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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.
Welcome everyone to How to Retire On Time. I'm Michael Decker here with David Franson, author of the book How to Retire On Time. This show is all about answering your questions. We wanna get into the nitty gritty here. So that being said, submit your questions to www.retireontime.com/ask and we'll be taking them in our live feed right here.
Mike:We're have a lot of fun today. Now, I always have a a kind of a a topic I wanna address as the questions are coming in. And the the question or the topic I wanna really hit hard today is the idea of diversification. Okay? So what in the world is diversification?
Mike:Like that's why do we diversify and is there merit behind the basic premise of diversification? So let's walk through this real quick. Okay?
David:Okay.
Mike:The idea is as old as time that you shouldn't have all of your eggs in one basket.
David:Yeah. Because why? What what's the danger of having all your eggs in one basket?
Mike:Well, it's not necessarily danger. It's it allows you to just lower risk. Okay. So many business owners have all of their eggs in their business basket because they have control over it, and they're able to do certain things. Right?
Mike:But if you're investing, you have less control. Like if you buy a some stock in Target or Walmart Mhmm. You don't have control over the business No. But you're a shareholder. So you wanna buy several businesses to mitigate that risk.
Mike:So I mean that that that's the idea is, you know, you you have multiple crops, you have just you want to diversify so you're not dependent on one particular thing. And that that makes sense. But it wasn't until nineteen fifties or so, 1952 specifically, that there was this thing called the Modern Portfolio Theory by Harry Markowitz that said the market is efficient. And this is really where modern day finance and diversification really became a thing. Okay?
Mike:So the idea was simple. If you buy the market broadly, you kind of average out, the markets tend to go up over time and it kinda works out. And the idea was that the markets are efficient. So if a company has a new breakthrough, that the price will increase to basically adjust to the perceived future revenue or the future value of the company. That was it.
Mike:The markets are efficient. They're going to adjust over time. And at least in my opinion, the markets become more and more efficient. I mean, back in the fifties, if you wanted to place a trade like, you had to go through someone, had to catch news about this. So there could be like a new breakthrough in California.
Mike:And if you're in South Carolina Mhmm. It might be weeks before you heard about it, but eventually it would catch up. Yeah. Today, it's like that because we have APIs. Right?
Mike:We have internet connections. Most trading seems to be done through high frequency trading, through bots and algorithms and so on. So anyway, it's become much more sophisticated. But then I did a little digging. What is diversified?
Mike:Now,
David:David. Okay.
Mike:I'm not leading you here, but I am curious if you took off your Kedric hat before you worked here.
David:Alright.
Mike:If you if I said you should have a diversified portfolio, what in the world would you even have thought of?
David:I would have thought, okay, I need to have a certain amount of stocks, a certain amount of bonds, real estate, whatever. Sixty forty split is probably what I would have thought of.
Mike:Okay. Yeah. So that does come from Harry Markowitz in his research. 60% stocks, 40% bond funds. And the reason was, stocks have the most growth potential, but bond funds, they're kind of a stability feature.
Mike:If the markets go down, you go down less. If markets go up, you go up less, but the bond funds are supposed to stabilize. Now nineteen fifties, bond funds were a great deal. Yeah. They haven't always been a great deal.
Mike:I'm curious in the chat. Let me know if you've been very fresher with bond funds over the last couple of years. That'll kind of help the our conversation here. So I kept doing some digging and what I found was in the sixties and seventies, they expanded. Bonded.
Mike:No. You shouldn't just diversify in stocks in the local market. You should put international stocks. We became more and more of a global economy and notice how the standard continues to expand its exposure. That's a key theme that we need to address here.
Mike:So in the seventies or so, it becomes more popular to diversify internationally. Whether that's good or bad, who's to say? It's just you're expanding your quote quote diversification. In the eighties, then the size of the company started to matter. So they started looking at what's called large cap, mid cap, and small cap.
David:Who
Mike:in the world, unless you have a financial background, really understands what that even means?
David:Yeah. Caps.
Mike:Yeah. And that's why when you work with a broker today or a typical money manager, an investment advisor that focuses on managing a portfolio, you're gonna get a port you're gonna do little intake. And then they say, all right, where's your portfolio? Large cap, mid cap, small cap, as if most people can even define what that is. It's the size of the company by the way.
