The Risk of Playing It Too Safe With Mark Biller

This faith and finance podcast is underwritten in part by Soundmind Investing. For more than 30 years, do it yourself investors have relied on SMI for proven strategies and trustworthy guidance. SMI helps people build wealth so they can provide for their families, prepare for the future and give generously. Learn more at soundmindinvesting.org. Economist and investment expert Peter Bernstein once said, the biggest risk is not knowing what you're doing.

Hi, I'm Rob West. All investments carry some degree of risk. Companies fail and governments fall. So it's important to make sure the return is worth the risk. Mark Biller joins us today to talk about managing investment risk. And then it's on to your calls at 800-525-7000.

That's 800-525-7000. This is faith and finance, biblical wisdom for your financial decisions. Well, our guest is Mark Biller, executive editor at Soundmind Investing, where they always know what they're doing.

SMI is also an underwriter of this program. And Mark, it's great to have you back. Thanks, Rob.

Good to be back with you. So Mark, the new issue of the SMI newsletter has a focus on risk management. And one of the articles, as you know, that we'll discuss today is the risk of playing it too safe. Now, that sounds like a contradiction in term. So maybe you can start by explaining it for us.

Yeah, absolutely. It does seem like a little bit of a riddle. But I think the best way to make sense of it, Rob, is by digging into a behavioral phenomenon that the experts call loss aversion. So researchers have found that most people feel the pain of losing money, roughly twice as strongly as they feel the joy of gaining money.

Let me say that again a little bit differently, just so everybody gets it really clearly. Losses feel roughly twice as bad as gains feel good. And so that naturally causes a lot of people to become loss averse.

And they try really hard to avoid losses. Sometimes people take that to such a strong degree that it actually undermines their long term goals. So one of the trickiest parts of investing is we need to take enough risk so that we meet our long term goals without taking more risk than you need to. And there's some really tangible steps that we can take to reduce or mitigate risk. A lot of those are the things that we talk about frequently on faith five, these are things like maintaining an emergency savings fund to minimize the risk of a financial emergency. When it comes to investing, diversifying your holdings rather than putting all your eggs in one basket is another good example of how we can take tangible steps to reduce our risk. Yeah, that's helpful. But as you point out in the article, it's also possible for a person to be too risk averse, right?

Yeah, that's absolutely right. And sometimes we actually increase our long term risk by playing it too safe with our investing decisions. So one example of that is young people not investing aggressively enough.

And by doing that, they let the opportunity for long term compounding to slip away. Now, this one's kind of ironic, because young people, we often stereotype them as inherently bold risk takers, you know, we read these stories in the newspaper, whatever about them buying meme stocks, and Bitcoin and doing other really risky investing things, and certainly some of them do. But the broad research on Generation Z, that's adults aged 27 or younger, really does not back up that perception. So the article we're talking about today discusses a recent national study that found these Gen Z'ers are the least financially confident generation. 57% of them think that savings accounts are the best way to invest their money.

And as you know, Rob, most financial pros would agree that savings accounts are just a really extremely conservative choice for people with several decades of investing time ahead of them. And even when we go up the next step of the age demographic ladder to the millennials, that's people aged 28 to 43. They're also surprisingly risk averse. So a different Schwab study last year, found that millennials were especially interested in bonds.

Well, again, bonds have historically been the favorite of retirees, not 28 to 43 year olds. So what these surveys indicate is that younger investors are arguably too loss averse today, and they're making investing choices that are likely to significantly impair their ability to build long term wealth as a result. Oh, really interesting, Mark, and really fascinating that we're talking about being perhaps too risk averse even in the younger generations. Well, when we come back, we'll talk about how this affects you, how you can prevent being too risk averse and investing in a way that will allow you to accomplish your long term goals.

Mark Biller with us today back with much more just around the corner. Every day, Faith by is working to meet people right where they are through our national radio program app and website. We're helping people put their faith in God and not in money and possessions.

