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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.
Aside from people just not understand the nuance of their situation and a popular strategy that seems good, that probably is good for certain people, but isn't like those dots don't often get connected. Aside from all of that, which we could spend episode after episode after episode talking about these things, the one that I think is most misunderstood is the word risk. Welcome to How to Retire on Time, a show that answers your retirement questions. We're here to move past the oversimplified advice that you've heard a 100 times. Instead, we get into the nitty gritty because the truth is there's no such thing as a perfect investment, product, or strategy.
Mike:In fact, there's no such thing as a riskless retirement. That's why it's so important to put together a retirement plan that's designed to last longer than you. Text your questions to (913) 363-1234, and we'll feature them on the show. Let's jump in.
David:Hey, Mike. What's something you see that people often misunderstand about their portfolio?
Mike:Generally speaking, people come in, they don't have a financial background. Yeah. That's okay. Right? I don't walk into a doctor's office saying, Hey, I googled it and this is what I need.
Mike:Can you just prescribe me the thing I need? Like the doctor is supposed to go through the procedure or the process of figuring out, is that right or not? Right? You ever had that? Like, oh, I've got cancer and it was like a tummy ache or something different.
David:Yeah. We get so scared because there's so much information out there. Right? Like, oh, I must have that or this because you can just Google all this stuff. So I'm sure over the years doctors have and physicians are like, oh, I wish that wasn't out there.
David:Yeah. They're making it worse.
Mike:WebMD maybe not as good. The same is in finance. But I think with finance, it's a little bit more nuanced because some strategies are the appropriate thing to do in certain situations and not in others. So in health, everyone should eat well, like, you know, eat your vegetables Mhmm. And maybe exercise.
Mike:That's a good thing for everyone. In finance, not everyone should do IRA to Roth conversions. Not everyone should do max income because the purpose of the money is different than someone else's. Not everyone should buy an annuity. Not everyone should fill in the blank.
Mike:And so aside from people just not understand the nuance of their situation and a popular strategy that seems good, that probably is good for certain people, but isn't like those dots don't often get connected. Aside from all of that, which we could spend episode after episode after episode talking about these things, the one that I think is most misunderstood is the word risk.
David:Okay. Yeah.
Mike:It is not understood. So David, let's just interview you real quick.
David:Okay?
Mike:Are you a risky person? Not like finance, like just in general. Do you take risks?
David:No. I don't think I have really. Not not not very much.
Mike:Have you been bungee jumping?
David:I have not. Skydiving? No. Would you ever want to? I do have in the back of my mind that I want to, but the opportunity hasn't really presented it hasn't fallen into my lap.
David:I haven't sought it out. Fallen. Yeah.
Mike:Yeah. But I mean, would you do it? Would you want to do it frequently? Or is it like one of those once again, really just live once and then that's done?
David:I feel like I wanted to at least check it off my list. Yes.
Mike:Okay. How would you feel about whitewater rafting or kayaking in extreme rapids over and over again? Like, would you would that become a consistent hobby or these like once in a while things you
David:do? I think that one I've done it somewhat in Tennessee. I did some whitewater rafting and I had a great time and I would like to do it some more.
Mike:But like, how how intense was it? Was it class one, class two, class three?
David:Think we maybe hit like a three, three plus. I don't know. It wasn't like super
Mike:So it was a splash pad on a river. That's not real. I'm talking class five fourteen foot waterfalls. You're going down canals. That's what I'm talking about.
Mike:Would you ever do something like that?
David:I'd like to try it at least once. Okay.
Mike:Yeah. Good. So everyone's gonna be different. Right?
David:Yes. Yes.
Mike:We just articulated your threshold. Some people won't even get in the water.
David:Right. Right.
Mike:Some people won't even get in airplanes. Not to skydive, they won't even get into airplanes. Right? That is risk associated with your death. Okay?
Mike:Mhmm. As in, hey, you could die from this. Why do people have a fear of heights? Because if they fall, they would die. Some people don't think they're going to fall.
Mike:Some people they're just it's it's over consuming. Right? We have all of these phobias of risk associated risk with death. In retirement, it's a completely different conversation. In investments, it's a completely different conversation.
Mike:And the reason why is risk is more associated with, are you going to get the outcome that you want in the time frame that you want or not? Let me give you an example. Okay. Technically speaking, if you put your assets into equities as in the stock market
David:Okay.
