Transcript
Intro
Stephan Shipe: Welcome back to the Scholar Wealth Podcast. Today we’re covering three listener questions that get into family dynamics, concentrated wealth, and private investments.
First, we’ll look at fairness across generations, how parents can think about gifting when their very different kids have very different weddings. Next, we’ll turn to a tech executive preparing for an IPO with most of his net worth tied up in company stock, and concerns about balancing long-term goals with steady cash flow.
Then, you get a capital call on a real estate syndication—what that means, how to decide whether to contribute more or to let your stake dilute. And in our rotating Myth or Money segment, we’ll ask: does hitting age 65 really mean it’s time to get out of equities?
So let’s go ahead and get started with question one.
Question 1 – Gifting to Kids
Listener: We contributed $50,000 toward our son’s wedding, but now our daughter, who’s planning a much smaller wedding, has asked us for the same amount as a cash gift instead. We don’t feel like that’s the same. What would you do in this situation?
Stephan Shipe: I actually had a great conversation with this listener who was able to give a little bit of additional context, and what really stuck from that conversation is he gave an example that I think really drives home the difference here and actually reflects a lot of the way I would look at it as well. He said that if he and his wife had planned to take the whole family on vacation — let’s say they’re going on a safari and it’s going to be $10,000 a person, they’re buying the experience for the whole family to go on this vacation — it would not feel right if one of the kids said, you know what, I don’t want to go on the family vacation, just give me the $10,000.
And there’s this huge disconnect, and that’s really what this is getting to, is that there’s a disconnect between what is being paid for. You’re paying for an experience, not necessarily a cash gift, especially because the $50,000 wasn’t a cash gift. It was really to support the families providing this type of event, so it’s not only just a one-family experience, it’s two-family experiences with all of these guests.
And when we start to look at this, it’s going to be really important to start looking at this not as a one-for-one experience. It does not have to be an equalized dollar-for-dollar experience, and we’re going to see this time and time again. In fact, I would use this as an opportunity to open up the dialogue around how this is going to work, especially if you’re considering gifting into the future or any other types of financial support, because this will absolutely come back.
It’s going to come back with maybe you want to help for a down payment on a house. Do you give the same down payment? You give a down payment to your son for his home, does your daughter say, well, I decided I don’t want a home, I’m just going to rent, so I would just like a few hundred thousand dollars instead? And the precedent that you’re setting now is going to be important, so having the opportunity to have this conversation is actually fantastic.
Because the other one that will inevitably come back will be grandkids. Unless your kids both have the exact same number of kids and they go to the exact same schools, if you ever decide one day to help them out with any of their financial costs associated with college, or even private school or any type of support as they’re growing up, there’s always going to be this idea of, well, this child got $100,000 to put toward a college savings account, that must mean I have the option to just take $100,000 in cash.
Now that can easily be remedied by having this idea of setting basically the family philosophy around this — of saying the dollar amount is not what we’re giving. We’re giving the experience or we’re giving the outcome. So if you would like to fund down payments for a house, you look at it and say, we’re not giving $200,000 in cash. What we’re doing is we’re willing to put up to $200,000 toward a down payment, and everyone in the family has that equal option.
And then you have scenarios of college — we’re willing to pay $50,000 toward college for grandkids. That way, whether or not grandkids go to college or don’t go to college, or depending on how many kids there are, all these different dynamics and all these different possibilities for conflict kind of subside. Because you look at it and say, that’s not what we’re paying for. We’re not giving a dollar amount, we’re giving an outcome. And we’re comfortable paying for the outcome. We’re not comfortable paying just for the cash.
And the issue you’re going to run into right now is that while that sounds good, while I would agree that I don’t think that’s an even mix — just handwriting a check for $50,000 to your daughter doesn’t seem like an even playing field there — I’d argue that your son probably doesn’t feel the same either. I doubt that if you told him, he would look at it and say, no, that sounds good, I feel like I personally had $50,000 worth of value for this party. That was for the wedding, that celebration.
Okay, so maybe there’s a way now that you can use this as the opportunity to open the conversation. You’re probably going to have to have some sort of monetary exchange here to remedy the current situation, but I don’t think it needs to be $50,000. I think there’s an easy scenario of saying that this was two families getting together — maybe it’s $25,000 to represent that half of the scenario, however you want to justify it.
But I think there’s an opportunity to say it’s not $50,000, but we’re willing to give you $25,000 to take into account the smaller wedding or any of these other financial goals. But more importantly, what we’re going to do is now have a more in-depth conversation related to what are the goals of our family when it comes to gifting? And what are we willing to gift? And are we gifting cash or are we gifting experiences? And maybe it’s a combination of both.
