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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. This show is an extension of the book, how to retire on time, which you can grab today for free by going to www.howtoretireontime.com, or you can buy a physical copy on Amazon. 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 money, dollars, cents, finance, investments, all of it, we can cover it all. Now that said, please remember this is just a show.
Mike:Everything you hear should be considered informational as in not financial advice. If you want personalized financial advice, you can request a wealth analysis from my team today by going to www.yourwealthanalysis.com. With me in the studio today is mister David Franson. David, thanks for being here.
David:Yes. Glad to be here.
Mike:David's gonna read your questions, and I am going to do my best to answer them. You can submit your questions in at any time during the week by texting (913) 363-1234. Just save that number in your phone when you think about it. (913) 363-1234, or you can email us at hey,Mike@howtoretireontime.com. Let's begin.
David:Hey, Mike. How do you increase growth as a conservative investor?
Mike:Yeah. Is that like a How do you
Mike:cheat the laws of economics?
David:Yeah. Right.
Mike:This is a fair question. And the reason is people are scared to death right now. Mhmm. We've got the terrorists. We've got geopolitical unrest.
Mike:We've got the president of The United States who used to tweet angrily at the Fed chairman. I guess things they've come to terms on that.
David:Oh, that's good.
Mike:Who knows? Yeah. But the markets don't like unrest, and so people are more concerned. It's funny. When things are going well, no one cares.
Mike:Yeah. To buy just a couple of stocks that are going up would be a conservative investment because it's working how you want it to work. It's like we like things when they go our way, but we don't like things when they don't go our way, so we only want the good, but none of the bad. Sure. That's a tough, a tall order.
David:Yeah. Yeah. Yeah.
Mike:No. So it is in separable. This is the biggest lie people tell themselves. People think that they can increase their growth potential without increasing their risk. Not true.
Mike:Those are inseparable. So if you wanna increase your growth potential, notice the keyword there, potential. Potential. You have to increase your risk. There's two problems with that.
Mike:Most people don't understand, at least based on my experience, what growth potential means. Okay. And most people don't understand what risk really means. Oh. Which one should we define first?
David:Let's dive into risk first, actually. That's tantalizing.
Mike:Risk is the risk of loss when you need the money. Most people don't understand the latter part. So risk of loss, markets go up and down. Sure. K?
Mike:So here's some fun facts. Every one point eight years, the markets dip around 10%, not the end of the world.
David:Mhmm.
Mike:Every seven to eight years, the markets will crash 30% or so. Okay. Not every seven to eight years, but on average. The averages are deceptive. And then you've got the markets will go flat for ten plus years.
Mike:Mhmm. And that's every twenty years or so. These are just market patterns that you need to be aware of. What does that mean? Markets are gonna go up or down.
Mike:That's how they work. If you wanna buy the stock market, and the stock market, talk to anyone at Fisher Investments. This is their thesis is that you can make more money in the stock market than anywhere else. Right. That is a true statement.
David:What makes that true then?
Mike:Yeah. And let's clarify too. Yeah. The stock market has more growth potential than any other marketplace. You've got the cash and cash equivalents marketplace, not gonna get you rich.
Mike:You've got the bond market, the biggest market, not gonna get you rich. You've got the stock market, very extensive growth potential. You've got the real estate market. Okay? The real estate market has made more people millionaires, but it's not because they just bought a property and let it go.
Mike:They were actively involved in the investment. So it's an apples to oranges comparison. Okay. And then you've got the insurance market.
David:Gonna get rich there? No? No. Okay.
Mike:Insurance is not an investment.
David:Oh, yeah.
Mike:But these are different places you can put your money.
David:Okay? Yeah.
Mike:And I stole that kind of breakdown the six markets from a dear friend, Brian Evans up in Seattle, Washington, a very smart CPA.
David:Okay.
Mike:But my point being is, markets are gonna go up and down, and there are different markets, and they're all gonna act differently. Okay? So now let's talk about the stock market, that's typically where people go when it comes to risk. Yeah. So the stock market has the most growth potential.
Mike:But when are you gonna invest the money, and when are you going to need the money? So if you put money in the market right now, and you might need it in one, two, or three years, then there's risk. The markets could crash. If the markets crash 30%, it would take a 43% return to break even, that could take two or three years. If you needed some of the money, and you accentuated the losses, it could take five to six years to recover.
Mike:So if you need the money in a short term period of time, that is a high risk situation. Yes. That makes sense so far?
David:Yeah. I'm following.
Mike:Okay. Now, let's say you were to invest in the market, let's say a couple of stocks, whatever.
David:Alright.
Mike:And you do not need to touch them for over ten years.
David:Okay.
Mike:There is a statistically significantly high probability of outpacing your more conservative investments. Depending on what stocks you picked.
David:Okay.
Mike:So that's when I say, it's not just about the risk you're taking. It's the risk you're taking based on when you will need the money. Oh. So a 20 year old that puts money in the market in a Roth IRA, crank that risk up. You can't touch the asset, the Roth IRA Yeah.