Mike:You are taking risk. If you have a portfolio with a 100% in equities, you are a 100% at risk.
David:And what is the risk of being in an equity invested in equity?
Mike:That the value goes down.
David:Okay.
Mike:And equities or stocks can go down typically more than bond funds. Well, that's why bonds are considered the less risky asset. Okay. So you with me so far on this? Yeah.
Mike:Okay. So how many times have have the market crashed and never recovered? It's kind of a funny way I'm asking the question, but do you see where I'm going?
David:Yeah. I think I know the answer to this.
Mike:In other words, how many times have has the market recovered? 100% of the time. The risk part of this conversation is if you're buying the indexes, when do you need the money? Because if you need the money within one, two, three years, then you have higher risk. Because it may it may have gone down in value when you needed it.
Mike:If you don't need the money for ten, fifteen plus years. There's a very high probability that the value would have increased even after one or two market crashes. It still would have increased in value during that time frame or at the end of it when you need the money. Do you see the difference here?
David:The risk is lower because you have time to recover.
Mike:Yeah, but but people think I don't want to take risk because what if I need my money? Well, you don't need all of your money. You might need some of your money, right? In retirement, you don't say, well, next year I'm going spend everything. And then I don't know what will happen after that.
Mike:Like, you you need some of your money now for the first five years, then the next five years, and then the next five years, and then the next five, and so on and so forth. And so when people say, I'm not a risk taker, I'm thinking, okay. They're probably talking more about their aversion towards bungee jumping or crazy experiences. Like they don't like to take risks. They like to be in a safe and secure environment.
Mike:Fine. But if you put all your assets in cash,
David:that's not a safe environment.
Mike:It's not a safe environment. It might be safe from market risk, but it's at risk of inflation. It's at risk of currency devaluation. It's and there's so many other risks there. You can't have a riskless retirement.
Mike:And so the reason why I bring this up is when people approach retirement or their investments, risk is not what you think it probably is. You have to ask yourself, okay, what is the investment itself? And I wanna dive into that in just a second. What is the investment itself? And then when do you need the money?
Mike:So for example, all of us here, you're here. Right? Layton's here, Layton's in the back, our producer, myself. We have over ten years for retirement before any of us would even consider retirement. Some of us more.
Mike:Why would we have riskless assets? I mean, Why would we not have most of our assets in stocks or I mean, estate's a great asset class as well. There's other great asset classes, but we wouldn't be investing in cash. That doesn't make any sense because the timeline is so great. And so just to kind of loop this all back into retirement planning.
Mike:Yes, some of your assets may need to be protected for short term interest. Maybe you do have a CD ladder or a treasury ladder or a SPIA. So a single premium instant annuity, it's basically a CD ladder from an insurance company for the next five years or whatever. Like, there's so many ways you could structure safety for your income so that the other parts of your portfolio have less risk from a time standpoint because you don't need to touch it for a long term period of time. I mean, I've I've created plans where you've got guaranteed income for five years, for ten years, for fifteen years.
Mike:Everyone's different. But do you notice how the other assets, you don't need to touch them for a longer term period of time?
David:So you're sort of sectioning off your portfolio. Like here's the part of my portfolio I need for the next five years. Here's the stuff I don't have to touch for a while.
Mike:Yeah. Diversify by objectives. Not investment ambiguity. As in buy a little bit of everything and that's just how you do things. Whenever someone says, well, this is how it's done, walk away.
Mike:Because if they can't articulate or answer the questions, well, why is that? Why do we do that? What's what's the academic research behind this? What's the investment theory behind this? They say, well, it's just how we do things.
Mike:That's a terrible answer. I mean, my job, I have to be able to articulate and explain from an academic standpoint, well researched why a recommendation would exist. If I can't do that, then I shouldn't be recommending that. That's like saying, hey, here's some medication. You should take it.
Mike:Well, what does it do? It makes you feel better. What does it do to my body? How does it make me feel better? Are there any side effects?
Mike:These are things you need to know. There's no perfect anything. There's always side effects. There's always detriments to it. Okay.
Mike:Now let's talk about stocks.
David:Okay.
Mike:Okay. Stocks and funds are different when it comes to the risk conversation. So Morgan Stanley did a study recently that exposed that stocks individual stocks when the markets crash, most of them don't actually recover ever. Let me say that again. Take a basket of 500 stocks.
