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Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, healthcare, 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.howtoretireontime.com.
This show is intended for those within 10 years of their target retirement date or for those are are currently retired and are concerned about their ability to stay retired.
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 RetireOnTime.com. My name is Mike Decker. I'm the author of the book, How to Retire On Time. I'm also a licensed financial adviser, insurance agent, and tax professional, which means when it comes to financial topics, we can cover it all.
Mike:Now that said, please remember this is just a show. Everything you hear should be considered informational as in not financial advice. If you want personalized financial advice, you can request your wealth analysis from my team today by going to www.yourwealthanalysis.com. With me in the studio today is my esteemed cohost and colleague, mister David Franson. Thanks for being here.
David:Yep. Glad to be here.
Mike:David's gonna read your questions, and I will do my best to answer them. You can always submit your questions anytime during the week by texting (913) 363-1234. Again, that number is (913) 363-1234. Let's begin. Hey,
David:Mike. Can you share how you vet different investments?
Mike:I can. Okay. You ready for a rant?
David:Okay. Rant, rabbit hole, or any r word here, I'm good for.
Mike:Yeah. The only the good r words, though. Some bad r words.
David:Yeah. Well, that's another show though.
Mike:Yeah. So I gotta be careful in what I say here, because I don't want to get in trouble by disparagement or anything like that. I wanna first state, I think most people in the financial services space are well intended people trying their best. They believe in the product or investment that they're selling or pitching, and that based on their understanding, it is good for people. The problem I find is the lack of understanding.
Mike:And yes, there are parasites in every industry, people that are taking advantage of a high commission product and manipulating people, like that exists too. But by and large, I think most people in this industry are just trying their best. So everything I'm about to say is not intended to disparage or be critical of any particular person or company. I wanna discuss it from an economic standpoint. Now let me talk about the poster child of complaints in the financial services space, and that's the annuity.
David:Okay. Right.
Mike:Now I'm not talking about variable annuities here, which I don't really care for. I understand how how or where they could be used. I've never actually sold one, because I've never found that situation to be applicable, And I'm not talking about fixed annuities, which are basically a CD for an insurance company. I'm talking about fixed indexed annuities.
David:Okay. A
Mike:fixed indexed annuity by nature is a contract with an insurance company when used as it's intended to be used as a guaranteed income for life situation. Now we, as many other financial professionals, will also use them as bond fund alternatives.
David:What do you mean by that?
Mike:So bond funds, let's say they average four to 5% year over year returns over the long term period of time. It's intended to be your less risky, less volatile asset class within your portfolio. That's why they put sixty forty together, 60% stocks for the growth, but you got a lot of roller coaster kind of experience. The bond funds are supposed to smooth things out, but bond funds can lose money. A fixed indexed annuity, depending on the product you have, is principal protected, so it shouldn't lose money.
Mike:I'm assuming that you don't buy the ones with fees. Mhmm. Now there needs to be a mechanism that allows the product to grow its cash value. That mechanism is an index.
David:Okay.
Mike:Hence, fixed indexed annuity.
David:Right.
Mike:There are more indexes than stocks available. Okay. Just dwell on that for a second.
David:Yeah. Was upset with There are
Mike:more indexes. There are more pigs with lipstick on them. I don't know.
David:I mean, how many stocks are there then? Just to give us an idea.
Mike:I actually don't know. Layton, would you look that up? How many publicly traded stocks? I do know that publicly traded stocks are diminishing in totality. So companies are being bought up.
Mike:Companies are going back to the privately traded. Yeah. They're just what's publicly traded is the company quantity is going down, but the total amount of what's being traded is increasing. So less selection, but still a lot of money in there. Alright.
Mike:So that's not a fear of, oh, I need to do private equity. It's no. It's just the selection might be decreasing, but there's still plenty of a selection to look into. Mhmm. So and we'll get that number here in just a second.
Mike:But the index is basically a methodology or a system on how to buy and hold or trade publicly traded investments. Indexes don't have to be just in American companies. They could be in foreign companies. Okay. So, Layton, do we get that number?
