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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 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 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 it all. Now that said, please remember this is just to show.
Mike:Everything you hear should be considered informational as in not financial advice. If you want personalized financial advice, then request Your Wealth Analysis from my team today by going to www.yourwealthanalysis.com. With me in the studio today is my colleague, mister David Fransen. David, thanks for being here.
David:Yes. Thank you for having me.
Mike:David's gonna be reading your questions, and I'm gonna do my best to answer them. You can send your questions in by either texting them to 913-363-1234, or you can email them to hey mike@howtoretireontime.com. Let's begin.
David:Hey, Mike. I want to work with a financial adviser, but none of them seem to be able to beat the magnificent 7. If that's true, why would I ever change what I have in my portfolio?
Mike:So the this is a very fair question because it's been doing really well. Yeah. When you think about magnificent 7, what we're looking at here are 7 stocks in the S and P, if you're unaware, that have just done really, really well over the past few years. Now if you're unfamiliar with the magnificent seven, this is the latest and greatest. Magnificent seven right now are Microsoft, Amazon, Meta or Facebook, Apple, Alphabet or Google, and then Nvidia and and Tesla.
Mike:K. So those are the stocks that really have lifted the S and P of 500 and all of its growth.
David:If you
Mike:got rid of this or those 7 stocks, the S and P really has not grown that much over the past couple of years, all things considered. And so the problem is why do anything else if it's working? There's an expression in the industry in the financial services space, but really it's applicable to all spaces that says it doesn't matter until it matters. What a stupid expression. The idea behind is well, well, it's working.
Mike:So who cares?
David:Like the, if it ain't broke, don't fix it kind of a deal.
Mike:It's the same thing. And so what people don't realize is the risk that they're taking by going too heavy in the magnificent seven. So in point of fact, let's do a fun case study, in the nineties. So in the nineties, you had the original magnificent seven, which were Microsoft, Intel, Cisco, Dell, Sun Microsystems, if you remember them, Oracle and IBM. Now Dell has since gone private.
Mike:Sun Microsystems has been acquired but those were the stocks. If you just if you were 1995 and you held those stocks, you made a killing. I I can't remember if it was Cisco or Oracle. I think it was Cisco that had a 2,000 percent increase during that time frame. Sound familiar?
Mike:Cough cough, nividia.
David:Right.
Mike:So why would you ever sell any of those original 7 stocks, the original magnificent 7 in the nineties during the dotcom boost? Well, consider just for a moment that from 95 to 2,000, it didn't matter because it was working until it mattered in 2,000. And then all of these stocks over the next 10 years had a total return of less than 0 as in negative. In 10 years, you lost money. Ouch.
Mike:Not like a 10 year average. Oh, it kinda no. Like it it went down for 10 plus years. That's the risk that many people don't want to see right now in going all in on the Magnificent Seven. I believe IBM from 2,000 to 2,010 or 2,011 was up around 40% total, not annual returns, but in total while the rest had lost money.
Mike:If you had just gone all in on these 7 stocks, you would have around a 3% total return over 10 years. Not 3% average each year, year over year, but a 3% total return in these 7 stocks. And the reason why this matters is in retirement, you can't most people can't afford to live off of no growth in your portfolio for a decade. People need their portfolio. So the question might not be, well, if financial advisors can't beat the magnificent 7, maybe the question should be, why are financial advisors not going all in on the magnificent 7?
Mike:What wisdom is out there that maybe you might be missing? Now in the more traditional portfolio, you might say, well, they broadly diversify the assets. They buy indexes. And that's fair. If you brought in your diversification, you buy more stocks or more ETFs, for example, you're going to lower your upside potential because you're also lowering your risk, but you lose that downside risk.
Mike:So do you want to have your cake or do you want to eat your cake? Because as the old expression goes, you can't have your cake and eat it too. You saw that one coming.
David:Yeah.
Mike:And this is where it I think of that analogy. I'm not sure, David, if you've heard of this one before, but if you wanna trap a monkey, what you do is you put a fruit or something sweet in a little hole that they can fit their hand in. But if they grab it, they can't pull their hand out because it's in a fist form.
David:Alright.
Mike:And so the monkey wants the thing so bad that it's willing to sit there. It won't it won't let go. In my opinion, the magnificent 7, which a lot of it is around the artificial intelligence hype. I don't wanna say hype like, oh, it's fake. No.
Mike:It's really cool what they're doing. It it can revolutionize our economy, our workplace, how things are done in every aspect of our life. Just like the Internet.
David:Mhmm.
Mike:But sometimes we get overexcited and there's a correction or a digestion period kinda like the 2000. And then we figured out how to work with this thing and then it evolved. So I think the Internet really took off when we figured out what to do with it and then 2010 hit and we had an incredible 10 years. What if AI follows a similar pattern? Are you willing to hold on to the magnificent 7 and risk the possibility of maybe they correct?
