Ryan Ermey: We know you're still concerned about coronavirus and so are we. Today's show features a main segment interview with Kiplinger.com senior investing editor Kyle Woodley on tactical market moves to make now and a discussion of virus-related scams to avoid.
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Ryan Ermey: But first, Sandy and I will chat about options for moving your 401(k) when you leave your job. That's all ahead on this episode of Your Money's Worth. Stick around.
Ryan Ermey: Welcome to Your Money's Worth. I'm Kiplinger's associate editor Ryan Ermey, joined as always by senior editor Sandy Block. And Sandy, I've had a bunch of friends asking me financial questions in recent weeks especially related to the topics coming up in our other two segments. But in the midst of that, I also have a couple friends leaving their jobs and they asked me about what to do with their 401(k)s. And I said, "I know just the person to ask about this," because you know about this. And we are actually covering it some in the upcoming millennial-focused column that's going to be in the May issue of Kiplinger's Personal Finance. So what choices do people have, Sandy?
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Sandy Block: Well, they have several choices, Ryan, and this happens a lot. I've actually been at Kiplinger's for a while, but when I was in my thirties I changed jobs, all the time.
Ryan Ermey: I'll tell you what, me and my roommate are the only two people that we mutually know that have been at the same place since we graduated college.
Sandy Block: Yeah. It's no longer a stigma to change jobs, it's just what people do. And a lot of times if you've been doing the right thing and saving money in your 401(k), you have to figure out what to do with your 401(k) when you leave. And you have several options, three are pretty good and one is terrible.
Sandy Block: I think my favorite option is to roll it into your new employer's 401(k) if that's an option. The advantage of that is that if you change jobs a lot, and this happened to me, you could end up with orphaned 401(k)s all over the place with former employers. And that's not the worst thing in the world, but it means that your portfolio may not be appropriately, asset allocation could be off...
Ryan Ermey: You're probably not going to be on top of it anymore.
Sandy Block: You can lose track of it, all kinds of things. So number one is find out if your new employer has a 401(k), make sure it's a good 401(k) with low fees and good investments. And if the option is available, and increasingly it is if you're working for a large company, you can just roll your old 401(k) into your new 401(k) and you've got all that money in one place.
Ryan Ermey: All right. But what if your new employer either doesn't offer a 401(k) or just won't let you roll it in for whatever reason?
Sandy Block: Well, then you have two choices. One is just to leave it alone with your old employer, which isn't the worst thing to do in the world unless your old employer won't let you leave it there. Some companies will make you cash out, won't let you keep it there, but a lot of companies will. So you could just leave it there. But I think a better option is to roll it into an IRA. And you may want to do this anyway, particularly if you're getting closer to retirement. The upside of that is that an IRA will offer more investment choices than you typically get. So if you're a really active aggressive investor and you want to get into real estate or something that isn't offered in a typical 401(k), that might be the way to go. Financial services firms are thrilled to take rollovers and will basically do all of the work for you.
Ryan Ermey: Yeah. Well, not only that, but I mean, not only do you have, you can invest in essentially anything in an IRA that Fidelity or T. Rowe or whoever you roll it over, whatever they have to offer. But it could also be the case that you don't have a particularly good roster of mutual funds offered at your current 401(k). Or maybe you don't like the roster at the place you're going. So it could be a lot of, say, high-fee mutual funds or maybe it's only, I mean, I know some places they only offer the target date funds. So it could just be a way for you to be a little bit more hands-on with your investments. So what is the bad choice?
Sandy Block: The bad choice is to cash it out. In all of the things that I've mentioned so far, what you need to do is what's called a trustee-to-trustee transfer, where basically you never see the money. You have it electronically transferred to your new employer's 401(k), your IRA and that's a tax-free transaction. You don't pay any taxes on that money. What happens a lot of times, particularly to young people, is they're tempted just to cash out the money. They take it out because they think, "Oh, I want to pay off my student loans," or, "Take a trip," not a cruise right now, but take a trip, do something interesting with it or just think they need the money.
