If Abigail Van Buren and Ann Landers had teamed up and become personal finance and investing experts -- and if they'd kept working into the podcast era -- one can imagine the result might have been a little bit like the Motley Fool Answers' monthly mailbag episodes. (Though thy probably would have done less "awfulizing.") Certainly, there are plenty of us who could use some guidance in the money realm -- so many, in fact, that two advice givers are hardly enough.
So for this podcast, hosts Alison Southwick and Robert Brokamp have brought back one of their more popular guests, senior analyst Emily Flippen, to chime in. Together, they'll field listeners' questions on diverse topics such as asset allocation shifts for workers getting closer to retirement, why investing in Chinese companies can be a little bit different, strategies for investing in the legal marijuana sector, when to take profits, how to get started in the FI/RE lifestyle, and more.
A full transcript follows the video.
This video was recorded on May 28, 2019.
Alison Southwick: This is Motley Fool Answers! I'm Alison Southwick, and I'm joined, as always, by Robert of House Brokamp.
Robert Brokamp: Uh, yes!
Southwick: How are you doing, Bro?
Brokamp: Yes, the deep podcast is dark and full of terrors. I don't know. Something like that.
Southwick: We're also joined this week by Emily of House Flippen to help us with our May Mailbag episode. We're going to be answering your questions about investing in Chinese stocks, how to keep an investing journal, when to lock in your returns, and so much more on this week's episode of Motley Fool Answers.
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Southwick: Well, let's just get into it, shall we?
Brokamp: Let's do it!
Southwick: Emily, by the way, thank you so much for joining us again!
Emily Flippen: Thank you so much for having me again!
Southwick: We received some lovely feedback from listeners the last time you were on the show, so we were like, "Oh, we've got to get her back ASAP!"
Flippen: Well, I like being here, so I appreciate it!
Southwick: All right. Let's just start the fun. Here we go! Here we go from Susan. "I am about five years, I hope, away from retirement currently with about 50% of my retirement investments in mutual funds and about 40% in individual stocks. Of the money in mutual funds, about 5% is held in target date funds.
"I know that I should probably start pulling money out of the market in the next year or two to start building my cushion for retirement income, but I'm reluctant to get completely out of the market, especially since rates for savings accounts and CDs are still so low. Is it Foolish or just foolish to think that I can stash some of my money in a target date fund before it's completely pulled out of the market?"
Brokamp: Let's start by discussing how much money you should have in and out of the stock market when you're within five years of retirement. If you look at a range of 2025 target retirement funds -- basically funds for people who are going to retire around 2025 -- you'll see that they keep about 355 to 45% of the assets out of stocks and then reach about a 50-50% mix by the time you reach retirement. But there's a broad range. It you look at T. Rowe Price's, they're more aggressive. BlackRock's are more conservative. So if you're going to choose a target retirement fund, you definitely want to choose one that is lining up with your risk tolerance.
For what it's worth, the model portfolios in my Rule Your Retirement service are a little more aggressive, so when you're about 10 years from retirement, I think you should have about 25% of your money out of the stock market moving to about 40% out of the market by the time you retire.
For someone like you within five years of retirement -- just so you know -- historically over five-year holding periods, stocks have made money about 85% of the time. What if you're in that 15% time [period]? Then you might have to put off your retirement plan. That may be fine for you, but I definitely think, based on what you said, you probably should have more out of the stock market than you do.
Now you can do it on your own or you can do what you're suggesting, and that is put more money in target retirement funds and let them do that sort of management for you. Just know that putting money in a target date fund is a mix of stocks and bonds, so they're not necessarily super-safe investments. Just keep that in mind.
Southwick: Our next question combines a question from Rachel and from @oschool? Is that off Twitter?
Brokamp: Yes.
Southwick: This is for Emily. "I tried to purchase individual shares of Tencent through my Vanguard account, but instead of sending it through as a buy, they want me to call in. Gasp! Who calls people these days? This makes me a little nervous. Is investing in China tech-risky? Is there an easier way to invest in companies in China?" And then @oschool is asking, "I'm thinking Tencent might be a possible portfolio addition. There are two OTC pink tickers for this stock, TCEHY and TCTZF. What will I actually be owning if I invest?"
Flippen: Those are really good questions! To answer the first one, yes, investing in Chinese stocks, especially Chinese tech stocks, is riskier than investing in home companies here in the U.S. That's not to say it is a bad idea, though. Your brokerage just makes you call them to verify that you do, in fact, want to trade international companies.
These are, for the most part, traded over American depository receipts -- ADRs. These do represent, typically, one share -- sometimes it depends -- of the underlying company. So if you buy ADR Tencent, theoretically you're owning one share of the company listed in Hong Kong. So it is a little bit riskier.
