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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 retirement questions. Say goodbye to the oversimplified advice. This show is all about getting into the details so so you can determine what is right for you. As always, text your questions to (913) 363-1234. And remember, this show is not financial advice.
Speaker 1:It's information to continue your exploration. With me in the studio today, mister David Fransen. David, thanks for being here. Yes. Hello.
Speaker 1:Thank you. David's gonna read your questions, and I'll answer them. Let's jump in.
Speaker 2:Hey, Mike. I'm getting tired of watching the markets each day. I can't get past the fear of another market crash. Any tips?
Speaker 1:Yeah. In the book, I talk about diversification in a different way. So when I talk about diversification, specifically, I'm trying to address diversifying your assets by objectives and not investment ambiguity. Here's what that means. When you're invested in the market, many people think, well, it all should be kind of in the same category, and then it will just overall smooth out.
Speaker 1:Like, things will just magically work out. I do not agree with that sentiment. I do not agree in the generic portfolio that you're diversified with large cap, mid cap, small cap, which, by the way, most people can't even answer what that means. Emerging markets, international, blah blah blah blah, bunch of jargon. They say, why do you have that?
Speaker 1:Why aren't you supposed to have that? Who said? That's what everyone does.
Speaker 2:I'm just going back in my mind as you're talking now, like, I'm in a previous job.
Speaker 1:Yeah. But remember when you're in the call center? Yeah. Your first job was a call center for a financial
Speaker 2:job. Record keeping for four zero one k plans. Right? Yeah. Employer sponsored plans.
Speaker 1:Yeah.
Speaker 2:So, know, they A
Speaker 1:little bit of a throwback?
Speaker 2:You just yeah. You just get these, like, menu. Go, okay. Here are my options. Oh, here's some small cap, large cap, emerging markets.
Speaker 2:Just like you said, I guess I should put a little bit here, little bit here, a little bit there. Right?
Speaker 1:Then because that's what everyone does.
Speaker 2:And then you don't really know why now that you're mentioning it. I'm like, oh, why did I do that? I just because I thought I was that's what I was supposed to do.
Speaker 1:Yeah. We're trying to be smart and diversify Yeah. Without understanding what diversification actually means. So the general rule of thumb for diversification is if you put all your eggs in one basket, you've increased your risk. That means you've increased your growth potential, but that increase of growth potential increases your downside risk.
Speaker 1:That right there is one of the most misunderstood topics in finance in my opinion. Here's why. When it comes to your actual investments, when do you need the money? If you need the money in one, two, three, four years, why are you putting in stocks or bond funds that can lose money? A CD, a treasury, a buffered ETF, which has upside potential but no downside risk, you know, it resets year over year.
Speaker 1:These other types of investments or products give you more predictability that the money that you need will be there when you need it to be there. So I have a client that just sold their house, and they said, what should we do with the 600,000 in cash? Put it in a high yield savings account because they're gonna buy a house later on this year. Why would they put it in the market risking that it could go up? Sure.
Speaker 1:10%, 20%, whatever it could do, or it could go down 20%, or whatever the market does. Maybe it does nothing. But do you really want that risk based on the timeline of when you need the money? Because that's the first part. First off, diversification.
Speaker 1:Do you really want a little bit of everything? And why? Because the more the more diversification you have, the less growth potential you have. If the objective is your money is to grow, the more you have, the less growth you have. Like, it's like you're almost contradicting yourself in your objectives and how you're investing.
Speaker 1:And then the second part is understanding what risk actually is. The risk of if you need it in the short term, it might not be there. So you don't want all of your assets at risk, in my opinion, in retirements. So you clear on those two?
Speaker 2:Absolutely. Yes. Like, when when do you need the money? And so for some people, if they're retiring now, they need money for income now.
Speaker 1:Yeah. So let's take the first five years of your retirement, which are the most critical years. Here's a couple of ways you could solve it if you're gonna diversify your portfolio by objectives. Maybe the first five years, do a CD ladder. Most people can go to bankrate.com, look up some CDs, and do a CD ladder on their own.
Speaker 1:They don't need a financial adviser to buy CDs or to figure that out. Maybe you do a bond ladder. So you go out on your brokerage, Fidelity, Schwab, whoever, and you buy a bond that matures in one year, a bond that matures in two years, a bond that matures in three years, and you just spend it down. Maybe you want little bit upside potential. And so maybe you have the first three years.
Speaker 1:The first year is a CD that year two and three is a bond ladder, and then after that, year four and five, your income comes from a buffered ETF. And maybe you found a buffered ETF just hypothetically that has up to 7% of the upside of the S and P, but no downside. So you should have a little bit more upside growth, but you don't have have it every year, but you don't need it for four years. Do you see how we're just we're taking okay. Here's the objective.
Speaker 1:Here's the income that I need for this year, and here's how I'm gonna invest it so that when I need the money, I'm not gonna need to touch it. It's there when I need it, and it's close enough based on the risk that I'm comfortable taking. This is a totally different thought process that many people getting closer to retirement do not go through the exercise. Because here's what typically is said, as well, if the markets are up, you know, we'll just take a little bit here with dividends, and then maybe we'll sell some of these stocks, the underperformers, and blah blah blah blah blah. And if the markets are down, maybe we'll take income from your bond funds.
