Exploring Different Ways to Invest in the Market

Hey Mike, can you run through different ways you can invest in the market? Discover the benefits and detriments associated with different ways you could invest in the market.

Text your questions to 913-363-1234.

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What is How to Retire on Time?

Welcome to How to Retire on Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show is about getting into the nitty-gritty so you can make better decisions as you prepare for retirement. Text your questions to 913-363-1234 and we'll feature them on the show. Don't forget to grab a copy of the book, How to Retire on Time, or check out our resources by going to www.retireontime.com.

Mike: 00:05

Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, health care, and more. This show is an extension of the book, How to Retire on Time, which you can grab today on Amazon or by going to www.how to retire on time.com. My name is Mike Decker. I'm the author of the book, How to Retire on Time, but I'm also a licensed financial adviser, insurance agent, and tax professional, which means when it comes to financial topics, we can pretty much cover it all. So that said, please remember this is just a show.

Mike: 00:35

Everything you hear should be considered informational as in not financial advice. If you want personalized financial advice, then request your wealth analysis from my team today by going to www.yourwealthanalysis.com. With me in the studio today is my colleague, mister David Fransen. Thanks for being here today.

David: 00:51

Yes. Glad to be here.

Mike: 00:52

David's job is reading your questions, and I'm gonna do my best to answer them. Now you can send questions in at any time by texting them to 913-363-1234. Again, that's 913-363-1234, or email them to hey [e-mail]. Let's begin.

David: 01:12

Hey, Mike. Can you run through different ways you can invest in the market?

Mike: 01:17

Yeah. Yeah. Absolutely. This is probably a more timely question because when Goldman Sachs comes out and says, hey. We might have a flat market.

Mike: 01:25

There might be another lost decade

David: 01:26

Mhmm. For

Mike: 01:26

the next 10 years. I think people are waking up a little bit and thinking, you know, maybe I shouldn't just default to the buy and hold strategy. To answer the question, I wanna divide up the camps of investment strategies into 2 theories. I think these two theories really summarize how to invest in the market. The first one is called relative return theory.

Mike: 01:49

And the idea here is

Mike: 01:50

that you're gonna invest in the market and get a relative return of whatever happens. It's very passive. It's very reactive, which is not a bad thing. I know when we say, oh, don't be reactive. Be proactive.

Mike: 02:02

When it comes to finances, sometimes it's okay to be reactive. You know, let the chips fall as they as they will.

Mike: 02:08

So that's relative return theory. You're going to receive a relative return based on the portfolio that you've purchased. And I'll break those down

Mike: 02:17

in just a second. But I wanna contrast the other theory. It's called absolute return theory. Now that does not mean absolute guaranteed return. Okay?

Mike: 02:27

Absolute return. Yeah.

David: 02:28

Missed opportunity there.

Mike: 02:29

Any economist or investor that can figure out how to absolutely guarantee returns can make a lot of money. Yeah. But no one's ever been able to do it. So no one will be able to. You can't.

Mike: 02:38

You have to be able to predict the future. I guess Biff from

David: 02:41

Back to the Future?

Mike: 02:42

Back to the Future. Yeah. But his book only went so long. Yeah.

Mike: 02:45

So, anyway, absolute return theory really is it's defined as basically, we don't care what

Mike: 02:51

the market's doing over a certain period of time What has a high probability of growth? Like, how can we make money in the next 6 months? And what's the best place to put the money for the next 6 months? So it's not trying to time the market. This is a common misconception.

Mike: 03:08

It's not trying to time the market by going in the market or going to cash. Typically, absolute return theory would fall under looking for momentum or shifting portfolios based on certain indicators. They'll break down those various strategies as well. Alright. Here's the big takeaway.

Mike: 03:25

And I wanna give it before I even explain all of this because we have so many cognitive bias. We want a certain result and wanna think that we're the smartest person ever. And it's just it's it's not that cut and dry.

Mike: 03:37

Every strategy, whether it's relative return

Mike: 03:40

or absolute return, has its benefits and its detriments. Whatever strategy you go with, don't pick it because it's what I'm used to. Think about it as, does it work within your emotional and economic limits? K? So emotional limits.