You do have some extra fees. They're typically very nominal. They're called depository pass-through fees. These range from $.01 to $.05 per share. You'll get those charges typically once a year. So there are some nominal fees, there. That being said, if you are interested in buying international companies, and I think every investor, in one form or another, should have some international exposure, these are totally fine ways of doing so.
Some brokers will require you to call in. Some will say you can trade automatically. I use Fidelity and never had to call for Fidelity, but that's five minutes out of your time to call. Get that approval. You won't have to do it every time you trade that stock.
And for Tencent, in particular, it does have two pink sheets, two tickers traded over the counter. One pays out dividends in USDs, the other in Hong Kong dollars. Dividends are very small for Tencent, so it doesn't really matter, but for the most part you'll probably want to buy the TCEHY. That's the one that pays out dividends in U.S. dollars. It's also more liquid, so you're more likely to get a better rate when you buy and sell.
Southwick: So both of these people are interested in Tencent. What does Tencent do? Do you like Tencent?
Flippen: I do happen to love Tencent!
Southwick: All right, tell me about Tencent.
Flippen: I do love all of my Chinese companies, though.
Southwick: All equally, I'm sure!
Flippen: Tencent's a Chinese behemoth. It's kind of an integrated gaming company, but really they do a lot more. They run and own WeChat, which is one of the largest Chinese social messaging systems. They do a lot in this space. They're a really great, strong, profitable, diversified company with lots of different investments, but they do have some of that Chinese exposure. Obviously the market's been a little unfriendly to our Chinese companies of gaming regulations in a trade war, so whether or not you want to add it to your portfolio obviously is up to your discretion.
Brokamp: And just for our listener background, you spent time in China.
Flippen: I did. I did my undergrad in China, in Shanghai, and I know firsthand I could not live there without using at least one of Tencent's products. So it is one of my higher-conviction Chinese holdings.
Southwick: Our next question is from David. "My wife and I were discussing our retirement savings and have a question neither of us knew the answer to, but it seemed important. If the brokerage we have our 401(k) with went bankrupt, do we lose our 401(k)? How would we recover it?"
Brokamp: That is a good question! Fortunately, every broker has what's known as SIPC coverage. It's basically the FDIC equivalent for brokers. And it covers you up to losses if the company fails -- or in some cases commits fraud -- but there's a limit. Protection is $500,000, which includes $250,000 of cash. The good news is that most firms have more coverage. It's called SIPC excess coverage, and it's enormous. Vanguard Brokerage has coverage of up to $250 million per account. Fidelity has up to $1 billion per account, so you're probably covered.
Southwick: Who insures these? Is it one company that insures?
Brokamp: I don't know, but it sounds to me like a Lloyd's of London type of thing.
Southwick: I mean if Vanguard goes bankrupt, we have bigger problems than our 401(k).
Brokamp: Well, that's a good question! First of all, it actually doesn't happen that often. I looked at how many cases are now pending with the SIPC, and there's only four. Legend Securities, Western Capital [Resources], Lehman Brothers, and Bernard L. Madoff Investment Securities. I don't think it happens that often, so maybe it doesn't actually cost that much to insure all this. Regardless, there is coverage. Also, with a 401(k), any of the qualified employment plans are covered by the ERISA laws, which are governed by the Department of Labor, so they have a whole other layer of protection.
All that said, if something happens, it's a big pain. The authorities come in, swoop into the brokerage, get all the accounts, and see who owns what, so it's really important for you to have documents. Keep your paperwork, because if the brokerage was a complete mess and they don't have enough paperwork to establish what you own, you have to be able to prove it, and there are limits to how long you have to make a claim. For example, in the case of SIPC, you have to make a claim within a year, so as soon as you know that there's trouble, make your claim, contact the relevant authorities, and make sure you get your name on the list.
Southwick: With something like Bernie Madoff, though, it wasn't like they just went bankrupt. It was fraud.
Brokamp: It was fraud.
Southwick: So you may have a piece of paper that says you had a bajillion dollars, but in actuality you have $0. Does insurance still kick in? Even in the case of fraud?
Brokamp: With that, there were settlements, where basically what they did have was split up among the people who made claims. And there was some coverage for it, as well, from the SIPC and other organizations.
It's also important to know that in the case of brokerage insolvency -- some cases fraud -- it does not insure you against investments going down or does not insure you against a financial advisor giving you bad advice. You're on your own for that.