Speaker 1:Well, what if the bond funds lost money?
Speaker 2:So it seems like a lot of maybes in there.
Speaker 1:Yeah. It's this kind of oversimplified advice where you're just kind of explaining away, well, you know, we'll figure it out then. It's not proactive at all. It's very much like, well, don't ask me detailed questions because I don't really wanna answer them because I can't promise returns, which no one could promise returns.
Speaker 2:Right.
Speaker 1:Anyone's promising you returns, it's better be about a CD or a treasury
Speaker 2:Yeah.
Speaker 1:At a fixed rate, because anything else is just wrong. You can't do it. But it's it's almost like, hey. No. Here's here's the portfolio I'm supposed to sell, or here's the portfolio.
Speaker 1:This is how it works. And, like, let's not get too detailed because no one really knows the future. That's horrible advice, because you can diversify your assets more specifically by very detailed objectives. This is why we do planning first and the portfolio second, is to figure out your needs first, figure out the seasons or the timelines of what your assets are supposed to do. Now the reason why I say all that, is because this individual right here is probably trying to time the market.
Speaker 1:They're probably trying to figure out every little detail that they need, so they don't screw it up, because all their assets are probably in kind of one type of investment, typically in the stock market, because that's where you have the most growth potential, but you have the most risk. And they're trying to figure it out each day, and that's a lot of stress. That's a lot of pressure.
Speaker 2:Right.
Speaker 1:And what if you get it wrong? It's you know, just the lifestyle you have for the rest of your life. It's your entire life savings that you may have screwed up.
Speaker 2:Yeah.
Speaker 1:So for the first five years, maybe struck and you could buy, by the way, a lot of people don't know this, you could buy a period certain annuity. Here are two options. A SPIA, single premium instant annuity. You could just basically say, hey, insurance company. I want a CD ladder, but I want you to do it for me.
Speaker 1:What's the going rate? You put the money in there, and instantly you're getting payments for the next five years. That's the easier option than going through all the work at the bond ladder or the CD ladder, and it's kind of comparable. Typically, I mean, you gotta shop these things around, but maybe you just solve it that way. There's also a fixed index annuity that you can buy with a five year period certain.
Speaker 1:So maybe you don't know when you wanna retire, but you know you wanna retire in the next couple of years. So you just put enough money into a fixed index annuity that when you wanna retire, you then turn on the next five years of income, period certain. So whether you're alive or someone else, you die and someone else is gonna get it, you're gonna there's guaranteed five years of payments. Someone's going to get that money. That's why it's called period certain.
Speaker 1:You're getting it or someone's getting it. It's not the lifetime income that everyone talks about. That's a different way to approach it. You can say, okay. Well, if markets typically recover within a couple of years, now I've got enough breathing room for them to recover.
Speaker 1:So then you have to take the risk part of your portfolio and ask yourself, do you wanna be an active trader, or do you wanna be a long term investor? Here's the difference. When you invest in the market, you're looking at high quality companies that you're gonna buy and forget about it for five to ten years. You are not gonna look at it. K?
Speaker 1:And this is the intelligent investor by Benjamin Graham, who was Warren Buffett's mentor. Great book. Read chapter 11 specifically on how to evaluate these companies. If And there's an emotional element, read chapter eight. Chapter eight talks about how to bridle your emotions.
Speaker 1:When the markets go down, know that they're gonna recover. K? It's talking about having good companies with good leadership with good financials that you're buying at a good price. K? And the first metric is you're looking at a price earnings ratio that's low, as in, like, nineteen, twenty, maybe 30 x.
Speaker 1:That's that's the threshold you typically would look at based on Benjamin Graham's thought process. You might not understand what that really means, but start looking at stocks and ask yourself, what's the price earning ratio? There it's available. Yahoo Finance will tell it to you. And if it's like twenty, thirty, maybe it's a good deal to have that stock.
Speaker 1:If it's 500 Mhmm. Maybe there's a bit of a red flag there.
Speaker 2:K. Palantir. Yep. For those who know.
Speaker 1:Yeah. Well, and the reason why I say that is meme stocks typically have a high price earnings ratio. So like for some stocks, have like a 500 price to earnings ratio. It means that their company revenue would have to increase by 900% before the current price of that stock makes sense.
Speaker 2:Okay. So this is maybe like a newer company that has promise for the future, and their so their stock is high now, but they're not making any money.
Speaker 1:Yeah. They don't have Lot of hype. Lot of expectations. Be cautious of those. And then you have companies like Nvidia, the price earnings was super high, but they kept up with the expectation and did an incredible job.
Speaker 1:And because of that incredible job, their price earnings, I think, is around, like, fifty, fifty x or something like that. So they were able to digest the expectations. That's why I think that the biggest company in the world right now, they have the highest market cap at least. But you're looking at fundamental analysis, and then you can let's say you don't wanna dive into the details of all of this. You just wanna buy index funds.
