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Is Spain’s Pain our Pain?
James Lange, CPA/Attorney
Guest: PJ DiNuzzo, CPA, PFS®, AIF®, MBA, MSTx
|Click to hear MP3 of this show|
- Introduction of Guest – PJ DiNuzzo, CPA, PFS®, AIF®, MBA, MSTx
- Background on the Euro and the EU
- Problems Arise in the EU
- Will Spain’s Situation Affect Me?
- Solutions to Auto Financing
- Is it an Ideal Time to Travel to Europe?
- Staying the Course
- You Must Have a Plan
David: Hello, and welcome to today’s edition of The Lange Money Hour, Where Smart Money Talks. I’m your host, David Bear, here with James Lange, CPA/Attorney and author of the first and second editions of the best-selling books “Retire Secure!” and “The Roth Revolution: Pay Taxes Once and Never Again.” Today, Jim’s in-studio guest is P.J. DiNuzzo, a nationally-recognized expert in investment management, who has appeared in numerous national and international publications and on television shows. He’s rated a five-star advisor by Paladin Registry Investor Watchdog, scoring in the top one percent of America’s more than 800,000 investment advisors. P.J. was approved as one of the first 100 advisors with Dimensional Fund Advisors in the early 1990s. His firm, DiNuzzo Investment Advisors, has been ranked among the top 500 investment firms in the country on numerous occasions, and by multiple national publications. Jim and P.J. will explore a variety of issues today, starting with a look at Europe’s current financial crisis and what it may mean for you. They’ll revue what happened with the market in May and what you should do about it. They’ll also assess a statement that most financial analysts make and why it can be so dangerous. Another topic they’ll cover will be a recently published paper that examines the validity of the widely held assumption that investment funds with long manager tenure are top tier funds. Before I turn the microphone over to Jim and P.J., I want to remind listeners that our show is broadcast live, so if you have any questions, please feel free to call in. The telephone number is (412) 333-9385. To Jim and P.J.
P.J.: Good evening.
Jim: Thank you, David. Before we even get into the substance of today’s show, I feel honor-bound to tell you that I am not independent of P.J. DiNuzzo. Usually, what I try to do on the show is have the top experts in the country, whether they be IRA experts, or estate planning experts, or investment experts, and usually, they are the top people and they have typically written a book, and I usually plug the book if I like the book, but I don’t really have any relationship with them. That is not true with P.J. DiNuzzo, and I have an important relationship with him that I do feel honor-bound to disclose. P.J. and I have an arrangement. P.J. is an excellent money manager. He represents low-cost index funds and, specifically, dimensional funds from DFA, which is Dimensional Financial Advisory funds, or, I’m sorry, just DFA funds, that have a wonderful track record, and he does a wonderful job. If you were to go to him and, let’s say, not through me, he would charge, depending on how much money is invested, somewhere around one percent or less, the more money you would have under management, the lower the percentage. But he and I have a deal whereby if somebody comes to me and they are looking for financial help in terms of managing money, that our firm does what we do best, which is Roth IRA conversions, how much money people can spend, certain tax implications of which money to spend first, when to spend the money, how to do withholdings, and all the tax and estate planning things that we do, and rather than me tacking on an additional fee to what P.J. charges, P.J. and I split the fee that he would normally get 100% of. So, the point of that is is that I am not independent of P.J. because if somebody becomes our mutual client, we do end up splitting fees. So, therefore, if you love what he says and you are interested in being his client and you do it through our firm, I do have a financial interest, which I felt honor-bound to disclose. But anyway, on to tonight’s substance, there’s so much turmoil in Europe right now, and P.J. is right on top of this issue, and P.J., I thought maybe before we get into some of the specific problems, if you can give our listeners an overview? So, for example, in the old days, each country, like the United States, had their own currency. And then, the Euro was born, and all of the countries except, I guess, England, flock over and change their currencies to the Euro, and now there’s some discussions, well, maybe that’s not the right way to go. Maybe one or two countries want to go back. Before we get into some of the specifics, can you just give us a general picture on what happened with Europe and the change, and then we’ll get into some more specific problems?