Southwick: The next question comes from Vijesh. "I am 27 years old and currently have my Roth IRA split almost equally between a target date index fund and individual stocks. My question is whether you think it is a good strategy to automatically sell a stock after it earns a certain amount. For example, I purchased McCormick stock in January and had it set to sell as soon as I made 10%, which happened to be in March, a fairly quick and nice return."
Flippen: Yes, it's a good question, and congratulations on the 10% return on McCormick! I will say we tend to invest a little differently, here at The Fool, and that's because studies continuously show us that long-term buy-and-hold investing tends to outperform trying to time the market. It's a funny thing about humans. We're really bad at that. We're really bad at figuring out the right time to put money in and take money out. We see media. We hear news and it makes us nervous.
We tend to buy and hold stocks for long periods of time. We tend to say three- to five-year time horizons and then you can reevaluate. Using McCormick as an example, it's actually up 15% over the year and 30% over the lows from the year, so theoretically, depending on what time somebody might have purchased McCormick, a 10% return was leaving a little bit of money on the table, despite the fact that a 10% return is also great.
So I think for those investors who maybe are a little bit more prone to be nervous about the market -- who want to put money in or take money out actively -- that sometimes index funds tend to be the best thing. If a 10% return on an investment makes you nervous, or a 10% drop in an investment makes you nervous, well, sometimes if you respond to that, you could be leaving money on the table.
Southwick: I don't check my scorecard very often to see how well my stocks have performed, and this is going to make me sound really dumb. I'm looking at my scorecard to see how well my portfolio of individual stocks has performed, and I was like, "Oh, huh! That's funny! The stocks I've held the longest have performed the best!" And then I was like, "Oh, wait! That's what we preach here at The Motley Fool." So yes, genius over here finally put together what we've been preaching the whole time.
The next question comes from Carlo. "In various Fool podcasts, it has been mentioned that it's a good idea to keep track of one's thesis for investing in stocks or funds. For me, the thesis consists of various numbers as well as text. Spreadsheets work well with numbers but don't do well with holding a lot of text. Do you have a recommendation for a format or apps to keep thesis notes?"
Brokamp: Yes, a lot of Fools talk about this, and on this show, one Fool who talked about it was Buck Hartzell, who was on the last mailbag episode, and he's talked about keeping a journal. Since Buck sits right next to me, I asked him. "So, tell me about your journal." He pulled it out. It's a Word doc, and at this point it's almost 600 pages.
He's kept it for years, but he showed me what he just entered yesterday. He sticks with a Word doc, and whenever he makes any sort of purchase or sale, he records it, he records the reasons why, and he says the most important thing is to look back at it in a year or two to think, "Based on what I knew then, did I make a good decision?" If generally you're making good decisions, great. If not, you need to change your process.
I put the question out to other folks in the investment group to see how they keep their journals. David Kretzmann does it in Google Docs. The same sort of thing. He puts down whenever he buys or sells. He puts valuation metrics. Any sort of price information. Any sort of information he used to make the decision just to keep track of things.
Tim Beyers uses a combination of Airtable, Notion, and Box, which he acknowledges is probably too complicated. He says Notion is a great catch-all because you can embed Google Docs and PDFs, write notes, and all kinds of things.
A few folks use OneNote, which is great because it integrates with all the Microsoft products, and others, like me, use Evernote, which is generally free, but if you have too much information in there, you do have to start to pay.
The good thing about Notion, OneNote, and Evernote is they do have capabilities of integrating a spreadsheet, so if that is something where you want to have a spreadsheet and text, those should work. If you're often using Excel, I imagine OneNote is probably best. As they're both Microsoft products, it probably makes the integration a lot easier.
Southwick: Emily, do you keep an investing journal?
Flippen: I do. I tend to do it very similar to the way Buck does it, though. Most of my investments I make for qualitative characteristics, so it's really valuable to me to look back on what I was thinking when I made the investment and why I chose to buy it. But I do keep an Excel sheet, and it's not just for my investments. It's for all of my finances, actually. But I keep my stocks in a tab in that spreadsheet, and I track their performance there.
But when I think about looking at my investments and gauging performance, I tend to look back on what's changed since I made that original investment vs. what I'm thinking now. I will say I have not been investing as long as Buck, but it already is getting a little disorganized.
Southwick: Six hundred pages. Wow!
Brokamp: The value is -- both he and David Kretzmann said the same thing with his big Google Doc -- it's just so easy to search it. As long as you include the ticker and things like that, it's just easier to find whatever you're looking for in that one, big doc.
Southwick: The next question is from Susan. "How do I go about investing in marijuana production and which companies are best? I'm only looking to invest a very small amount of $100."
Flippen: I want to go off on a little side note.
