Anthony Saffer VP / Financial Advisor CFP®, CKA®,

Alex Okugawa  / Financial Advisor CFP®, CKA®, CEPA® 

Alex Okugawa 0:00
Hi there, and welcome to our segment Cut Through the Noise where we answer your questions that we’ve been hearing throughout the month. Today, we’re talking about rising home values and cashing out that equity, big tech stocks, bond replacements, and potential market tops. Stay tuned.

Alex Okugawa 0:25
Alright, Anthony. So the first question they have here is actually a submission from George L. And he says, “I’m 53 and have been thinking about cashing out some of the equity in my house, I’m not planning to move and the kids are out of the house, I would use the cash and invest in the stock market with inflation on the rise, I feel like this would let me capture the equity in my home that’s risen in value and help protect my income in retirement, which sounds like it’s down the road. We’d like to get your opinion on this idea. Thanks in advance.

Anthony Saffer 0:57
It’s tempting, isn’t it? I mean, it’s it’s definitely out there with with equity high, interest rates low. I think the thing here is that the math on paper can work. If I’m borrowing at 3% I have the equity that’s just sitting there, and I invested in you know, a higher percentage, whatever that is, then yeah, you can you can make more, but I don’t really agree with it.

Alex Okugawa 1:19
Well, and debt presumes a certain future, right, if I’m going to do a cash out refi, again, just to kind of break that down is you’re taking on more debt, you’re essentially pulling that equity out of your house. And in exchange, you’re kind of like adding on to the mortgage or creating a larger mortgage, which then adds more debt. So you know, if we just, if we think about it on paper, like you said, Sure, the math can make sense. You know, 3%, maybe sub 3% on a mortgage, hopefully more than that in the market long term. That can make sense. But in this situation, it’s. Do you really want to be adding debt to your plate? Especially when a lot of retirees do have goals of being debt free in retirement. We’ve talked about this a lot. I know you’ve gone through it, working with retirees that were debt free.

Anthony Saffer 2:09
Yeah. And we really see the home as an element of stability. It’s like, do you want to risk your home because, you know, the the loan to the value of the home? It might be you have great equity right now. But what happens if home prices go down? Yeah. And you’re in a different situation, you lose the flexibility. If you do have to move? It makes for a difficult situation. We saw that back in, you know, 2008 & 2009.

Alex Okugawa 2:31
Yeah, absolutely. So I think that the the key point here, is that on paper, yeah, I think the math can make a lot of sense. In practice, and what we’ve seen and what you’ve seen going through different market cycles, it may not be advisable. And again, without knowing your exact situation, it’s hard to say for certain, but just anecdotally, definitely something to take caution.

Anthony Saffer 2:54
Definitely be cautious of that. All right. Next question. I’ve held apple and Amazon stock for the past few years. They’ve done great, and I’ve made a lot of money. The recent market, choppiness has me a little concern, should I hold on?

Alex Okugawa 3:04
Yeah, absolutely. It’s a really good question. Of course, it can be a little emotional, like, especially holding on to these these big household names. And when they’ve done so well, right, you’ve probably made a lot of money. Like he said, I think it goes back to having a plan in place. Honestly, as boring as it may sound, you need to have a plan in place. So what is my target allocation to Apple and Amazon? I’m not saying you need to sell all of it. But you might want to consider reining it in it also might depend upon your risk preferences, and also your your time horizon. So you know, let’s just give you a hypothetical example. Let’s say someone is closer to retirement and they hold both Apple and Amazon. Well, maybe we rein that in to maybe have it be five maximum 10% of your total portfolio heading into retirement, right. I’m not saying sell all of it. But trying to rein it in and having a guardrail in place. So that way, let’s say Amazon or Apple does grow beyond your target of five or 10%. Then you have a system in place to rebalance, sell, bring some of that back to the target, so it doesn’t get out of control.

Anthony Saffer 4:11
Yeah. And so then you’re not prognosticating. You’re saying okay, well, I know if it goes back up, if it continues to go up, then I’m going to be happy that I own some of it. I may not be as happy as if I owned a bunch of it. But at the same time, I’m more diversified. And I’m able to spread my risk.