Mike:Yeah. So globally, there's 55,000. But in The US, there's roughly 6,000. Okay. It's about 6,000 in the company.
Mike:But there's a lot globally. K? And more there are
David:more indexes than there are Yeah. More than 6,000 indexes.
Mike:Yeah. Indices. Indices. So that's the stock market, though, the equities market. Then you've got the bond market, which the bond market's the largest market.
Mike:Okay? That's that's important to note. So in the bond market, that can be also part of these indexes. Do you trade bonds in the indexes? So it gets very complicated.
Mike:Right? And many times it becomes a black box, which is a problem. So what you need to understand is first, if you're buying a fixed index annuity or any index product, a buffered ETF, a structured note, life insurance, you're buying mutual funds, you're buying ETFs, a lot of them around indexes. You need to understand what it's doing.
David:Okay.
Mike:So a lot of people bought a bunch of fixed indexed annuities that had indexes around bond funds. Okay. Like a PIMCO fund. Okay. PIMCO, they're kind of the king of bonds.
Mike:You got Bill Gross, smart people, wonderful company. Okay? So this is not despairment of them, but I've seen a lot of PIMCO, I've seen a lot of BlackRock, I've seen a lot of companies, these big companies that have bond fund indexes that are associated with the fixed index annuity.
David:I see.
Mike:Bond funds are susceptible to interest rate risk. It seems weird to explain it, but this is the economics of the situation. If interest rates increase, bond funds lose money.
David:Okay. You wanna say that again so we all get it?
Mike:Yeah. If interest rates increase Yep. Bond funds lose money.
David:Okay.
Mike:That's how it works, generally speaking. Okay. Let me explain why that is. If I have a chicken that you can buy today for a thousand bucks
David:Yep.
Mike:It's gonna give you three eggs every single week
David:Yeah.
Mike:For ten years, guaranteed. Can't get killed by foxes or anything like that. Okay? You know exactly what the market is for that that chicken. So you've bought a couple of these chickens.
Mike:Well, let's say next month, science had a breakthrough, and now you can buy a chicken that lays five eggs every single week, lives for ten years, and they're signing up for a thousand bucks. What are you gonna buy? Two chickens, allegedly both a thousand bucks, 1 gives you 40% less of return. Doesn't work. So you now have to take your chickens if you wanna get rid of them, and sell them for less at a discount to compensate for the missed opportunity of the other legs that could be there.
Mike:Kind of a weird analogy, but people tend to get it. So the reason why I say that is, if you're investing into an index that's banking on these returns, and then interest rates increase, everything in that index has now fallen off a cliff. So when people complain to me about, well, my fixed index annuity, my annuity, because no one ever says my fixed index annuity, they just say my annuity, because they don't really know the differences, and that's That's like my wife has a horrible habit of saying, my upper door smiths, or she she says like, she's hiding a massage like some on her back, whatever, and she uses the scientific word for it. I'm like, I don't know what that means. Can you just point or say your shoulder or something like that?
Mike:Right? So when people say, oh, well, my annuity isn't making much money, it's like, okay, well, what's the index associated with it, and what's the sustainability of that index performing year over year? Bond funds are susceptible to interest rate risk. They're susceptible to all sorts of things. It's also a very risky alternative because if something happens, then you've got an asset that's illiquid for the most part that Dow can't perform.
David:Right.
Mike:So you've got to understand when you're vetting anything, what is the index or the growth mechanism, and how does it work? Many times it's a black box. When you hear proprietary or sophisticated black whatever black box is really what it is, be skeptical. Don't say no, be skeptical. Okay.
Mike:There's all these terms that are intended to confuse you into getting some sort of fake confidence into buying some product. I mean, they're real terms, they make sense, but most people don't understand. Even finance professionals. Ask a financial professional how a volatility control index actually works. Mhmm.
