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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 retirement questions. We're here to move past that oversimplified advice you've heard hundreds of times. Instead, we're gonna dive into that nitty gritty. So as always, text your questions to (913) 363-1234 anytime during the week, and we'll feature them on the show. Just remember, not financial advice.
Mike:This is an educational show. David, what do we got today?
David:Hey, Mike. I know I should be in the stock market, but I can't get myself to go in since I think it's going to crash. A, is this normal? B, what else is there?
Mike:K. So multi layered question. Is this normal? What was the second one?
David:Yeah. Is it normal, and what else is there? Maybe are they asking, like, what else is there to invest in, or what are they missing?
Mike:Strategies. Okay. So first off, let's talk about is this normal? I don't know what the general consensus is of the financial services space, but I can speak for myself. And I would say, yeah, it is normal.
Mike:It's kinda like in the wintertime, you put on a few pounds, and in the summertime, you shed a few pounds. Like, there's this natural phenomena or whatever you wanna call it
David:Yeah.
Mike:To where we grow, grow, grow. We invent, we invent, we innovate, we create, we're industrious, and then at some point, we kind of overdo it. And we get excited, maybe a little too excited, and then the markets are overbought, and they're over evaluated, and and then we have to kind of digest it. The hour after Thanksgiving, all the regret you have for eating too much. Maybe you're more self controlled than others, but it's a very normal thing.
Mike:And people blame the tryptophan or whatever on that Thanksgiving turkey. Yeah. It's not the tryptophan. You ate too much. So in my mind, that's kinda like the market.
Mike:So let's use a case study. In the eighties, this thing was invented called the personal computer.
David:I I'm familiar.
Mike:Yeah. Have you ever used one before? Yeah. They're wild. And then this other thing came about with the Internet, which connected all the personal computers together.
Mike:I'm being a little facetious here. We all know what a computer is, but at the time, do you remember how cool this I remember the day we got our Macintosh computer in. Wow. We plugged it in, and then we went, what's next? And then there was this floppy disk.
Mike:It's floppy. I use that loosely. We could plug it in and do this thing called American online. And it was amazing. You could block out all incoming calls because of, what, 56 dial up and all these things, and you could log in.
Mike:And then what? We were kinda like, okay. What do you do with the Internet? What's a website? Are they trustworthy?
Mike:Yeah. It was this brand new thing, and it created all of these really cool ideas, and we got very excited. And then the nineties boomed. Microsoft boomed. Apple boomed mostly.
Mike:I mean, had its own journey. The Internet, Cisco boomed. All these massive boom existed, and then it was overpriced. And if you look at it from more of a technical standpoint or fundamental standpoint, whichever way you wanna interpret this, you could argue that the price earnings, so the price of a stock versus the earnings of the company, was not in proportion. So, like, I'm not a nutritionist, but there's probably a healthy percentage or something like that of fat to muscle, body weight, or something.
Mike:Sure. There's probably a healthy range where you might be a little bit too lean or you might be a little too obese, and that's not supposed to body shame anyone. That's just reality. Right? There's a health spectrum here.
Mike:There's a health spectrum in stocks or any asset class that the price of it may not be appropriate.
David:Give us an example of a company that where it's imbalanced. Like, yep, they're making good profits, and they're priced accordingly.
Mike:Yeah. So Microsoft, for example, the price of the stock was significantly higher than the earnings that was rationalized, what the company was actually earning, because we were expecting it to continue to grow at exponential rates. And so we just thought, oh, I wanna get in early. The company will continue to grow, and it rationalizes its price. That was the idea.
Mike:And then 2000 comes along, and we start to lose momentum, and then we start to digest what this thing was. Because we didn't really know what the Internet was for a long time. Okay? Then 2000 o one and o two from top to bottom at the S and P, that's like 50% decline in the market. The QQQ or the Nasdaq 100, so it's it's a 100 stocks more tech focused.
Mike:Those were all newer companies, by the way. It's a different version of QQQ today. But that went down, I think, like, 80% or something In
David:the early years. To bottom.
Mike:That's a pretty big drop. And then people figured things out. Right? Amazon figured out what they were doing. A lot of companies, they figured out what they're doing.