P.J.: Yeah, Jim and David. That’s a great topic because, as we were talking earlier prior to the show, if we take a look at the last week, month, year to date, actually the last close to three years now, the number one topic when we meet any individual is, the number one topic, something related to the Euro zone, to the EU, and people feel as though it’s affecting their portfolios. They’re really uncertain as to just what is it, what’s going on over there, how can this thing be dragging on for three years, etc. And basically, to try to give an executive summary as brief as possible, with the European countries who are members of the EU in the Euro zone entered into was a monetary union, and the monetary union, as you said earlier, you know, people in Greece were harkening back to the days of the drachma, their prior currency before they joined the EU, and when they had the recent run on the banks in Greece, it was basically just people having the common sense to say, hey, we can get full value from a Euro if we withdraw our money from the bank, but if the elections don’t go the right way, we’re going to be maybe withdrawing drachmas that are worth about half of what the Euros are. So, you know, people over there have a lot of common sense like anything else. But the real challenge is that it’s a monetary union, not a fiscal union. So, one thing a lot of our clients and individuals we’re in consultations with will ask is, you know, why can’t they do something? Any one that we look at has a home bias as far as looking at things through the lens of our country, and they don’t have any taxing capabilities. They don’t have any authority to be able to mandate to these countries that you have to be able to balance your budget, for example, or when you run a certain size deficit. So, they have a lot of countries coloring outside the lines, which is affecting, again, getting back to the monetary union, and now it’s reached a point where even the most intelligent economist that I’ve followed are saying some simple things like “Well, boy, it’s amazing that they set up the EU, and it was basically a one-way street. It’s almost like one of those things that you played with when you were a kid. You put your two pointing fingers in the little Chinese…”
David: Handcuffs, yeah.
P.J.: “Yeah, the little Chinese handcuffs. You know, hey, it’s one-way. It goes in, but how does something come out?” And they said, “You know, it’s really hard to believe that all these highly intelligent individuals set up the Euro zone, the EU, as basically a one-way street, and now that they’ve got a problem, well, what if we need to unfold this situation, that’s where the challenge lies, that they don’t have any fiscal control.” So, it’s really frustrating Germany, for example, who is the strongest fiscal financially in the EU, that they don’t have any controls over the southern Mediterranean countries in the EU regarding either fiscal budgets. They’re running tremendous deficits, which are hurting the whole EU.
Jim: Well, I think one of the problems is is that we in the United States, we think of states like, well gee, California is probably in worse shape that Spain. How would that be different that Europe? I mean, yes, people are not happy about California’s finances, but they’re not running on the banks and they’re not divesting themselves of all the California bonds. How is that really different?
P.J.: Yeah, it’s just really a very tenuous structure that they have. It’s a union. It’s a bond in money only, basically. That’s the only bond that these countries have. They’ve signed some other side treaties, etc., but they really don’t have anywhere near the cohesion that we have in the United States.
Jim: So, it’s not like the U.S. Treasury that will back up any of the individual states, the U.S. Treasury having the power to tax and have their own revenues, basically you’re saying, if I’m getting this right, is that there is no Big Brother or big organization that has clout, that has money overseeing all of these individual countries. Is that right?
P.J.: Yeah, and they key thing that they’re missing, Jim, is they don’t have any taxing authority. So, behind the federal treasury, you know, we’ve got the Internal Revenue Service Department of Revenue that can raise money, you know, and push it into the system. So, they really don’t have that hammer that they can bring down on the number of countries that are in the EU. That’s the problem.
David: And they also don’t have any banking regulations that necessarily extend across the borders. Each country has its own twists and turns, and that has allowed, for example, in Spain, the banks have gotten in trouble by lending money and now they can’t, you know, the same thing has happened here with real estate values.
Jim: All right. So, you have a bunch of countries that used to have their own monetary systems, and they have this loose association, the Euro, as the item that is in common, and I guess, for a number of years, that worked. Well, what happened? What’s the problem?
P.J.: Well, I guess, you know, to keep it on a basic level, it would just be the old saw that anything is only as strong as its weakest link, and you know, there was a commentator I know talking a little while ago, and he was talking to one of the senior executives from the EU, and they didn’t take it very well, and it was one of the national “stock channels,” and he was talking to him and he says, you know, the EU, the flag or banner that they have has some stars and some different symbols and things, and he says, “Hey, it looks like you’re missing a couple of stars, or some things are hanging off there a little loosely,” and there is. I mean, you’ve got Ireland, it’s completely…you know, they had one of the first bailouts. You’ve got Greece, you’ve got Portugal, now you have Spain, and those smaller ones aren’t really a big deal, but when you get into Spain being around the fourth largest economy in the EU, Italy being the third largest, approximately, now you’ve got some real challenges to the system.
Jim: And I believe there were some problems in Iceland, also, with the banking system.
P.J.: Yeah, they wrote a lot more checks.
David: Yeah, but Iceland’s not part of the EU.