Southwick: Please do!
Flippen: Susan, I am so excited by the fact that you're interested in investing in marijuana stocks. Here at The Motley Fool, I work on our Marijuana Masters Service along with Shannon, another analyst. The two of us have looked at metrics for our Marijuana Masters Service. Do you know what group owns predominantly marijuana stocks here at The Motley Fool?
Brokamp: I don't know.
Flippen: Women!
Brokamp: Really?
Flippen: Women tend to be very interested, especially in comparison to the male cohort, in buying pot stocks. First of all, Susan, thank you for contributing to that! I'm onto something here. Maybe we need a female-oriented pot service.
Southwick: Right.
Flippen: So I just wanted to note that before I answered your question.
Brokamp: That's interesting!
Flippen: So all of that being said, and as excited as I am by the marijuana industry, I will say it is extremely risky, and there's a couple of things you need to know. You got the first part down, which is invest only a small amount of money -- only the amount of money that you can afford to lose. So when you talk about investing a small amount -- say $100 -- as long as that's a low percentage of your entire portfolio, you should be fine.
Think about it in terms of the amount of your portfolio and that you'd be totally OK if it went to nothing, because honestly, a lot of marijuana companies, right now, are extremely hyped. Extremely overvalued. We saw the same thing happen with cryptocurrency. When the media gets ahold of something in an industry, people want in, and it's great, because unlike crypto, I do see the underlying demand for marijuana, but you need to invest wisely.
This is why I'm part of the Marijuana Masters Service here in the U.S. We tend to invest in not only pure-play companies that have strong financials, but there's ancillary companies, so the companies that are going to succeed even if marijuana were to fail. Some of the companies that we tend to like a lot are OTC Markets Group. That's a great example of a company. They actually own a lot of the over-the-counter exchanges, so as these marijuana companies list -- and lot of them do and a lot of them will fail -- they're poised to succeed regardless.
But if you are really interested in getting into maybe the pure-play companies -- the producers -- it's important to focus on companies that have strong underlying financials. Avoid companies like Tilray and Acreage Holdings, those companies that you hear a lot on the news, because they have weak financials. They have a lot of debt, a lot of shareholder dilution, and you're not likely to make up your investments. But if you choose to go into the marijuana industry, just remember to invest only what you can lose.
Southwick: With the marijuana industry, how likely is it that all of these little companies that are producing marijuana are just going to get bulldozed if a major company decides, "You know what? Now we're a marijuana company."
Flippen: We've already seen a lot of major companies start to invest in the space. I think it's more likely that a lot of these companies will be bought up. Whether that be at a discount or a premium is to be determined. A lot of them will fail. A lot of them will go to nothing.
Look at the beer industry, for example. People tend to mischaracterize the marijuana industry. You see a lot of it as a commodity. You see a lot of beer producers. Sure, there's a commodity underlying them -- hops -- but you can tell the difference between beers.
The same thing is true for the marijuana industry. We're focused on really strong competitive advantage brand differentiation that will end up being, you could say, the Sam Adams of marijuana. And in a lot of cases, that might actually end up being something like Sam Adams. We've already seen a number of beer producers, for instance, invest in the space.
Southwick: The next question comes from Matt. "What are some good ideas for investing money from redeemed Series EE savings bonds? I have several that my grandparents purchased for me and they will be fully matured over the next eight years. I thought about reinvesting in savings bonds, but it doesn't seem like there's a very good rate of return on them these days."
Brokamp: Ah, the classic grandparent gift!
Southwick: Oh, that's so sweet!
Brokamp: It is very sweet and very thoughtful! First of all, let me establish that you are right. The EE savings bonds currently don't pay much. According to TreasuryDirect.gov, they currently pay 0.1%, so it's not something I would suggest that you roll over. However, I would say it does matter when you got the bonds, because currently the bonds are issued at face value, and you just get a fixed rate. In the past, what you got was an actual paper bond, and you paid half of the face value. So if your grandparents wanted to give you a $100 bond, [they] only paid $50, and it was guaranteed to at least double your money within 17 years. So if you have one of those bonds, and you haven't owned it for 17 years yet, you might want to at least hold onto it until then.
I should point out that there are a couple of other benefits to these savings bonds. Like all federal government securities, they're free of state and local taxes. Also, the taxes from the redeemed bonds you don't have to pay if you use the bonds for qualified higher education expenses, so something to think about if you're going back to school. Otherwise, once you do get the money, I would say look at something other than a savings bond -- even a good old cash account through something like The Motley Fool's Ascent, which will help you find a higher-yielding savings account. It will pay much more than a typical savings bond.
