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The Thing We Never Talk About is an educational podcast about personal finance for creatives and other weirdos. We'll discuss managing cash flow with a lumpy income, when to save & when to invest, and how to reduce stress & build confidence when it comes to your money. No hot stock tips, no complicated strategies, and no finance bro jargon. We'll hear from artists, musicians, creative professionals, and other weirdos about how they navigate these questions for themselves. The Thing We Never Talk About is hosted by Timothy Iseler, CFP®, a former recording & touring audio engineer with 18 years experience in the music industry.
Timothy Iseler: Hi, everyone.
Welcome to The Thing We Never Talk About.
Thank you for being here today.
My name is Tim Iseler.
I'm a certified financial planner,
and I run my own independent financial
advisory business, helping musicians,
artists, and other people with weird jobs.
You can learn more at iselerfinancial.com
If you have suggestions for things you'd
like to hear about or a question you would
like me to answer in a future episode,
please visit iselerfinancial.com/podcast.
And if you like what you hear,
you can also subscribe to my
Keep It Easy newsletter at
iselerfinancial.com/newsletter.
I write about exactly this kind of stuff,
and I share it there every few weeks.
i've mentioned many times on this
podcast that even though the stock
market is choppy from day to day, it
is very likely to go up over time, and
the odds of a positive return increase
the longer you can stick with it.
Not only do I firmly believe
that, but the data backs it up.
The stock market is very up and down,
very volatile in the short term, but
it's surprisingly reliable when you
zoom out to a 15-plus year timeline.
But there is, of course, the risk
that one of those dramatic, painful
stock market drops will happen right
before you need access to that money.
We can be confident that the market
will recover eventually over time, but
that doesn't solve the short-term pain
experienced when there's a sudden drop.
This is especially important if
you're approaching retirement and
you're gonna need to start using those
investments to replace your income.
When there's a known risk that is
unlikely on any given day or in any
given year, but the results, if that
risk should come to pass, are potentially
catastrophic, there's a solution for that.
It's called insurance
The odds that you'll get into a traffic
accident on any given day are low, but
it might happen, and if it does, it
could be potentially very, very costly.
That's why we have auto insurance.
The same with homeowners insurance.
Is your house likely to get
struck by lightning today?
Well, not really, but if it did,
you'd be glad that you had that
insurance to help you recover.
So getting back to investments, the
stock market goes up most years,
and sticking with it for a really
long time increases the likelihood
that you'll see those life-changing
impacts from compounding growth.
But Underneath all of those
positive statistics, there's always
the risk of a drawdown or even
an outright stock market crash.
And some people, because of that risk of
a stock market crash, don't invest at all
or pull lots and lots of money out of the
stock market when they really shouldn't.
I recently read a book called Your Perfect
Portfolio by a guy named Colin Roche.
If you're curious about portfolio design,
this is a great and approachable resource
if you already kind of know the basics
and want to learn a little bit more.
He has an interesting way of framing
certain asset categories in terms of,
air quotes, "insurance" against known
risks that I find really, really useful.
Now, I put those air quotes around
the word insurance because there
is no literal insurance for what
happens with your investments.
But, by choosing to own different types
of investments, you can help protect
yourself against the risks and the
quirks inherent in each asset class.
Here's an example: the stock market
goes up and down unpredictably every
day and many times throughout the day.
But you know what doesn't really
change value on a daily basis is cash.
The value of the dollar today is
likely to be indistinguishable from
the value of a dollar tomorrow.
And it's true that inflation
erodes your purchasing power over
time, but money in the bank is
incredibly stable in the short term.
In other words, having a sufficient
amount of cash on hand can be thought
of, again in quotes, "insuring" against
short-term drops in the stock market.
And I again want to stress that this
is not literally insurance against
the stock market dropping, but it
helps protect you in the same way.
It manages a known risk that is unlikely,
but if it were to happen, could have
profoundly negative consequences.
And conversely, letting your stock market
investments grow and compound over time
can be thought of as, quote-unquote,
"insurance" against the erosion of the
value of the dollar due to inflation.
But it can sometimes take years for
the stock market to recover, and as
I've mentioned a million times, I
mentioned it just a moment ago, inflation
does start to weaken your purchasing
power after just two to three years.
In fact, inflation has pushed prices
up over nine percent during the
last three years alone, according to
the US Bureau of Labor Statistics.
So if inflation erodes the value of cash
after just a few years, and it might
take many years for the stock market
to bounce back, what should we do?