P.J.: No. Well, the effect of Ireland was what happened there. Yeah, Iceland was offering interest rates that were so high, the majority of people of Irish descent were depositing their money in Ireland, and the Irish government got in such bad shape that basically Iceland was on the verge of taking down Ireland because they couldn’t make good on the deposits. So, Ireland had to come in and guarantee a lot of the deposits just because so many of their citizens had invested in Iceland. Yeah, so a small country like Iceland basically almost took Ireland down.
Jim: Yeah. Well, what’s the background…let’s just take Greece because Greece was one of the first to fall. Well, maybe not fall, but let’s say they’re looking pretty tipsy these days. What happened in Greece?
P.J.: Well, what happened in Greece, what a lot of, a number of economists and market historians that I follow, Jim, have postulated is that they basically had cooked their books, for lack of a better word, up to the hilt, and it was very convenient, excellent timing for them when the EU came to them and wanted to absorb them into the EU. So, relatively speaking, they get a chance to erase their books, erase a lot of red ink and start back from zero. Well, they’ve spent that point in time running up another huge, enormous debt, and Greece probably has one of the largest social mentalities in EU. They had recently lowered their retirement age, I mean, some real crazy numbers, like, you know, you’re going to retire at 52 years of age or receive 80% plus of your average lifetime savings. I mean, how are you going to fund this for the next 40 years while someone’s retired? And they basically made a lot of promises that now the cows are coming home and they can’t cover the checks, so that’s why Greece is such an egregious problem. I mean, there’s no way to get out from how far in they are. Now, a lot of other people would comment and say if you look back at the history of Greece, I think we’re not used to it because we’ve never defaulted on our debt, relatively speaking, in the U.S., but I think there’s some type of number, like in the last hundred years, Greece has defaulted on their debt over thirty or forty times. So, it’s not a big deal to them. They say they owe you money, they don’t take that real seriously. It’s like, ah okay, if we can, we can, and if not, we’re just going to keep on writing checks and see how far we can push it.
Jim: All right, and I guess since now that they’re not in complete control of their own currency, that they just can’t print more money like we can.
Jim: You know, some people think that we’re going to get out of this mess just by printing more money and paying off debt with money that’s worth a lot less, and they can’t do that.
P.J.: Yeah, that’s what’s always gotten them out before, and that’s what’s strangling these countries now. They’ve always been able to inflate their way out of it. They print more money, and although it’s ugly and it causes problems, it’s not a potential death knell with a guillotine coming down, you know, with the situation that we’re looking at recently, if things don’t get worked out.
Jim: All right. And then, why don’t we also talk about Spain, because I actually put that in the headline “Is Spain’s pain our pain?” And I guess that’s really what our listeners…I wanted to do that little bit of background because I think it’s important. But I think that what most listeners are thinking is is how is this going to affect me, and what, if anything, should I be doing about it? So, maybe talk a little bit about Spain, and then what the impact is for people, and then what should the average investor do?
P.J.: Yeah, Jim, you know, the old saying there would be that, you know, once bitten, twice shy. So, if we were to look back at the bear markets since the Great Depression and say what was the largest amount that the broad market had dropped since the Great Depression, that was in 2008-2009, the broad markets were off a little bit over 60%. You take a balance portfolio with international in there, as well. So, what a lot of people, again, once bitten, twice shy, are sort of twitching, looking over their shoulder and saying, you know, is this Euro situation another Lehman Brothers in the making? Is something going to come out…is Greece going to be analogous to Lehman Brothers, and is that going to be the big domino that knocks a thousand or a million dominoes over? Spain is a different situation. I mean, some of the just fundamentals in Europe are sort of hard to comprehend. We’re in a very challenging period right now economically. Our unemployment rate’s a little bit over 8%. Spain’s unemployment rate right now is over 24%. It’s just really hard to comprehend. Their, I think, either teenage or under twenty-one or under twenty-five unemployment is literally 50%. They had a real estate bubble to end all real estate bubbles. The buildup that they had…in fact, I was just talking to a client of our the other day who actually has a second residence in Spain, and they were describing to us when they first built this property that there were very few properties in this area of Spain, and there was more building and more building. They said now, it’s basically like a fully built up suburb with apartments and everything else, and they said they are still probably, even optimistically, two, three, four years away, even basically giving a lot of these properties away to be able to sell them. So, you’ve got that type of overhead, and in relationship to the United States, you know, a lot of, again, very well-respected economists would maintain that we’re not going to come out of what we’re going to come out of right now until we finally reach the ultimate bottom in our housing crisis that we’ve had, until we get that straightened out. So when you look at that with Spain, they have a very long row to hoe to get out of this thing.