You can pull together some cash gifts that are given every year that are meant to be open-ended — saying you can spend these however — and then you supplement those with additional gifts that are going to be focused on experiences.
But I think the big thing now is communication with the family. They’re both getting married now, there are a lot more opportunities for this in the future. The fact that you have this conversation now and you’re thinking about it, I think it’s fantastic. And opening this up to say, let’s talk now about what this philosophy is and what’s going to happen in the future.
So now let’s jump into our next question.
Question 2 – Tech IPO Preparation
Listener: I’m a tech executive with a net worth of about $6 million, but more than half of that is tied up in stock options and RSU grants at my company. We’re planning an IPO in the next 12 to 18 months. I’m worried about being too concentrated, and if the stock does well it could be life-changing, but if it drops after the IPO, I could lose a lot of what I’ve built. I also have a $1.5 million mortgage and two kids in private school. So how can I balance near-term cash flow with long-term upside?
Stephan Shipe: You have to be really careful about this type of situation, and it’s not probably for the reason that you think. I want to be very aware of the fact that there’s a possibility of there being huge upside potential. But the number of people I’ve talked to who have a company that will IPO in the next 12 months is significantly larger than the people who actually have an IPO in the next 12 to 18 months. So be very careful around this.
This is a classic “don’t count your chickens before they hatch” type of scenario here, where we want to be careful not to focus so much on what could happen — whether for the good side or the bad side — and start focusing more on the cash flow planning scenario of you have a mortgage, you’ve got kids in private school.
That’s the priority. Planning for what could happen with an IPO and things could go well — if things go well with the IPO, things are going to go great. The net worth is looking good, you have things that are going to be there. I’m not as concerned about that one.
What concerns me now is we need to start saving as if there is no IPO and there’s no possibility of any of these stock options or grants. Because you said these are options and grants. By definition, these are not yours yet. So there’s a lot of unknown and uncertainty out there. And depending on how you’re calculating net worth, if you’re including those options and those RSU grants as part of your net worth, which I would not recommend doing, then your net worth could significantly be less, which changes the whole dynamic of this conversation.
And so we could get into a 10b5-1 plan if that’s a concern, and allow you to start diversifying if in fact you own some of those shares that are not in future RSU grants or haven’t vested yet, or stock options. Then starting to remove some of your stock I think is absolutely a great idea.
So if you are in a situation where you require a 10b5-1 for trading so there’s no insider trading issues, then you should absolutely do that. If you can sell some stock, then I’d start selling some stock. Sounds like you still have a lot outstanding from an option and RSU perspective, where if the IPO happens and it does really well, you’re going to do well no matter what.
So the goal is what happens if it doesn’t do well? If it doesn’t do well, how much of your net worth is tied up right now in this scenario that you’re truly locked down in? And anytime we start to see positions over 10%, that’s going to be a concentration risk in our mind. So the fact that you have more than half of your net worth tied up in these options and grants — my follow-up question to this would be, how much of that do you actually own right now?
In this scenario, if more than half of your net worth is currently tied up in a stock that may or may not IPO, then I would cut that down significantly as fast as possible. Regardless of what I think about the company, it could be the best company and have the best prospects out there.
I’m looking right now at family, mortgage, and how do we lock those goals down first so that you can say, you know what, I’m in a good financial position currently. If this thing IPOs, that’s just icing on the cake. But what I don’t want is you banking your entire family’s future and education all on the possibility of a company, maybe sometime in the future, going public.
So we want to start earmarking cash. It’s pulling cash into short-term savings — a year’s worth of cash would be completely fine, especially if there’s a lot of volatility. Fortunately, if the company’s planning to IPO, it doesn’t sound like they’re in too much of dire straits. Usually you don’t try to do that at that time. You try for a better time to pull equity, and that would be a big concern there.
There’s some tax strategy in that and you could go in and do some tax planning around what stocks to sell and what’s best. I think that’s important, but that would be a secondary concern. The primary concern is reducing concentration.
If you could pull out of that a million, $1.5 million, and get that into a portfolio that is not related to the stock, this will take a little bit of planning. For instance, you’ve got a tech company that’s likely going to be highly correlated to growth stocks. So I wouldn’t go say, well, I’m going to go liquidate a million dollars of the stock and then I’m going to go buy something like the QQQ and invest more into tech. You’d probably want to invest more in value or more in bonds to balance out the large tech concentration that you have right now.
The issue that you’re running into is that your human capital is tied to your financial capital right now, and that is a dangerous place to be in. What I mean by that is when you look at earnings power throughout your life, you look at two areas: how much can you earn personally — that’s going to be your human capital — and then how much can your portfolio generate — that’s your financial capital.