David:Yes, so market capitalization. Yeah. What does even that mean?
Mike:So Apple is a very large company.
David:Yes.
Mike:Chipotle is not as big as Apple.
David:Right.
Mike:So because of their size and volume, there's built in different filters for risk factors. A smaller company might be more susceptible to risk than say a large company, but they also have different cycles, different influences, like it just they're kind of a different class of investment. Now that's a very deep topic that we're glossing over for the sake of time. Yeah. But notice it started with just buying a bunch of good companies Mhmm.
Mike:That you believe in. To, okay, maybe you should add some bond funds in there then hold this large group of funds. Then maybe you should put some international in there. And now, let's be more detailed about you need to have a certain percentage in large cap, mid cap, and small cap because we know that that's proper diversification. As if it it I would question the research on this.
Mike:It's a good idea, but let me keep going here for a second. Okay?
David:Okay. Alright.
Mike:And then it was in the mid nineties that Morningstar, which is a great company by way, love Morningstar, had this style box that then puts your large cap, mid cap, small cap size of the companies into more categories. Value blend and growth. Notice how we've taken a simple idea of buying and holding a lot of good companies, maybe not as some bond funds in there to help stabilize portfolio returns when bond funds were a good deal, by the way, we'll get to that in just a second. And now we have layers and tranches and different ways to look at this. Like, why do you think people are overwhelmed by finance and how to put together a portfolio?
Mike:It's like, oh, I and they just Yeah. Just do a random suitability questionnaire and say that's good enough. And never questioning the why. So then we have index fund or mutual funds were a thing for a long time. But then we have index funds, which became a thing.
Mike:You could buy the S and P 500. The S and P have been around for a while, but now you could buy their 500 stocks or so. It's not exactly 500. It's around 500. And then you could buy ETFs, exchange traded funds.
Mike:Now you could buy the indexes for a low fee. Technology kept evolving. And then over time you started getting things like Robin Hood and Acorns and E Trade. Remember E Trade with the baby commercials? Yeah.
Mike:Those were hilarious.
David:I love those during the Super Bowl.
Mike:Yeah. We kept handing more responsibility, more access to people. Yeah. The financial services space was never done. Just we had more access to more people.
David:Can skip the broker, right? And just do the trading yourself or the investments yourself. Yeah. With these easy apps and websites and etc.
Mike:Yeah. What a cool thing.
David:Yeah. Could be.
Mike:Some foreshadowing there. I didn't prime you for any of this.
David:No, no.
Mike:So we've given, we've created a system where now there's easy access to have a diversified portfolio. But is anyone asking why you should have small cap in your portfolio or not? Why you should have value versus growth? Or should it all be blended? And what is even the difference?
Mike:I bet you if remember jaywalking? Jay Leno would walk around asking questions? Yeah. We should do that. And say, what's the difference between a value stock and a growth stock?
Mike:Right. Like just ask these basic questions.
David:Be interesting to hear the answers to those.
Mike:It'd be really interesting. And then if you look at the different returns, most people miss what are called total returns. So a value stock, right, is going to pay dividends, maybe have less growth on the price, but pays dividends. More of an income play. And that's an oversimplification, but I'm trying to make it simple here.
Mike:Well, what's the difference of let's say a stock that grows on average three or 4% a year, but pays a 3% dividend versus a and you know, the dividend versus a stock that grows by six or 7%. It's kind of the same deal if it's in an IRA. There's no tax issue. So you have to now start to break down. Okay.
Mike:Well, why do you have what you have? That's a complicated question. And we've given access to people to assume this. And so I have found a lot of people are just blindly taking a questionnaire or doing robo investing saying, the robots know I'm buy and hold, the markets are efficient, and they stop asking questions at that point. Yeah.
Mike:And here's what that got a lot of people. By not asking questions, a lot of people held 40% of their assets in bond funds. So in 2022 and 2023 when interest rates increased, they lost a lot of money on the asset that is supposed to be stabilized.