Sandy Block: When you do that, you will end up paying taxes on everything that you withdraw. Also, if you're under 55, you'll pay a 10% early withdrawal penalty, which means you could end up giving up to 40% of the entire amount that you had saved to the IRS. Unless you're facing eviction, this is a really bad option. And I think people have figured that out. We used to see pretty high percentage of job changers cashing out. You don't see it so much anymore. I think people have gotten a little wiser about this, but it is a temptation. And as I said, unless you desperately need the money, don't take it out.
Ryan Ermey: And it would be especially crippling to do it now given that markets are down.
Sandy Block: Right. Right now you would be selling your investments at a severe loss, but even in an upmarket you're giving up opportunities, that money is not working for you. So this is one we really discourage.
Ryan Ermey: All right, well, check out all of our advice related ... the Millennial Money column coming out in the May issue. We'll have a couple more pieces of advice for people changing jobs, on the paperwork front, so keep an eye out for that. And yeah, a lot of options for people looking to move their 401(k), just don't cash it out.
Ryan Ermey: Coming up, Kyle Woodley gives you stocks to avoid as well as fun picks that help tamp down on volatility and even provide upside in bear markets. Don't go anywhere.
Ryan Ermey: We are back and the coronavirus market tumult continues. And so we thought we would check in with our friend, Kyle Woodley. He's the senior investing editor at Kiplinger.com. Kyle, thank you for coming on.
Kyle Woodley: Thank you for having me.
Ryan Ermey: So we talked a little bit about coronavirus and its effects on markets in our last show, but for people who somehow have missed this news, what is going on?
Kyle Woodley: In short, the coronavirus, a COVID, COVID-19 outbreak, has spread from Wuhan throughout much of the rest of the world. I know that we're north of 50 countries at this point. The U.S. has started registering some fatalities. They're trying to expand testing in the U.S., but right now, we're looking at much more than just disruption in China. South Korea is being hit pretty hard, Iran is. You are also starting to feel the effects here in the U.S. in travel, restaurants, entertainment, trucking, shipping. You're starting to see just small amounts of effects, and obviously, people are starting to believe that this is going to snowball.
Ryan Ermey: Right. And so we're recording here on March 5th and as of the time of this recording, I mean, the market's bounced around, it's had some volatility over the last couple of days. But we're sitting in about 11% below the previous highs for the S&P 500 which is, obviously, what we like to use here as a proxy for the broad market. And the advice that we gave in our last issue is that in terms of investing, you should stick with your plan, whatever you had in place, don't panic and sell everything. And that generally, I mean, if anyone saw Warren Buffet speak on CNBC, whatever happens with the coronavirus in terms of your portfolio, in the short term you have to be thinking about what your stock portfolio is going to be doing in 20-30 years from now, what have you.
Ryan Ermey: But that all being said, many of our listeners probably want to be a little bit more proactive or tactical about how they are managing their stock portfolios. And a lot of people now are considering whether to buy the dip or what have you. Kyle, what are some stocks that people should be avoiding?
Kyle Woodley: So to start with, a few of the things that you want to avoid are actually going to, right now, look like some of the things that you think you might want to buy on the dip because they are dipping. So cruise lines have been ruinous. I think it's fair to say the cruise line operators would have suffered as soon as anyone put two and two together that being huddled in a confined space is a recipe for disaster in this coronavirus. But the outbreak onboard the Diamond Princess really put a spotlight on that risk.
Kyle Woodley: So the best time to buy stocks is when there's blood in the streets and there's been plenty spilled right now. So Royal Caribbean (RCL), is off 40% year-to-date. Carnival CCL, is off 36%. Norwegian Cruise Line holdings (NCLH), is off 44%, so you've clearly got discounts here. And also, they're trading at never before seen yields. I mean, Royal Caribbean's at 4% which is pretty generous. And Carnival is at a silly 6.2% right now.
Ryan Ermey: Yeah, juicy.
Kyle Woodley: But demand isn't just going to rush back into these companies as long as the outbreak is continuing at its current pace, you need to see at least a slowing in cases worldwide. I mean, you're starting to see a little bit of that in China, but you need to see that in a lot more places. And possibly even in the manufacture of vaccines, which would make people feel a lot safer. The time in-between here and there, you're looking at snuffed out interest in these ships or massive discounts to get anyone on board. I don't want to stretch and say that the dividends themselves are in danger. Actually, they're very well covered based on past profits and the companies might keep them intact through a couple of quarters worth of difficulty.
