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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's the difference between an ETF and a mutual fund?
Mike:So ETF, electronically traded fund, it's basically, it's a low cost efficient way to just kind of set it and forget it on a system. It's like they're great for indexes, they're great for managing money, it's just a lower cost way typically to do it, but not always. But ETFs have their own unique restrictions on how the funds can be managed. A mutual fund, based on what I've seen, typically has a little bit more fees associated with it, but more wiggle room associated with it. So depending on the prospectus, if you put it in the perspectives, you can do it.
David:Oh, okay.
Mike:So different risks, different strategies, different things like that. But a mutual fund has a little bit more leeway in how it could be managed. But in mutual funds, you're gonna have things like front end fees, back end freeze, ongoing fees, hidden fees associated with mutual funds. This is how some big box companies, I won't say their name, make their money. So if you say, well, I have a financial adviser, but I don't pay him anything, he's probably selling you mutual funds because that's how he gets paid.
Mike:Uh-huh. It's not wrong. It's just mutual funds was a way that someone could sell it, manage it, and then you go from there. Mutual funds are sold at whatever the price is at the end of the day. Okay?
Mike:So you might be in the morning and be like, oh my goodness, I need to sell this thing. You're still gonna be invested till the end of the day, then things settle. ETFs on the other hand, you can trade in the middle of the day. They're typically I have noticed, or I should say I best believe that they're appropriate for indexes. So if you wanna buy the S and P, you wanna buy the NASDAQ, you wanna buy the Russell two thousand, whatever it is, people will be like, oh, well, what does that even mean?
Mike:They're different groups of investments. Uh-huh. Okay. Different stocks. Right.
Mike:An ETF is a low cost way to say, can buy one ETF, and I have exposure to all of it. Yeah. It's when you buy an ETF, they're gonna take the money, and fractionally buy, like let's say you buy the S and P five hundred, you just bought a fraction of all of those 500 companies. So it's an effective way to diversify. It's a really cool tool.
Mike:Yeah. But here's my beef on ETFs. There are restrictions on the diversification of it. So the regulators, to their benefit, to their goodwill, I'm not ridiculing them, but this is how they kind of set it up, is that you need to have an ETF where basically any single position has to be less than 5% of the portfolio, and you can have up to I don't know if it's two or three that are greater than 5%. So it needs to have a bunch of companies in there, okay, in the ETF.
David:Okay.
Mike:And you can't have any one or two really be overly weighted to certain thresholds. It's a restrictive way to manage a portfolio. So it's great for indexes because an index has hundreds of companies. But for an actively managed portfolio, we consider doing mutual funds. We consider doing ETFs.
Mike:It's too restrictive. They're doing a good job with this. But if I'm thinking about, okay, here's a specific client with specific needs, that wants this specific thing, just buying one or two mutual funds, or one or two ETFs, it's an oversimplification. I don't think it really does the client the best service.
David:Okay.
Mike:Now that said, I mean, yes, buying an ETF as a part of the portfolio is gonna make sense.
David:Okay.
Mike:I don't wanna say that you can buy one ETF, and that's the end all be all.
David:Yeah, then you're good.
Mike:That's what you wanna be cautious of. Yeah. But if you buy a bunch of ETFs, you might have bought the same thing with different names.
David:Oh, right.
Mike:So here's an example. There are more indexes out there than there are stocks available. Oh. How's that possible? Yeah.
Mike:Index, let's say x, index y, index z, all might be large cap indexes that all have basically the same internal workings, but they have maybe 10 stocks that are different.
David:Okay.
Mike:So you've Bali's different ETFs, but you didn't look under the hood. You basically just bought the same ETF three times. So that's the concern I have in broad diversification with ETFs, is do you know what you're actually buying, or are you just saying I'm diversified, but you bought a bunch of the same thing? So it's really common that I'll do an analysis on someone's portfolio, and I'll say, yeah, you've bought a bunch of ETFs, but you have like 10% in Apple. So those are the things to be concerned about with mutual funds and ETFs.
David:Mutual fund is managed by like a live human person. Right? There's a fund manager, and they're based on what the prospectus allows them. They're placing the trades. People are actually doing that's
Mike:why there's an expense ratio. That's why they charge fees. Someone's gotta do the work.
David:Yeah. And on an ETF, there's no one's doing Nope.
Mike:Someone's still doing it. Yep. It's just a little bit easier. Well, I shouldn't say easier. It's It's a little bit more simplified or streamlined.
Mike:More restrictions. Based on what I've seen. But yeah. Now you might wonder who the GOAT or wonder what Berkshire Hathaway is. Ever thought about that?
David:Yeah. So I've heard of them, and they have like annual meetings and Warren Buffett, and he writes a letter every year. Right?
Mike:Yeah. He's neither.
David:He's not an he's not an ETF or a mutual fund.
Mike:Most people don't realize this. He's a holdings company. Oh. And when you buy a share of his company, you're buying a share of a holding company. So again, when you ask questions, you realize it's not just a bunch of stocks, mutual funds, or ETFs.
David:Okay.
Mike:There are shares of holding companies. The investment options are huge. Yeah. Yeah. Yeah.
Mike:It's not just these two options. People say, well, these are the only options, or just buy ETFs.
David:Because we see a lot of commercials on TV that, oh, these are my investment options, but there's a lot of stuff out there that doesn't advertise on TV.