Alex Okugawa 4:25
And it’s a really good question, because, you know, we will have clients ask us this question all the time. Well, well, do I own some of these big tech stocks, and some people don’t want to own it, but some people do. You could still get exposure to these big names Apple, Amazon, Netflix, Google, Tesla, through the use of broad based ETFs and mutual funds, where again, it diversifies that exposure so you get a good exposure to it. It’s just not heavily concentrated, which you know, is a good investment principle.

Anthony Saffer 4:54
The other thing people lose sight on last point here is that holding the broad indexes the markets contain the next apple and Amazon. Yeah. So what’s what’s what’s going to be the best the next 10 years? Yeah, you know, and it’s if you look at the stats of that it’s usually not the same ones that have been the best the last 10 years.

Alex Okugawa 5:10
But of course, this time is different, right? Every time is different. All right. Next question. So a lot of bonds. Most bonds are down Year to Date in 2021 here. I’ve looked at bonds to create safety in my classic 60% stocks and 40% bond portfolio. What should I be considering for bond replacements? You know, there’s a lot of news out there basically saying, you know, bonds are terrible. Why would you invest in bonds negative yielding even real returns might be negative?

Anthony Saffer 5:44
Yeah, I don’t, I don’t know that. It’s just about replacements, right? I think bonds are still worth investing. And I actually wrote a post on this in February, you know, our bonds worth investing in. And there’s a lot of reasons why Yes, stability, because when when bonds go down, it’s usually not nearly as much as stocks. In fact, Ben Carlson wrote about this where he compared a bad year in bonds is like a bad day in stocks. I mean, that’s the difference in fluctuation we’re talking about. So when you’re looking for income, stability, the ability to rebalance between your stocks and your bonds, and then maybe it’s not an all or nothing approach, if you are looking for that replacement. It’s not necessarily just selling all your bonds, it’s maybe taking a little bit off the table if you really are concerned with it, and looking for other risk management techniques.

Alex Okugawa 6:32
Yeah, and I might be butchering this statement. But I, I’ve heard a user on Twitter, Corey Hoff seen, he has this phrase with his firm, and it says, you know, “Risk can’t be destroyed, it can only be transformed”. And again, I might be butchering that. But I really liked that phrase, because again, when we look at all this, and it’s saying, well, should I look, you know, to alternatives from bonds, it’s not a magic bullet, you’re not all of a sudden going to remove any risk from bonds and then have greater rewards, you’re just going to be transforming the risk into something else. So I really like that. Yeah, that phrase.

Anthony Saffer 7:05
Yeah, good point. All right. Last question here. So market seem crazy. Assume stock market here. I’ve been pretty conservative and keep waiting for the stock market to drop. Are we nearing a top?

Alex Okugawa 7:16
Yeah, that’s a good question. Again, goes back to planning. Waiting, you know, are we nearing the top of my waiting for a top this, this is classic market timing, right? This is that classic, waiting for the market drop, or waiting for the top, and I’m going to sell. If we know anything about statistics in history, it’s incredibly hard to time the market. And we actually wrote a post not too long ago, basically talking about how we are preparing for the next bear market. And in that post, we’re not saying Well, we’re, you know, the next bear market is coming right now. But it’s saying, well, we’re always in preparation mode, we’re always preparing. But just because there’s a market top doesn’t necessarily mean that we’re going to have a down market and JP Morgan had a great link in there basically showing like, just because you hit a market top, the market can continue to go up. So it’s a tough question to answer. I would just say it goes back to the overall plan. And before making any adjustments very often it does make sense to make small, incremental changes over time rather than drastically shifting between styles

Anthony Saffer 8:22
Personal objectives, planning situation all that is definitely needed to be considered.

Alex Okugawa 8:29
All right. Well, we hope you enjoyed our segment Cut Through the Noise. If you have questions that you would like us to answer, feel free to email us at admin@onedegreeadvisors.com. We look forward to hearing from you.