Kyle Woodley: But the share prices are not out of the woods at all. Especially given that a second Princess cruise is actually now parked off the California coast because of a death onboard due to coronavirus. This isn't to say the cruise lines won't bounce back at some point. It doesn't seem like right now is that point.
Sandy Block: So, Kyle, if people, I mean, obviously, we've been telling people don't panic, don't sell, stick to your plan. But if this volatility has been too much for some people to sleep at night, what are some things they can do to dampen down on volatility? Because it looks like that's going to go on for a while.
Kyle Woodley: Sure. So as the name would imply, low volatility funds are a good way to go. So these are typically going to be exchange-traded funds and they have exploded in popularity to absolutely no one's surprise. The name gives it away. These funds try to invest in low volatility stocks, which basically means that if the market's moving, these stocks move less and that's exactly what you want when the market is moving lower. So there are several ways to go about this, and I'm going to just rapid-fire through three quick options.
Kyle Woodley: So you've got the Invesco S&P 500 Low Volatility ETF (SPLV). This invests in the 100 S&P 500 components with the lowest realized volatility over the past 12 months. The least volatile stocks make up the biggest portion of the fund. So right now the portfolio is heaviest in utility stocks and real estate, which have acted very defensively through this downturn. Then you've got the Legg Mason Low Volatility High Dividend ETF (LVHD). Now, this is a great fund that I've highlighted a few times online in the past and I featured it in the magazine recently. As the name suggests, it focuses on both income and volatility. So it starts with a group of 3,000 stocks listed on U.S. exchanges. It trims it down to between 50 and 100 of the stocks with high sustainable dividend yields, which is important, that also have low volatility. So this one is heavy in utilities, again, REITs, real estate, again, and also consumer staples, which are another big safety and income sector.
Ryan Ermey: Tell the people what staples are. Not everyone knows what that means.
Kyle Woodley: Oh, sorry about that. So consumer staples are basically staples for your existence. In other words, things that you need on a daily basis, so anything from canned goods to toilet paper to toothbrushes.
Sandy Block: Which have been selling off the shelves, I should add.
Ryan Ermey: Purell hand sanitizers, a good for instance as I do a little squirt, squirt into my hand.
Kyle Woodley: Yeah, those are all amongst the consumer staples and reasons why people have been flocking into places like Costco, Kroger, both of which have done exceptionally well from a stock performance lately.
Kyle Woodley: Anyway, this all leads up to a yield of 3.4% right now, a pretty good performance. And for context, SPLV, that I mentioned before, that yields 2.3%, and the S&P 500 only yields 1.9%, so significant income here. And the last one, so this is the JP Morgan Ultra Short Income ETF (JPST). The name doesn't say low volatility, but it absolutely is in practice. So you have a bundle of about 700 investment grade bonds with extremely short maturities, it's a little bit more than a year on average. Bonds like this don't have a lot of price potential. You just sit on flat returns and you collect a 1.9% yield. But that works to your advantage when stocks are plunging around you.
Kyle Woodley: So to give you an idea of how ludicrously stable this fund is, the fund went live in May of 2017, so we're looking at well more than two years of experience now. Since then, the biggest gap between its lowest low and its highest high is just 1.2%. To put that into context for you, the gap for just the benchmark, it's called the AGG bond index...
Ryan Ermey: The broad bond benchmark that we use all the time in the magazine.
Kyle Woodley: ... the gap there is 11%. For the S&P 500, it's 44%, again, JPST, it's just 1.1%.
Ryan Ermey: Right. So you're on a very narrow band of expected outcomes.
Ryan Ermey: Well, so the last thing I wanted to pick your brain on here, a lot of people think that we're perhaps headed into bear market territory, which we've defined before as a 20% decline from market highs. Are there investments that are geared toward protecting against bear market level of volatility?