Speaker 1:K. You can buy an index fund and just set it and forget it. That would be John Vogel, the founder of Vanguard, who did the common sense investor, which is another great book. And that just talks about buying index funds like SPY or VOO, that buys the S and P five hundred. You can buy the Nasdaq one hundred, so more concentrated, but more growth potential.
Speaker 1:That's the Nasdaq one hundred. That's the top companies in the Nasdaq, which is an index or a trading marketplace as well, however you wanna define it, but QQQ is the ticker for that. These are options that are available to you, but if you're a long term investor, you're buying it and you're letting it go. The active trader, you're looking for a trade that's gonna make sense for a couple of months or a week, and then you're moving on to the next deal. That takes a lot of time, a lot of effort.
Speaker 1:Both of them take a lot of time, a lot of effort, but one is a little bit easier to stomach than the other one. So you just gotta ask yourself, what are you willing to put into it? What do you expect to get out of it? And are you willing to spend the appropriate time for the investment responsibility, or do you want someone else to do it for you? That's really what you're asking.
Speaker 1:And then if you want someone else to it for you, are you gonna go to a robo investor and pay like point one, point two, point three, whatever the cost is for that? Are you gonna go to an adviser, then they're gonna charge anywhere from 1% to 2% for their services, and you judge them by based on their net of fee performance, or you need go someone like us where it's a flat fixed fee of, like, 4 to $600 a month, regardless of how much money you have, to do this job. And we do active management for stocks, momentum as well. We also do fundamental analysis like Warren Buffett would do, and we diversify by strategies for the long term investments. But the point of this is saying, it sounds like the responsibilities and his lifestyle and his plan and the portfolio expectations, the responsibilities, he's not in alignment of what he would want or what he would need.
Speaker 1:The expectations aren't really there. So there's just there's some things out of the way. And so either he needs to or she needs to move into a longer term investment situation where you're buying and setting and forgetting, knowing how you're gonna take income with other assets for the first couple of years of retirement so you don't have to be in it every single day, or you hire someone to do it for you. These things don't magically work themselves out. You can't have your cake and eat it too.
Speaker 1:So what option is there for you? But typically, when people are stressed about their finances, they're trying to time the market. They're trying to actively trade. They're trying to be this sophisticated investor, and it takes a lot of time, a lot of effort to actively manage, even the fundamental analysis. I mean, you really gotta understand the company.
Speaker 1:Too many people, well, in my opinion, say, well, what are the stocks everyone talks about? Let's just buy those. There was a I think Roger Ibbotson, who was one of the cofounders of Morningstar, did an I think it was him that did an interesting study. Maybe it was Bob Schiller. I can't remember who it was.
Speaker 1:But, anyway, they did a study on hot stocks and cold stocks. The hot stocks are like the meme stocks, ones that are often talked about, and the volatility and the probability people get them wrong is quite high, the cold boring stocks tend to actually do pretty okay. Not not this boring stocks that don't do well. Like, you think of, like what's a good example?
Speaker 2:Of a cold boring stock?
Speaker 1:I'm not giving investment advice here. Right. Right. I'm not telling you to buy these companies, but you look at a company like the Southern Company. SO is the ticker.
Speaker 1:It's just a utility company. Very boring. Has reasonable returns. That's a pretty neat deal. Or you can look at another part of the energy sector like CEG, Constellation Energy Corporation.
Speaker 1:They're focused on renewable energies, but also nuclear. They got the three mile island deal with Microsoft. They're building a nuclear plant. If you look at the energy usage that we're probably gonna need in America to keep up with AI, you might favor some long term investments with the energy corporations, but that one's gonna favor nuclear. And you have to look at, well, why did they miss their earnings recently, and and why the stock drop in here, and what's the long term play?
Speaker 1:What's the intrinsic value of a company that is able to create and manage nuclear plants? And are you okay with that? Are not okay with that? And how they play into the green energy as well because they're also doing that? Or do you go to Chevron, CVX.
Speaker 1:And a Chevron and then do you blend the two? So you don't just buy random companies and hope it works out. You've gotta understand and really almost date the companies and understand what you're buying and is the intrinsic value, the long term play, does it make sense, or has it kind of already run its course?
Speaker 2:And so if you do this, if you sort of know what you're investing in, maybe you lose some of that fear because you you're not sort of paying attention. The the market ups and downs won't hurt you as bad because you know, well, I know why I'm in that, and I know I've got time.
Speaker 1:Yeah. If they've got good financials, okay. The short term blip, like the markets day to day is a voting machine. It's just noise. Long term, high quality companies with good financials, lower debt should recover just fine.
Speaker 1:So who cares about the day to day drama? That's what this is intended to do, and and may give this person some peace of mind if they transition to this. It depends. I personally believe that there is no perfect strategy. I believe in blending active management with stock picking, momentum models with fundamental analysis like what we just talked about, and buying some of the indexes.
Speaker 1:I think that's the best of all the worlds because you're diversifying by those objectives, but that's just my opinion. 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.
Speaker 1: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 ww.yourwealthanalysis.com today to learn more and get started.