David:Yeah. Did they even know that was happening? Probably not. So
Mike:why do you and then a lot of people and we'll talk more, but let me do the bond funds. I'm gonna go down a little bit of a tangent here for a second. How do bond funds work? You need to understand this very basic concept. Bond funds are based on the constant buying and selling of bonds.
Mike:Bonds are, you buy it, you hold it for for the the time that it's supposed to be there, right? And you get these coupon rates or you get these distributions and that's it. Bond funds are constantly buying and selling them. So if a bond loses value and you sell it at a discount, your bond fund is losing value too.
David:Mhmm.
Mike:Okay. Try to do the chicken analogy.
David:We've done it and long time listeners will will know this story but for new people let's do it.
Mike:Okay. Let's do it. So here's how bonds or bond funds work. So let's say science invents a chicken that's guaranteed to live for ten years. Okay?
Mike:No fox or wolf can kill it. Okay. Its skin is impenetrable. Yeah. This is an analogy.
Mike:That's why we can make up these sorts of things.
David:Yeah.
Mike:And that chicken is guaranteed to give you three eggs a week. Alright. I don't know what the going rate of a chicken and egg is, but for this analogy, we're gonna give you three eggs a week. Okay? And then a year later, you buy the chicken, you buy you pay a thousand dollars for this chicken, you get three eggs every single week for the rest of its life.
Mike:10. Right. But then science has a breakthrough. The same quote unquote organic beautiful chicken is now gonna give you five eggs a week and they're gonna sell that for a thousand dollars. Now which would you prefer to buy?
Mike:The the chicken with five eggs a week or the chicken with three eggs a week? Obviously the five. Yeah. So if you had a chicken with three eggs a week and you held it for two years and you're like, I'm going vegan or you know, I'm not gonna have eggs anymore. I wanna sell this.
Mike:You can't sell it at market value because the person who buys it is gonna get two eggs less every week for the remainder of that chicken's life. So you sell it at a discount. In this analogy, the eggs are interest rates. If interest rates increase, means new debt, new bonds going into the market are paying you more money than the ones you currently have. So if you wanna get rid of them, which is what bond funds do, they have to sell them at a discount, which means they lose money.
Mike:That's why when interest rates go up, bond funds lose money because they got a bunch of uncompetitive chickens.
David:Right.
Mike:Okay? Yep. Hopefully that makes sense. Let me know in the comments if you appreciate the analogy or if you're just confused to death. But in 2010, let's say, the ten year treasury is historically low.
Mike:That's like if you were to enter into the bond market, you're buying a bunch of chickens that give you an egg once every two weeks.
David:Oh, right.
Mike:Why would you wanna buy that chicken? Yeah. I mean, really?
David:Unless I was getting a huge discount.
Mike:No. You're buying a thousand dollars. That's what the going rate is. Yet so many people held so much of their portfolio in bond funds. They bought a bunch of chickens that were uncompetitive and they held it there for a long time.
Mike:And they're like, why do we have bond funds? They're not very competitive. It's like, yeah, the conditions would suggest there's more growth potential in the stock market because money was cheap, stock market had more growth potential, the conditions were ripe for great growth in the market, not for the bond market.
David:Mhmm.
Mike:Oh, but Mike you need to stabilize your portfolio for what? Because if inflation gets out of control and they raise interest rates, your bond funds are losing money. So what you have is a condition. Sounds like, you know, you've a medical condition. No.
Mike:You've got a financial condition
David:Right.
Mike:Where you're making very little money on 40% of your portfolio if you follow this strategy, plus you've got interest rate risk, which means if interest rates go up, you're gonna lose money on the thing that's not making you any money anyway. And no one questioned it. Because you just buy and hold based on the sixty forty split that won a Nobel Prize, so why ever question it? Which by the way, Harry Markowitz didn't even follow the sixty forty himself. He was like, yeah, it was great literature.
Mike:It was great research and it inspired a lot of great portfolios. But he didn't follow it himself. So you have to ask yourself, well why didn't he follow it himself? Yeah. He retired and put most of his assets in municipal bonds because they were paying a good rate, and they paid it tax free.
David:Oh, right.
Mike:So you have to ask yourself, what are the current conditions and what ingredients make sense to be in my portfolio? I mean, Dave, what are your thoughts? I mean, is this wild? Am I out of turn here? What do you think?
