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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, well, 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.how to retire on time.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 pretty much discuss whatever's on your mind. Now that said, please remember this is just a show.
Mike:Everything you hear should be considered informational, as in not financial advice. With me in the studio today is my esteemed colleague, mister David Frandsen. David, how are you doing today?
David:I'm well. How are you?
Mike:I'm doing well. Great. This is gonna be a good show. And now just for the newcomers, this is how the show works. David will be reading your questions, and I will do my best to answer them.
Mike:You can send your questions in by either texting them to 913-363-1234. That's 913-363-1234. Or email them to heymike@howtoretireontime.com. Let's begin.
David:Hey, Mike. You keep talking about active management when everywhere online, I see that most money managers can't beat the market. Why do you promote something that is statistically not probable?
Mike:So there's a great book out there called how to lie with statistics, and it's just you can take certain data points and make things look really, really good for whatever bias you want. So this research typically is sourced by Spiva, I think, s p I v a. I don't know if it's an acronym or whatever it is, but that's that's the company. And here's what is actually being quoted. So I wanna be very clear about the the details here.
Mike:So it says after 1 year, and this is from SPIVA, after 1 year, nearly 73% of active fund managers underperformed their indexes across 22 equity categories. Okay. Got it. After the 5 year horizon, 95.5 percent of active stock fund managers lagged their index. After 15 years, there were, quote, no categories in which the majority of active fund managers outperformed across domestic and international equities.
Mike:It's talking about mutual funds. It's talking about mutual funds specifically. And and let me just differentiate that. Here at Kedrec, we don't support a fund. We are not a mutual fund.
Mike:So how we manage, what we can do is much more proactive, deliberate. We're not beholden to a very specific perspective. We can be incredibly dynamic with our clients. When you're in a fund, you're kind of restricted in some sense to do certain things and stick within a box. Also, with these these fund managers, do all of them really want to beat their benchmark index?
Mike:So you'll have a fund manager that wants to mimic some of the S and P five hundred's returns, but they're including bonds. There's no fund manager in the world that I can think of that, at least if they have a right mind, thinks that they're gonna beat the s and p by sticking a bunch of bond funds or bonds in their portfolio. That doesn't make any sense in the world. Now there are some active fund managers. They're all at stocks trying to mimic and beat the S and P.
Mike:Yeah. There are some losers out there. When I say losers, they are not losers. They are losing or not keeping up with us. I get that.
Mike:But in every profession, every category, there are people that win and lose. But if you're only gonna look at fund managers and you almost oversimplify a lot of these the the data points, yeah, you're gonna get some really appealing statistics to sell an index fund. Do you notice the bias? Now, this is my interpretation of as I've gone through this research, but the idea that you people can't beat the index let me let me quote the great and late Charlie Munger, Warren Buffett's right hand man, the other half of Berkshire Hathaway, when he talks about the idea of excessive diversification, which essentially is index fund, investing, is is maddening because excessive diversification requires including mediocre businesses into your portfolio, which in return will give you mediocre returns. The s and p, and I'll use that as the standard example here, if you look at it from an equally weighted standpoint, so all 500 some companies have an equal rate, significantly underperforms the s and p as it is currently weighted.
Mike:Why? Because there are a lot of mediocre I wanna say mediocre businesses that's not meant to be degrading to the business itself. They're just not growing as fast as other companies. And so you could probably do this on your own. This is, again, not investment advice.
Mike:I'm theoretically having some fun here on the show. Nope. But maybe you take the top 100 stocks based on the allocation of the S and P, and then the rest of them, you just kind of pick and choose based on fundamentals, growth potential, and this is the statistical analysis, the the fundamentals, the the technical analysis. I mean, you have to dive into the details here. But then you just wait a little bit differently, the s and p as itself, only pick the the positions that have shown more growth potential and get rid of the mediocrity within the 500 companies, if you were to do that, there's a good chance in my opinion that you might beat the s and p year over year you might not you know that vast performance isn't indicative of future performance but you got to buckle up for the volatility the the roller coaster you're about to go on so is it appropriate for you probably not Please don't listen to this and then go do it.
Mike:But in theory, if you got rid of, let's say, 100 of the S and P 5 100's companies that really just aren't doing anything, In theory, you would then beat the S and P on the upside. Do you wanna do that? That's a lot of work. I mean, you've you've gotta be vetting almost on a yeah, on a daily basis or 500 companies can you do that probably not
David:are you gonna go to work yeah
Mike:do you can you put in the researching and put in the time and so this idea that we're gonna compare stock bond fund portfolios with indexes, the closely related, or whatever the I in my mind, it's just marketing intended to sell index funds. That's it. Again, that's my opinion. I have no problem with people going to Vanguard, Fidelity, buying the index funds, SPY, VOO, IVV, whatever fund you want and holding it, there's no problem with that. But to say that most managers fail, and to quote that statistic I think it's just an oversimplification to hide behind that I can do this myself going back to the Dunning Kruger effect which we we had previously addressed
David:that's right
Mike:I just I think it's just an oversimplification here. I do think that there is a reasonable chance that people can be more competitive in the market than that statistic would suggest and I'll just I'll leave it at that
David:fair enough
Mike:I don't think people should take that much risk especially when you get towards retirement you've got to start slowing down the risk that I believe the day you retire is the day you should have the least amount of risk because that's when you've got to preserve it. You've got to get through the market crashes and things like that. So let's let's make sure we're having a conversation within context. Am I saying that people can beat the S and P every year? No.
Mike:Past performance is not indicative of future performance. We've all heard that disclosure before. But to just say well it's not an absolute guarantee so I'm just going to defer to index funds I think that's also selling yourself short that's my opinion if you want to have a greater conversation about this if you want to really dive into growth potential how models work what what you could be doing to possibly take a part of your portfolio and give it more growth potential, but also build a portfolio that supports your lifestyle and legacy plans even if the markets were to crash next year, the year after, or whatever they're gonna crash next time. This is why we have that analysis. Just request it at no cost today.
Mike:Go to www.yourwealthanalysis.com. That's www.yourwealthanalysis .com. Or text analysis to 913-363-1234. That's keyword analysis. To 913-363 1234.
Mike:Now that's all the time we have for today. If you want more tips about retirement, income, taxes, social security, healthcare, and more, make sure you subscribe to this show wherever you get your podcast. Just search for how to retire on time. Also, you can catch this show via our 247 digital broadcast by going to www.retireontimeradio.com. You can stream various episodes on your phone while you're on the go, in the car, or wherever you are on a run.
Mike:Just go to www.retireontimeradio.com. From everyone here at Kedrec Studios, thank you for spending your time, your most precious asset, with us today.