Kyle Woodley: Absolutely. And they come in a wide variety of herbs and spices. Online, I actually have a recap of a bunch of these funds going anywhere from, say, sector funds that invest in things like utility stocks and REITs to some of the low volatility funds we've talked about here and some bond funds. But there are bear market funds and then there are bear market funds, and the ProShares Short S&P 500 ETF (SH), that's the latter. So the ETF effectively provides the inverse performance minus fees of the S&P 500's daily performance. So what does that mean? If the S&P 500 goes up 1%, SH goes down 1%. If the S&P 500 goes down 1%, the SH goes up 1%, it's very straight forward.
Kyle Woodley: Now the important thing to realize is that you have to back out fees on this and I believe SH is 0.89%, but otherwise, if you look at a chart of the S&P 500, the SH looks close to its mirror image. It's a really basic market hedge. So one thing to try to avoid is, you don't want to go out and to get into anything that's called leveraged. So there are things that, for instance, will go down 2% every 1% that the S&P goes up or say 3%, and that is extremely risky.
Ryan Ermey: That'll have two X, three X whatever in the name usually, right?
Kyle Woodley: And this is, like I said, it's a much more basic market hedge and it's still, even then at just one X, it's relatively aggressive. This isn't something that you should play with if you're, say, drawing income in retirement already. But if you're holding onto a lot of stocks with, say, great dividend yields on your original cost basis that you still believe in long term, then SH is a way to counteract some of the shorter term downside without exiting those positions. There is a very obvious downside here. Once the market starts going back up, SH is going to limit your potential upside. So this isn't a position that, no matter what you do with it, you don't want to sit on it and forget about it. You will want to actively manage this.
Ryan Ermey: Right. You're going to have to really be on top of things, which is a great way to dovetail into what are you working on these days? You're doing this kind of coverage pretty much every day on Kiplinger.com. You have an email newsletter. What should the people be looking for?
Kyle Woodley: The answer is that it changes every day and necessarily so. The situation even hearsay three weeks ago, was different than it was now. I mean, three weeks ago people were buying stocks thinking that the US was going to be immune to everything that was happening, that the U.S. looked better than China because the coronavirus was happening in China and not here. We're in a different world now. China cases are slowing, ours are accelerating. And we think that there's a lot of things... the U.S. hasn't even been able to test yet. The point is that this is a rapidly evolving situation.
Kyle Woodley: And so what we're trying to do is make sure that people have the options at their fingertips necessary for wherever they are in their time horizon, their risk horizon, just basically anything that they can use. If you are risk averse, we want to make sure that you know what you can use to be able to, in the case of the low volatility ETFs, tamp down on volatility, bring in income rather than just relying on price returns to get you through. And in some cases, we're even explaining to people, if you do want to, say, go to cash or get rid of some of your holdings, how to do that in a smart way. One thing I always like to say is, "It's okay to sell, just don't panic sell."
Ryan Ermey: Right. Listen, we really appreciate having you on. As always, we will have links to a lot of our Kiplinger.com investing coverage in the show notes.
Ryan Ermey: Yeah. Kyle, thank you so much for coming on.
Kyle Woodley: Thank you very much.
Ryan Ermey: After the break, Sandy and I highlight emerging coronavirus scams and how to avoid them. Stay tuned.
Ryan Ermey: We are back and sticking to the coronavirus theme, we wanted to do a quick scam watch. There's a lot of stuff going around out there, that is preying on people's fears.
Sandy Block: Right. And one of the things, whenever there's something that's in the news, you can count on seeing phishing attacks where people get emails seeking to get their personal information or implant viruses in their computers. And one of the concerns now is that people are getting emails from WHO or the centers for disease control saying, we want information about you or there's a virus in your area or something really scary to get people to click on them. And the advice here is the same advice that you always hear about protecting yourself against phishing expeditions. Don't click on links that are unfamiliar, never give personal information, your Social Security, your passwords or anything like that. And if you do see something that looks legitimate, go to the site, go to the CDC.
Sandy Block: But I really don't think the CDC's going to be reaching out to you individually about this virus. And there is plenty of good information that you can get directly from the source without exposing yourself to a computer virus as opposed to the other virus that's going around.