David:Well, mean, yeah, think it's hard for the sort of, I guess maybe the masses to know what is right. Because we kind of hear in the periphery that go, well I need to be in, I need to have a certain amount of my portfolio in bonds. So I'm just gonna do it and follow that advice semi blindly because that's what we've been told.
Mike:I mean, yeah, it's like going to a doctor and assuming that you know medicine. Mhmm. If I took Tylenol, I have no idea what it actually does, other than it kind of like helps with pain relief. And I guess ibuprofen is like a blood thinner, it helps with pain relief. Yeah.
Mike:All I know is if I take it, this amount is safe and it helps me here. Let's like Yeah. That's kinda like how finances. We don't really know, and that's why we have shows like this. That's why we have these kind of commentary to help people ask some questions.
Mike:Yeah. So, what's the opposite of the buy and hope diversified portfolio? That's called a tactical model. It's very well researched, but a tactical model says, if conditions are x, you're in the market. If conditions are y, you're out of the market.
Mike:Yes. That's called timing the market. Sometimes it works really, really well. Other times, you completely miss the recovery. Very difficult to do.
Mike:So there is a benefit to it. There's also a detriment to it. Yeah. And there's a big trade. I personally don't subscribe to either.
David:Okay.
Mike:I think it's both just kind of ludicrous.
David:Alright. And does that put you in a minority or are there other similar thinkers? Total minority.
Mike:I I don't know another advisor that thinks this way yet. I'm sure there there are some that are out there. Okay? It's not a completely original thought, but I don't see this in the big firms.
David:Alright.
Mike:That's not representative of the entire industry. Right? Everyone's gonna be a little different. But here's my opinion. Is you take the different asset classes and you evaluate them, and then you figure out what are the current conditions and what ingredients warrant that portfolio.
Mike:And this is tricky because you have to look at valuations or the how expensive the market is. You need to look at trends. You gotta have smoothing factors, so you're not getting whiplash, whipped around the whole time. Right? And then you have to understand each each asset class and if it earns a seat on the bus or not.
Mike:So let me simplify the whole thing for you.
David:Okay.
Mike:Okay. Now, we call it the KDRC model here at Kedric.
David:Alright.
Mike:You can call it whatever you want. But the way the the most fundamental way I look at a portfolio is as follows. Broad diversification is a great thing. You wanna be in the game. I'm not saying all of your assets should be in the game.
Mike:I'm saying the growth part of your portfolio. So if you're 20 years old, your portfolio. If you're 60 years old, you wanna do some planning around this, but there's a part of your portfolio that should be in long term growth because you need money in ten, twenty years. You need to be in the game Mhmm. To offset inflation, to help with unexpected costs, to be in the game.
Mike:The game is investments. Not the game of gambling and playing Wall Street like a casino. The idea that you buy into the markets and you have broad diversification, the markets are efficient, and economies always want to grow.
David:So having said all that
Mike:Anyone can do that.
David:Yeah. It's likely that there'll be some growth, but no guarantee. Is that what we're saying?
Mike:Yeah. And we'll get into flat markets here in a second. Okay. But generally speaking, you wanna be in the game. Yeah.
Mike:Okay. You wanna have broad diversification or some exposure. Now that could be the total market. You could do just the S and P 500. You could do large cap, mid cap, small cap.
Mike:Any combination of this, it still follows the underlying principle, broad exposure.
David:Mhmm.
Mike:You can do that on your phone on your own. Then, when conditions are favorable, this is the k. We call it kinetic. It's overweighting your portfolio to winners.
David:Okay.
Mike:What does that mean?
David:Who's a winner?
Mike:So I'll I'll quote Charlie Munger. May he rest in peace. Alright. That man's incredible. Man, if you know, one of the people you wanna go back and visit with, I would love to just chill with him, like just interview him for a while.
Mike:He always said like he he was he had Berkshire Hathaway stock, but he had a couple of others. One was Costco. You know Costco has beat the S and P most years? I
David:guess I'm not too surprised as a Costco member, as a card carrying Costco member. Yeah. Love that place.