Jim: Okay. So, let’s say that you’re one of our listeners, and you’re thinking, “Well, boy, you know, I’m glad I’m not in Spain, and it’s pretty bad, but I have this sense of uneasiness that everybody keeps talking about what’s going on in Europe has a large impact on my life and my finances and my retirement, and I sure don’t want to go down the tubes just because Spain, you know, has some policies, or Greece has some policies that didn’t work out.” What should our listeners do, and particularly, and this is a little bit of a, maybe, a sore spot with certain listeners, people who don’t like to invest in anything that has any kind of negative connotation. So, if I made a living selling European funds, I don’t know if I’d be such a happy guy right now.
P.J.: Yeah, Jim, what our position would be as efficient market theorists in plain English indexers, you know, we believe that all market information is currently reflected in the prices. A lot of times, what people worry about is another giant shoe to drop. Whatever giant shoe that any individual is worried about, there’s millions of other very learned, very educated investors who have already taken it into consideration and placed those…it’s baked into the cake, so to speak, as far as the prices go. Individuals would want to still maintain a globally diversified portfolio. I was just looking at Vanguard the other day and they just came out with another recommendation of approximately, a little bit less than two to one, but approximately, you know, they’re still recommending that of whatever you put into the U.S. stock market, you put approximately half of that internationally. I mean, you know, fully understanding what’s going on in Europe and everything else right now, but you want to maintain a diversified portfolio. As you and I have talked a number of times before, you know, and as we are right now, we’re talking about the numbers and everyone thinks it’s a number-driven process, but really it’s that behavioral science. It’s the emotions of investments. And so I sit back and take a look at over the last five years, approximately, since the high in October of 2007, this market cycle high, there’s been approximately 1.4 trillion dollars pulled out of stock funds, moved into bond funds and money market. Generally, if we just juxtapose that against the backdrop of the fact that the average individual investor is wrong a tremendous amount of time, we could say at some point in time where they’re going to come back into the market and want to have that exposure to equities. So, you maintain a globally diversified portfolio, keep your fees and expenses as low as possible, you do want to maintain a full allocation to international exposure, even with the bad news that’s coming out. I mean, right now, even with all this bad news year to date, we only have one of our international asset classes that is negative, and it’s negative, I mean, it’s 1 ½% or so. So, even with that consideration.
David: Well, let’s take a quick break right here, and when we return for the second half of this edition of The Lange Money Hour, Jim Lange and P.J. DiNuzzo will continue their discussion. So if you have any comments or questions, please call us at (412) 333-9385.
David: Welcome back to The Lange Money Hour, Where Smart Money Talks. I’m David Bear, and I’m joined again by Jim Lange and P.J. DiNuzzo.
P.J.: Yeah, David, you know, one thing that I was just thinking, we were just talking on break and it’s funny that when I first met Jim, it was probably approximately fifteen years ago, and I met him at one of his seminars. So I’m just thinking, you know, Jim was just running a promo for a couple of seminars that he has upcoming, the estate planning for married couples and controlling from the grave topic.
David: What do you have to say about those seminars?
P.J.: Well, that’s why I’ve had a fifteen-year plus long relationship with Jim. I mean, I am a professional. I have tons of continuing education opportunities, but I can honestly say that Jim’s seminars are absolutely top notch. It’s amazing. I mean, the level that he’s going through is what we’re basically usually exposed to, professionals, myself as a CPA, or a registered investment advisories, even things the DFA, Dimensional Fund Advisors, puts on at that level. So, anything that Jim does for estate planning, wills, trusts, administration, is excellent, and I can’t think of any time that I’ve actually been at one, even sometimes Jim and I will co-prepare at a seminar, and even while I’m just sitting there listening to Jim talk waiting for me to say something, I’ll say, hey, you know, that’s something I didn’t even know. I mean, so I’m still learning. Yeah, the seminars are great and I’d recommend anyone who has an interest in any of these topics, I can generally tell you that it’ll be well worth your time.
David: Great! Well, that’s a good endorsement.
