Dennis: When the tech crash began, it was the day that my purchase order went in to buy tech stocks.
Jamie: Meet Dennis. He’s in his sixties now but the decision to invest in tech stocks 20 years ago, right as the dot-com bubble was about to burst, still stings like it was yesterday. It cost him around a third of his net worth.
Dennis: It was very sad. I was raised by scientists. They were really interested in like the background noise made from the big bang and building an antenna to detect it. Like nobody in my life has ever really thought about money. Honestly, it left me really feeling that the only thing in life that one could really rely on is real estate.
Jamie: That instinct served him well. In 1980, 20 years before the tech crash, he invested in an apartment in New York City. What cost $17,000 at the time, is now worth about a million and a half. But it’s meant a lot more to him than just a smart investment.
Dennis: There's a tremendous emotional connection. I moved into that apartment 45 years ago. It's been my home for my entire life, my entire adult life, anyhow. I'm the eldest of six kids and at some point in our lives, virtually all of my brothers and sisters have come to live there with me for a while. So to the extent that we have a family homestead, it's that. So letting go of it and letting go of my connection to New York City is tremendously hard, but I might have to.
Jamie: Dennis has held onto the apartment, renting it out to cover costs, but life has him currently elsewhere. He’s recently divorced and lives close to his two children – a son who’s 17 and a daughter who’s 10. And while he may be at retirement age, he’s not ready to retire. He’s a music producer and loves his work, so he still has some income there. He also has the proceeds from a house he just sold with his ex-wife. But as he plans his life's next chapter, he knows one thing for sure. He can't afford an investing experience like the one he had back in the '90s.
Dennis: It was a disaster. It was just a disaster. I would say that has left me very wary of financial advisors. I feel kind of like one of those guys that sits out with a table with a sign saying you're all crazy. Convince me otherwise.
Jamie: And that's where we'll start today. I'm Jamie Roo and welcome to What Should I Do With My Money, an original podcast from Morgan Stanley. We match real people asking real questions about their money with experienced financial advisors. And you get a front row seat to hear what it’s like to talk to a financial advisor. And hopefully, get answers to some of the questions you might have yourself. Dennis comes with a good amount of hesitation about investing – about trusting the advice of financial advisors after the losses he incurred investing in tech stocks all those years ago. But he knows – at this stage in his life – he needs help to manage his assets, to make them last. For both himself and his children. That means today, he wants to know, should he sell that New York apartment? How should he incorporate saving for college for his two kids? What about the money he has from the sale of the house he and his ex-wife shared? How much should he keep available? How much should he invest? Are there any investment options he'll feel comfortable with? Joining us today to help answer these questions is Cathy from our Rehoboth Beach, Delaware office, a senior vice president and wealth advisor with a lot of experience working with people concerned about providing for their families.
Cathy: I've been so fortunate to have had such great relationships with some of my clients that when their children come of age, I then as well work with the children on their investments. They stay with me. It's so special when you can be a part of a family's life across many generations, really getting to know them and seeing the fruits of all their hard work and labor, and being able to be a part and explain it to the next generations.
Jamie: Helping clients reach their goals truly motivates Cathy. She takes the time to really know them and has learned what often holds them back.
Cathy: I always think that fear is the biggest problem of investing.
Jamie: And Cathy knows, fear comes from a lot of different places. The better she knows her clients, the more she can help clients like Dennis overcome their fears and make rational decisions about their finances.
Jamie: Hi, Dennis and Cathy. It's so great to have you. Thank you so much for joining us today.
Cathy: Great to be here.
Dennis: Nice to be here.
Jamie: I was eager for the two of you to meet because Cathy’s been in the business long enough to remember the tech crash and the impact that it had on people in your shoes, Dennis. And also because Cathy has worked with many people who are trying to balance short-term expenses like college tuition with longer-term retirement planning, just like you are. She knows a bit about your situation but has some questions to get the full picture on your needs. Then it’s over to you to ask the questions you have today. And we’ll speak again after.
Cathy: So my first question is your son. What do you think the college costs will be?
Dennis: Why don't we figure that it'll cost me out of pocket, say, $30,000 a year.
Cathy: Great. And at the same time, as far as your partial retirement, what do you find that you might be short a month that you need to supplement, to keep your life perfect?
Dennis: To keep it perfect. I'll go for pretty good. But to keep it perfect would be maybe 2,500 a month.
Dennis: That would be pretty darn good and perfect would be three, 3,000.
Cathy: Great. And of course, Social Security that you're already taking or?
Cathy: Okay. Great. And with that right now, your flow is pretty good with an additional 3,000 a month, 2,500-
Cathy: To 2,000-
Cathy: A month? Excellent. So in looking at the cash flow needs and how much liquidity might be needed within the next year to four years-
Jamie: Cathy and Dennis continue this exercise of adding up all of Dennis' short and long-term expenses. College for his kids will naturally be a big one. His own needs seem relatively modest. He's got a bit of an income and some help from Social Security. So the next question is what other assets does he have to work with?
Dennis: So I recently got divorced and in the process, we sold the property that we had owned together. So from the sale of that property, I got about $800,000 and I need to figure out what to do with that money.
Cathy: Okay. So what we want to look at will be what will be comfortable for you, how much of that 800,000 could be invested for the future and how much should be kept separately for your shorter term expenses. Given your short term needs of college and supplement of earnings, I think what makes sense to is to keep a quarter, or even up to a half of the 800,000 in more liquid types of investments or accounts. For the rest, it's a matter of figuring out what makes the right asset allocation to make sure that your portfolio is properly diversified to withstand a variety of market conditions.