Mike:Now is that a guarantee that Costco will continue to beat the S and P? No. I'm just if you if you bought the S and P five hundred and maybe ten years ago you put 10% in Costco or 5% whatever it is, and this is not financial advice, please don't just go out and do this. Mhmm. I'm just proving the When conditions are right, you might put ten, twenty, 30% of your portfolio in something like stocks that you believe in that you can hold for ten years.
Mike:That are valued or priced at a good rate that have growth potential. You could do something like buying the Nasdaq 100 which overweights your portfolio to tech. Tech has an inherent advantage of growth because you write one line of code and you can use it over and over again. Mhmm. As opposed to in retail, very competitive, very labor intensive.
Mike:It doesn't have as much competitive growth, unless you're Costco. Yeah. Okay. But you see the difference there? It's it's overweighting to where there's a competitive advantage.
Mike:Another way that a lot of people this is very well researched, is momentum. You might, under certain conditions, want to overweight your portfolio to momentum. When the conditions are right. Here's a free fun fact for you. A lot of people don't know this, But if you want momentum in your portfolio, because the conditions are right, it means that momentum is not the the current price of whatever momentum strategy you're using is not 20% more than its 200 day moving average.
Mike:If that sounds like Greek for you, that's okay. We help people figure this out. Uh-huh. But the idea is simple. You need to understand if you're overweighting it, does it earn a seat in your portfolio or is it running too hot?
Mike:So there's too much risk, or it's going down not enough risk.
David:Okay.
Mike:Systems. Do they earn a seat in the structure of the portfolio or not? So you've got broad exposure, and then when conditions are right, you might want to overweight it. When conditions are not, maybe you go back to broad exposure and you overweight with consumer staples because that's kind of a nice way to hedge against expensive times or uncertain times. Alright.
Mike:KD, simple portfolio. Now let's go to R. Reserves. If the markets are starting to trend down, you can't time that, but you might want to start moving some of your portfolio to buffered ETFs. Why?
Mike:Because a buffered ETF can slow the decay of a market collapse, but also if the markets have a quick recovery, you still get upside potential. You're trying to blend that middle ground. Alright. The conditions we call it a risk dial, the KDRC risk dial isn't trying to time the market, it's adjusting risk on risk off on a spectrum based on current conditions. It's not you need to have 10% in this allocation, 20% here, and 40% here, and 40 It's what's happening today, and what's the exposure.
Mike:Very it's a dynamic risk dial.
David:Alright.
Mike:I'm gonna get to why this is so important in just a second, and I'll give you a hint. It has to do with flat markets.
David:Okay. Okay.
Mike:So, reserves. Buffered ETFs can really help with that factor. By the way, those only have been around since '19.
David:What has the
Mike:Buffered ETFs.
David:Buffered ETFs.
Mike:It's a new instrument that is not being incorporated into many of the mainstream portfolios because it challenges the concept of 6040 and this how it should be. What if you got a better tool in the toolbox you could put in there? That's kind of nice. Now let's do let's go to the bond funds. So in my opinion, since twenty two thousand nine, 2010, it really hasn't made any sense to have bond funds in your portfolio.
David:Because of interest rates?
Mike:Yeah. The ten year treasury was low. Okay. So it's earning very little of your portfolio. It's got interest rate risk, which everyone just experienced that recently, and how annoying was that?
Mike:But if the ten year treasury were, and this is just hypothetical here, if it were, let's say 3% or higher, and the twelve month average, let's say, was either flat or going down, it might earn a reasonable part of your portfolio. Because in 02/2002, your bond funds is what saved you. In 2008, the bond funds helped save your portfolio. Throughout the last decade, your bond funds are probably what made you money. The conditions were suitable to have bond funds in the portfolio because they earned their own seat on the bus by their own independent merit.
Mike:Mhmm. Not broadly diversified with this buy and hope situation.
David:Yeah.
Mike:Right now, I don't know if bond funds have earned their seat. I think they're getting close to it, but I don't think they have earned their seat. Notice that there's a constant valuation of what earns its seat and what doesn't by merit. Mhmm. Not buying hope, blind diversification, let the chips fall as they lie.
Mike:Alright. Why is this so important? We've talked openly about a oh, then c. I got it. So K is kinetic, overweight your winners.
