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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.
Here is the conflict of interest that I think revolves around this theology. Okay.
David:All right.
Mike:When you are a trillion dollar asset manager. I don't know what these big companies are. I'm not going to say their name and don't you say their names of the big ones, but we're all thinking of them. The company's managing billions and billions and billions and billions of assets, maybe even trillions. I don't know.
Mike:We'll look it up, but we won't say it on the show. But at some point, they have to look for other places to put your money. Welcome to how to retire on time, the show that answers your retirement questions. We're here to move past oversimplified advice that you've heard a 100 times. Instead, we're going to get into the nitty gritty because the truth is there's no such thing as a perfect investment product or strategy.
Mike:Heck, there's no such thing as a riskless retirement. That's why it's so important to put together a retirement plan, one that's right for you, that's designed to last longer than you. That's why we do this show. Text your questions to (913) 363-1234, and we'll feature them on the show. David, what do we got today?
David:Hey Mike, my portfolio always underperforms, even though I do exactly what I am supposed to do. Why is that?
Mike:So the first question is, what does it mean to underperform? Like what's the standard? What are the benchmark
David:expectations, I guess?
Mike:So you've heard the expression, you can't have your cake and eat it too. You can't have all the upside potential and now the downside. Let's use, I don't know, athletics. Those are pretty easy analogies.
David:Yeah.
Mike:Okay. If if you want to be an Olympic competitor, Olympic athlete, you got to sacrifice a lot. You got to work a certain way. You got to train a certain way to be able to compete with those benchmarks.
David:Right.
Mike:If you just enjoy running, then great. Just enjoy running, but don't compare your running time to an Olympic athlete, unless you're willing to give everything to get those times.
David:Yeah. For your whole life. I mean, they're, they're a long time doing that, aren't they?
Mike:Yeah. Yeah. So you have to understand what is the benchmark and why is that benchmark the benchmark? Okay, so that's the first question. And here's why I bring this up.
Mike:A lot of people will say, well, I want to keep I want to beat the S and P. I say, okay, are you okay with all the downside of the S and P? They say, no, that's why you're here. I said, What do mean? They said, Well, you're going to diversify a portfolio for us that's going to beat the S and P on the up years, but won't have any on the down years.
Mike:I said. Oh, how how do you do that? Right. And people get stunned by saying, well, aren't you the professional? I said, yes, but I understand how economics work.
Mike:There's a disconnect here or some sort of unrealistic expectation. Okay. And let me use a couple of different examples. Okay. And I want to explain these examples first.
Mike:Yes, it may be possible to beat the S and P on the up years and not have as much of the down years, but there's a risk you're taking for that to happen. It's not a guarantee that it will happen. Okay.
David:Okay.
Mike:So let me just use a couple of examples, different portfolio styles. Okay. So if you want to match the S and P 500, which I don't know why the S and P 500 is this grand, everyone should just do it. By the way, have you ever thought about like, why is the S and P why isn't the Dow Jones?
David:Yeah. Was just going say the
Mike:NASDAQ or these other the Russell two thousand. Why is it always the Russell? Everyone comes here and says, I want to I'm basing this on the S and P five hundred. And there's some sort of propaganda machine doing that.
David:But poor Russell sits
Mike:there
David:on the sidelines.
Mike:Poor Russell. But we're going to use it because it's what everyone talks about. So if you want to get the returns of the S and P 500, the good, the bad and the ugly, you buy an index based on the S and P 500. You're not going to beat it, but you're not going to lag it. You're going to get everything it is.
Mike:Okay. Now you say, well, I don't really want that much on the downside. Okay, so let's put 40 percent of your assets in bond funds. Now I don't recommend this. I actually don't like bond funds most of the time in a portfolio.
Mike:I think that's an oversimplification of a portfolio, but that's my opinion. We won't go there for now.
David:We've talked about it a lot. Yeah. And we will talk about it again, probably. Yeah.
Mike:But if you put 40% of your assets in bond funds, bond funds have less growth potential, but less downside risk. All things being equal. Sure. So now you've taken some of your portfolio and you've slowed it down or you've put like a governor on it. You ever like drive a golf cart and you're like, oh, can't this go faster?
Mike:Yes. But there's a governor so you can't. Like it prevents you. That's that's kind of what bond funds do. They they limit some of your upside, but they also help you against the downside.
Mike:So if the markets go down, the Fed drops interest rates to make money cheap again or whatever happens. There's a number of ways we can manipulate markets. Bond funds tend to do well. It offsets, it helps. So you have to ask yourself, do you really want the full roller coaster, the ups and downs of the S and P 500 or whatever index you decide as your benchmark?
Mike:Or do you want something that may not have as much of the upside, but doesn't have as much downside risk? But you've got to ask yourself that question. This is a harsh reality that many people don't want to face. They don't want to accept that. They want to believe that they're the exception to the rule.
Mike:It's possible to beat the S and P 500, but you got to take more risk.
David:Right.
Mike:And sometimes the risk that you took doesn't work out. So what are we really trying to solve here? That's the question oftentimes when I get this, is my portfolio underperforms each year, underperforms to what? What expectation?
David:Okay.
Mike:What standard? Yeah. It an index standard? Is it you need to make X percent in your portfolio each year? Is that the standard?
Mike:There's so many different standards, but you've got to define those expectations first. Okay.
David:Okay.
Mike:Let me use a totally different example. Okay. Okay. Someone I know, not a client of mine, but someone I know years ago, before I got started in the business, went to an advisor and said, Hey, I want to make money. I just, I need to make more than, than, you know, a high yield savings account.