Mike:I'm willing to bet eight out of 10 of them can't actually explain it. Yeah. Yet they sell it all the time. Yeah. Oh, it's a volatility index, so you've got less volatility, so you've got more sustainable returns.
Mike:Maybe that works in theory, but there are detriments or risks associated with these kinds of mechanisms. Mhmm. And I'm not saying all volatility control, which most people probably listening have no idea what that even means, have risks. I'm saying pump the brakes and ask more questions. You've got to understand what it is.
Mike:When you understand what it is, then you can start to say, okay, are the returns sustainable, and is the investment or product predictable? I drive a Subaru. Do you wanna know why I drive a Subaru? It's cheap. It's dependable.
Mike:I don't need to look cool on the road, though I I think I do look pretty cool in my old Subaru, whatever. I like dependable long term cars. Subarus don't typically break down quickly, in my experience. This is my second one. And this is
David:not a sponsored post, by the way.
Mike:This Subaru didn't pay us to say that. No. But it's true. My wife drives a Toyota.
David:Yeah.
Mike:That's a good long term car.
David:I have one.
Mike:Yeah. They last forever. So and that's not to say that other cars don't last as long. What I'm saying is you want something that's almost like a index that's boring, predictable, and and so on. Then you need to take the index, and you need to look back, and understand how does it work in different situations.
Mike:One of the biggest crux of the financial services space is when they say, well, if you look back at the last ten years, this is what it made. Well, last ten years were great. Yeah. What did it do in a flat market cycle? What did it do in a down market cycle?
Mike:What did it do when interest rates were rising? What did it do when interest rates were decreasing? You need to understand the different environments as they shift, and what this index could do.
David:Because you're going to be in it for decades maybe.
Mike:Long term period of time. Yeah. Yeah. If it's a fixed index annuity, it's anywhere from five to fourteen years.
David:Okay.
Mike:Yeah. They make fourteen year fixed index annuities.
David:Alright.
Mike:We'll see what comes out next year. Yeah. But the point is, it's not about what the illustration says. Let me tell you a story actually about illustrations. I coach financial advisors all over the country.
Mike:Okay? And one one said, oh, you don't do income for life? Why not? Look at this illustration. This is incredible.
Mike:Yeah. I said, wait. Hold on. So I I back tested. I looked at this thing.
Mike:I said, okay. What you're saying is this bond fund index that's steady, eddy as can be with some leverage, because I I reverse engineered what this thing was. Uh-huh. I said, you're telling me this thing is gonna average a I think, if memory serves me, and don't quote me on this, was like an eight to 10% growth on average of your income every year.
David:That sounds like a too good to be true. Yeah. Just to my ears here.
Mike:Yeah. I mean, it's like, yeah, if I can put a million dollars into something, get $60,000 out, and then that $60,000 increases by 10%, who wouldn't sign up for that? Yeah. That's where the red flags are going off saying, oh, hold on. Yeah.
Mike:Something's too good to be true. Opened up the index, and wouldn't you know that same product that I was looking at was doing horrible for the last couple of years? Didn't match up to the index at all. Now the index was true, but it was selective data that overemphasized this hope, when the reality is maybe the income would be increasing by maybe 3% realistically, when you look at the other environments. The only thing honest about illustrations are the page numbers.
Mike:Everything else is a sales pitch, and that's fine. You know, when I walk to a Toyota dealership, I expect to be sold. Yeah. I have no problem doing that. When I walk into any store, I expect to get sold.
Mike:That's okay. Yeah. But it's this line of questioning that we need to start to have of just understanding it. Yeah. So like there are indexes that I prefer.
Mike:I reverse engineer them. I like some of them where they're based around the S and P, and they've got a bond fund component that they can dynamically adjust to, but they're mostly in United States stocks. Large cap stocks, think of the S and P 500. Mhmm. There are other indexes that we have used for clients that are more focused on global economics.
Mike:So shifting between The United States equities market to the Japanese equities market to the EU equities market, and then has a component towards going to commodities, a completely uncorrelated market. So I can understand that and how the mechanisms work, and say this is predictable and it's sustainable. Oversimplifications on back tested data is where it gets dangerous. And so how do you vet products? You've gotta ask a ton of questions, and you have to understand how it would operate in different environments based on the different risks.
