But you need to understand what happens when markets go up and what happens when the markets go down because that's really when you boil it all down to retirement. How are you gonna take your income out of your portfolio? Welcome to the Retire On Time podcast. I'm Mike Decker here with David Franson. This show is all about getting into the nitty gritty, not that oversimplified advice you've heard hundreds of times.

Text your questions to (913) 363-1234, and we will feature them on the show. And as always, remember, this is just a show. It is not financial advice. Keep doing your research. Explore the options.

Have fun with AI, but don't take this as financial advice for you specifically. David, what have we got?

Hey, Mike. Can you recommend an easy to manage portfolio for a DIY investor about to retire?

The question is predicated on your investment experience. So I can't recommend it, okay? But let me give you a couple of ideas you can sort through.

Okay.

So probably the most traditional version is you're gonna take your age and put the percentage of your assets in bond funds. So if you're 60 years old, put 60% of your assets in bond funds. If If you're 70 years old, 70% of your assets are in bond funds. Why? Bond funds aren't supposed to make you rich.

They're just less risky, and so when you're taking your income, you've got less you're you're not accentuating your losses as much. That's not that bad of a deal. And bond funds in a flat market cycle don't do that bad. Like, they're pretty okay.

So this isn't a good or bad strategy. It's a strategy that's pretty easy to maintain, and then you just rebalance it once a year. I mean, you could be as simple as buy maybe the S and P 500 ETF, maybe a total market stock market ETF, and then you could buy a core bond fund ETF. And Vanguard has them. Fidelity has them.

Dimensional funds now is in the ETF space that you you can get on your own. You don't Dimensional funds, you used to be able to have to go to advise you used to have to go through an adviser to get

it. Okay.

Not anymore. You can just get it yourself. That's kind of cool. Yeah. But these core funds are are great.

So understand the shorter the term, the less volatile. The longer the term, the more volatile it could be. But it's not a bad situation. Mhmm. Okay?

So that's one pretty easy, simple, just rebalance once a year, maybe twice a year, up to you, set it and forget it kind of growth portfolio that hopefully isn't gonna take you for a wild ride when the markets go up or down.

Think of it steady Eddie. And for those that wanna hate on the stock bond fund split, yeah, the last ten years, it's underperformed the S and P, but it also took less risk than the S and P. But if you look at the stock bond fund portfolio between 2000 and 2010 Uh-huh. It beat the market.

So that $60.40 split beat the market for that ten years Yeah. Decade.

So if the markets are just going up, of course it's going to underperform.

Uh-huh. Sure.

If the markets are gonna go flat, there's a good chance it's gonna do better than the market. Uh-huh. And the markets don't just trend up despite, you know, what they say on TikTok about, oh, you know, just do this and blah blah blah. The markets don't trend. They cycle.

So they'll go ten years flat. No returns. And you can look at 2000 or 2010 or 1965, 1966 for over ten years, or 1929 for over ten years, or nineteen o six for ten years. So this pattern happens often. It's a very large pattern, so many people will miss it.

But, yeah, unless you're a genius and you can predict the next flat market cycle, which no one can do Right. This is a simple way to say, you know, I'm okay maybe not making as much on the up years, but if the markets were to go flat, if they were to crash, this just helps govern my volatility in my portfolio. That's what it's intended to do. Yeah.

It sounds like your whole, you know, for decades, we're like this in accumulation phase, you want to see it grow, and you have to like train your mindset to it. Now I'm in preservation mode, right? Yeah. Don't have to keep growing.

I forget the two researchers, but what they found was the status quo or what we are familiar with is the if you don't know, you opt into that strategy. There's a dangerous cognitive bias towards doing what we've always done. Alright. And so when we need to shift, things don't typically go very well. And this might be a good example.

I don't know. But if you were to live a radically independent life and then get married and keep living that radically independent life, your marriage will probably not last.

Yeah. I would think so. K?

Yeah. If if you live a radically high growth life in the market and you shift to distribution, dollar cost averaging in is a benefit, but sequence of returns risk or pulling money out is a detriment.

And people miss that. I I can't tell you how many times I've seen on, like, the YouTube reels or whatever. I don't spend much time on on social media, but there are people saying, if I were retired, I'd only buy these three funds, and it's like the S and P 500 and a total market value or whatever, and then, like, a little bit in cash. And then they would dollar cost average out of the market. Like, by definition, that is a risk.

That they're posing it as a benefit, like they're smart. It is a detriment. Uh-huh. So be careful. Yeah.

But so that's one option. Another option that I've really enjoyed putting together for certain DIY investors is really just a simple laddered approach of buffered ETFs.

Alright.

So the S and P 500 is a good growth vehicle. Okay? It's diversified by sectors, it's a bunch of stocks, but if you just have pure S and P 500, that's a pretty tricky situation.

Just because the

It can go down pretty hard.

Yeah. So buffered ETFs, what they do is they'll give you, for example, the max buffer in today's price and volatility. It's not protected on the downside, but you might have, like, up to 40 or 50% downside protection. Well, the markets don't typically crash over 50% often. Sure.