And we're encouraging and equipping Christians to have a passionate pursuit for sacrificially living and giving the money entrusted to them. If you believe in and have benefited from Faith by, would you consider becoming a monthly faith by patron? Learn more about the faith by patrons membership at faith by.com and click Give. We are grateful for support from sound mind investing in the faith and finance program. For more than 30 years, they've been helping Christians reach their financial goals with step by step guidance for investors at every stage from those just getting started to those getting ready for retirement through scriptural principles and practical suggestions. SMI offers financial wisdom for living well. More information, including the short video webinar on profit and peace of mind no matter what's happening in the market is available at soundmindinvesting.org. So thankful to have you with us today on faith and finance.

With me today, my good friend Mark Biller. He's executive editor at sound mind investing. You can learn more at soundmindinvesting.org. You'll also find the article we're discussing today from the recent SMI newsletter. It's called the risk of playing it too safe. And it's available for your reading pleasure again soundmindinvesting.org. Mark, before the break, you were sharing some fascinating data, some research on even the younger generations that were perhaps too risk averse that could actually create more long term risk because they're not on track to meet their long term financial goals.

That's surprising. And maybe it comes down to younger folks just having less experience with how investments work over time. They're not seeing what can happen down the road. Would you think that's it? Yeah, I do think that's right, Rob. I would also point out, though, that previous generations didn't have that same conservative inclination when they were younger, and when they were less experienced investors.

So I do think there's something else going on here. But you're exactly right that there's a disconnect between making, you know, a safe 5% return in a savings account or a bond today, and not recognizing the impact that inflation is likely to have on that relatively low rate of return over time. And, you know, the reason young people should be targeting that higher return of stocks over these many decades that they're saving for retirement is so that they can grow the purchasing power of their savings at a faster rate than inflation over the course of their careers. Hmm.

Yeah, interesting. And unfortunately, that disconnect, if you will, isn't limited to young people, is it? Tell us about the new retiree that you talk about in the article. Yeah, it's exactly right, Rob, retirees often fall into the same trap.

So the article talks about a particular 65 year old new retiree who recently contacted us, they have all their retirement savings in cash. And this retiree told us that she could live just fine on Social Security, plus the $450 that she was taking out of her retirement savings each month. So of course, we asked her, well, how long will your savings last, if you keep taking out $450 a month? And to her credit, she knew that answer immediately. She could do that for a little over 25 years. So she felt pretty good.

She had run the numbers, she thought she was in good shape. But the reality is she really isn't in great shape, because she was failing to factor in this rising cost of living. And because of inflation's corrosive power, I mean, we've seen this in the last three or four years, firsthand, how $450 today is going to buy far less in the future than it does right now.

And that means that this retirees standard of living is unfortunately just going to decline steadily as the years pass. So this is a case where an investor doesn't want to take any risk. But ironically, by playing it so safe, she's not just risking the possibility of financial trouble down the road. She's basically guaranteeing it if she stays on that ultra conservative path.

Yeah, that's a really helpful example. Alright, so for our listeners today, Mark, how do they prevent this from happening? Yeah, well, to prepare for the future, you know, investors normally need to accept some degree of risk. And that typically means maintaining at least some exposure to stocks, even after they reach retirement age. And that's simply because these days, you know, a person needs to plan as if their retirement could last 20 or 30 years. Now, admittedly, it is tricky to dial in that not too much risk, but just enough balance, it is kind of a fine tuning process. And this is where a good financial advisor or a service like SMI can often really help someone figure out what is that appropriate level of risk, and then translate that into a portfolio of stock and bond investments. You know, Rob, as you know, I'm not a big fan of annuities in most cases. But let's take this case of this new retiree, we were just talking about a moment ago, you know, even an extremely conservative step, like buying an annuity with an inflation rider would likely provide that person with a higher monthly income, while also locking in at least a little bit of inflation protection. So the point of bringing up that example is there usually are things that can be done. But first, the person has to recognize this risk of playing it too safe.