Mike:D, broad diversification. R is reserves. When the risk is going the wrong way, start to shore up those assets. And then C is cash. Have like four or 5% in cash.
Mike:In retirement, you need to spend your money. Yeah. That structure is designed to get out of the way when markets are going up, just to let the markets ride. So in 2010, the conditions are perfect to be like 95% growth focused on the growth side of your portfolio. You don't really need buffered ETFs.
Mike:You don't really need bond funds. Conditions say go into the stock market. But now markets are kind of expensive. Things are shifting a little bit. Maybe you're starting to adjust it based on current conditions.
Mike:Let me know in the chat if you find this at all interesting or any sort of comments here.
David:Like who's reading these conditions? Who's there to tell me like, oh, the conditions are right for this now?
Mike:Well you have to have a system. So we've said systems need to follow sentiment. Or no, I'm sorry. Follow systems not sentiment. Your emotions can betray you.
Mike:So what was the the according to the advisor alpha, this is just some research that was done by by Vanguard, Morningstar, Fidelity and so on. Systematic rebalancing can contribute an extra 0.1 to 0.3% of your overall portfolio. Investment products and access, behavioral coaching. These things can add up to half a percent to 2% or more of following systems and being disciplined about it.
David:So a systematic rebalance would mean that my system says that during for these certain for this what am I trying to say? At these waypoints, that's where you rebalance.
Mike:Yeah. So the research shows if you have a static portfolio, rebalancing once a month, once a quarter, once a year, there are there's no statistical significance between the two. It kind of all average itself out. This model says, you need to make subtle adjustments every month. Just a little rebalance.
Mike:The point being is it challenges conventional wisdom because it questions every seat on the bus. And that they're only in there if they earn their merit. But when you look at a flat market cycle, okay? From 2000 to 2009, 2010 or so, if you were all equities, you probably made nothing in the market. Broad diversification.
Mike:Yeah. We know those conditions weren't suitable for just all equities. And if you follow the sixty forty split, historically speaking, you probably would have earned like three and a half percent on average year over year returns. That's a pretty reasonable deal. But imagine now, if that when the markets are going down, you have lowered your downside risk and gone very heavy in the bond funds because they earn their seat.
Mike:And then by the time the markets have gone down far enough, that the model is forcing you to buy equities because now the markets are at a good deal. And then as things come back up, like do you see how it's It just says what is today. It isn't in or out. We're not timing the market. We're adjusting it based on temperature.
Mike:Mhmm. That's it.
David:Yes. So we we might go more heavily into our into equities, winners, or if the dial says, oh, you need to things are hap things are the conditions are saying we need we need to be more in bonds. Yeah. So you just make that subtle shift.
Mike:Yeah. Or buffered ETFs. Or consumer staples.
David:Alright. Okay.
Mike:Systems, not sentiment.
David:Yeah yeah yeah.
Mike:A couple of questions popping in here as well. But and I'm gonna answer each of these questions coming in. But here's here's my thesis, philosophy, if you will. I don't believe in buy and hold. I believe in buying at a good deal under the right conditions with reasonable growth potential, which means there needs to be a system to question what you're doing.
Mike:And the thing that almost no financial advisor wants to admit is when the conditions are right. So let's say the market is now valued appropriately, the markets have become efficient. We've gotten rid of, let's say, of the AI hysteria for a moment. The things are priced correctly. That the bond market is is maybe not as competitive.
Mike:Like it's okay to be mostly in the market and under certain conditions, you have incredible, tremendous growth potential. You don't need an adviser to buy the S and P 500 if that's what you wanna do. But you do need to know, are the conditions correct or not? I think sometimes the financial services space does an injustice to people by trying to scare them into this idea that you need us or else you're in a bad spot. Well you only need a firefighter if there's a fire.
Mike:You only have smoke alarms to help you know that something's gone off. In my opinion, I hope that the financial services space moves in this. I highly doubt it will happen. Is that financial advisors are starting to give more guidelines, but allow investors, the retail investors, the DIY investors to operate within those principles, within those guidelines. Because that sounds like a much better situation.
