention to my spending and saving and living with. With monthly budgets, since being in my twenties, I'm now planning to retire next year at 61 years old.
28:02 Speaker 03 Early retiree, Dennis.
28:04 Speaker 02 I was listening to Wes the other week and he mentioned something about when taking money out in retirement, we should try and withdraw it in a down market year and not an uptick market year. If I heard that correctly, I would love to hear more about why. I guess I always thought that I would take money out of my safe money pile when the market was down and wait until the market corrected itself before taking it out of my 401k. Thanks to the whole team for bringing us such great content.
28:30 Speaker 03 Dennis, thank you for the question. And yeah, that is the right way to think about it. So no, you do not want to be taking money out of stocks when they are down. And that's the whole purpose of dry powder, or you can think of it as a bucket approach, or think of it as an allocation where you have a certain percentage in safety assets that are meant to not go down when stocks go down and maybe even go up in an uncorrelated way. I'm talking about using that, the safety money that doesn't go down. That's where you want to draw from when stocks are lower. So think of it this way, any sort of financial plan assumes that markets are going to go up and down. You never get to take, very rarely can you ever take money from your stock account
29:15 Speaker 03 at the perfect all time high, because there's only a few times during the year if we ever get all time highs, right? But you're on the right track. We want to be drawing from stocks when they're up. But stocks are rarely ever at their pinnacle. So if stocks are, let's call it meh, and they're doing okay or doing not great, then you can still draw from stocks. It's just when stocks are way down in a, in a down 15, 20, 25% scenario. We absolutely do not want to draw from them if we don't have to and use our safety assets. The reverse is true. The stock market is rocking and way ahead of schedule.
29:54 Speaker 03 So you've planned for a 5% rate of return over time and you get three years where stocks are up 15, 15 and 20? Well, that's when you want to withdraw potentially even more. A, you lock in some of those gains and historically, you're better off taking when markets have already done well. So your intuition was exactly right. I don't know if you heard me wrong. Maybe I was wrong. Maybe I said it backwards. I don't know, but either way, you're on the right track.
30:22 Speaker 02 Okay, Mark in Florida says, Wes, I've thoroughly enjoyed your Tuesdays on Clark's podcast. My question, you say you do not like target date funds. However, many of us are overwhelmed because we are not in the industry like you. Clark has shared if you don't understand or know what to do to put your money in a target date fund, what would your recommendation be for somebody who's overwhelmed or doesn't understand the investment world? I'd love to know your opinion.
30:47 Speaker 03 Look, I mostly agree with Clark. Clark likes target.
30:50 Speaker 02 He loves them, yeah.
30:51 Speaker 03 He loves them. I would say I like them. So I don't dislike them.
30:55 Speaker 02 He loves them for this purpose. So someone can set it and forget it.
30:59 Speaker 03 I totally agree with Clark on this one is that they really were a great innovation. And what they helped with was people never jumping into the water. Right? It's like I'm putting money into a 4K and it's money market and money market. It's hard to get started because I'm nervous to get going in an investment. So the target fund immediately says, oh, come on in. You're already diversified and oh, by the way, we're going to get more conservative when you get closer to retirement. All that is a pretty darn good idea. It's not the perfect idea, but it's a better idea than not getting invested. So I like, or I'd say even I really like target date funds. I just don't love them only because I think they get way too conservative when you're at retirement age.
31:43 Speaker 03 A lot of target date funds, if you'll look out into the future and it'll show you by the time you hit your date, your year, they're like 65, 70% in bonds, 75% in some cases. And that to me just gets too conservative. So I think they're great when you're younger. So maybe here's an easy way to remember this. So what else could you do? And remember to do the 4% withdrawal rule, one of the parameters is to have at least 50% in stocks. So how do you answer this? Well, maybe from age 20 to age 60, use a target date fund and from 60 to 100. Use a balanced fund because remember a balanced fund is always going to stick and
32:27 Speaker 03 rebalance to half in stocks and half in bonds. Maybe it's just that simple is that use a target date fund for your first 40 years and then use a balanced fund for your your next 40 years.
32:40 Speaker 02 Sounds great to me. Okay.
32:41 Speaker 03 A new rule of thumb.
32:42 Speaker 02 I love it.
32:42 Speaker 03 I don't know if we'd call that. Target date to balance. I don't know.
32:46 Speaker 02 Okay, David in Virginia says for Wes to reduce the risk of sequence of return risk, the reverse glide path is gaining popularity. You go to 70 30 bonds stocks when first retiring and then when you start collecting social security, you increase the stock allocation. Are there downsides to this reverse glide path?
33:06 Speaker 03 All right, Dave. I had not heard of the reverse glide path until this question. So I went, I looked at, I watched some videos on this, Dave. I read the Michael Kitsey's article. He's a super well-known financial advisor, CFP, very technically oriented and minded and does lots of financial planning research. And so I kind of dove into the reverse glide path. So for those listening, you think traditionally, we think of retirement like we would use a, our allocation would be like a target date fund. Starts out mostly equities and gets more conservative over time. The problem with target date funds is it gets way too conservative. What the reverse glide path or equity glide path essentially
33:51 Speaker 03 says is stay heavy stocks, then five years before retirement, get really conservative. Five years after retirement, stay really conservative. And then once you're in your five years in, then you get more aggressive and your allocation in equities goes way up. Okay. Sounds like a lot to do, right? So if you look at the heat map, when you're looking about withdrawal rates, looking at a heat map, the red areas are the bad scenarios and the green areas of the when money lasts a really long time. Even from the Kitsey study was, which was somewhat advocating to think about or use this. A scenario that started out 30% in bonds and rose to 70 in stocks,
34:35 Speaker 03 basically had a 95% success rate over 30 years. Okay, that's pretty good. Just having a 50% stock, 50% bond allocation over that whole period of time? It's 94.1%. So you get to pretty much the same place through simplicity and just using a balance versus this have really heavy in equities, then reduce them for a short period of time, and then get into retirement, keep that low, and then increase that. And then you're in your 80s and you're ratcheting up your equity position. What? That's not good. It might work on paper, but a lot of financial planning is solving for what works in real
35:19 Speaker 03 life and what you're going to actually do. So you're going to change your allocation every year and go high equities, down to super conservative, then back up. And then when you're in your 80s, you're going to get to be 80, 75%. I just don't think practically it works. So I don't discount it, and I think the math behind it makes some sense, but it also doesn't have materially better results. And I've watched full videos on this, and some of the results are somewhat better, but it's also all historical anyway. So there's no way to know if it will work into the future. So I like to make things simple in a very complex world. It's kind of one of the main pillars of my financial planning creed in life, because
36:02 Speaker 03 if it's not simple, people are not going to do it, or they won't do it and follow all the way through. So I like it, but I wouldn't bank my retirement on it because it's a little too complicated. What does John Bogle say? "The enemy of a good plan is the dream of a perfect plan."
36:22 Speaker 02 Ah, yes. That's a great quote. That's a John Bogle.
36:27 Speaker 03 A lot of Bogle today.
36:28 Speaker 02 The Bogle heads would be loving it. That's awesome. All right, well, that does it for this episode of Ask an Advisor. Thanks for being with us. Remember, you can send in your questions, Clark.com/ask.
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