Mike: 03:57

Can you handle, you know, a market going down? If not, what's the strategy that you're gonna be okay with? And and these aren't all in strategies either. I wanna clarify. Investing in the market or what I'm gonna be talking about should be a part of your overall portfolio.

Mike: 04:12

I don't think a retiree should have all of their assets at risk. And we're talking about strategies where all of your assets are at risk. I do believe in the reservoir strategy where some of your assets are principal protected, whether that's in CDs, treasuries, money markets, fixed or fixed index annuities, or maybe you have some cash value permanent life insurance. Whatever it is, I don't care. But you have to have some protection, and bond funds don't count.

David: 04:35

Okay.

Mike: 04:35

Bond funds can lose money. And if you didn't know that, you probably recently realized that the interest rates are going up and bond funds were losing money. Okay? And by the way, now bond funds could be good to lower your overall risk because if interest rates go down, bond funds would increase in value.

Mike: 04:53

So it makes sense to have maybe some bond funds in your growth portfolio, but I digress. Alright. Let's talk about relative return strategies. So the first one I wanna talk about is probably the most popular one that's indexed investing. Everyone knows this one.

Mike: 05:08

Right? Van this is Vanguard's, like, flagship, pun intended, and the product.

Mike: 05:13

yeah, you can buy SPY or qqq or v o o or whatever. You you can buy an ETF that mimics an index.

David: 05:22

Okay.

Mike: 05:22

And you get the relative return of the index. And the and the index is a beautiful thing because, like, if you buy SPY or VOO, it's you're buying basically a little portion of 500 or so stocks in the s and p. So these are very large companies. They're not the largest companies in America. They're just handpicked for a various amount of reasons, but they're a prominent part of the American economy.

Mike: 05:44

If you believe in the American economy, you believe in its growth, you believe in the companies that are kind of within it. It's a very cheap and effective way to just buy and hold and get the relative return of whatever the S and P would do.

David: 05:55

So is that like your Home Depots and your, I don't know, Coca Colas or Yeah.

Mike: 05:59

Something like that? Yeah. The the big ones that are popular right now is NVIDIA, Microsoft, Amazon

David: 06:05

Okay.

Mike: 06:06

Google. Tesla's in there. These are very common companies. Uh-huh. And you can pull up a list if you're curious.

David: 06:11

Right.

Mike: 06:12

There's a few companies you're going, I never heard of that one before. And then you look at the companies that that company owns, and you're going, oh, yeah. Those guys Yes. Got it.

David: 06:19

Yes.

Mike: 06:20

But the Goldman Sachs is suggesting that we could be in a flat market for the next 10 years would suggest that index investing might not make any money for 10 years like it did in 2000 or 1965 or 1929 or 1906. The markets every 20 years, they'll go flat for 10 years or so. Historically speaking, no one knows if it will happen in the future or when it will happen in the future. So that's the risk. Index investing, it's very low cost, but there isn't really a way to protect yourself for when the indexes go down.

Mike: 06:53

And if you're retired and expecting to have returns year over year to keep up with your income needs, a flat market cycle can really suffocate you. So you see how that works? I mean, if you're if you're averaging, let's say, 1, 2% at best a year over a 10 year period of time, and you're trying to draw out 4% from your portfolio, you're going down the other way. Yes. And then you have to include sequence of returns risk where you're if you're drawing income from an account that's lost money, you're accentuating losses, making it more difficult to recover.

Mike: 07:22

Mhmm. Just just for quick math so you understand this. Because this is a risk most people don't connect the dots on. If your accounts were to lose 30% in a market crash, it would be a 43% return needed just to break even. Just to get back to 0.

Mike: 07:36

No growth. Just to get back to 0. Now if your accounts lost 30% in a market crash, which happens every 7 or 8 years, and you took out 4%, now you're down 34%. That means you would need a 50, 50%, return to break even. If you lose 50% overall, including the income, then you would need a 100% return to break even.