Yeah, that's really helpful, Mark. annuities, of course, tend to be costly among other issues. And I know they're not my first choice, either. Although for somebody that wants to transfer that risk to an insurance company, it is an option. But what would you suggest is perhaps a better approach? Yeah, well, we typically would suggest for SMI investors, that really closer to like a 5050 blend of stocks and bonds is still pretty appropriate for most people as they're hitting early retirement age. If the numbers work for a person, a conservative investor like this one that we've been talking about, they might be able to drop that down to 20 to 30% in stock mutual funds or ETFs and putting the rest of that in fixed income securities. But even they're just keeping that little bit of stock growth exposure is one way to really improve the odds of having enough money in your later years. Now, again, I want to reiterate, we don't take on extra risk, just to try to grow our pile as much as possible.

We need those returns to be higher than inflation in order to protect our purchasing power. For most people, that means taking on some risk, you know, you want to reduce that risk over time. That's why you scale back your stock exposure. And we constantly remind our readers and members don't take on more risk than you need. But ironically, recognizing that taking too little risk over the long haul can be as damaging as taking on too much risk. So we've got to weigh the risk of action against the risk of inaction. Great stuff, Mark. Of course, folks can check out these articles about risk management, and specifically the one we've been discussing today, the risk of playing it too safe at soundmindinvesting.org.

We're nearly out of time, Mark, tie a bow on this for us. Yeah, so you know, I guess the takeaway, Rob, is investment risk certainly needs to be managed. We're not trying to tell people to ignore the risks involved with investing. To whatever degree possible, you want to minimize your risk.

Nobody gets bonus points for taking on more risk than they need to. But against those truths, we need to balance that by understanding sometimes the riskiest thing to do is to play it too safe. You can't go into the bunker too early and expect your purchasing power to keep up, much less grow ahead of inflation over time. Yeah, and given inflation and the fact that people are living longer with the advances of modern medicine, that just makes this all the more important, right? Absolutely. Yeah, you've got a plan.

Like I was saying earlier, even once you hit retirement, that's not the end of the investing game, because most people have 20 to 30 years that they've got to make that money continue to last. Mark, we always appreciate your insights, my friend. Thanks for stopping by today. Always my pleasure, Rob. That's Mark Biller, executive editor at Sound Mind Investing and underwriter of this program.

Again, check out this article, soundmindinvesting.org. Your calls are next 800-525-7000. That's 800-525-7000. I'm Rob West and this is Faith and Finance. Have you downloaded the Faith by app yet? You need to do that today because this is going to make your life easier. Yes, you can manage your money through the in-app envelope feature, but also plan out future goals. I want to buy a house in five years and I'm on track to do that.

Here's also what I like. You can connect with people around the country. It's like social media, but better. Ask a question, get an answer and share what you're learning about money and investing. So why don't you grab your phone right now and download the Faith by app? As the leading advocate for the Christian financial industry, Kingdom Advisors serves the public by promoting the integration of a biblical worldview across every aspect of the financial services industry. And we serve a growing network of thousands of Christian financial professionals, equipping and empowering them to carry biblical financial wisdom to their clients, peers and community. For more information, visit kingdomadvisors.com. That's kingdomadvisors.com.

Hey, thanks for joining us today on Faith and Finance. Lines are just about full. We've got one open. 800-525-7000. Let's head to Texas. Chuck, you've been waiting patiently, sir.

How can I help? I was looking to move some money out of a regular annuity into a, like a donor advisory fund. Do you have one of those funds that you recommend? I do, but you are not able to fund a donor advised fund with an annuity. So you can fund a donor advised fund with cash, with various assets, but not with retirement plans or annuities. So you would have to, in this case, to fund a donor advised fund.

And let me just make sure I'm clear here. You're looking at a donor advised fund. You're not talking about a charitable gift annuity, correct? Yeah. In other words, these annuities have gone their full distance and now I can take the money out and whatever I want to with it. Got it.