Southwick: The next question comes from Tamaran. "I am a student at the University of Northern Iowa. I recently started listening and have been bingeing on all The Fool podcasts." Oh! "What advice would you have for college students who are interested in being on track for FIRE?"
Flippen: That's a really good question!
Southwick: And we'll have you define FIRE.
Flippen: Yes, I feel like I should define FIRE first. So FIRE is financial independence/retire early. F-I-R-E. And it's a movement essentially saying I either want to make a lot of money or I want to save a lot of money. Make more money and cut my expenses -- one or the other and probably both -- so I have the financial independence and flexibility to not work in the future if I don't want to.
And I'm a big fan of this movement -- maybe not the "RE" -- retire early -- part of the FIRE, but at least the financial independence, and I feel like that's something every person should consider in their life, is reaching that point of financial independence. It's great that you're thinking about this in college. I'm a recent college graduate myself. -- Can I still say that? -- I'm a recent college graduate myself...
Brokamp: Yes, you can.
Flippen: ...so it's important to start thinking about that earlier rather than later. And the biggest thing, a lot of people say, is cut your expenses. Don't go out to lunch. Make a budget. That's really important, that is.
But the biggest thing that defines people who are able to retire -- if that's what you're interested in doing -- in their 30s vs. their 40s or 50s tends to be their career. So if that's extremely important to you, then think about your career. Think about the big purchases you make in your life. So car loans. Student loans. Buying a house. Even the place where you choose to live and start a family. And marriage, for instance. All of these things are big financial decisions that a lot of people get into without realizing the impact that it's going to have on their FIRE potential.
So think about it. The first thing I'd do is make a budget. Understand your income or your projected income, I guess, if you're in college. Understand your projected expenses. What you can live off of. And importantly, what you can save. And I'm sure both of you tout this; but save at least 15% of your income for retirement starting early. That makes a huge difference as you age. If you start now, you start when you graduate college, then even if you aren't able to retire early, you'll be able to retire, and that's the more important thing.
Brokamp: Yes. And the people who do manage to retire early -- like by their 30s or even 40s -- are saving much more than 15%. They're saving like 40% to 50%, so that's something to keep in mind. Another resource I'd recommend is RetireEarlyLifestyle.com. That is the website of Billy and Akaisha Kaderli -- who we've talked about on the show before -- who retired in 1991 at age 38. They've been early retired almost 30 years. They're kind of pioneers in the whole idea of retiring early. And they were able to do it because they live all over the world in very low-cost locations and live on less than $30,000 a year.
And I bring them up because they just updated their book, The Adventurer's Guide to Early Retirement, fourth edition. It is chock-full of all kinds of practical and philosophical tips on retiring early. Visit RetireEarlyLifestyle.com if you want to learn more about that.
Southwick: The next question comes from Justin. "I think I might have made a mistake. I had several higher-yielding dividend stocks in my brokerage account. I sold all of these and repurchased them in my Roth IRA the same day. My thought was that I should move these stocks to the Roth in order to not pay taxes on the dividends through the years. Also, the dividends do not count toward my contribution limit, which would be another advantage, as I'm only 30 years old and plan to continue maxing out the contribution yearly.
"I assume that because I sold and rebought the stocks on the same day I cannot take a capital loss on my tax return. In the future is there a way I could transfer stocks from the brokerage account to Roth?"
Brokamp: So the first thing you did was smart. If you are young, it definitely makes sense to have your dividend-paying stocks in your tax-advantaged account so you don't pay taxes on those dividends each and every year and then at your taxable brokerage just have a good stock that doesn't pay a dividend. It's more tax-efficient.
But unfortunately you're right. Because you sold and bought on the same day, you can't take any loss on the sale because you violate the wash-sale rule, which means you have to wait 30 days from selling the stock at a loss until you can buy it back, and that's actually wait 30 days afterwards and you can't buy it 30 days beforehand. Some people think that if they sell it in their taxable brokerage account but buy it in their IRA, that doesn't violate the wash-sale rule, but that's just not true. So unfortunately you will not be able to take that loss.
Another question you had was whether there is a way to move stocks to an IRA, and the answer is actually also no. You can only move cash into an IRA with the exception of employer stock. There's some ways to do that, but otherwise you can only move cash into an IRA. Now if you want to take stock out of an IRA, you actually can do that without selling it, but cash is the only way to put that in there.
He also had this interesting point there about how the dividends do not count toward his annual contribution limit. And I think most people know that, but every once in a while I do get a question where people ask. The cash that is paid in my investments -- either interest from my bonds or dividends from my stocks -- does that count toward that $6,000 annual contribution limit for my IRA? And the answer is no, you don't have to worry about that.