Mike: 08:00

The deeper you go down, the harder

Mike: 08:01

it is to recover. Relative return is

Mike: 08:03

a wonderful way to invest, but you need to understand the risks associated with it. That's why I talk about the importance of the reservoir. If you have some principal protected accounts that you can draw income from when markets crash, then index investing might be a suitable way to blend your your reservoir, your principal protected accounts, and an indexed growth strategy together that might work. And maybe it doesn't. That's the nuance of financial planning, but that's index investing and kind of how it would have worked in the retirement situation.

David: 08:32

So if we juxtapose that with someone in their thirties or forties, the market crashes, it's kinda kinda no problem. Right? You just you're not you're not drawing income from it.

Mike: 08:40

Yeah. Well, I mean, David, let me ask you, when do you like to buy things? When they're on sale. Right?

David: 08:46

Yes.

Mike: 08:46

So great. When the market crashes, buy buy buy. Right. Right. Right.

Mike: 08:51

It's the same thing. It's the markets have recovered a 100% of the time. So if your income is coming from your employment, then the market crashes are actually kind of a deal for people.

David: 09:02

I see.

Mike: 09:02

As long as you keep your job. And the joke is a recession is when your neighbor loses their job. A depression is when you lose your job.

David: 09:08

Yeah.

Mike: 09:09

You still have to be able to handle 3, 6 months of unemployment. So hopefully that cash is in a savings account, high yield savings, or something like that. But yeah. I mean, index investing, this is now my bias. K?

Mike: 09:22

Index investing is a wonderful option when you're looking at your non qualified assets. Buy and hold relative return. Don't create a lot of capital gains. Just let it ride. I think that makes sense.

Mike: 09:35

But if you're young and you're 30, let's say, and you've got some assets in the 4 one k, maybe you change jobs, rolling your 4 one k to an IRA and then buying the indexes, I don't know if that's the right play because you have opportunities to be more proactive with those funds, and we'll talk about that in absolute return. Okay. The other strategies for relative return, and and this is how I categorize it, in my mind, dividend investing, which is a very popular thing. But you have to understand that dividend investing has risks. So during the corona crash, as I've named it Mhmm.

Mike: 10:06

I'm sure other people have called it that too. And there were, like, 4 to 600 companies that just stopped paying their dividends. So dividend is fine. But if you're depending on your income from dividends, you don't wanna be in a situation to where if enough of them stop paying, and you have now sell your dividend to make ends meet, then it's kinda hard to recover from that. Yeah.

Mike: 10:31

Dividend investing is a very traditional thing to do. It was more popular in the fifties, sixties, seventies, eighties when you couldn't actively trade or move things around. Lately, in my opinion, there's more stocks or equities, companies that are focused on growing their price as opposed to paying out dividends because we like the growth and we don't need the dividend necessarily. And then also you have to consider the tax inefficiency. So in your brokerage account, if you're reinvesting your dividends, you get the dividend.

Mike: 11:00

You still have to pay taxes on that dividend, and then you reinvest it. That's not as efficient. And then when you think about dividend investing in the relative sense of it just it is what it is, and it's very passive, very low cost. You need to really focus on 2 things. 1 is the growth is the dividend being reinvested.

Mike: 11:19

Because dividend stocks don't typically grow very quickly. And then the greater the dividend, the more the risk. So I hate leading conversations. This is so leading, but just bear with me for a second. Okay?

Mike: 11:34

At least I'm calling it out. Yeah. Okay? Because I'm not trying to sell you a bond right now or a dividend stock, but I need people to understand this. So many people come to my office and say, look at my dividend portfolio.

Mike: 11:45

I got the best ones. I found the secret positions. No. You didn't. You just took a little bit more risk than you may realize, which is fine.

Mike: 11:54

Mhmm. But are you comfortable with

Mike: 11:56

the risk? Are you aware of

Mike: 11:57

the risk? Okay. So let's say you've got one stock that's paying a 2 and a half percent dividend with not much growth. And then you've got another stock that's paying, let's say, 5% dividend with growth or bond that's paying 5% coupon rate. Which one would you prefer?