Well, luckily for us, there
are things called bonds.
Bonds are a form of debt in which you
lend your money to an organization,
which is typically a corporation or a
government, in exchange for interest
payments and the return of your money
after a specified amount of time.
And bonds tend to do a pretty good job
of keeping up with inflation, especially
shorter duration bonds that mature in
less than five years, and especially
US Treasuries, which are, despite a lot
of negative headlines and developments
in the last few years, still the
most stable investment in the world.
US Treasury bills mature as quickly
as four weeks and up to one year,
while Treasury notes mature at two,
three, five, seven, or ten years.
There are also corporate bonds that
can offer better interest rates,
but also come with added risk.
The more stable a company is, the lower
the interest rate they'll pay bondholders
because there's less risk, and the less
stable a company is, the more they have
to pay investors to accept that risk.
I happen to think that owning a
mix of corporate, government, and
municipal bonds is a good idea
so that you get the stability of
government-backed debt and the extra
interest that comes with corporate debt.
That means that keeping a mix of US
Treasuries and corporate bonds should
allow you to keep up with inflation
over a two to five-year period.
And even though bond prices go up and down
on the secondary markets, they tend to
do so with less volatility than stocks.
That is great for our purposes.
So cash helps, air quotes, "insure" us
against short-term stock market movements,
the stock market helps us " insure" or
protect against inflation, and things
like treasury bills, treasury notes,
and corporate bonds help protect that
middle period while the market recovers.
The name for this approach of
choosing different types of
investments to mitigate and manage
risks is called diversification.
The scenario I just described is
diversifying across asset classes:
spreading your money to different types
of investments so that the risks of
each are balanced out by the others.
But you can also diversify
within asset classes.
For example, if you own 50 different
stocks, but they're all high-growth
tech stocks, you're not really
diversified because the tech sector
tends to move more or less in the
same direction at the same time.
So you can diversify within the category
of stocks by owning a mix of growth
stocks, steadier and less flashy companies
that pay dividends, and even stocks
from companies in other countries.
Or the example of adding corporate
bonds to your government notes and bills
is another form of diversification.
Certain asset classes can also help
with edge case risks like extreme
inflation or extreme deflation.
For example, gold tends to appreciate over
time, but also tends to be uncorrelated
to the value of the US dollar.
That means it could be an effective
hedge against runaway inflation.
On the opposite side, US Treasury
bonds let you lock in today's interest
rates for the next twenty or thirty
years, which could protect you in
an extended period of deflation.
However, I think any hedging strategies
designed to protect money against edge
case scenarios are only appropriate for
people who already have a ton of money.
For that reason, I don't really
recommend them for most people.
To wrap all of this up, diversifying
your money across cash, bonds, and
stocks can help you, quote-unquote,
"insure" or protect against the
known risks involved with investing.
Adjusting the mix of asset classes,
as well as the things you own within
each asset class, can help you smooth
out the ups and downs to line up
with your particular situation, your
timeline, and your feelings about risk.
So if you're in or near retirement
and need more short-term stability,
keeping a lot of money in cash or things
like treasury bills is a good idea.
But someone with plenty of working
years ahead of them can lean more
heavily into stocks because there's
more time to recover and the need
for immediate income is lower.
I hope that framing about risk
and diversification makes sense.
Even though diversification is
not literally insurance in a
contractual sense, it can play
the same role by balancing the
risks of each type of investment
against the strengths of the others.
As always, if you have questions about
any of this stuff or would like to talk
about your investment mix, send me an
email at podcast@iselerfinancial.com.
I'm always happy to talk.
That's it for today.
Next week I'll be talking
with actor Matthew Wortz.
Matt and I have known each other for
almost 30 years, and I was very surprised
to learn that he had begun acting after
many years in conventional employment.
Matt shares how losing a job pushed him
to think outside the box and try acting,
where he's found success, and how he
thinks about money now that he doesn't
have the stability of a conventional job.
I look forward to sharing that
conversation with you next week.
The Thing We Never Talk
About is for educational and
entertainment purposes only.
It is not legal,
investment, or tax advice.
People on the show, including myself,
may have interests for or against
any investments discussed, so do
yourself a favor and don't ever make
any investment decisions based on
what you hear on this or any podcast.
If you like what you hear, please
like and subscribe to this show
wherever you listen to podcasts.
And if you have a money or finance
question you'd like answered in
a future episode, please visit
iselerfinancial.com/podcast.
Thank you so much for listening.
I appreciate you.