And when they do, you should be excited about that because if it goes down 60%, you just lost 10%. I mean, you'd you'd wanna buy back in on the market at that point. Oh, yeah. Because you're buying everything on a discount, but that's beside the point. But you could put part of your assets into a max buffered ETF, so you've got up to 7% of the upside, 50% of the downside buffered out protection.

K? Now you're in a position where you should be earning more money than a bond fund. Bond funds historically average three or 4%. This thing should average maybe, like, 5%. Maybe maybe five and a half percent.

Alright.

All things considered. That's not that bad of a deal. And then you can go to another of buffered ETF where it's like a moderate buffered ETF. So maybe you have the first 5% of losses, but then from 5% to 25%, that's buffered out. But then you get not 7% on the upside, you get maybe like 12%.

And I'm not quoting actual pricing here. Okay. The pricing's gonna change, the caps, the restrictions, it's all based on volatility. But what you're doing is you're basically allowing another company to create these new products, which they didn't exist pre 2019. Buffered ETFs are kind of a newer thing.

Alright. But you can ladder out a spectrum of deep buffer, moderate buffer, or let's say max buffer, deep buffer, moderate buffer, and then just a typical buffer. And then if the markets are down, maybe you sell more of the max buffers to generate your income. If markets are up, you take a little bit of everything. It kind of follows the purpose of what I write about in the book and what we talk about.

You don't wanna accentuate your losses, but you've just you've simplified it by blending the strategies together, and what you've done is you've lowered your downside risk, you've given up some of the upside, but you have more predictable trajectory. That's that's the idea at least.

Which is important in retirement. Is that right?

Yeah. And that's an easy to manage portfolio because you just set it in there and you forget it. So for the people that like sell their business, k, that's a pretty neat portfolio because you don't wanna sell your business. You've got a bunch of nonqualified assets. And then what do you do?

You you buy a bunch of annuities. You're taxed as income, not long term capital gains. Buffered ETFs, you're taxed as long term capital gains.

Oh, right.

That's a that's a sweet deal. Yeah. And so maybe you do that. I mean, it's it's frightening when you realize how you're getting taxed on interest and dividends with your nonqualified portfolio. Like, you wanna grow things, but you don't wanna take and you sell your business for $10,000,000.

Can you imagine the interest or the dividends you're making out $1,210,000,000 dollars in the market?

Oh, yeah. That'd be a lot.

That's a crappy tax situation. I mean

Tax is ordinary income.

Help us file our taxes. It's Yeah. You know, think of line and if if you don't know this, look at your tax return. Line two b, not two a, but two b, three a, three b if you've your dividends being reinvested. I mean, that that's a crappy situation.

Line seven, when you're looking at your short term and long term capital gains, these things add up and they create tax inefficiency. Alright. Whereas you can defer the taxes. I mean, bond funds, you're getting you're getting dividends. And if you don't spend it, you're getting taxed on that growth.

That's an inefficiency. Buffered ETFs, more efficient. Similar growth patterns, if not slightly better. So context matters

Whether you're doing that sixtyforty or, you know, the rule of 100, whatever your age is as your bond fund kind of mix, or a blended version of the Buffered ETF, which is also kind of a nice deal. So these are kind of ideas for a, I don't know, a nice DIY strategy. DIYer? You could you could do a very generic, like, robo investing thing. My my issue with the robo investing is you fill it out and you don't maybe have full context of what you're answering, and then they give you a generic broad based portfolio, a little bit of everything.

And in theory, that might be nice. But when the markets crash, it's not so nice. Mhmm. So my mind in retirement goes to how do you take a portfolio that can handle the market crashes? Not all of it.

You know, you some growth that's gonna have some risk, some of this got protection, but a broad based portfolio might not have that much protection.

And so, yeah, tell people what is the robo investor? Is it really just like a questionnaire and it spits out kind of a generic?

Yeah. And it's not a bad thing. It's a pretty sweet thing. I mean, if you've got a pension and you don't really need your income, then that might be a more appropriate growth vehicle. If you're managing a portfolio you need income from, it may not be an appropriate portfolio.

But the idea, this is so cliche, is, hey, we're gonna diversify your assets among all the different classes so that you're set. And we're gonna put in large cap, mid cap, small cap stocks. We got emerging markets over here. We've got your bond funds, and we're gonna we're gonna spread it between the bond funds. You know, the high yield bonds, the ones that earned a little bit more, and then we've got your core fund.

Got your treasury funds or the less risky one, and people say it in all sorts of different ways. We got a little real estate exposure over here, and and we got these fancy, like Yeah. It's great. There's no problem with that investment philosophy. It's just when the markets tank, small cap, mid cap, large cap, which really is a fancy way of saying larger companies, middle size large companies, smaller large companies.

It's not small business.

These are massive companies. Okay? But they're publicly traded. So I mean, you you could have a nice broad portfolio, but you need to understand what happens when markets go up and what happens when the markets go down. Because that's really when you boil it all down to retirement, how are you gonna take your income out of your portfolio?