Mike: 12:13

Well, 5% is better. Right? Alright. Well, David, what about 7%? Yeah.

Mike: 12:18

10%?

David: 12:18

Keep going.

Mike: 12:19

Yeah. So at some point, you know, you go to 15, 20, 30%. At some point, everyone starts to say, what's the catch?

David: 12:27

Okay. Yeah.

Mike: 12:28

The problem is people will let greed blind them to the maybe 7, 8, 9, 10%. Oh, this is fine. And then we rationalize it. And then we don't realize we're buying a bunch of Toys R Us bonds. Which for those who didn't realize if you haven't noticed Toys R Us isn't really around anymore.

Mike: 12:45

No. Certain situations don't always work out. So when I look at a portfolio, you look at the classics. Like, Chevron is a classic dividend stock. The position's probably not gonna grow, but I think it's paying, like, 4 or 5%.

Mike: 12:59

It's usually somewhere around there. Great. But you're gonna pay taxes on the dividend, whether you need it for income or you reinvest it, which is fine if it's within a qualified account like an IRA or a Roth. You won't pay taxes on the dividend, but you'll pay taxes when you pull out the funds. It's just a different way to invest.

Mike: 13:16

Is it better or worse than indexed investing? Who's to say? And you even buy the S and P 500. You're gonna get some dividends up as a part of it anyway.

David: 13:24

I see.

Mike: 13:24

So the again, who's to say which is right? This is now more of a conversation of opinion. Not confirmation bias, but here's how it works. Here are the benefits. Here are the detriments.

Mike: 13:36

Which one are you more comfortable with? And then here's my other in the broad spectrum of categories of relative return, It's not indexed investing. It's I I call it sniper investing.

David: 13:48

Okay.

Mike: 13:48

This is the Warren Buffett situation.

David: 13:50

Being more precise.

Mike: 13:52

Buy good companies. Yeah. Alright. David, name 5 companies that you think are just good solid companies that probably won't go anywhere anytime soon.

David: 13:59

Apple.

Mike: 13:59

Yeah. I don't think Apple's going anywhere anytime soon. What else?

David: 14:03

Walmart. Yeah. Toyota?

Mike: 14:05

Yeah.

David: 14:06

What am I gonna have? 3? I've got 2 more.

Mike: 14:08

I mean but do you see, these are companies you're familiar with.

David: 14:10

Yes.

Mike: 14:11

You believe in them. Sure. Okay.

David: 14:13

Yeah. I'm a customer of all those.

Mike: 14:15

So maybe you buy those the stocks that you understand you're familiar with, and you believe the company will continue to grow. Yeah. I love the story of the janitor up in the northeast that was secretly a multimillionaire. And all he did was just buy companies he understood. Reinvested the dividends, or if they didn't have dividends, they just grew.

Mike: 14:34

That's a way to to invest. And then as you grow the positions, if it's in a nonqualified account like your brokerage account, you can slowly divest them if they're growth positions under long term capital gains, which is favorable based on current tax law. Or you might just live off the dividends because you picked stocks that you preferred, and you were reinvesting dividends to grow your portfolio. And then you retire and you start taking the dividends. I want to highlight, though.

Mike: 15:00

Do you see how neutral I'm being about the conversation? They all have benefits and detriments.

David: 15:05

Sure.

Mike: 15:06

It's just how do you blend things together? Now let's talk about absolute return. The reason I wanna highlight absolute return is it looks fancy. It feels fancy. You feel smarter when you're saying I'm doing a sophisticated model.

Mike: 15:19

Yeah. And I'm making fun of myself because we believe her here at Kedrick in absolute return models, but it's not for everyone. It's just different. So I don't I don't wanna Yeah. Come off and and push anything harder than the other.

Mike: 15:34

So absolute return, which you're gonna find commonly in hedge fund or, you know, with many of the money managers who have, like, a $3,000,000 start. You you have to have $3,000,000 just to get into the fund. Oh. Absolute return, as I've seen it, is more of a quantitative algorithmic situation. It's following a formula or a system that looks at positions in the system's objective way.