Jim: Well, yeah. Thank you very much, P.J. P.J., I actually had a personal question for you, and I actually e-mailed you. I just purchased a car, and by the way, I got it from Day Subaru, which is on West Liberty Avenue, and by the way, if you are in the market for a car, I thought they did a very nice job. The difference to me, the car company is fine, and I think their prices are good, but Rob Zee is the guy who was my salesman, and he truly knew what he was doing. Anyway, I’ll just put in a little plug for them. Their number is (888) 856-6478. But anyway, P.J., my question that I e-mailed to you was I do have the cash that I could’ve paid for the car, and the other thing that I could’ve done is I could’ve taken it on a home equity loan where I’m paying prime plus one-quarter percent, or I could use one of the finance agreements that they now have for new cars, and one of the options was actually paying .9, that is nine-tenths of one percent over, I believe, a four-year period. And I know that in addition to actually being an investment expert with dimensional funds, that you are also a CFP and you do these personal finance questions. How would you finance a car if you were going to buy a car these days if you had an option of a. either paying cash because you had it, b. financing it at one of these very favorable rates, and in my case, it was .9%, or c. using some kind of home equity line of credit, in which case, you can pay it off whenever you feel like it?
P.J.: Yeah, Jim, a lot of times, we get asked that question or a variation of that question, and one of the solutions that pops up an awful lot would be to use other people’s money, especially at the low interest rates that are available at a lot of dealerships. I mean, there’s been a lot of 0% money, 0% 9% money, and it comes back in to at least a duel perspective in we do a tremendous amount of personal balance sheet construction for individuals. Before we can provide a recommendation on asset allocation, how much to place in stocks in bonds, we really want to be able to build a balance sheet for an individual, and one of the key areas on their balance sheet is what we refer to as cash reserves. That would be money market, savings accounts, CDs, checking accounts, etc., and that category of a balance sheet is very difficult to build up because everything that goes into that category is what we would call after-tax, and everybody in the audience can certainly appreciate when they look at their paycheck, they look at the gross up top, and in a lot of cases, hey, that looks pretty nice, but then when you look at what you’re left over on the bottom once all the taxes come out, you say jeez, holy mackerel, I got a lot of headwind. So, it’s that money at the bottom after all the taxes have been withdrawn from the portfolio that go into that cash reserve account. Considering that we want individuals to have twelve months at least, at any point in time when they’re working, at least six months, but especially retirements twelve months or north. So the first thing we usually do is use the organization, the auto financing, use their money for the .9%, etc. The other one is, in a lot of cases you’ll see a lot, a tax advisor will use if you do have a home equity line of credit, and one of the benefits if you use their money versus the home equity line of credit is still you’re maintaining your line of credit so that you have more that you’re able to borrow at the drop of a hat at a moment’s notice. The other perspective, of course, from your home equity would be the deductability if you’re able to itemize on your write-off from the home equity since it’s against your house. And then, the third one would be, again, applying any money in cash, we have had some clients in certain situations that getting back to that cash reserve, they’re over-funded. We give clients a number that we want them to have as a minimum, and let’s just say, for example, if we did the calculation for a client and we told them their goal at least would be $50,000, some people may have twice that or even more, and a lot of times, we’ve run into individuals that if they have an over-funding in their cash reserves, and everybody, or a lot of people, rather, can appreciate right now how abysmally low interest rates are, that we have had a number of cases in that scenario that we’ve recommended clients to pay for cash since they only have a .1% rate of return and they’re over-funded in their cash reserves.
Jim: Yeah. By the way, you did say something that probably should be of interest to people, in that you mentioned the asset allocation for even, let’s say, a short period, whether it’s six months or a year, and I know that, very frankly, of the thousands of financial firms that I am familiar with, you are the only one that actually comes up with separate asset allocation strategies for different times that the money is needed. So, for example, you might have one asset allocation that might be virtually all cash, unless there’s other income for, let’s say, a one-year period, and then maybe year two to five, you will have a different asset allocation, still heavy in cash and CDs and fixed income, and then, let’s say, a different one might be for years six to ten, where you are actually having a higher concentration in the market in long-term investments, and then your eleven on. You’re the only one I know that not only talks about that, but actually has the money in separate accounts so people can actually see, oh, well this is where I’m going to get my money for year one. This is where I’m going to get my money for years two to five, and then you have progressively more long-term oriented investments in these different portfolios to the point where sometimes it’s ten, fifteen, twenty years, and often legacy money, that is money that you’re not likely to ever spend, and that’s one of the areas that I get involved, and there’s this nice juxtaposition where I say, “Well, for the long-term money, why not do a Roth IRA conversion and then let’s invest that in a way that is much different than you would for short-term money.” So, I know we’re going to get back to Greece and Spain, but I did want to just ask you that because it did come up, and then I did just buy a car today. And by the way, for me, I’m one of these cheapskates. The last car I had, I had for seventeen years, and I kept driving it until it died, and I’m usually the kind of guy who buys used cars, but I did get a new Subaru today because the new Subarus, they’re not that much more expensive than the used ones. So, anyway, if we can go back, parallels have been drawn between what’s happening in Europe and what happened to Lehman Brothers, and could this trigger financial Armageddon in Europe, and then could that spill over to us, or is this something that is a worry but not an extreme worry? How bad is it, and what should we be thinking in terms of preparation, and what, if anything, should we do in terms of changing our portfolio, or changing our spending?