Mike:A lot of investment options that aren't out there. A lot of stuff you can't get on your own either. So think of a doctor and medication
David:Mhmm.
Mike:You can buy over the counter, no problem. Yeah. But to get prescription level, something that's more sophisticated, you have to go through a licensed person to do so. Right. So the reason why I say all that is just don't default into oversimplified understanding, ask questions.
Mike:Really break it apart. What don't I know? What questions should I be asking to understand this XYZ concept? That might help you expand, and ask questions you wouldn't know to understand. Sure.
Mike:But again, mutual funds, ETFs, it's just a tool in the toolbox. Uh-huh. It's not the end all be all. Put your plan together first
David:Yes.
Mike:Then explore your efficiencies, and then put together multiple portfolios based on your lifestyle and legacy expectations and goals. That's the, I would say, the the moral of
David:the story. And maybe a mutual fund's right
Mike:for you, maybe not. Maybe an ETF is right for you, maybe not. And they're all different. In my mind, mutual funds and ETFs are the real money managers. Oh.
Mike:Okay. And then you've got a bunch of financial advisors who do planning allegedly, and they just help you pick what they're already doing, and you've now paid doubled in fees. So it's like, if you're going to invest in mutual funds, you've decided that for whatever reason, or you're gonna invest in ETFs, and you're gonna do your research, do you really need to pay a 1% fee for an ETF or mutual fund that's actively managing your portfolio? Now the answer might be yes, if you want planning advice, or tax advice, or other advice. Mhmm.
Mike:But if you're just looking for money management, that's who manages your money. Yeah. And you might say, well, my financial adviser trades on these, probably not often if it's mutual funds, because there could be trading fees, early redemption fees.
David:Oh, right.
Mike:That's not suitable for you. Maybe they're trading ETFs, but it's understanding what's actually happening, and are you getting your money's worth for it? I mean, that's why at Kedric, do a flat planning fee, a flat management fee. Yeah, we do active management. It's it's a more comprehensive relationship.
Mike:Mhmm. Do you need us? No. You could buy ETFs on your phone. Yeah.
Mike:Do you want a more comprehensive deliberate conversation about taxes and income planning, and understanding how to x y z? Then it might make sense to work with a financial adviser. But if you want to buy mutual funds ETFs, you're basically paying for a financial professional to manage your money for you in a broad spectrum. That's the truth. As much as people don't want to admit it.
David:Are ETFs new are they a newer kid to the block here? Are mutual funds older than ETFs?
Mike:Yeah. Okay. Mutual funds were the original, and then ETFs came about later on. And then since then, like, other things have come out, like buffered ETFs. I mean, it's just Uh-huh.
Mike:You take the same thing and you rewrap it over and over again in different ways.
David:And there could be other new things that are on the horizon that we don't even know about yet. Yeah. Is that right?
Mike:And watch out for new products, new investments. So I have a theory that's not fully researched yet.
David:Okay. Okay.
Mike:So please understand, I'm still doing the research on this, but I'm comfortable enough to explain it.
David:Okay.
Mike:I have a theory that any new investment product or strategy, when introduced, has the first couple of people that do really really well with it. Oh. It's a cool tool. Yeah. Now emphasis on tool.
Mike:Uh-huh. Then it gets crowded, and then it gets abused. So let's look at the real estate market, happened way back when, before the financial crisis happened, to where you could take a bunch of mortgages, and put them into a bond. Oh. Okay, and then sell it to the pensions, and who doesn't pay their mortgage.
Mike:An original idea, not that bad of a concept really. Uh-huh. Then, and these are mortgage backed securities. Yeah. And they worked great.
Mike:And then they couldn't find enough good mortgages, so then they started putting crappy mortgages in them. Oh. And they weren't getting checked appropriately, and then things kind of ballooned into these not so healthy mortgage backed securities. And then you have the insurance industry, not literally insurance industry, the securities industry using options or other contracts on the mortgages to do synthetic or fake mortgage backed securities that were already crappy, and weren't rated properly. So do you see how a good thing evolved into an abused thing?
Mike:Yeah. And then it blew up. Let's look at tech stocks. So tech stock was a great thing, and then people figured out if you just start a company and you IPO, you launch it, and .com is in your name, that it would be great. Yeah.
Mike:And then towards the end of the nineties, it blew up. So when something new happens and it explodes, I become hesitant because how is it getting abused? How is it getting manipulated? And when will that bubble pump?
David:Right.
Mike:The reason why I say this is with ETFs, it's a passive tool to invest wonderfully Mhmm. Into the indexes, but the theater gets more and more crowded, and the exit door is still the same. To quote Michael Burry, he was made famous by the Big Short. The reason why I say that is when you sell your ETF, you also sell the percentages of all of those stocks. So when you sell an ETF, you push down on all of those stocks, not just one or two, but all of the stocks.
David:Oh, right.
Mike:So if we had a massive sell off of ETFs, it would really hurt. That's my concern about ETFs, which is why we do use them, but we're also waiting into other types of investments. A stock is different than an ETF. You have the insurance market, which is different than an ETF. You have the alternative market, which is different than an ETF.
Mike:You have the cash and cash equivalents market, which is different than an ETF. So just be cautious about using all of the same tool. 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 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.