Mike: 15:58

And I say objective because the formula is it's a theory. And looks to buy positions for a certain period of time. A trend following model.

David: 16:08

Okay.

Mike: 16:08

Where's the trend? Here's an example of one of our models. K? Take the S and P 500. Do you think all the stocks are really growing at a good rate?

Mike: 16:15

Do you think they're all gung ho? Let's go go go.

David: 16:17

Like, out of all 500.

Mike: 16:18

All 500 are really growing right now.

David: 16:20

They probably that would be great, but probably not.

Mike: 16:22

No. It almost never happens. Right? So what if you add an algorithm that says, here are the 500 stocks. Maybe let's quantify their momentum, their current price, their price earnings, and a bunch of other factors.

Mike: 16:36

Put them on a scoring system and pick, let's say, 10 or 20 of them that have the highest probability of growth over a predetermined period of time. Maybe it's 45 days you're gonna hold it. Maybe it's 60 days. And then you reassess after that time period. That's how some of our absolute return models would work.

Mike: 16:54

Our Kedrick models work. It's a different way to think about it. We're not trying to time the market. We're looking for getting rid of inefficiencies and seeking efficiencies or what really is growing right now. And some years, the trend is very difficult to find.

Mike: 17:09

Like this year, it was really difficult to find because the markets were going up, and then they went down really quickly, and then they went up really quickly. That messes up the system. That's called whipsaw.

David: 17:19

Okay.

Mike: 17:19

So if the markets are trending up, it would be more efficient or should be more efficient in the growth. If the markets are going down, it might be more efficient and maybe saying, hey. Maybe we should put some in cash because we're trending down and cash has higher growth potential like BIL, b I l. It's a fun little ETF for a time being. Right?

Mike: 17:38

It can find things in trends. But if it's going up, down, up, down, down, up, that's hard for us. That's the weakness of the models. There's no such thing as a perfect investment product or strategy. This is a strategy we're talking about.

David: 17:52

I think I followed that. Do you

Mike: 17:53

think I covered it? Okay. So that's trend following. Those are the ones that we typically do for our more aggressive clients or the clients that wanna be in a more sophisticated situation. They're okay with the ups and downs and maybe some quick turns because they are at the reservoir built out.

Mike: 18:08

They've got other things kind of peppered in. Sometimes they'll do some of our models and some of the indexed relative return

David: 18:14

Okay.

Mike: 18:14

Strategy. You can blend these things. The other ones for more absolute return in my definition, you can do your more fundamental analysis. So, hey, this company is priced lower than we believe it should be. We're gonna buy it for this period of time.

Mike: 18:28

We believe it's gonna grow in it. That's kind of the same idea. Michael Burry, the big short, guy, he's more of a fundamental guy. And then tactical is charting. I won't dive too much into tactical, but that's trying to figure out how to pie base on charts.

David: 18:42

Okay. Yes. Yes. Yeah. I I I glazed over it.

Mike: 18:45

It's just these are all different ways to kinda go about it. Yeah. But the idea here is nothing's perfect. They all have detriments. But find the ones that that you can work within so you're okay with it emotionally and economically.

Mike: 19:00

It works in your time frames. And stick to it. It's not always gonna be perfect. There's gonna every model is going to struggle in certain periods of time. Every strategy is gonna struggle during certain periods of time.

Mike: 19:13

The trick is not switching your strategies all the time. It's being consistent with your strategy. Pick a system and stick with it and kind of ignore the sentiment, the emotions that can compromise your ability to be consistent. I swear half of investing, especially in the market, is a hubris exercise. It's trying to control your emotions and stick to the system.

David: 19:35

Yeah. What's the saying? Like, you can't change horses midstream.

Mike: 19:39

Yeah. You wanna pick systems that are gonna work in up markets, help protecting down markets, and be able to potentially make money even in a flat market cycle. And you're not guessing or winging it along the way. That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcast.

Mike: 19:58

Just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles or if you're missing tax minimization opportunities that you may not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility. This is not your ordinary financial analysis. Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date.

Mike: 20:26

Go to www.yourwealthanalysis.com today to learn more and get started.