P.J.: Yeah, the Lehman Brothers, again, that analogy has been talked about a lot. You know, one thing that we like to remind clients is there’s no shortage of prognosticators on the stock channels and anywhere else who are constantly referring to some type of Armageddon. We just like to remind people that by the pure definition of Armageddon, that occurs one time. I mean, that’s it. So, you know, we don’t think that, you know, there’s going to be a financial Armageddon due to the EU and the Euro zone. It could get bad. It could get very bad, but with the resources that they still continue to have, maybe it takes them a little bit longer to come out of it, but we don’t see this completely disjointing the entire system. So, we don’t see the Armageddon perspective. We do see, potentially, more tough road ahead. What they’ve been doing, literally, is just putting out fires and putting out fires and putting out fires, and again, as we mentioned earlier, they just don’t have the firepower to be able to come in from a fiscal perspective and to be able to do it otherwise. So, they’re very limited in what they can do. But we would recommend individuals to maintain, you know, you have a plan, or you should have a plan, and you want to stay on your plan. That plan would indicate a fully diversified portfolio not being in the group that had transferred $1.4 trillion out of equities into bonds. In the rare case that that would be appropriate would be if someone had a watershed moment in their financial life and said, “Now I’m really going to go from a 50% or a 60% stock investor to zero for the rest of my life,” as the case will be, and as we’ll see whether it can start in six months, two years, five years, who knows? But we will enter another bull market, another up market, and the same individuals will be coming to the party late and trying to put money back from their bond funds into the stock funds. That’s just literally a loser’s game.
Jim: Okay. Now, I have a question. It’s a little bit out of left field, and one of the things I don’t like is sometimes when you hear a talk show, and you hear one person who doesn’t know much about things asking somebody else who doesn’t know much about things what their opinion is, and I don’t know if anybody noticed, but the new host of the Lange Money Hour is David Bear of Traveler’s Journal fame, as well as the Post-Gazette, and as long as we are talking about Europe, and you’re the financial expert, David is the traveler’s expert. So, David, is this a good opportunity…so her I am, asking…but see, David really is an expert in travel. David, is this a good opportunity to travel in Europe because the Euro is down, and we can get a good value for our traveling in Europe, and should we be worried about some unrest in Greece or any of the other countries?
David: Well, I mean, clearly, it’s a time when you can get more Euros for your dollar than you could, I think it’s down now to, like, $1.25 or $1.26 for an exchange rate, and it’s been up close to $2.00 at various points. So, you clearly do get a lot more mileage out of your dollars, and depending on where you go, I think that you’ll just find a lot of bargains and Europe is much the same as it always was, and in fact, people are still going to Greece. People are still going to Spain. It’s not I think at the point where you have to sort of fear for yourself as a traveler at this point. But, you know, as always, you have to be prepared, and one of the things that is always good to do is have, if you do go, have a variety of monetary sources at your hands. You never know what’s going to happen, so you have to be prepared. But if you have the opportunity, there’s never a good reason not to go.
Jim: Okay. So, how would you find prices relative to comparable cities, you know, New York versus London or a mid-sized town, or even the countryside? I mean, would it be the kind of thing that you’re paying $5.00 for a glass of orange juice at a dive restaurant, or would it feel pretty similar to what you might expect?
David: I would say it would probably be similar to what you expect here, although there are huge price differences in things like gas. So if you’re driving around, you know, you’re going to expect to have some hefty prices at the gas pump, which will dwarf anything that you’ve ever paid here. So, that’s always the case, and will be the case going forward. It’s also true that travel, particularly, is expensive in cities. Paris, this year, you know, we have the Olympics in London, and that, of course, drives prices way up. So, you know, if you’re looking for bargains, you don’t go to the places where everyone else is going.
Jim: Okay, very good. Thank you for that expert opinion on travel in Europe. P.J., if we could get back to Europe for a moment, is there a run on Greek banks? Are people…you know, you read headlines, are people literally standing in line in Greece trying to do what they can and walk out with either U.S. investments or gold or something? And again, is that something that should concern us, or, you know…by the way, it’s interesting. You seem to have a little bit of a pattern and it’s kind of boring and it’s a little bit like mine, which is I’ve been basically advocating the same tax strategies for years and years in terms of don’t pay taxes now, pay taxes later, do Roth IRA conversions, particularly at lower incomes, etc., and you seem to keep coming back to a very well diversified portfolio using low-cost index funds, and regardless of what is going on, you’re not actively putting more money in Europe or actively taking investments out of international. You’re just pretty much staying the course. Is that right?