Southwick: The next question comes from Rich. "I was talking to some co-workers the other day about investing and a question came to me. Is there an index fund for the Nasdaq? The best I could come up with was the ticker symbol QQQ. It seems this ETF has some decent compounded returns. Would this be more advantageous than an S&P 500 index?"
Flippen: I also talk to my co-workers about investing. What a small world it is! Yes, there is an index fund for the Nasdaq. The S&P 500 also has index funds that track it. It really is just a question of what you're trying to achieve. S&P 500 index funds are all a little bit different. The same is true for Nasdaq index funds, but let's use a traditional index fund.
Probably the most popular S&P 500 index fund is Vanguard. I think its ticker is VFINX. That one tracks the S&P 500 by buying all 500 S&P stocks on a market-cap-weighted basis. So it has much higher holdings in larger companies, less in smaller companies, with the intent of recreating the returns of the S&P 500 for those companies.
The Nasdaq, on the other hand, using QQQ as an example of a Nasdaq index fund, attempts to recreate the returns of the Nasdaq, but they buy the top 100 Nasdaq companies also on a market-cap-weighted basis. You'll notice if you dig into that a little deeper, 55% of the portfolio is held in the top 10 companies of the Nasdaq, and the Nasdaq tends to be very tech focused. You'll notice the returns for an index fund that tracks the Nasdaq are higher than that that tracks the S&P 500, and that's in large part due to the big success that we've seen of technology and tech-based companies that have been in the Nasdaq over the past five years.
So when you look at the returns, Nasdaq looks better, but it really is up to what you're trying to achieve, and it's important to remember that neither of these are completely diversified index funds. A lot of people think that they can put all their money into an index fund and it's fine. And you'll notice that companies like Vanguard, for instance, actually stopped offering the S&P 500 index fund to their employees because too many people were putting all of their money in it thinking this is a diversified index fund, when in reality both of these are just large-cap companies.
So if you're like me, I tend to take a five-fund approach, I guess, to my retirement, which is large-cap, mid-cap, small-cap, international, and bonds fixed income. Something safer. Now index fund[s] that track the S&P 500 or the Nasdaq are great for the large-cap portion of that approach, but they're not going to give you any other exposure.
So both are totally fine. It really is just how much you are comfortable with the tech weighting that the Nasdaq tends to have.
Brokamp: The QQQ is interesting because it is really the hundred biggest companies in the Nasdaq; whereas the Nasdaq, itself, as an index, has 3,000 stocks. And there aren't that many -- in fact, I couldn't find any in my brief search -- ETFs or funds that track the entire Nasdaq.
Flippen: It would be too much. It would be an active portfolio at that point.
Brokamp: Yes. Fidelity has an open-end mutual fund that has 2,000 of them, and it has an ETF that has about 1,000 of them. And the good thing is those are a little bit more diversified. Not as concentrated in the top 10 holdings. A little more diversified by the sector, but still very tech heavy and consumer cyclical because Amazon falls under that heading. Whereas the S&P 500 is, as Emily said, very large-cap focused. Also concentrated on the top holdings, but not as much and more diversified by sector.
And one of the other things that Emily also pointed out is that Vanguard, in its own 401(k), switched from the S&P 500 to a total stock index because it's just more representative of the broader market and we, at The Motley Fool in our Motley Fool 401(k) committee, did the same thing.
Southwick: Our next question comes from Matthew. "I have a question regarding my Roth 401(k). I have asked my plan's sponsor, the investment firm where my 401(k) is located, and the benefits company my HR department recommended I contact and none have provided a clear answer. Here's my question. Why am I not seeing dividends with my mutual funds on my quarterly statements?"
Brokamp: First of all, I'm a little surprised that they couldn't provide an answer to that. That's a little shocking. All I can say is I know how it's all reported in our 401(k) which is administered by BB&T. And when you look at the quarterly statements, you do not see the dividends. You have to go onto the website itself and choose "account activity" or "transaction activity," and there you will see the dividends paid by each fund and what they bought. So if you're reinvesting them, it tells you how many shares you bought of that fund.
If you haven't visited your 401(k) or 403(b) website, I totally recommend it, because you're going to get a lot more information. More and more of these providers are providing tools and different ways to look at your holdings. Even retirement calculators. I would go to the website and see if you can find the information there.
And since this is about dividends, I'm going to bring in another question that was asked by Bobby, and he basically asked, "Should I reinvest my dividends?" And you have a choice in your 401(k) or outside of your 401(k). I would say for most people I think reinvesting dividends makes sense. It's automatic. It's a built-in dollar-cost averaging, so you're buying more shares when that investment is down and fewer shares when that investment is up. That makes a lot of sense.