Mike:Until you're 59. So why would you not take more risk? Quote unquote risk. It's just it's horrible branding. It's horrible.
Mike:I think it's it's poor rhetoric on the financial services space, because people think risk is equivalent to gambling. It is not. It is a calculated decision based on your specific needs and timeline. Sure. People forget the timeline.
Mike:People have this idea where, well, if the markets go down, I'm experiencing pain. No, you're not. Right. Markets have recovered 100% of the time.
David:Yeah. So the value of your holdings might go down, but given the you apply some time to those holdings, they recover.
Mike:Yeah. Now let's take individual stocks as an example.
David:Okay.
Mike:Because we that's what we've decided to talk about. Yeah. The stock itself has its own variations of risk. K? So a larger company, think of Microsoft, and Apple, and Amazon.
Mike:What are the chances you think those are gonna go bankrupt?
David:Seems like very low chances. Just off the top of
Mike:my head. Yeah. Sorry for the leading question. Alright. There's a very low chance they're gonna go under.
Mike:Okay? So their risk is maybe a little bit less than buying some small newer company that just IPO ed, which is the fancy way of saying it became publicly traded. Yeah. Initial public offerings, what IPO stands for. So I act this industry is full of another language.
Mike:It's it's
David:like So much jargon. I was watching a show on Apple TV last night, and there's a character, John Hamm, and he's talking about his book all the time. Like, oh, I got my book, and he's in the financial services, and there's a lot of jargon. And and I happen to know a little bit of it, but I wonder what other people
Mike:Just pretentious. Yeah. Yeah. It's unnecessary.
David:It sounds very pretentious when he says it too. In his most John Hammy way. It's great. I
Mike:love it. The financial services space is pretentious. Sorry. Yes. We try to break it down in a simpler way, but it is.
Mike:Alright. Anyway, where were we?
David:Yeah. So we were talking about risk.
Mike:Risk. Okay. So Apple, Microsoft, these are very stable companies. Let's go to a different industry and a smaller company, Chipotle. Love Chipotle.
Mike:That's my healthy quick meal.
David:Yeah. Yeah. Yeah.
Mike:If I need one. Okay?
David:Absolutely. It's healthy ish. It's real food. It's real ingredients.
Mike:Yeah. Thank you This is a Chipotle ad, by the way. Yeah. But Chipotle, it's one, a smaller company. Mhmm.
Mike:So there's more risk. Two, it's a food company.
David:Uh-huh.
Mike:More risk. So it's a riskier stock because it's going to wiggle around a lot. Chipotle for years was struggling. Then some company bought a lot of their shares, exercised influence, changed out some leadership, changed out some of the internal parts of of the business. Mhmm.
Mike:And if I had known what was gonna happen, I would have just went all in on Chipotle. Layton, would you look up real quick what Chipotle what the performance was? But Chipotle, just as an example of the stock. Let's see. Chipotle stock.
Mike:Here, I got it right here. Let's do five years. Yeah. It grew by a 79% over the past five years. Wow.
Mike:That's pretty good. Yeah. Good. And a big reason for that was again because there's a riskier stock, things became less risky, the company got more organized, had more growth. Now the inverse could have happened.
Mike:It could have just tanked. There is a difference between larger companies and smaller companies. There's a difference within the industry of the company. These are all the nuance side of risk, but overall, if you understand the company, it's big enough that Mhmm. You'd recognize it, chances are it's pretty stable, and if you don't need to touch the stock or your position for a long term period of time, I don't really know it's as risky as maybe the term would suggest.
Mike:You with me so far? Yes. Okay. So that's understanding risk. Yes.
Mike:What was the other one?
David:Yeah. How do you increase growth as a conservative investor?
Mike:Risk and potential reward. And potential. Yes. So now we have risk. We understand what risk is.
Mike:It's the ups and downs, and the timeline of when you would actually need the funds. Right. Because it doesn't matter until you actually sell. Yes. Now the other side of it is, you can't have more reward for less risk.
Mike:So let's use bonds. Bonds are simple, And by the way, bonds, fixed income, it's the pretentious way of calling a bond something else. But so bonds, it's a debt instrument. So basically, someone's trying to raise capital in the form of debt. Okay.
Mike:So you buy a bond, and they promise to pay it back. They're gonna give you the money back plus interest. Okay. Let's say there's company A and company B, two companies. And in each company, they're both gonna give you a 4% coupon rate or interest rate, so to speak.
Mike:Okay. You with me so far? Yeah. Company A has solid financials, great track record, great revenue. They're issuing the bond just to accelerate their growth.
Mike:Company b has horrible financials. Think of Dave Ramsey's nightmare. They don't have good consistent revenue. Which one are you gonna choose?
David:I mean, I I wanna go with the It's
Mike:the same coupon rate. Same interest rate.
