Our newest team members, Jackson Baltz (JB) and Noah Wolfe (NW), sat down with Dave (DM) and Christian (CM) to ask some questions surrounding the market. Read the full conversation below:
NW: With the S&P nearing all-time highs, should we expect a pullback? If so, how are we prepared for that?
DM: I think it’s certainly a possibility that the S&P 500 pulls back. The million-dollar question is when, and that’s the thing that we just don’t know. We prepare for market pullbacks ahead of time in our retirement income plans. It’s not a decision or something that we’re reacting to when the pullback is taking place because it’s too late at that point in time. Part of every good retirement income plan takes into account that there’s going to be a market pullback and addresses where we take income from when those market pullbacks take place.
CM: I think it’s really important to simply recognize that time in the market is more important than timing the market. Because we don’t know when that pullback is going to happen, guessing is not the prudent position to take.
JB: With a lot of large IPOs (SpaceX, OpenAI, Anthropic) in the future, is this something clients should be interested in?
CM: I think that these recent and upcoming IPOs are very, very interesting, and it’s a fun development in the stock market. I think it’s really important to recognize that a lot of these companies are highly speculative and that they’re not profitable yet.
SpaceX and a lot of these companies are being priced on the market based on what people think they’re going to do in the future, what this technology they have is expected to generate, or what expected profits people believe they can produce. If these companies don’t achieve those expectations, their pricing and valuations are going to drastically decrease. On the other hand, if they meet those expectations, the pricing could go up drastically.
It’s simply something to recognize when you’re making investments or thinking about making investments in these types of companies.
DM: We get phone calls from folks who ask about getting involved in IPOs fairly often. For one, it’s very difficult to get in on an IPO at the IPO price before it starts trading on the market. Almost always, they’re oversubscribed, and the portion of the IPO that you can actually get is just a few shares.
The next way that folks get involved is after it’s traded on the market, and in these oversubscribed IPOs, that’s often at a price that’s very inflated. It’s just not a very stable investment to be in with retirement dollars. If you’re in a growth phase, maybe it’s prudent to do that, but with retirement dollars, it’s not a very stable investment.
We go through a very detailed screening process for the companies that we own in our portfolios. Many times, they’re mega-cap companies. There are different capital requirements that they have, and a lot of these IPO companies don’t even qualify to be in our portfolios, or won’t for at least the first year.
It’s just really important to focus on stability and quality. We’ve always focused on mega-cap, large companies that are very established. They’re sitting on a lot of cash, and somehow they always manage to be on the cutting edge of technology that’s out there. Whether they buy it or develop it, they manage to do it.
NW: Should there be concern that the target-date funds and index funds inside 401(k)s own these companies? How do we responsibly pay attention to what’s happening here? With all the buzz and frequent swings in value, how should investors think about its volatility and whether it truly fits into their strategy?
CM: Well, I think it is a concern that inside these retirement plans and index funds, they’re going to be automatically adding these IPOs to their portfolios simply because of their market capitalization.
I think it’s really important to recognize that this is going to increase the risk level of the different index funds that they’re being added to. I think it’s prudent to realize that and recognize that your retirement plan and your asset allocation are specific to you. If you need to make changes to that, you’re going to have to do that with our help or on your own.
These target-date funds and index funds aren’t necessarily going to replicate your desired risk tolerance.
DM: We’ve had concerns about the lack of diversification in the S&P 500 for a lot of years. Over the last five years, anyway, it’s worked out. The markets have been good, and technology has done well, but it’s very overweighted toward technology and is going to become even more overweighted toward technology.
I think stability is going to be a theme that we want to point toward with retirement portfolios and owning well-established, good-quality companies.
JB: How important is legacy planning and preparing/coaching your kids on what your plan looks like?
CM: I think it’s really important to coach your kids up and have a laid-out legacy plan. In the United States, the wealth gap—or what we know as the disparity of wealth between the upper class of America and the middle class of America—is getting wider and wider. Part of the reason for that is the next generation simply not being financially literate or not understanding what’s being passed down from their parents and how to handle that when they do receive it.
DM: We always encourage people to coach their kids up on their legacy plan, with a couple of caveats in there. When they’re capable of hearing it, when the kids are capable of hearing it—and there are instances where it’s never appropriate—but when they are capable of hearing it, it can make a huge difference in the legacy plan and the efficiency of the plan.
I had someone in my office this year, and it breaks my heart when I have someone in the office who has distributed a tax-free account that should have remained tax-free for the next 10 years in the first year after their parents have passed and they’ve inherited a Roth IRA. It can make a huge difference in the child’s legacy and just the peace of mind of knowing what to expect when their parents pass from a financial perspective.
CM: I think there’s a big peace-of-mind factor when it comes to your family members simply knowing who’s going to be in charge when you pass away. A lot of conflict can be taken care of if everyone’s on the same page with who’s handling the finances when you pass away, who’s distributing funds, and even to the point of where they go to find documents, store these things, and who they call.
Are they calling an attorney, or are they calling our office? What does that process look like? It’s things like: Where can my family find my trust document? Power of attorney? Where can they find the contact information for these people?
DM: The goal with legacy planning is—and it’s a very attainable goal—for your estate to be taken care of in the conference room and not the courtroom. We see so many people who think they’re taking care of it, but there are these little nuances, and laws change. There’s at least a portion of their estate that’s going to be public and taken care of in the courtroom. It just takes a review. Just review it periodically.
This material is for educational purposes only and is not intended to provide specific advice or recommendations for any individual and does not take into consideration your specific situation. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Be sure to consult with a qualified financial advisor, legal, and/or tax professional before implementing any strategy discussed here.