However, there are many people, including people here at The Motley Fool, who like the idea of letting the dividends accumulate as cash and being more deliberate about where they invest it. They may look at it every month and say, "Now that this cash has accumulated, where do I think now is the best place to put that cash?" I think that makes sense if you're that type of investor.
I also think it makes sense once you're reaching maybe a decade of retirement. We mentioned Susan earlier on. It might be a good time, then, to turn off the reinvestment of dividends, because then you're going to automatically start building up that cash cushion as you get closer to retirement.
Southwick: Our next question comes from Ben. "Hey, Alibert Southkamp, what are your thoughts on contributing in this order of priority. One, max out company match. Gotta get that free money. Two, max out health savings account. Three, max out Roth IRA. It offers the most options. And No. 4, contribute what I can to Roth 401(k).
"I'm already doing one, three, and four, but I'm going to be starting an HSA this coming year. The way I look at it, the HSA has more tax benefits than the IRA and 401(k). I'm worried that too much money is going to my health rather than retirement, although health costs are astronomical. I'm 36 and newly married with kids hopefully on the way."
Flippen: Well, congratulations, Ben, on your marriage! That's exciting! And in the premise, I think I agree with your one, two, three, and four: company match, HSA, IRA, and then 401(k). That is in the order, I guess you could say, of tax priority. You get the immediate free money on your match, and the HSA tends to be the best tax-advantaged vehicle for retirement, not only because you can contribute that money before you pay taxes, but also if you don't spend that money on the medical expenses that you accumulate over the years but keep the receipts, you can then withdraw that money in retirement with those receipts without ever paying taxes on it.
But here's the thing. Most people aren't diligent enough to keep those receipts, and a lot of people end up spending that money on healthcare needs. So you mentioned that you're married. You maybe have kids coming up in the next few years. It's important to look at whether an HSA is the best option.
A lot of people tend to find that as they get older, their healthcare costs become more expensive, and as they have kids, their healthcare costs become more expensive, and you only qualify to have an HSA if you have a high-deductible healthcare plan. So it may be less beneficial to pay for a high-deductible healthcare plan in order to access the HSA than it is just to pay for a healthcare plan that maybe covers more and doesn't give you access to the HSA.
So theoretically, I think that order is correct assuming you keep the receipts, you don't spend any money out of the HSA, and save all that to be withdrawn in retirement. In actuality, not a lot of people are able to achieve that, and if you have extremely high healthcare costs coming up in a few years, people might want to reevaluate whether or not a high-deductible healthcare plan that qualifies for an HSA is actually better than a healthcare plan that isn't high deductible, doesn't qualify for an HSA, but covers more.
Southwick: And our last question comes from Paul. "My employer offers both a traditional 401(k) and a Roth 401(k). I'm confused about the maximum contribution. In 2019 is it accurate to say I can contribute $19,000 to the traditional 401(k) and contribute another $19,000 to the Roth 401(k) for a grand total of $38,000?"
Brokamp: Nice try, Paul, but no. Sort of. He's not quite 50, so his contribution on that is $19,000. If you do the Roth and the traditional, the total can only be the $19,000. The same with IRAs. If you do a Roth IRA and traditional IRA, it can only combine to the $6,000. If you're 50 or older, you can do another $1,000 for the IRA, and another $6,000 for the 401(k).
That said, there are some quirky little things. For example, if you are lucky enough to work for an employer who offers both a 401(k), 403(b), and a 457, which is mostly government companies, you can actually max out both. There's also something called the after-tax contributions to the 401(k). So that is there's actually an all-in limit to 401(k)s, which includes everything the employer puts in as well as the employee, and that all-in limit is $56,000 in 2019.
So what he could do is put in the $19,000. Then there's whatever the employer puts in his match. And then whatever is left over up to that $56,000 limit, he puts in as an after-tax contribution. No deduction on that contribution. The money grows tax-deferred, so he won't pay taxes as it grows, but then when he retires, he'll have to pay taxes on the growth.
It's sort of like a nondeductible, traditional IRA. For some people who are super savers, that actually can make a lot of sense. The alternative is just to invest outside of a tax-advantaged account in a taxable account. Just don't sell anything for several years and then when you pay the taxes, it's at long-term capital gains rates, which is lower than withdrawals from a traditional IRA. Just making you aware of all the options.
Southwick: Well, great job, you guys! You answered 13 questions today!
Brokamp: We've been bumping up our number.
Southwick: A new record?
Brokamp: I think we did like 15 or 16 last month.