We ideally want those to be uncorrelated or at least have a low correlation, so that way you don’t run into the situation of company performance drops, so the stock price is dropping. So now your financial capital is decreasing, but that also leads to a higher likelihood that you lose your job.
So now you run into a situation where you lose your job and your financial market portfolio starts to drop. That’s not a good place to be. That’s exactly where you’re sitting right now. Your future is tied to your portfolio going up, which is based on your company, and your ability to earn is also based on that same company.
That’s too much risk in my mind. That’s why I’m saying you need to get out of those holdings as much as possible. If this thing IPOs and does fantastic out in the future, the stock is still going to do well. You’re going to do well. But you need to focus right now on getting out of that concentration and ignore what could be happening in the future for the upside, and focus on the fact that the upside can’t happen if you don’t first secure what you already have.
What I see right now is a large, concentrated position that holds a lot of risk, and we’d want to cut down some of that risk for you and for your family.
So let’s move on to the next question.
Question 3 – The Capital Call Dilemma
Listener: A few years ago, our friends talked us into a real estate syndication deal with them. It sounded good and everyone else was in, so I ignored my gut and invested too. Now we just got a capital call. We initially put in $100,000, but rents haven’t kept pace with expenses. Interest rates went up and now the sponsor is asking for another $30,000. Should I double down and send more money or accept dilution and cut my losses?
Stephan Shipe: So here’s the big lesson for everyone out there on this one, and hopefully for you as well, is that unless your friends are expert real estate investors who have done this for a long time, you should ignore every investment advice that’s ever given to you by them or any other friends that are in an investment.
And the reason for that is most retail investors make poor financial decisions. In fact, the research shows that the majority of retail investors make poor financial decisions. So if that’s the case, especially with concentration risk in stock picking, or in this case picking individual funds, if that’s the case, then you should ignore a majority of people that give investment advice — especially if they don’t have any type of experience in this area.
Now, the capital calls are a red flag immediately, right? That says they’re in distress. That a company now is asking for you to put more money in because they were wrong on all of their prior projections.
So if you ignore the fact that you have a hundred thousand dollars already invested, and I said, hey, I have this real estate investment opportunity for you, you can put $30,000 in. The models have been wrong in the past, so the people who are managing things have not managed it correctly. And they’re wrong on rates. They’re not really doing great on rents, and things aren’t looking very hot for them. Would you invest the $30,000? Of course not. That makes no sense to go throw $30,000 — but that’s exactly what you’re doing right now.
This is your chance. A capital call is your opportunity. The sponsor is saying we need more money because we were wrong. Please give us more money. And who are they going to? They’re going to you first before they go and offer it to somebody else. And they use this dilution thing over your head — it’s like a subtle threat here of saying, if you don’t give us this $30,000, then your percentage ownership in this real estate is going to drop.
Well, of course it is. You need more money. So if they go raise it from somebody else, they’ve got to give away somebody’s equity, and they’re just going to give away some of your equity in that case. I would not look at dilution as a reason to invest. We don’t want to go take good money and throw it after bad money.
In this scenario, especially such a large amount compared to the investment, they’re asking you for another 30% to add to an investment where they were wrong. Now, you could go and evaluate the sponsor. You could look at how good they are on a track record, but I would look at the fact that their track record right now with your money has been bad.
And that’s the track record I’d be focused on, especially because there’s no requirement for you to be adding more in there. I’d much rather see you say — if you said, Stephan, I still want to be invested in real estate — then go take that $30,000 and go invest that in another type of real estate that’s very different from the real estate that you’re in right now, and do all of your due diligence there to truly start building out a portfolio.
What I see happen more and more often is you have situations like this where somebody jumps into a syndication and says, I need to diversify into real estate, so I’m going to go throw a hundred thousand dollars into this one property. And they don’t realize that the risk of that investment is really high as an alternative investment. And what they should do is they should wait until they have five, six hundred thousand dollars and maybe then go into five or six different properties. Because now you’re spreading out that risk.
But what I’ll commonly hear back — and so you listening may be saying the same thing — it’s like, well, I don’t want to deal with five or six properties. Then don’t get into real estate, right? Then that’s not the way to go. Just because you don’t want to get into all the different types of diversified holdings doesn’t mean you just concentrate into one.
So in this scenario, I’d avoid the capital call. I’m very skeptical whenever a sponsor comes back for capital calls for clients. When we’re looking at that, they’re already starting so far away from a yes. The level of due diligence that’s needed after that point is already significantly higher because I look at that as saying, you’ve already failed once, you’ve already lost the trust of the investor at one point.