Mike:Okay. The markets crash. Let's say it's 2,000. The markets crash. 500 stocks.
Mike:A majority of those 500 stocks may never actually get back to that original price.
David:That's sobering, isn't it?
Mike:Yeah, let that sink in. So there's a reason why Vanguard, a reputable company, is recommending people buy index funds because the index fund compiles so many stocks that the ones that never really recover. Well, that's okay because the other assets do recover and index funds like the S and P five hundred, they switch out the bottom stocks or the stock the positions. So you're kind of in this group or collective group that's able to be able to recover. Because the stocks that go bankrupt or go down, you know, the Toys R Us, what Bed Bath and Beyond hasn't been doing so well.
Mike:They are still alive, but it's the the casualties of creative destruction can get out of these indexes and kind of go on their own path. Okay. Not everyone can be a Carvana recovery story. Do you hear about that one?
David:Yeah. I I knew they were sort of in trouble, but I I don't think I heard their redemption story. I must have missed that.
Mike:Oh, man. For everyone listening, look up Carvana stock. It was like a death sentence and it came roaring back. I I have never seen a better recovery. But that is the exception to the rule.
Mike:Sure. Now why do I why do I wanna broach this part of it? Okay. First off, if you're stock picking, you don't have the guarantee that the stock will recover after a crash. You don't have that.
Mike:You've purchased a single company. You are dependent on that company making good financial decisions that they'll be able to recover and continue to grow. That's a risk. That is now a different type of risk. An index fund is a different type of risk than a stock risk.
Mike:Do you see the difference here? Yeah. So for people that are saying, well, I just bought, you know, three or five really good companies. Okay. Well, I don't think Coca Cola is going out of business.
Mike:But let's take let's pick on Nvidia for a moment. Okay?
David:Alright.
Mike:Largest company in the world.
David:Is it now? Yeah. Well,
Mike:They Good for are massive. They've beat out I mean, just think of that for a second. They they technically the market cap. Yeah. The market capitalization, the the if you take all the stocks and it's somewhat sum sum it all up, what the value is of the company.
Mike:It's larger than Apple. Wow. Larger than Microsoft. Larger than Amazon. You know, the company that brings us all of our goods Yeah.
Mike:To our doorstep within two days. Not an Amazon advertisement. I just appreciate the convenience. But just think of that for a second. That company is now the largest company.
Mike:And why is it so big? It's because of it creates AI chips. I I mean, really, that's mean, it does other things, but basically what it does. And AI is the new revolution. So when people say, well, how could the largest company ever go under or go down?
Mike:Let me tell you how that happens. Creative destruction. What if someone can make a chip for half the price that does the exact same? What if a tech company figures out how to build a large language model, which is AI by the way, that's how ChatGPT works, It's how Grock works. That's how what's the one Claude you're Claude.
David:You're working
Mike:with right now? Yeah. That's how these all these work. What if they can create a system that doesn't half the cost? Right.
Mike:Now the intrinsic value of Nvidia has gone down exponentially. So there is AI risk because what if we haven't priced it right? Or what if we have priced it right, but then the price changes? And oh, well, you know, I'm not buying the indexes. I'm buying this the couple of stocks that are really, really good.
Mike:This is a risk people are taking. That is a risk where it may go down and maybe it doesn't recover for, I don't know, ten, fourteen, fifteen years.
David:Which is not unprecedented, right? Is that right? Sometimes it could take that long?
Mike:Look back at the the .com bubble and look at the Amazons, the Microsofts, the the Apples, the Oracles, the Intel's, the IBM. Look at those companies and how long each of those stocks took just to break even. Now those are the ones that survived. Many did not. So when you're going and saying well, know, hey, I've got Nvidia, but I've got some of these other up and comers.
Mike:They may not survive. There's no guarantee. So stock picking has a different set of risks. That's why Vanguard says common sense investors should buy indexes. So you don't have to pick the right ones.
Mike:You grab most of them. Most of them hopefully win, some of them go away, but overall you kind of get the middle. Yeah. Okay. But risk is often misunderstood.
Mike:In my mind, should be when do you need the money, and then invest based on those timelines. Forget the word risk. Let's talk about timelines. Let's talk about let's talk about it from a planning standpoint. When do you need the money and what could happen in the future and are you okay with that?