Southwick: Well, we'll see what we can do. I feel like 13 is still a good one.
Now it's my turn to talk about the other feedback we've gotten. We received a message from Zach. Zach wrote, "I love, love, love your podcast. I'm super stoked whenever I see a new episode pop up my iPhone. However..."
Brokamp: Uh-oh! Is it about my voice or your voice?
Southwick: "...recently I've been cringing whenever I hear you guys talking about the amount people have invested in their 401(k)s and how it's such a low amount. I think you guys are making a mistake assuming that people don't have money invested elsewhere. While many people have 401(k)s at their workplace, not everyone has low expense ratio investment options in their 401(k) plan. By only focusing on dollars saved in 401(k)s, you are undercounting people like me who've had most of their wealth in other investment instruments."
Brokamp: Well, I think Zach makes an interesting point because 401(k) average balances really are just a small part of someone's overall retirement picture, so it is not necessarily the best gauge for whether the average American is well prepared for retirement.
We talked about Fidelity's numbers previously, and they talked about the average balances for people who have been contributing for 10 years and 15 years, and I thought that was a little more informative, but I think he makes a good point.
Southwick: And just note, Zach, that when we complain about 401(k) amounts, we're not criticizing you personally.
Brokamp: That's right. We think you're doing a great job, Zach!
Southwick: You're doing great, Zach! You're doing great!
Let's head to the postcards. So Rich Smith went to Texas, but he also reported back on his trip to the Berkshire Hathaway meeting in Omaha. He said that our travel-hacking episode inspired him to travel Hacker Airfare to Omaha.
Brokamp: And it worked?
Southwick: I guess so.
Brokamp: That's outstanding!
Southwick: All right. FiftyBillionCent is hanging out in Saint Thomas and Puerto Rico and wanted to remind us to take some time off with our spouses.
Brokamp: Oh, that's a good idea!
Southwick: Yes, we're going to Bermuda in a little bit. How about you guys? How about you, Bro?
Brokamp: We're taking a cruise to Alaska.
Southwick: Ooh! Emily, do you have any travel plans coming up?
Flippen: Scotland, actually!
Brokamp: Wow!
Flippen: Yeah, I'm excited!
Southwick: Very nice!
Brokamp: The nicest people in the world!
Flippen: I hope I understand them!
Brokamp: It is tough. Surprisingly tough!
Southwick: Stocks! John from Queens wrote from Seattle. They are on track with their emergency fund and retirement, so they took a well-deserved vacation. Also stocks! David sent a card from his trip to Jordan and Israel, but all he was thinking about was stocks!
Someone used to write postcards. I don't know if it was Dave. I think it was someone -- who I'll get wrong -- who did it originally. They wrote on their postcards, "stocks!" screaming at me, and it makes me laugh. And so now other people are writing in and yelling "stocks!" at me. It just makes me laugh. It's so funny!
And speaking of traveling, Patty and Gene are still on the road. They're never not traveling. They sent us cards from Massachusetts and Rhode Island.
Brokamp: How nice!
Southwick: Isn't that nice?
Brokamp: Thanks, guys!
Southwick: They have such great handwriting! Also, I want to thank everyone who wrote a review on iTunes recently. I must have asked nicely. Did I? You're nodding your head.
Brokamp: Yeah, you did say something along those lines.
Southwick: Well, I guess I asked nicely enough, because four of you responded with reviews, so I want to thank 14ch14, and Volv 575, and MEGary, and Bernie Schultz for writing nice reviews. For example, 14ch14: "I've listened to a lot of financial podcasts while working out or driving. This is my absolute favorite."
Brokamp: Oh, man!
Southwick: "Alison and Bro make a great team. Alison is an absolute delight and I believe she'd make any podcast instantly better." And then they just keep going on about how great I am.
Brokamp: That's true! And as is often the case, people are like, "Oh no, Bro. You're OK, too! You're just not as good as Alison." And I totally agree!
Southwick: "Bro would be my favorite podcaster if it weren't for Alison." And then the reviewer offered up that it deserves a special hug, which we haven't talked about in a while. So special hugs all around!
Brokamp: Let's just say these things make our day, so if you ever feel inclined to add to the reviews, just to make us happy, it will work.
Southwick: Oh, my goodness! You guys are funny! You guys make us laugh! Well, that's the episode!
Brokamp: It is. You're right!
Southwick: Emily, thank you so much for joining us!
Flippen: Thank you again for having me!
Southwick: Please come back again! The show is edited Flippen-t-ly by Rick Engdahl. For Robert Brokamp, I'm Alison Southwick. Stay Foolish, everybody!