Mike:This is back when it was, you know, crappy returns, crappy interest rates. So they were in bond funds. They said, but I don't want to lose money. Bond funds can lose money. And she lost money over a short term period of time and got frustrated.
Mike:Right. She had more growth potential, but she didn't realize she had some downside risk too. It wasn't great. It wasn't a lot of risk, but you have to align expectations first to find expectations.
David:And
Mike:then align the portfolio to those expectations. So for young people, yeah, I mean, you want to take more risk? Fine. Because you have the time to recover. You should be just fine.
David:Right.
Mike:Right. If you build a portfolio correctly. But if you're in retirement, you might not want to match the S and P 500 return because remember, the S and P 500 can go down pretty sharply, pretty aggressively. And in twenty twenty and twenty twenty two and these recent quote unquote crashes, they were fine, but we manipulated the markets to recover. We may not be able to keep doing that in our current situation, especially with debt so high.
Mike:Those resources are running out. So could we have another .com crash? Three years of the markets going down? Yeah, we could. Could we have another two thousand and eight financial crisis?
Mike:Yeah, it might not be the housing market, but it might be something else that creates a very difficult crash that takes years to recover. Those could happen. And if you're all in on the S and P, great. You've matched the S and P for better and for worse. Sure.
Mike:Is this making sense?
David:Yeah. So first part of this recipe here is like define what performance you think you should be getting and then maybe correct to, oh, I'm actually doing fine or I have underperformed based on what I expect. But what can we address when they say I've done what I'm supposed to do? What are
Mike:they missing Yeah. Okay. So I might get in trouble for saying this. Please, please. I'm trying to just define things as they are.
Mike:Okay. How's that for a caveat?
David:Yeah. We're not afraid to get in trouble on the show.
Mike:Well, no, we are. Oh, we don't want to get in trouble.
David:Oh, that's not good.
Mike:But I think we're gonna be okay saying this. So and this is my opinion. There's there we go. This is my opinion. Your opinion.
Mike:Go. So many portfolios are built around the idea that you should have some assets in all of the categories. Large cap, which means big companies, small cap, smaller companies, mid cap, middle of those two categories. You've got emerging markets. So think of companies overseas.
Mike:Think of, you've got your bond funds, which is in the bond market, which by the way, the bond market's bigger than the stock market or the equities market. So, you know, let's make sure we include part of that. Let's have this beautifully let's have some real estate exposure over here. Let's maybe have some gold and silver. Let's have this beautifully diversified portfolio where we get a little bit of everything because in any given year, one of those categories will outperform the others.
David:Yeah. So that seems like this very basic bland cliche, like do that and you'll be fine no matter So
Mike:that works. You're not going to have the best of the best on the growth years, but you might not do as bad on the bad years.
David:Okay.
Mike:So, you know, that that bond stock bond fund blend we talked earlier that it's kind of a more expansive version of that.
David:Okay.
Mike:And that's what everyone is supposed to do.
David:All right. Here
Mike:is the conflict of interest that I think revolves around this theology. Okay.
David:All right.
Mike:When you are a. Trillion dollar asset manager. I don't know what these big companies are. I'm not going to say their name and don't you say their names of the big ones, but we're all thinking of them. The company's managing billions and billions and billions and billions of assets, maybe even trillions.
Mike:I don't know. We'll look it up, but we won't say it on the show. But at some point they have to look for other places to put your money. So if your business model is, hey, we can't put everyone's money in just to a really nice American indexed fund like the S and P five hundred or the Nasdaq, for example, one hundred or whatever the Dow Jones Industrial. At some point, we're running out of room for the portfolio.
Mike:Let's maybe sell people on the idea that they need to expand their diversification so we have a place to put their money. What if that were happening? What if there was a reason? I mean, you can make an argument. Well, you know, international, that's a great place to put money.
Mike:It is. And sometimes it works really, really well. Sometimes it doesn't. But at the end of the day, are you trying to do? Grow your money.
Mike:Yep. So do you need those? Do you need such broad diversification to accomplish your goals? I don't think so. Yet that's what we are told we are supposed to do.
Mike:And I question that validity or that that claim and its validity because what if you don't? What if at some point they're not being they're not picking certain stocks to build a really nice portfolio that's suited for you? What if they're just saying, where can we put the money? Sure. I think that's a realistic situation.
Mike:I'm not accusing anyone of it. I think certain business models might have a conflict of interest to where maybe that is a part of their recommended strategy because it's kind of out of necessity because they may run out of rooms. There is an inherent advantage in working with a smaller practice that doesn't have to figure out, well, where do we put all these funds where it's not too concentrated? And that might be a real situation. I don't know.
Mike:But at the end of the day, I don't know if Warren Buffett said or Charlie Munger, but one of the, one of the two said, you only need a couple of stocks to really get wealthy. You don't need a complicated portfolio to become wealthy or to stay wealthy. Things can be simple. The question is what is the return you're looking for? What risk or roller coaster are you okay getting on?
Mike:And then are you set up for the good years? Are you set up for the down years, the bad years? And overall, are you sitting pretty? Are you comfortable with your standard, own benchmark? Create your own benchmark.
Mike:Create your own expectations. Don't get caught up on this. Everyone needs to do the same thing business. It's just not true. Everyone's different and should be treated as such.
Mike:That's all the time we've got for today's show. If you enjoyed the show, consider telling a friend, leaving a rating, and most importantly, that you are subscribed to it so that you don't miss a thing. For more resources, including a copy of my book, on demand courses, and so much more, just go to www.retireontime.com. If you want help putting your retirement plan together, go to retireontime.com and click the button that says get started. But seriously, from all of us here at Kedrick Wealth, we wanna thank you for spending your time, your most precious asset with us today.
Mike:We'll see you in the next episode.