Ryan Ermey: Right. So any emails from the CDC or the WHO, as you say, Sandy, they're not going to be reaching out to you. They are not going to be emailing you with offers for vaccinations or advertise some kind of medical breakthrough that you need to get in on over email.
Sandy Block: Or vaccination or something like that, it's not real, it's not happening.
Ryan Ermey: That's one of the big issues in both, the WHO has come out with advice about this, the FTC has come out with advice about this. So we will put both of those up in the show notes. None of these people are calling you, emailing you, sending you texts, this one says or even fax messages. Honestly, if you're a scammer out there and you're still faxing...
Sandy Block: You're a really old scammer.
Ryan Ermey: ... kudos, frankly.
Sandy Block: Where is the fax machine?
Ryan Ermey: I enjoy that. I mean, I guess it seems more official, I don't know. Why would the CDC be faxing you, can you fax me back here, no password. So another one that the Better Business Bureau has started alerting people to is, a lot of folks are considering buying a face mask to protect themselves or their family from coronavirus. So obviously, lots of online sellers out there touting these.
Sandy Block: Right. And there's two things. One is the surgeon general has asked people not to buy masks. The ones that actually work should be reserved, at least for now, for healthcare professionals. There's been a lot out there about how they don't protect you, they protect people from you if you have it. But even if you really think you want a mask, and I've heard some people say they want to wear a mask so they won't touch their face, whatever. Be very wary of stuff that you see online. They could be counterfeit. I can't think of anything worse than walking around with a mask that doesn't work. I mean, that does you no good and actually could do more harm than good.
Sandy Block: So be very suspicious of offers for masks that you see from online sellers. They could be third party, they could be counterfeit, they're probably overpriced. And the other thing we're seeing, and don't know if this falls into scam or just exploitation, is these huge markups on hand sanitizers.
Ryan Ermey: I know, it's crazy.
Sandy Block: All these third party sellers...
Ryan Ermey: $600.
Sandy Block: ... they've cleaned out the CVS and now they're trying to resell the hand sanitizer online. The companies that make hand sanitizer are ramping up their production. So I don't really think it's necessary to go out and spend $300 on a bottle of Purell. And the other thing is, I mean, the most effective thing you can do to protect yourself, it's said over and over and over again, is just to wash your hands. And we're not running out of soap. We're not running out of water. So if you wash your hands, I don't think you need to spend $300 for a hand sanitizer. I think that's just scare tactics and people trying to exploit fear.
Ryan Ermey: Yeah. So anything that you're going to buy in order to try to protect yourself or keep yourself from being infected, and this is advice from the Better Business Bureau, that you should be savvy about product claims. Wearing a mask is not going to stop the virus from spreading, only buy from reputable stores and websites and be sure that the online store that, as a general rule, just buy from trusted sellers.
Sandy Block: Right. And that's the other problem is, in addition to the markup, some places are claiming to provide hand sanitizer and taking your money and then disappearing. So again that goes to...
Ryan Ermey: Make sure they have working contact information. I mean, these are precautions that you should take when buying anything online. And this is honestly probably the best piece of advice that they have is that you should check with your doctor before buying anything like this. They are going to be able to tell you if a mask is going to help you, if it's appropriate for you. I mean, you could be buying construction masks. You don't know what's out there.
Sandy Block: Halloween masks.
Ryan Ermey: Yeah, like Darth Vader masks, if only. I'd like wearing a Darth Vader mask.
Sandy Block: Well, people would stay away.
Ryan Ermey: It's true. No one else wouldn't get within radius of me if I was walking around dressed as Darth Vader. So just be careful out there, folks. There's no need to panic either when it comes to the market or when it comes to buying.
Ryan Ermey: That'll wrap things up for this episode of Your Money's Worth. For show notes and more great Kiplinger content on the topics we discussed on today's show, visit Kiplinger.com/links/podcasts. You can stay connected with us on Twitter, Facebook or by emailing us at podcast@kiplinger.com. And if you like the show, please remember to rate, review and subscribe to Your Money's Worth wherever you get your podcasts. Thanks for listening.
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