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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 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. The 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. 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 cover it all. Now that said, please remember this is just a show.
Mike:It's 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, mister David Franson. David, thanks for being here.
David:Yep. Happy to be here. Thank you.
Mike:Yeah. David's gonna read your questions, and I am going to do my best to answer them. You can submit your questions at any time during the week by texting (913) 363-1234. That number one more time, (913) 363-1234, or you can email us at hey, Mike at how to retire on time dot com. Let's begin.
David:Hey, Mike. What does a diversified portfolio look like?
Mike:So first off, don't think about one portfolio. Think about multiple portfolios. Their traditional model in the financial services space is you fill out a questionnaire, and here's what you get.
Mike:Now I'm gonna be a little facetious in saying this. Okay. So, okay, based on your risk suitability portfolio, which you told us you want, even though you may not understand everything you put in there and the consequences of that, you've told us, so you can't hold us accountable, but now you're gonna invest in large cap, mid cap, small cap markets. We've got some emerging markets. We've got these bond funds.
Mike:We're blending between corporate treasuries. We're putting some high yield bonds, you know, for a better yield, of course. Yeah. Most people I explain that to, they go, what in the world is any of that? Yeah.
Mike:What's an emerging market? I mean, most people don't really know. Yeah. I mean, I guess now you can ask chat cheap PT and say, hey. What are all these really fancy terms?
Mike:And here's what it's gonna say. Large cap stocks are just companies that have a lot of money in them. So think of, like, Facebook or Meta. Think about Netflix. K?
Mike:Their stock has a large market cap, which is where it gets this information from. Yeah. But it basically means there's a lot of money in that company. And then you've got your mid cap, small cap. It's just smaller sized companies.
Mike:Yeah. The larger the company, the more stable it is expected to be. These smaller companies, they're expected to have more risk. Allegedly, there's more growth potential. But the reality is what's going on today is large cap companies just buy the small companies Oh, right.
Mike:And then just exploit their services, write off some losses, and then grow their own companies. Yeah. It's not like it used to be.
David:How did it used to be? What was the
Mike:You you buy the small cap companies that you believed in, and then they had exponential growth. Look at Chipotle. That wasn't as large of a cap as you would expect. It wasn't as big of a company as you'd expect, but the growth so Pershing I think it was Pershing what's his name? Bill Ackman?
Mike:That's name. He's one of the hedge fund guys at Pershing. Familiar. I believe, as the story says, they bought it. They kind of made some change with the the company.
Mike:They got a new CEO, and it just took off. I mean, the company just exploded. It did really, really good. So that's again, if you buy a smaller company, there's more risk, more growth potential. That's that was the traditional idea.
Mike:And you can get down to even micro cap stocks, smaller companies, or nano companies. These are pennies. Very risky. Uh-huh. But if you got lucky, I mean, technically, Nvidia at some point was a small cap company.
Mike:So anyway Yeah. Emerging markets, you're looking at other countries. So it's a way to broadly diversify. Now let me quote the great Charlie Munger, Warren Buffett's right hand. I love this quote.
David:Alright.
Mike:He says, broad diversification is madness, because when you buy a little bit of everything, you inherently have mediocre businesses in your portfolio, which will give you mediocre returns. Do you want mediocre returns?
David:Who raises their hand for that?
Mike:People do every day without knowing it. And that's by saying, well, you know, I'm 60 years old, so I shove 60% of my assets in bond funds. Why? Because that's what you do.
David:Alright.
Mike:Yeah. Why do you do it? If you just ask why, you know, like how kids will ask why when they learn that question, and it's really annoying. Yes. You should do that to your financial adviser.
Mike:Well, why is that?
David:Yes.
Mike:Well, why is that? How come? Can you explain why? Any research to back this up? You you realize it's almost like this rule of thumb of just a general guidance of trying to help people handle the volatility based on their stage of life than actually doing what might be in their best interest.
Mike:Here's why I argue that. Okay? I'll give you two secrets.
David:Okay.
Mike:They're not really secrets, but it's fun to call them a secret. Yeah. Do wanna know how to beat the S and P every year? I do. I wanna know.
Mike:That's very engaging. Yeah. I do. Alright. Don't actually do this.
David:Okay.
Mike:Please don't do this. I am oversimplifying how to construct a portfolio to prove a point. Okay. You buy S and P 500. Let's say you put 90% into SPY or VOO.