Dennis: What my nightmare is, is putting $500,000 in and having it worth $400,000 in two months.
Cathy: And we don't want that to ever happen. So we figure out how much is the right amount for you to invest and create a portfolio that is designed to not expose you to the big swings in the stock market. For someone like you who is not comfortable with a lot of risk, a portfolio would be designed to have less exposure to stocks. So a 20% decline in the stock market would actually have a much smaller impact on your portfolio. This kind of portfolio is one I recommend to people thinking about or in retirement.
Jamie: Cathy goes on to explain ways a portfolio might generate some income. There are a few ways portfolios generate income. Investing in bonds is one way. Another is investing in stocks that pay dividends. A dividend is a payment made by a company to its shareholders, generally as part of the company’s earnings or profits. Cathy suggests stocks with stable dividends for Dennis, based on his income needs and his aversion to risks. Dennis has some questions about this.
Dennis:... something that pays dividends, fairly high dividends, even though the value of the stock itself isn't going to necessarily climb to the stratosphere. Or dividends aren't something you can count on?
Cathy: You want companies that have a stability history, an increasing dividend stability, so not necessarily the highest dividend. Some companies pay really high dividends, but those high dividends don't match the company's earnings. So they may not be able to sustain that dividend in a more stable, reliable way. Better to choose stocks with dividends that may be more modest, but are more closely aligned with the company's actual earnings, which enables those companies to provide a more stable, predictable income stream. So-
Dennis: Gotcha. So you want something boring and reliable. I'm happy to be bored. I am totally happy to be bored. Bored works for me. Okay. Bored, steady, reliable, that's music to my ears. I don't want my excitement to be coming from checking my balances.
Jamie: Now here's Dennis' last big question.
Dennis: What do I do with this apartment? Do I sell it? Do I live in it for a while and then sell it? Because there is an advantage and an emotional connection, certainly. But at some point in life, you have to say, yeah, that's great, but it's worth a million dollars and you're not making anything from it.
Cathy: Would it make you happy to live there? Not live there?
Dennis: Well, I need to stay near my kids and my kids aren't in New York. So, there's going to be a period of some years where living there really isn't an option.
Cathy: Well, it would be advantageous to make this New York apartment your primary residence before selling. If the New York apartment qualifies as your primary residence, you may be allowed to exclude $250,000 of capital gain from the sale of the apartment from your income.
Jamie: As always, consult your own tax advisor for specific guidance regarding any available deductions or the tax treatment of specific transactions you are thinking about.
Cathy: So, that's definitely one thing to consider. I want to look at the cash flow again and think through your needs. Because you've got some great liquidity from the home you just sold and that should help with college and your more short term needs. If you don't have the immediate need, maybe you want to hold right now selling the apartment.
Dennis: If I can sort of revoice what you seem to be telling me already is that I've got a little time to play with that property, that I don't need to do it right away.
Dennis: And so I've got a little bit of time to come up with a plan because I don't need that stream of either income or investment right at the moment.
Cathy: That's my thought. Do you have any questions for me right now?
Dennis: We'll go back to where we started, which is what's my fear. My fear is that it all goes to hell or it all goes downhill and I'm struggling. So I suppose what I really want to hear is that given what we've gone over, that it will be okay, that the resources exist to actually achieve the goal of low stress, if not luxury, certainly comfort in the years to come.
Cathy: And that is the goal is to make sure that the portfolio is designed to do that for you.
Dennis: Okay. That's a goal. Is that an attainable goal? That's what I need to know.
Cathy: I've been doing this a long time. And while no one can make guarantees, we can look at the probabilities. I've worked with people like you or people in similar situations and when we've run their plans, accounting for their cash flow needs and how they expect their portfolios to contribute under all sorts of market conditions, the probabilities for success have been really high.
Dennis: Okay. Well thank you very much.
Cathy: Such a pleasure.
Wrap and Recap
Jamie: Dennis, I just have a few questions for you before we wrap. Was there anything surprising that stood out for you from what Cathy said?
Dennis: I guess I've been so focused on this short term that I'm a little surprised to be thinking, okay, well we got to think 20 years out and we've got to send my son to school next year and my daughter in six years, but there's a whole life beyond that. And honestly, I haven't really thought about life beyond that.
Jamie: What do you feel like the next steps are for you? What's the first thing you're going to do with your newfound knowledge?
Dennis: I'm going to have to really consult with the financial advisor to make sure that I actually do. That's always the problem. It's sometimes you know what to do, but then actually doing it is always a challenge, at least it is for me. So I'm going to have to actually do it.
Dennis: And then, hopefully I will get to that point where I get the text every month saying we're doing fine, that there's no emergencies. And as I keep saying, I don't need luxury, but comfort will be comforting.
Jamie: I’m hoping that talking to Cathy today may have helped you overcome some of the bad experience you had years ago?
Dennis: No. It was fabulous. And I really, really appreciate her time and her insights.
Jamie: Good. That's what it's all about. Well, Dennis, thank you so much for joining us. Please keep in touch and let us know how things are going.
Dennis: I will.
Jamie: That's it for this episode of What Should I Do With My Money, an original podcast from Morgan Stanley. If you enjoyed this episode, please follow us wherever you listen to your favorite shows. And if you would like a deeper dive on what was discussed today, come see us at morganstanley.com/mymoney. I'm Jamie Roo. Talk to you soon.
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