And if you do the robo investing and you go down with the market, you might not go down all the way with the market, but you might go down enough that taking income from it would hurt overall. So just be careful of that. Okay. Right. It's it's context.

Think of it as not just ambiguous diversification. Why do you have what you have, and how does it play a role in your short term needs and your long term needs?

So if you're a DIYer and you're retired or you're near retirement, should there be a lot of, like, transactions and trading happening in your account, or is that we can't answer that for everybody?

I mean, if you're a day trader

Then you're actively doing that, you're spending your retirement being a day trader.

So there's nothing wrong with that then?

No. If that's what gives you purpose and you know what you're doing, great. If you've never done it before, this is probably a terrible time to start. Maybe take, like, $10,000 of your million dollar portfolio and day trade that. Okay.

Because if it all went away, it maybe isn't, you know, detrimental to your quality

of life. Don't have to sell

the house or whatever. Yeah. Moving with the kids.

Okay. Yeah.

A lot of day traders are emerging saying, oh, I could do this, and this is a great training program. You have to kind of ask yourself, why, if it's so good Mhmm. Are they teaching you it for a $100 a month? I mean, really? Mhmm.

One of the greatest investment funds ever is closed to new investors. Why? Because if they shared what they did, it wouldn't work. Oh. There's a critical mass limit that all strategies that are like that would have.

So if everyone were doing it, it would fall apart.

Oh, I see. I see. Yeah.

So so, like, you have to kind of ask yourself, where's the money really being made? It's kinda like automakers or car dealerships don't really make money off of selling you cars. They make money on selling you a car and then getting you to finance the car. Yeah. The gold rush, yeah, some people found some good gold, but the money was really made on the pickaxes and the jeans and the the tools to get you there.

So are you being sold hope? Because I found that being boring with your investments actually can do quite well. Uh-huh. I mean, we we and and this is another point too. What's better, being active or passive with your investments?

The answer is who's to say? Uh-huh. In some markets, being active in your portfolio really can pay off.

So a lot of transactions, a lot of in and out?

Yeah. Not necessarily daily, maybe monthly.

Okay, okay.

You know, maybe weekly. That's up to your activity level. Uh-huh. But in other markets, you have a lot of whipsaw. That's where the markets shift on a dime.

Mhmm. And active trading gets destroyed, and you want to be more passive.

It's more of a buy and hold as in passive?

Yeah. Passive buy and hold.

So and this is you can do some research on this. It's the difference between relative return theory and absolute return theory. So relative return theory suggests that you want to basically get the relative return of an investment or a basically, group of investments. Think of like an Mhmm. It's just easier.

Vanguard, John Bogle, wrote his book on this, Common Sense Investing, and the entire business was built around relative return theory. And then you've got What Works on Wall Street and several other books that are more technical that's built around absolute return theory. And it really just says we don't care where where the money is right now. Where's the best place to put money now regardless of market conditions? And that could change at any given time.

Mhmm. And you could Google these. Google or what? DuckDuckGo? Yeah.

Bing. Bing it. Yahoo searched it.

Is Yahoo still in search?

Yahoo it. Yeah. I don't know. AI it, maybe. But you look up the definitions, absolute return theory and relative return theory.

Ask your maybe we should just AI, do a compare and contrast with your AI about this. I think it'd be interesting

dive into those details, but nothing works always. Isn't that a great statement? Nothing works always. So you got the seasonality there. Be careful of that.

But, yeah, in general, a typical stock bond fund portfolio, great idea. If you wanna get more advanced, work through a financial adviser to maybe get access to a couple of real estate positions or some private placements that you can't get on your own.

Okay.

That doesn't mean you need to pay them 1% every single year. It means you've gotta go through a licensed individual to get access to certain things, and maybe you pay them a one time fee to put the plan together, you get access to it, and then you're done, and then you separate the relationship. You take that responsibility on. I think it's kind of silly that there's this codependency. Well, I have to pay you 1% to get access to some things that you don't really look at anymore.

I that's weird. Yeah. And then you've got the buffered ETF blend, which is a different style or type of investment portfolio, which I think is kinda nice. And then you've got just the more sophisticated ways to go about it, but you inherit more responsibility. Do you want to spend your retirement in the market daily?

Some people do, some people don't. Just don't assume that you're gonna do something brand new and it's gonna it's gonna go well. And that's a mistake. I've always wanted to get in the market, but, you know, now's the right time. Now's the time to start learning, but not put all of your eggs in that basket.

And I would cite, look these up, Dunning Kruger effect, Kelly and Connor cycle of emotional change. Those two, hopefully, will sober people up and to try not to take on more responsibility than they realize. That's all the time we've got for today's show. If you enjoyed the show, consider telling a friend, leaving a rating, and subscribing to us wherever you get your podcasts or on YouTube. As always, go to retireontime.com for the book, the the workbook, and all the other resources.

Also, join me as I build a retirement plan live and answer your questions as I do it. You can go to those workshops, retireontime.com. And, yeah, that's remember, this is not this is just a show. It's not financial advice. We'll see you in the next episode.