Mike:Okay? Those are two ETFs, cost. It's the S and P 500. That's the benchmark everyone likes to talk about. Right.
Mike:Okay? Which is kind of funny. That's the benchmark. It's not the best benchmark. It's just a benchmark.
Mike:Mhmm. But whatever. So you've got that benchmark. Okay? Now put 10% in, let's say Apple.
Mike:Okay. And that's it.
David:That's it. I've got two positions.
Mike:Yep. Alright. Over a long term period of time, whether it's most single years or a two or three or four year, you would probably beat the S and P
David:almost consistently. And what's the S and P do usually?
Mike:S and P five hundred. It's 500 stocks that Standard and Poor's has deemed to be credible and good. Yeah. It's not the largest 500 stocks in America. Okay.
Mike:It's just whatever S and P has deemed to be a good company. And I say that kind of sarcastically, because I have no idea how they actually quantify that. I think they pick good companies to be in I just like a little bit more transparency on that, but it's not the 500 largest companies. It's just 500 large companies.
David:And this is Standard and Poor, and they're like some
Mike:They're a rating company. Okay. Yeah. Yeah. Good company.
Mike:I I like the company. Yeah. I'm not disparaging the company by any means. Sure. I like what the S and P does and their research.
Mike:So they have 500 companies. Do you think all 500 of those companies are doing a great job of growth? No.
David:No. Probably not. That's a lot.
Mike:So if you just take one company, usually in tech, that has a stable track record of growth, what you've done is you've taken the S and P, and slightly overweighted it to a company that you believe has more growth potential, more consistent growth potential, than the mass of all of these other companies. So the odds are now in your favor, because you slightly weighted it, which you slightly increased your risk, but you've slightly also increased your growth potential, and you could, I don't know, find whatever financial tool online, or just model this out. This wouldn't be hard to model out. I don't know what tools you can get for free online. We pay for our tools, but yeah, you'd probably beat the S and P in most years.
Mike:So when people say, oh, well, you can't beat the S and P year over year consistently. Okay. Well, that's that's not true. What are you being sold? Yeah.
Mike:You have to ask the question, what does a diversified portfolio look like? Don't buy blindly a bunch of stuff, diversify by objectives. Look, if there's risks you're concerned about, you buy life insurance in case of that risk. If you're not concerned about the risk, you don't buy life insurance. If you want growth, you go to equities or you go to stocks.
Mike:If you want growth, but you wanna kinda smooth out the ups and downs, you put some bond funds in there. You don't need to buy a bunch of everything, you need to understand what's your objective, and what behavior or emotions are at stake here, because you need to live within your economic and your emotional limits.
David:Mhmm.
Mike:Some people can't handle the Wall Street roller coaster.
David:Yeah. You wanna be able to
Mike:sleep well at night. Yeah. Now that is your bull market portfolio. That's the long term growth, and stocks have more growth potential than anything else. Yeah.
Mike:When it comes to investments. Now look, you wanna buy a business, or if you wanna start a business, you've got more growth potential there, but eighty five percent of businesses fail in the first year.
David:Mhmm.
Mike:More risk. Yeah. If you want to do real estate, and there's this thing out there, they call it whatever. I don't know. It's where you buy a property that's that's kind of it it needs a little TLC.
David:Okay.
Mike:Okay? You then renovate it.
David:Uh-huh.
Mike:Then you refinance it, and then you take out the additional equity because it's now valued more. You take that, and then you do it again and again and again. Okay. And you've got people like Robert Kiyosaki, the guy that wrote Rich Dad Poor Dad Dad. He talks about how real estate has made more money than anyone else.
Mike:So what happens, all these podcasters, all these influencers talk about how they're brilliant real estate investors. Yeah. And the stuff they say is just insane. Here's my point. Why does Dave Ramsey hate debt?
Mike:Because he did that, and then the markets turned, and he got screwed. And he realized all of this stuff that people are saying, this buy and refinance, it's called leverage. Uh-huh. And it means you're taking on additional risk. If you're okay with the risk, that's fine.
Mike:Yeah. But you have to know what you're signing up for, and most people seem to not fully understand what they're signing up for. There's no way that you're gonna cheat the market. There's no way you're gonna cheat finance. There's no way you're gonna cheat economics.
Mike:Yeah. You are rewarded for the risk that you take. The problem is most people don't understand the risk that they're taking.
David:So they gotta ask those questions. They gotta keep asking why, why, why?