You’ve got to dig yourself out of a really big hole to prove that you deserve that trust again. And not only that, you deserve the trust again and you deserve $30,000 of their money. That’s a hard hole to dig out of, and it’s a lot easier to say, you lost your chance. I’m still investing. If this thing turns around, fantastic. So I’m diluted a little bit. You get some of your money back. Go put the money somewhere else.
Rotating Special Segment – Myth or Money
Stephan Shipe: And for today’s rotating special segment, it’s time for Myth or Money, where we take a look at a common belief in personal finance and put it to the test. Today’s myth is: at 65, you should shift most of your portfolio out of stocks.
This really came from some older theories around how you invested. An old rule of thumb used to be your age in bonds. So as you got older, you increased your bond exposure, your fixed income exposure, which by definition decreased your equity exposure, so that way as you got closer to retirement, you had this glide path of decreasing risk.
The issue with that is that was a long time ago, and interest rates were much higher. So retirement today often lasts a lot longer. You’re looking at possibly 30-plus years in retirement. So equities are absolutely still necessary for growth and inflation protection. Over time, equities tend to work as a pretty decent inflation hedge unless things get out of hand there.
Plus, we want to start thinking about this not as a one-size-fits-all approach, but as something that has to be a little bit more customized. You need to look at your own personal circumstances and say, are you going to have any other sources of income throughout retirement? If you have sources of fixed income throughout retirement, that can start taking the place of some of those bonds that you’d have in the portfolio.
For instance, if you have some real estate that’s throwing off income, or you have possibly a pension, or you’re doing some part-time work, that’s all different sources of fixed income that could take the place of some of those fixed income sources in the financial portfolio and allow you to increase equity.
So we want to increase equity. The other way to think about this too, as a corollary to this idea of holding too much or holding a large amount of bonds in your portfolio at 65 and pulling back significant equity, is if you’ve done a really good job with your portfolio and you’re in a situation where your portfolio amount is larger than what you personally need throughout retirement.
So you may be in a situation where you say, I have $8 million, but I could probably retire with five. What does that tell me? That tells me you have $3 million that you could live without. So we don’t want to just set that money on fire and we don’t want to just go throw away the $3 million, but what it does allow you to do is start thinking about that portfolio differently and saying, well, that $3 million really could be invested more aggressively. And if that $3 million is invested aggressively, then that whole $8 million ends up having an overall higher equity weight.
Another way to think about that, especially if you have kids and you’re looking at this from an estate or a legacy perspective, is you look at this and say, well, this money is slowly not mine anymore, and it’s more of the kids’. So I need to stop investing like a 65-year-old and start investing more like a 35-year-old in these cases.
And we see that over time, where it’s not uncommon for us to see a reverse glide path where somebody builds up their bond portfolio, decreases their equities up until retirement, which is completely fine. I’m not advocating for a 100% equity portfolio going into retirement. We still need some buffer there to take into account sequence of return risk. But you go into 65 at a lower equity portfolio, maybe you hold that lower equity portfolio for five, 10 years, but over time we actually start building up the equities again.
Because you can take more risk in the portfolio. From a time perspective, you don’t have to have as much of a concern about a portfolio lasting for 30 to 50 years into the future. So it starts to last 30 to 50 years for the next generation, which tends to have a higher equity weight.
So the takeaway here, when we talk about de-risking a portfolio up until retirement, is it’s not just about hitting an age and saying, well, at this age you’ve got to cut back on equities and you’ve got to increase bonds. It’s all about balancing cash flow needs, tax considerations, legacy goals, and what spending dynamics look like throughout retirement.
Especially given the fact that most people spend in an inconsistent way throughout retirement. We don’t have flat retirement spending. We tend to spend a lot of money upfront in retirement — doing all the travel, all the fun stuff — and then it starts to slow down later through retirement.
So think about things a little differently when it comes to your portfolio, especially when you see all these glide path pictures of de-risking.
And that’s our show. Thanks for listening. We’ll see you next week.
Outro
Stephan Shipe: Hey, this is Stephan Shipe. Thanks for tuning in to the Scholar Wealth Podcast. If you have a question you’d like us to tackle on a future episode, share it with us at scholaradvising.com/podcast. We’d love to hear from you. Until next time.
Disclosures: The information provided in this podcast is for general informational and educational purposes only, and is not intended to constitute financial, investment, or other professional advice. The opinions expressed are those of the hosts and guests and do not necessarily reflect the views of any affiliated organizations. Investing in financial markets involves risk, including the potential loss of principal. Past performance is not indicative of future results. Before making any investment decisions, you should consult with a qualified financial advisor who can assess your individual financial situation, objectives, and risk tolerance.