Mike:Maybe we overdid it a little bit and maybe we didn't. The thing is, no one actually knows. But there's risk for the potential reward. And that's the key phrase. It's not no risk, no reward.
Mike:It's risk for a potential reward. Can I emphasize that enough? So take your your typical portfolio. You diversify. You're gonna have mediocre positions in there, which I hate, but that's just a part of it.
Mike:The typical investment adviser would probably have you in, like, a 6040 split. So 60% in stocks, 40% in bond funds. Because bond funds, when the markets go down, typically can help hedge against that. Or, you know, if interest rates drop, maybe they increase in value. I say maybe it's not a direct correlation as we saw in the past couple of years, But that's a way that you can hedge against these risks.
Mike:And if you look at a 6040 portfolio over a 10 year period of time, like 2,000 to 2,010, it would have done a little bit better than a 7 stock portfolio with the original magnificent 7 or would have done better than the S and P 500 index and going all in on equities or stocks. The portfolio isn't just randomly buying a bunch of things. It's understanding what you're buying and why you're buying it. Now, in my opinion, I I I see the value in bond funds for a growth focused person. But if you're growth focused, I think more on equities is appropriate.
Mike:Now that's, you know, I guess, the common ground that I have with Ken Fisher when it comes to growth and investments. But in retirement, you can't go all in on stocks, risk it all. If the markets go down, you can still draw income. Because if you're focused on growth, there's a small chance that you're also getting dividends. If you're focused on growth, there's no protection.
Mike:So if you're focused on growth and markets go down and you draw income, you're gonna accentuate the losses. Mhmm. Let me say that a little bit differently. One of our rules for retirement plans is you never draw income from an account that has experienced significant losses. Why?
Mike:Because the deeper you go, the harder it is to recover. So here's just some simple math. If your accounts are down 30%, which is very reasonable and can happen every 7 or 8 years, then it would take a 43% 43 to break even, just to recover. Many times you don't recover with a 43% gain in a quick period. That might take a couple of years.
David:Right.
Mike:Now if you're down 30% and you take out, let's say, 4% of your portfolio because you're following this arbitrary rule that you can take out 4% and be fine. You're now down 34%, which means you need to have a 50%, 50% return to break even. You see where this going?
David:Does that happen very often?
Mike:Every 7 or 8 years. Uh-huh. But it's not every 7 to 8 years. It's just that's the average. Like 1987, we had Black Monday.
Mike:Markets crashed. Luckily, they recovered. 1999, a geopolitical event. Markets crashed as well. So that was a 3 year time frame.
Mike:2020, the markets crash, recovered quickly. Thank goodness. So there there are no exact patterns. You can't predict the future. I loved, The Motley Fool did a fun tweet the other day, if that's what we still call it, a fun post on x.
Mike:Well, they said, no one knows the future of 2025, and I agreed with them because they were correct in saying that. But I I believe when you're retired that you ought to have instead of bond funds, principal protected accounts. I call it the reservoir. So instead of 40% bond funds, consider for for 40% of your portfolio. I'm not saying exactly 40%, but roughly 40% of your portfolio and something that can't go backwards, but still has the the growth like a bond fund could have.
Mike:So I'm talking specifically maybe you have some treasuries in there not treasury funds but actual treasuries. Maybe you have some CDs some short term CDs. Maybe you have some fixed indexed annuities as a bond fund alternative. Really anything that can grow 4 and a half to 8 percent expectation, and they're all different. If you're young enough, you might be able to use life insurance, cash value life insurance, like an IUL as a bond fund alternative.
Mike:That might sound crazy. It's not. You just need to understand how to fund it, how to get rid of these fees that prevent it from being competitive. That's a whole conversation into itself. But my point being is, why work with a financial advisor when they can't keep up with the magnificent 7?
Mike:Maybe there's some wisdom into why they're not trying to beat the Magnificent Seven. If you want more growth potential, you take more risk in retirement. You don't want to take more risk. You're not trying to become wealthy. You're trying to stay wealthy.
Mike:And there's some wisdom in that. Don't risk it all. Make sure you understand what you're doing. Make sure you put a plan together first, then you explore the strategies. It's like, what would you do in the up market?
Mike:What would you do in a flat market? What would you do in a down market? What would you do when taxes are increasing? What would you do if taxes were decreasing? What would you do if inflation got away from us again?
Mike:What would you do if inflation came to a standstill again? You go down the strategies and then you build your portfolio around the ability to implement those strategies so that your lifestyle and legacy expectations can be fulfilled. You're listening to how to retire on time. 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.
Mike:Just search for how to retire on time. 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.
Mike:Go to www.yourwealthanalysis.com today to learn more and get started.