Mike:Yeah. Well, and then you get other stuff like, and I hate this. There's this tool out there where it's like, hey, would you be okay losing 200,000 in your portfolio? No? Oh, well then you should buy an annuity.
David:Oh, right. Yeah. Line and sinker. Right?
Mike:It's like, well, hold on. Hold on. Would you be okay if it dips 20%? That would be 200,000, but if you didn't need to touch the funds, and there's a high probability that it would recover within the next five years, but this is your overall growth trajectory, and you don't need these funds for ten to fifteen years.
David:Yeah.
Mike:Are you okay with the ups and downs? No. You don't need it for ten, fifteen years. Right. Yeah.
Mike:I could do that because I have these other funds on the side. I've diversified by purpose, by objectives, then people can stomach it. But when you take some out of context. Yeah. The diversified portfolio is just a bit of a sales pitch to sell either a portfolio in the market, or they're gonna charge you 2%, or whatever the rate is, or you can do a robo investing.
Mike:It's a diversified portfolio. Same thing, except you're not talking with a human. You're talking with a basic robot here. Or you can talk to someone that says, well, you're diversified, but man, that's a lot of risk. Mhmm.
Mike:These are the problems. Yeah. So that's the bull market portfolio, long term growth, knowing that you don't need to touch it for a long term period of time because it can dip, you can ride out those dips.
David:Yeah. So any money you have, like, in securities in the market. Yeah. I know that that money is set aside. If if it goes down, fine, because I don't need it for
Mike:a while. It can recover.
David:It'll recover.
Mike:Yep. Then you need your bear market portfolio. Yeah. Bad news bears. That's how you remember bear markets are bad.
Mike:Bull markets have the u, they're up. K? Okay. Bear market portfolio. Simple.
Mike:It's your secondary portfolio. You put enough in there that you could have, let's say, five years of income. It's all protected, and there's really seven or eight different investments or products you can put in there. High yield savings, CDs, bonds, so treasuries or corporate bonds or any sort of bond instrument that you're comfortable with. You got fixed or fixed index annuities.
Mike:If you're old enough, You've got cash via life insurance. If you also wanna pay for the the life insurance component
David:Yeah.
Mike:If you don't want the death benefit, don't buy it. Mhmm. And you've got buffered ETFs and structured notes. Some of those things you can buy on your own, some of them you can't. They all have different offerings, different benefits and detriments.
Mike:So blending some of them together might make sense.
David:Mhmm.
Mike:Understanding which products I mean, just like CDs, you can buy a CD today, I think, at, like, three and a half, 4%, or you could buy a CD at, get this, point 2%. Which would you prefer?
David:Sounds so good. Point two.
Mike:Do your research. When you put together your stock portfolio, understand what risk you're taking or your real estate portfolio or whatever, the alternative portfolio, whatever it is. Yeah. Understand the risks you're taking, and then have your bear market portfolio, and understand the risks you're taking. Yeah.
Mike:There's no such thing as a perfect investment product or strategy, but a diversified portfolio just means you've diversified your objectives. It's not, in my opinion, buying a little bit of everything because perfect diversification means zero growth. You have to have risk for growth. If you have no risk, you have no growth.
David:That makes sense. Yeah. So you could take this sort of one single portfolio, I've bought a little bit of everything. It's, oh, now I'm diversified. Or we have these two different
Mike:Two different portfolios, different objectives. And you can even have more portfolios based on different objectives. Maybe you've got a legacy portfolio Okay. Specifically for the kids. Maybe you have an endowment portfolio.
Mike:Maybe you have $20,000,000 or you're selling your business, and you put some funds into a charitable crut. So charitable remainder trust, or charitable unit trust, or annuity trust. Basically, can give you some money, but it's gonna go to a charity eventually. Avoid some taxes. Right.
Mike:The point is diversify by your objectives, not this blind ambiguity of buy a little bit of everything, because that's what you're quote unquote supposed to do. Don't fall into that trap. Get detailed, ask questions, sound like Ms. Frizzle from magic school bus, if anyone even knows the reference. Was it take chances, make mistakes, get messy?
Mike:Don't make mistakes with your finances, but get into the details. Explore your options. Because just a 1% difference in performance in your portfolio makes a huge difference over your life. Yeah. Huge.
Mike:So don't just, I don't know, kick it to the side and say it's good enough. Yeah. That good enough could lead to significant money that's missed out as an opportunity. 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:Just search for how to retire 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. 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.