David:Right. So there there's sort of apples to apples there, but then if you peel back the coupon rates and look at the companies underneath them, I wanna go with the good financials, solid track record. Seems like there's stability there.
Mike:Yeah. So when company b, who has horrible financials, it has high risk or higher risk Mhmm. It's not working out for them, what are they gonna do? They have to raise their coupon rate, their interest rate to a higher level. Maybe it's seven, eight, nine percent, so that people are saying, I'm willing to take the risk for the potential reward.
Mike:Yeah. You see the difference there? I do. You cannot separate risk and potential reward. If you take more risk, you have more potential reward.
Mike:Mhmm. It is inseparable.
David:They're just attached to the hip.
Mike:You look at every investment, every product, you cannot get around that. When you invest with an advisor and you say, hey, I want you to try and beat the S and P. You are taking more risk that they are gonna be able to place the right trades at the right times to try and beat the market. That's okay. The problem though is when they say, hey, I want you to invest my money.
Mike:K? I want you to try and beat the market, but I don't wanna take as much risk. So they put 40% of your assets in bond funds. That's never gonna beat the market unless the markets crash, which case that probably won't beat the market anyway. You're damned if you do, damned if you don't.
Mike:Yeah. K? So we need to properly define what is the objective, understand what risk is, and then build a portfolio based on those terms. Sure. I think a lot of the confusion in this ideology is that most financial institutions, when you wanna invest with them, will have you fill out this objective survey thing.
Mike:He answers some questions, and it pumps out and says, based on your risk tolerance quote, well, which most people can't even define, this is the portfolio you should have. Yeah. Really what they've said is, hey, you filled it out. You told us what you want, so you can't sue us if this doesn't work out. So I've got some retired clients, for example, that do not need their money.
Mike:They have everything taken care of with investments, pensions, other assets. So they've said, hey. We're comfortable with risk because the intention of this is legacy. Guess what they're in? All stocks.
Mike:Guess what we're doing? Actively trading those assets. We're trying to beat the S and P every single year.
David:Because they don't need it now. They have other assets.
Mike:They can afford to take the quote unquote risk because they don't intend to touch it until they die, and it goes to the estate.
David:Right.
Mike:So they have twenty to thirty years. So do you see the difference? It's not your age. It's what's the purpose of your money? When will you need to access it?
Mike:And then you can start to have a more holistic conversation.
David:That makes sense.
Mike:So can you increase your growth potential and be a conservative investor? You can't. Here are your options as plain as day.
David:K.
Mike:You can either, as a conservative investor, work harder and spend less now so you save more, or you can start to develop a healthier relationship with money and investments and understand what risk really is because it's not the common term of, oh, I'm I'm taking risks. I'm going skydiving. That's the definition we all think of. Oh, skydiving is a risk because you might die. Bungee jumping is a risk because you might die.
Mike:Scuba diving is a risk because something could happen and you could die. Investment risk is a different definition of risk. So if you want to develop a healthier relationship with your investments, and understand that the financial term of risk maybe looks a little bit differently, and you can take a more calculated approach based on your timeline needs, then maybe you can have a healthier relationship with money, and have a better suited portfolio than all this jargon that confuses people into making dumb investment decisions. I'm not saying that the person's dumb. Right.
Mike:I'm saying that the process is set up to scare people into making decisions that aren't actually aligned with their investment goals. Right. And that maybe we should have a holistic conversation with someone as opposed to, hey, here's a survey. Now let me sell you what the survey told me to sell you.
David:Yeah. Yeah. Survey says that I should put you into these, like, mid cap stocks or whatever. Right?
Mike:Sort of generic. The primary reason why I'm speaking so forcefully about the topic is too many people have been scared by their four zero one k or HR department administrator of, hey. We'll match funds, and here's your investment options, and they say, well, I don't want to take risk, so they put it all in cash. If you put money into your four zero one k and you keep it in cash, it's gonna be very difficult to retire. If you put the money and just put it into a bunch of stock mutual funds, knowing that in your twenties and thirties, it's gonna go up and down, but you can't really touch it until you're in your sixties, because there's a 10% penalty, and it's intended to be there for retirement.
Mike:You're not really taking that much risk, all things considered, But you've got to connect the dots. Right. It's like going to a doctor this is a horrible analogy, but I'm gonna use it anyway. It's like going to a doctor that can only prescribe you medication, or going to a doctor that can only prescribe you, I don't know, yoga, or something to treat the system. Yeah.
Mike:Like when you're working with someone that can only prescribe or offer one thing, that's a terrible situation. Sure. I love working with medical professionals. They're medical doctors. Okay?
Mike:So they understand medication. They understand surgeries. They got the Western training. Right. But they also explore the Eastern medicine in a more natural, hey, maybe you should change your diet.
Mike:Maybe you should start exercising. Mhmm. We need to have both sides of the conversation. That same analogy could not be more true in the financial services space. Unfortunately, I don't think it's happening enough.
Mike: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. Discover if your portfolio is built to weather flat market cycle 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.
Mike: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.