Mike:And if you wanna default into a a basic, this is the system, just do this, that works. But if you know the conditions are suitable for 20%, let's say in Kinetic for growth. Over winning your winners, and you like picking stocks, you like doing a little bit more, that gives you permission to know those conditions are right. But you'd wanna know when those conditions have turned. Yeah.
Mike:And you might wanna get out. You wanna know I mean, the car is only as good as the brake. Right. Okay. Some of the questions popping in here.
Mike:Perfect timing with the Fed meeting today. Oh, I haven't even seen it yet. Would you look that up, David? What did the Fed say today? Yes.
Mike:I have been in meetings since the show, and then we started the show. Don't hold bond funds. However, do you hold individual bonds for Yeah. This is great, MJ. So there's two sides.
Mike:Bond funds have to earn their seat. I think inflation is sticky. I think interest rates might actually go up, and you'll tell me, David, what what's gonna happen here. I I think that we're not gonna get to the the one or 2% environment anytime soon. So bond funds, if you look at their total return, aren't that bad.
Mike:They're just haven't earned their seat yet. It's kinda like they're knocking on the door of the bus, but the bus driver hasn't opened the doors yet based on at least our models today. That's not investment advice for you, MJ, or anyone else listening on the call, on the in the show, or over the radio waves, or anything like that. However, if you're within, let's say, three to five years of retirement, laddering out bond funds can be a very prudent thing to do. And the reason is, let's say the markets grow for two years and then there's this massive crash.
Mike:You made no money in the market. Because you've lost more than you gained over that three year period of time. But you still wanna retire in two, three, four, five years. This is what we call laddered reserves. So reserves basically means that you can pull it out without accentuating losses.
Mike:And you might do a one year CD if you retire next year, then a two year bond, maybe a three year bond. But I'd also add in MYGAs in there as well, multi year guaranteed annuity. It's like a CD from an insurance company. Those also grow at a fixed rate. Don't use them for income, you just ladder it out.
Mike:If you can get like, you know, 4% from a CD that's liquid next year, that's a good deal. You can get four and a half percent maybe from a a treasury maturing, so total return. You might buy the discount, maybe not, but that matures in two years. That's a good deal. And now you are laddering your income for the next couple of years from a bond, not a bond fund, and you know how much it's gonna grow because there's a fixed interest rate to it or a coupon rate.
Mike:And then you know when it's liquid and it matures, and then you spend it at that time. This is often called the bucket strategy, but laddering bonds or fixed investments or products is a wonderful thing to do so that you know if the markets crashed the day you retired, your income's coming from a fixed source and you've got plenty of time for it to recover. Typically five years or less, I prefer fixed. So those are CDs, treasuries, a good corporate bond, maybe, just depends on the company. And then also you've got MYGAs.
Mike:Mhmm. If you wanna ladder things out more than five years, I'd go more towards the index categories, namely buffered ETFs and index annuities, depending on if you wanna fund it from your IRA assets or your non qualified assets like your brokerage funds, you know, the after tax ones.
David:Mhmm.
Mike:And by the way, this model, it's never gonna perfectly time it. Nothing can perfectly time the market. That's why there has to be other mechanisms to smooth things out. And sometimes it's really painful because you're gonna see the market shoot up when the risk was trying to hold you back. So that's part of it.
Mike:You have to give something to get something. This is more for stability based on current conditions, not buying hope. And also giving yourself a green light, a yellow light, and a red light. Just to try and have some a system to help guide you through a time where you can't just have everything in the market. And if the markets go down, you've just destroyed your retirement.
David:Alright. So the Fed started their meetings today, but they will announce tomorrow their decision about rates.
Mike:Oh, that'll be interesting. So yeah, we're recording this Tuesday live for our audience. And then it plays Saturday and Sunday and the radio waves. Oh, yeah. And YouTube.
Mike:So that said, let's see. Can you please put KDRC acronyms? Or I think please put yeah. So kinetic, it's the idea is overweight your winners. Diversified, D is diversified.
Mike:Broad diversification exposure, you're in. You want at least some sort of exposure. R is for reserves. Those are your lower risk assets, and we like to look at buffered ETFs and or bond funds, and then c is cash.
David:Mhmm.
Mike:In my mind, those are the four parts of the portfolio. Sometimes that part is not suitable. Sometimes it is suitable. It's a system on when they earn their seat and when they don't. So I will say here pretty soon, we are actually gonna launch a subscription model.