Mike:Cisco never really recovered until twenty five years later. But Microsoft recovered and figured this. So that's very normal in the markets, that there's a new industry, a new bubble, a new something that grows, grows, and then it digests. It's we grew too fast, too much. Right now, we've got the AI, and and you know it's a bubble when you're getting your groceries, and the clerk, whether it's the 18 year old clerk or the 80 year old clerk, is telling you, yep.
Mike:Those AI companies, that's all you need in your portfolio that because it just grows, and it's gonna keep growing. Well, maybe not. So there's a metric out there called the Schiller CPI index. So basically, they take the CPI, they back in inflation and make it more realistic.
David:This is consumer price index?
Mike:Consumer yeah. It's it's inflation. So, like, the price of a stock twenty years ago isn't really the same equivalent of a price of a stock today because inflation has adjusted that price, which by the way, stocks are a great way to hedge against inflation among other assets.
David:Because they'll appreciate faster and keep up with inflation?
Mike:Yeah. Inflation's basically the economy is running too hot. So if the economy is running too hot, what is the economy? Well, a lot of it's your companies. And if they're growing too fast, then the price would increase as well.
Mike:Okay. It's an inflation hedge. But going back to the Schiller consumer price index adjusted, basically, his metric Okay. For this. What he found was that the stocks if you look at the price earnings with the Schiller consumer price index, the only time we've ever been higher was at 2,000.
Mike:So not 2,008, not 1966, not all these other market crashes, and the markets crash every seven or eight years or so. We are in a very unique time, not 2020, not 2022. We're in a unique time where the markets are, by definition, overvalued. So if you put your money into the market today, there's a high chance you're actually gonna lose money in the near future. So why would you do that?
Mike:Yeah. Herein lies the conundrum. In the mid nineties, people had the same argument. I know many financial professionals, mostly brokers that were in the nineties, who had told me the stories about how they were saying, yep. These stocks are this is, like, '93, '94, '95.
Mike:These stocks are overvalued. They're overvalued. Let's buy consumer staples. Let's buy boring stocks. Let's buy bond funds.
Mike:Let's buy other things because it's overvalued, and it's going to drop. And then it didn't.
David:And so they were they missed out. Is that what
Mike:you're saying? Best gains ever in market history. Some of the best years ever were in the late nineties. And, yeah, it eventually crashed, but you cannot time the market. You can't do it.
Mike:And so instead of trying to wait for, oh, well, I wanna wait until the markets crash, then I'm gonna buy in. That might work, but it might not work. And it takes a certain amount of humility to to acknowledge that. And so if you have that understanding, then you can pull back a little bit and say, what are the right investment and products that are appropriate for me? Okay?
Mike:I'm gonna ask you kind of a funny question, but because you're pretty handy.
David:Oh, thank you.
Mike:I I know you've got a lot of tools, so I assume you're handy because have a lot of tools.
David:We have some tools. Yeah. We've accumulated some.
Mike:Have you ever not had the tool that you needed and tried to use a different tool to make it work?
David:Yeah. And it didn't work. I've been there. Like, oh, I can sort of make this work, and no, it didn't. Can I tell you a
Mike:quick story about boxcar derby?
David:Okay.
Mike:You know, the the boy scouts. So my son wants to carve a boxcar, and I don't have the right tools for this. I don't have like, growing up, we had the saw that was really thin, and you could like carve it all out. Yes. We didn't really have that.
Mike:So what I did was, and thank goodness he was four years old when we did this, so he didn't really understand what aesthetics meant. Uh-huh. I I took the only saw I had, and I cut off just like a diagonal through it. Not balanced at all. Looked horrible.
Mike:And then I took the drill, and I just tried to do a bunch of drills into this wooden block, and then I took a flathead, and just tried to chisel it off so the car kind of was what it should be, and then we kind of sanded it down. Frankenstein looked beautiful compared to this thing that we have. And that's kind of like trying to have stocks figure out all of your retirement needs. If you use a tool inappropriately, you're going to get hurt. I shouldn't say that promissorally, but there's a high probability that you're going to get hurt.