P.J.: Yeah. We would be staying the course and, you know, as I like to say anytime I talk to individuals in a meeting, Jim, that if I’m doing my job as well as possible as well as I should, my voice should never be coming across my lips. And what I mean by that is we’ve prided our practice on just focusing on endowments, foundations, institutional money managers, I mean, $500,000,000 is a small portfolio, even $1 billion or $2 billion, and you look at these organizations and you’ll see a set asset allocation. Now, if they have a growth portfolio that’s between 60% or 70% in stocks, but as you mentioned earlier, it was funny you were talking about, you know, we talk about our DiNuzzo money bucket stack analysis, you know, what are these buckets of money for, etc. We just had a meeting just this morning at our downtown Pittsburgh satellite office branch and the same thing came up with this gentleman. We set up his cash reserves, which, of course, is zero percent in stocks. Then we went to that next part that you talked about and our recommendation was 25% in stocks and 75% in bonds. Then we went to the next part that’s going to pay their risk tolerance which is going to pay for his other expenses in retirement, and we’re going to be around 40/60, 50/50 max, and then, as you said, which is your sweet spot, in the legacy bucket at the top of the list, and we recommended (he was a little bit more conservative), we talked around a 70/30 asset allocation. So, if you identify these asset allocations correctly, you don’t have to worry about hopping in and out of those allocations.
David: Well, let’s take another short break before we go on.
David: Welcome back. We’re here with Jim Lange and his guest, P.J. DiNuzzo.
Jim: And by the way, before I continue, I do feel honor-bound to tell you that I am not independent with P.J. DiNuzzo. Usually, when I have guests on, I try to get the best and brightest people I can, the top IRA experts in the country, the top estate planners in the country, the top Roth IRA experts in the country, and usually, if they wrote a good book, I will put in a nice word for their book, but I don’t have any financial interest in them selling books or them performing any services. I do have a financial interest with P.J. DiNuzzo, and I do feel obligated to disclose that. If you were to go to P.J. DiNuzzo and you had never heard of me, and you came to him and said, “P.J., I understand you are a wonderful financial advisor and you are using low-cost index funds, specifically dimensional fund advisor funds, to invest for your clients,” that his fee would be 1% or less, depending on how much money was invested. If that same person comes to me and then I refer them to P.J. for actual money management, our firm then does what we do, which is things like the big picture Roth IRA conversions, how much money you can spend, what your estate plan should look like, should you do a gifting plan, how should you take care of your grandchildren’s education, that type of thing, and P.J. and I split fees. So, in our opinion, it’s really a win-win-win where the client is getting what we think is the top tax and strategy advice, getting excellent money management services with not only wonderful funds, but P.J. being a very hard worker and doing all the hard work that few financial advisors will do. So, I do feel obligated to say that, and I’ll also say that it’s interesting, P.J. comes from a background where his parents were in the restaurant business, and when he was growing up, he was actually working in the restaurant business, and if you are an employer, you might know that those are the kind of guys that you want to hire. You want to hire people who grew up in the restaurant business because those guys know what hard work is. When we’re talking about separate asset allocations for different time periods, that is a lot of additional work for the financial advisor, and most financial advisors don’t do that partly because it is additional work. But P.J. is a hard worker. I often get e-mails from him at seven in the morning or ten at night, so I think that a lot of people could benefit from that joint association between my firm and P.J.’s firm. But anyway, P.J., we don’t have that much time left, but you wrote about a bond anomaly that I thought was terrific information, and I know that you can’t really reproduce that whole article, but maybe if you could give people a little summary about what you were talking about in that paper, because I thought it was very well done, as frankly, I always enjoy your newsletters and the information that you send out to your clients.