Mike:So this is not an advisory service. But we're gonna share that model. You could subscribe to it and basically get monthly updates of what the model suggests. I am pretty, pretty aggressively trying to build systems that support the individual investor because they are neglected by financial services often. And they just wanna know kind of what's going on, and they wanna check their own work.
Mike:I mean, me know in the chat if that's you. I'm I am curious. I think it's ridiculous that you either have to give all of your money to a financial adviser and pay them one to 2% for them to watch your portfolio for you, or you gotta be on your own. Why can't there be a middle ground of research that's built to help sustain someone that they've got guidelines, they assume their own responsibility. That's fine.
Mike:But pay an advisor a one time plan. I mean, gosh, would you this is probably a terrible analogy, but would you wanna pay a mechanic a percentage of the value of your car every year? And he might just do an oil change once and on, like call it good like, no, you pay them to do a certain job for a certain time.
David:Yeah.
Mike:The fee structure of financial services made sense in the seventies, the eighties, and nineties when you couldn't do this. But we've replaced that, a lot of that responsibility through technology. Schwab, Vanguard, Fidelity, they've already replaced that, and they're great institutions. And then the rest of it is done in the funds. So why is it that people and I'm getting a little bit of a tangent here today.
Mike:But why why would you pay one to 2% to a financial adviser to pick a bunch of ETFs when the fund manager's really doing the hard work in that sense?
David:Right.
Mike:I'm just talking myself out of a job, but not really because we do one time plan, set people up for success and then let them govern themselves. And if they wanna come back and they can't, it's just an hourly rate. This is the kind of transparent. This is where I hope financial services goes. I highly doubt it because why would I mean, did Blockbuster wanna not give up their late fees?
Mike:Why did Kodak not wanna give up their their film business? Right. I think there's something to be said that there's a lot of forces that don't want something like this to happen, but we don't care. We're independent. No one owns us.
Mike:So we as long as, you know, we're very compliant. We follow the rules. But we're really trying to have some fun challenging the assumptions being made, whether it comes to systems for how you're supposed to be diversified, supposed to. Yeah. To how to set people up for success.
Mike:The last thing I want is someone to buy the S and P 500 in retirement, follow the TikToker's advice, and get destroyed. I don't want that to happen. Right. And whether that's a one time plan or you listened to this show and made some other decisions like that's If you want a one time plan, if you want more resources, we've got how to retire on time. It's a free book on retireontime.com.
Mike:You could download today, the DIY for annuity guide, a book I literally wrote to convince some people to buy annuities and some people to not buy annuities because I define it as it is. It's just a tool. And sometimes it earns a seat on the bus and sometimes it doesn't. I don't care if you buy one. Is it a tool?
Mike:Is it not a tool that should be for your portfolio? We have a lot of clients that don't have annuities because it made no sense. So just, you know, and then I've got four other books coming out this summer. All of that's gonna be available retireontime.com. If you wanna chat with us, you can go to retireontime.com.
Mike:Schedule your visit, thirty minute call, here's how it works, and then we're gonna get into your questions for the rest of the time. Thirty minutes call, tell us what you want your retirement to look like, and then what you want You're not gonna hurt our feelings. You want a one time plan? Great, no problem. You want just an analysis?
Mike:Great, no problem. You want an ongoing relationship? Great, no problem. You wanna be set up and then enter into our subscription model? Great.
Mike:No problem. Tell us what you want. We'll tell you then what it takes to get there and you decide if you wanna proceed or not. Typically, we give the first two appointments away for free because we want you to see what the planning process looks like. It starts with the asset flow analysis.
Mike:That's projections, proper expectations, tax efficiencies, social security optimization. How do you get the most out of your money? Then we have the second appointment which is the build method. How do you build the portfolio to support then your plan? See the plan is your guiding light.
Mike:The portfolio is just a bunch of tools to be used appropriately to support that plan. You don't go to the hardware store to buy the tools and then figure out the house you wanna build. You say, here's the house I wanna build, then you ask what you need for the tools and materials to get there.
David:Yep. That makes sense. So
Mike:that's how you chat with us.