Mike:The reality is, I don't know if enough people in the space are doing enough due diligence to really get this. Even if you do enough due diligence, it's not a guarantee that you're gonna get it right. Everyone makes mistakes. Things happen. There's no such thing as a perfect investment project or strategy.
Mike:Even everything that with all the perfect due diligence, things can go awry.
David:And how much time would you say you've spent or do you spend on vetting these products? An embarrassing amount of time.
Mike:My eyes first opened up in 2016 when I had my interns do a research project specifically on fixed indexed annuities. This is before I was working with buffered ETFs, structured notes, alternative investments, privately traded REITs, Delaware statutory trust, and all of that. My eyes opened up when we looked at 1,400 annuities, and most of them were not sustainable on their growth. It was almost like they were designed to have great potential returns for the first two years, but they probably were gonna lower their renewal rates, and then give you less competitive returns for a longer term period of time. That was a very harrowing moment in my career, very sobering, and it was because we started asking questions, and I've got story after story after story about vetting products like this.
Mike:But how do you vet it? You need to understand the mechanisms of how is it able to grow. Okay. Insurance companies don't have a special market. The private equity isn't necessarily a special market.
Mike:These institutions, think of Warren Buffett, the greats out there, the great hedge fund managers, the great any money manager, really, they're still buying and trading the publicly traded markets for the most part, and yes, in private equity as well. Mhmm. But it's all the same market. There is no secret club out there. So you have to understand what is the trade.
Mike:That's the simplest form of it. If you don't really understand it, ask more questions. There's an interesting psychological phenomenon called the Dunning Kruger effect, and it's why people who lack sufficient experience overestimate their abilities, because they don't know the right questions to ask. I hope the takeaway in this is, I'm not gonna just avoid things, I'm going to ask more questions, but I'm also gonna look for people who are maybe with a chip on their shoulder asking questions as well, that are willing to ask more questions on behalf of the potential investor to try and antagonize whoever is offering this investment product or strategy to figure out the reality of what's going on. It's very difficult, if not near impossible, for someone without experience to properly vet the product, and I don't want anyone to listen to this thinking, well, I'll just ask more questions, and that that'll be It probably won't.
Mike:That's like saying, I'm gonna ask more questions about my surgery than I'm about to have, and I'll know everything I need to know going into It's not gonna happen. That's why professionals are here. Unfortunately, though, I would say many professionals themselves are not asking enough questions, and that's my concern. Yeah. What was the question again?
Mike:I wanna make
David:sure we answered it. Can you share how you vet different investments?
Mike:I dive really deep into understanding the trades and mechanisms within typically the indexes or whatever the instrument is that allows you to understand, is the system sustainable? Not from an environmental standpoint, is it sustainable from an economic standpoint to maintain the returns and or the functionality? And we didn't even talk about option contracts in here, or the more sophisticated futures, and we didn't even touch that. Yeah. The rabbit hole goes really, really deep here.
Mike:I think it's incredible that we are offering very complex and sophisticated products to people without even the people who are selling them, in my opinion having sufficient training, or understanding how they actually work. Right. That's like having a bunch of medications available, and saying they all kind of do the same thing, give your clients whatever ones you want. And then you can say, well, what are the research? Oh, don't don't worry about it.
Mike:Did you do a double blind placebo on this? No. It works. It was approved by some regulator, so that's good enough. It's like, no, that doesn't count.
Mike:Yeah. I mean, they offer CDs today at what, 2.2%? So if you can offer a CD at point 2%, every investment product or strategy also has a good offer and a bad offer. Right. You gotta sift through those.
Mike:That's why shopping comes in. That's why vetting goes through. 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. Just search for how to retire on time.
Mike:Discover if your portfolio is built to weather flat market cycle 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. Go to www.yourwealthanalysis.com today to learn more and get started.