P.J.: Yeah, Jim. You know, for the listeners, I guess one of the very beneficial takeaways from this would be that, as you’ve heard before, there is no free lunch. The market, again, is taking all market participants global-wide and arriving at prices. The recent ten-year bond rate as of about a week-and-a-half ago, the Greece ten-year bond rate was approximately 29%. At first glance, that may sound very sexy and very attractive. Boy, I’d like to invest my money and get 29% per year, but what the market’s telling us is that there’s an extraordinarily high probability that there may be a default on that. So, it looks good on paper, but the return of principle is more important than the return on your principle. And when you take a look, there’s basically a correlation that you would expect from countries that have higher debt that have to pay higher interest rates. There are a couple of outliers, one is us in the United States having one of the higher debts, being in the top tier, so to speak, internationally, and what we need to be careful of is living off of our good reputation, so to speak. We’ve had a great fiscal diligence for the last couple hundred years. We haven’t defaulted on our debt. The age-old saying guaranteed by “the full faith in credit of the United States government” carries a lot of weight, and we need to be careful that we don’t minimize that or prostitute that and we maintain our standing across the globe. The other one that’s interesting is Japan pays extraordinarily low interest rates, and when you look at Japan, you say my goodness, you know, how can they have that high a debt and pay that low an interest, but they also have one of the countries that has the highest participation of bond owners being their own citizen. So, our bonds are being purchased, you can listen to the talk shows and everybody’s always quoting what percentage of our bonds are bought up by the Chinese, every bond auction that we have. So, there are these anomalies across the globe, but it really ties into to be careful. When you’re looking at a high rate of interest, it can look attractive initially, but there is the other side, the risk side of that equation that you need to consider, as well.
David: Bond buyer beware.
P.J.: Bond buyer beware, yes, David.
Jim: I had a client in actually today, and he’s very scared right now. He thinks that something very bad’s going to happen, and he’s putting all his money into CDs and treasuries, and he says, “Hey, I’m not comfortable with what’s going on with Europe. I’m not comfortable with what’s going on with the United States. I don’t know what’s going to happen with the election. I’m really just going to stay out of this. But my plan is, after things settle down, then I’m going to go back into the market.” And the thing I always remember you saying is, you know, they don’t ring a bell at the bottom, they don’t ring a bell at the top. What would be good advice for people, and I know there’re a lot of people out there who are generally uneasy (and Europe is certainly one reason to be uneasy) about changing course with their asset allocation right now.
P.J.: Yeah, the one thing that they would need to internalize is, I mean, as well as anything in life, if you’re going to go on vacation and drive from here to St. Louis, you’d want to have an idea how you’re going to drive from here to St. Louis. Are you going to stay overnight? Which highways are you going to be on? You know, making sure your gas tank is full, etc. I mean, you have to have a plan, and the average individual is really exacerbating, and they’re making their situation worse by not having a plan. They’re providing a lot more anxiety than even professional money managers would have. So, they just need to know that, fundamentally, they’re really stacking the deck against themselves, and again, I can appreciate that if that’s their emotions, but I would suggest at least taking that baby step. If they, theoretically, potentially made…if they should have 50% in stocks, or let’s even say 40% in stocks depending on how old they are, maybe they put 10% into stocks and have 90% in bonds, short-term investments, etc., at least to be able to average back into the market. The biggest mistake that they don’t want to make, one of the most famous sayings, if you did, I guess, a Nexus Lexus financial word search, would be what you just mentioned, Jim, that we hear constantly, the same thing that you just heard is, well, I’m going to get back in when everything looks good and when it’s obvious that it’s okay to get back in “when I’m comfortable.” That’s usually, at least, 20% or more off of the bottom of the market. If you miss a 20% or 25% move, you potentially have missed a two, three or even four-year rate of return by missing that initial move.
Jim: Yeah, and I know that you also have…one of the things that you talk about is that most investors don’t get the benefits of their investment funds or their index funds because of marker timing. Is that right?
P.J.: Yeah, that’s back to the Dalbar research with the average individual investor only achieving a little bit over 40% of the rate of return of their investment. If their investment grows 10%, the average individual investor is only achieving a little bit over 4% per year.
Jim: So, that’s actually psychology of investing in behaviors. Is that right?
P.J.: Yes, that is a behavior challenge across the board.
David: Well, thanks for listening to this edition of The Lange Money Hour, Where Smart Money Talks, featuring James Lange, CPA/Attorney and best-selling author, and thanks also to tonight’s guest, P.J. DiNuzzo of DiNuzzo Investment Advisors. Remember, you can find the library of past shows on Jim’s website, www.paytaxeslater.com. You can also call Lange Financial Group at (412) 521-2732. Join us again in four weeks on July 18th. Encore editions of The Lange Money Hour are also rebroadcast on Sunday morning at 9:05 right here on KQV-AM 1410.
James Lange, CPA
Jim is a nationally-recognized tax, retirement and estate planning CPA with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania. He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again. He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans. His plans include tax-savvy advice, and intricate beneficiary designations for IRAs and other retirement plans. Jim’s advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger’s Retirement Reports and The Tax Adviser (AICPA). Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.