Mike:If you use just stocks in your portfolio or equities to fund your whole retirement plan right now when we're at a market top, You're probably gonna get hurt, so the sentiment of this question, I think, is valid. But it doesn't mean you should put your assets then in cash and just try to wait and time it, because now you're losing against inflation. And I know what the inflation numbers just came out, and I know that inflation is historically low. It's low until it's not. The markets are going up until they're not.
Mike:So going all in on a particular investment or product may not be the best thing. So here's a couple of strategies or a couple of things to consider. First off, you could you could invest in short term, let's say, CDs, treasuries, not treasury funds, not bond funds, though you may do that as well. That's a different conversation. But something that's fixed, but is gonna become liquid at some point so that you're beating cash returns.
Mike:And I'm not saying you should put all of your assets into something like this. Not at all. But maybe you put some of your assets so there is protection, so that if the markets go down, you have a safer place to pull income from in retirement if you're retired. And maybe you also put a little bit extra into something like this so that if or when the markets do crash, you can then buy at the bottom, but you were still growing your assets. Maybe you put a part of your assets into more indexed products, buffered ETFs, and you could do buffered ETFs that reset quarterly.
Mike:If you don't know what a buffered ETF is, basically, there's a downside buffer. So if the markets go down, you don't get all the downside hit. That's how it works. You don't get all the upside, but you're buffering out some of the downside risk. That's a way that you may be able to hedge against this downside risk and then buy in at a better rate.
Mike:This is a clever one. You could buy a fixed indexed annuity as long as it allows the five year period certain at any point. So it basically turns into a five year CD ladder. Okay. At any point, that's maybe got, I don't know, seven, ten, whatever.
Mike:It has upside potential. No downside risk. Markets crash, it's near the low, maybe it's down twenty, thirty, 40%, and then you turn it on. Now you've got five years of income and dollar cost averaging into the market when it's down. The bear market, which is the down market, bad news bears, really is the opportunity for those who prepare.
Mike:And those who just buy the stock market, you're basically walking into a fight with your hands tied behind your back, hoping that you can just withstand the blows that could be coming. That's kind of rough spot to be in. You wanna avoid that. My son does Krav Maga. Oh.
Mike:And I'll tell you what, there's no way I'd wanna get in a fight with any of those people, even the teenagers that are training there. Uh-huh. Because I haven't trained in Krav Maga. That's Israeli street fighting for those who are unaware of the term. Uh-huh.
Mike:But you got to understand the environment that you're walking into. You've got to understand the appropriate use of certain investments and products. You have to have strategies for if the markets go up or down, and you have to understand how to take advantage of those situations for better or for worse. The problem I feel is that people just know how to build a portfolio that can grow when markets are good, when times are good. That's not how it works.
Mike:You don't play chess going just all out for the king and leaving yourself exposed. You don't play risk just going having one army and just going all out. Like, life takes strategy. It's not getting boardwalk in monopoly. You don't go all in on one strategy.
Mike:You have multiple strategies. Now how much of your portfolio would go to each strategy? That depends on your lifestyle and legacy goals and how your plan looks. You first run the plan. Well, first off, you should figure out what do you want your life to look like.
Mike:That's kind of an important thing. Your money serves you. You don't revolve around, oh, well, this is my income, so I'm gonna make it work. No. You plan your life first, then you do your financial plan, which has nothing to do with investments or products.
Mike:You're first looking at the cash flow, the flows, the ins and outs, the growth projections. You're looking at it from a high level, then you explore the strategies, then you pick the investments and products to support those strategies and that plan. Too often, people will just solve it by saying, here's a strategy. I'm going all in on that and calling it good. Not how it works.
Mike:Design your lifestyle, put together your plan, figure out your strategies for what markets are good or bad, and then put together your portfolio with whatever investments or products work, and there are so many out there. But to answer this person's question, your sentiment is valid. It makes sense. That does not mean you go to cash and wait for the other shoe to drop. You need to outpace inflation.
Mike:You need to make sure that you're growing your assets. Maybe you have some stocks, but you don't need to touch it for over ten years. Maybe you've got other assets that have growth potential that can provide you the income you need for the first couple of years. Divide and conquer. I cannot emphasize that 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 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.
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.