Mike:If you don't need, let's say a $100,000 of this part of your portfolio for another fifteen years, then why wouldn't that part of the portfolio be in something like the S and P five hundred or the Nasdaq one hundred or whatever it is?
David:Sure.
Mike:We need to be aware of what we're invested in and how long it could take. Now one quick anecdote here. The Nasdaq one hundred, which is the Nasdaq, it's a lot of tech stocks, mostly tech stocks, bigger tech stocks. It's 100 stocks. K?
Mike:QQQ is an example of an ETF that operates off of the Nasdaq one hundred.
David:Okay.
Mike:K? That that ETF lost 77% from 2000 to, I think, '22 or '2 or 2000 to 2000 somewhere around there.
David:That whole index?
Mike:Top to bottom. Yeah. 77% in the index fund.
David:Okay.
Mike:Index fund. 100 stocks. You're diversified kind of. Yeah. So you need to also understand what is in the indexes, what positions are there, and is there a potential overvaluation.
Mike:Why do I bring that up? I am seeing more smart investors that are starting to de AI their portfolio.
David:Say that again?
Mike:Yeah. They're getting rid of too much exposure to AI because if what the .com experience happens again with AI, if we have not priced it right or maybe we price it right now, but it's not priced correctly in the next two or three years and there is a correction based on the the AI stocks are more likely to get hit than other companies.
David:Okay. So that's what you mean by D AI ing it.
Mike:Yeah. D AI. Not DEI. I didn't realize that. Not a political show.
David:Yeah.
Mike:To get rid of or to get rid of, yeah, certain AI positions or have less exposure. Like for for us, for example, we are over allocating our portfolios to things like insurance companies or consumer staples and things like that because those are less subject to an AI correction. Yeah. Okay. So just buying the Nasdaq 100 or the S and P 500, a lot of that growth has been from AI.
Mike:Are you okay with the inverse of that as the AI coming down? Because those index funds are are likely to really get hit by a potential AI correction or crash or whatever it is. And all it takes is someone figuring out a better algorithm or a better system to offer the same product for less cost.
David:And do this might be another rabbit hole, but do people want to understand fees in their in their portfolios?
Mike:Yeah. Good question. I mean, with stocks, there really is no fee. I mean, as long as you're with like Vanguard or Fidelity or, know, a reputable company Schwab Yeah. That doesn't charge a custodial fee.
Mike:Some do, some don't. And then also, got to understand if the ETF has expense ratios, but usually ETFs are pretty cheap. You can look them up like QQQ, SPY, it's like 0.1% or around there. Very, very low. Some more thematic or specific ETFs, they might have like half a percent or 0.7%.
Mike:Like these are things to be aware of, yes. But don't be upset by fees. Just, you know, is it worth the fee that you're paying?
David:Sure. Yeah.
Mike:Someone if you buy an ETF, you got to have someone on the back end that actually makes it happen.
David:Right.
Mike:It's not magic.
David:Right. Right.
Mike:So someone's got to make that happen. But I mean, in the end, what you think about risk, make sure that you understand it is different than risks you take in life. It's not risks of physical harm or death. It's risks based on when do you need the money and are you okay with the ups and downs during the duration of that time. That really can help put together a more properly constructed portfolio based on the objectives of what you're looking for.
Mike:This investment ambiguity business of just buy a little bit of everything or, oh, well, 60% stocks, 40% bonds, all this. It's oversimplified advice. Every person's retirement plan is going to look different, which means every person's allocations within their portfolio and what they want their money to do for them is going to be different. How much you want to have earmarked for legacy versus max income or whatever might be. Those are all different variables that will affect your portfolio.
Mike:So first off, build your plan. Second, figure out the strategies and the efficiencies to get more out of your money. Third, then build the portfolio to support those standards, benchmarks, financial goals, whatever you wanna call them. That is how you do it. And that can help understand the quote unquote risk part of your portfolio and if it's suitable for you or not, and if you can emotionally stomach it or not because you understand those timelines.
Mike:Hey. Thanks for watching this video. Make sure that you like and subscribe first and then go to www.retireontime.com to grab a copy of my book, how to retire on time. Take a few courses about retirement, join my newsletter, and so much more. Now, if you want to work with one of our advisors here at Kedric Wealth who can help you put together a retirement plan that's designed to last longer than you, just click the button, get started.
Mike:Everything we do is intended to help you retire on time. We hope you enjoy, and we'll see you in the next show.