Yes. So you would just have to pull it out and then any tax consequences from you taking it out, you know, whether you have taxes on the, if it was put in pretax or if you have some gains in there, all that would be taxable. And then, as you said, now that it's outside of the annuity, you can do whatever you want with it. And then you could absolutely fund a donor advised fund at that point. You just can't roll it from the annuity into the donor advised fund and try to preserve some tax deferral status.

Is that clear? Well, my CPA says I can, but anyway. He's saying you can roll the annuity into the donor advised fund to save taxes? As long as I don't ever take possession of the money.

Yeah. The problem is, to my knowledge, you can't fund a donor advised fund with an annuity. I mean, I'll triple check that, but I'm almost certain that that is unacceptable. So we'll get you make sure we just double check that just given that it sounds like you're getting conflicting advice. But based on the answer to that, obviously, you know, whether you have to pull it out first and then recognize any taxable event that would occur as a result of you pulling the money out of the annuity. I do love donor advised funds because then as that money goes in, you would get that charitable contribution for the full amount that you put into the donor advised fund that could then be deducted. So long as you itemize and often making a large contribution will, of course, get you up above the standard deduction.

So you get the full tax benefit in a single year. And then from that point, you would decide how you want to distribute the money from the donor advised fund. Essentially, you're turning it over to the donor advised fund sponsor and then you make recommendations and then they grant the money out based on those recommendations that originate with you, the donor. In terms of which donor advised fund sponsor to use, we often recommend the National Christian Foundation at ncfgiving.com.

It was started by Larry Burkett and Ron Blue and an attorney named named Terry Parker, a wonderful man. And, you know, they're one of the largest Christian ministries in the world. They don't develop their own giving strategies.

They're just a giving vehicle for believers like you. And so using one of their giving funds, which is just their name for a donor advised fund, could be a great tool for you. OK, you said that's ncfgiving.com? Yes, sir. Ncf stands for National Christian Foundation, ncfgiving.com. OK. Well, I'll check into them and see what we can do with the money.

Yeah, very good. If you find something else out, let me know. But I'm fairly confident you're not going to be able to roll that in and avoid any taxes.

You just simply can't fund donor advised funds with annuities and retirement plans. Hey, God bless you, Chuck. I love the fact that you're looking to be generous with this money. Call anytime.

Let's go to Kansas. Hi, Jim. Go ahead. Oh, thank you. I'm kind of far this back to my first time call a long time listener and I'm calling about a individual widowed lady that and I do have a sortie to talk or meaningless or accountant here in a couple of days.

But I wanted to get your thoughts and have a little knowledge going into it. She sold her property, a small farm, and she has not actually her income been so low all these years. She's not actually paid any taxes over the past 10, 11 years. Is she going to have a big tax liability on selling this property? Well, you know, the capital gains rate. So as long as this is a long term capital gain, which the definition of that is a property held more than a year that is then sold, the capital gains rate on whatever gain she has on that property is either based on, you know, either last year or this year, zero, 15% or 20%. It's going to be one of those three and the way that you determine whether your capital gains rate is zero, 15 or 20 has to do with your taxable income and that long term gain does not factor into the taxable income. So if her taxable income as a single filer is less than for 2024, tax year 2024, if it's less than $47,025 as a single filer, again, taxable income, not the gain itself, then her capital gains rate is zero percent.

So there is no capital gains tax if her taxable income is less than $47,025 as a single filer in the year 2024. Does that make sense? Yes, it does.

That leaves her mind a bit. Okay, very good. Always a good idea to get with the accountants. I highly value the work that they do.

But yeah, generally speaking, that's the way this works. Grateful that you're walking alongside her in this, Jim, and thanks for your call today. Let's go to Georgia. Hi, Wayne. Go ahead, sir.

Hi. My question is with regards to a solar roofing system. So just on the quick here we have our home is paid for, our insurance company essentially said we need a new roof due to wind damage, and we would like to incorporate a solar roofing system when we install the new roof. Those that's not a separate tiles, those are roof systems so that we will we would qualify for the 30% tax credit. My question is, is the 35 to 40% offset on the solar roof worth it as a return on investment for our home?

Yeah, it's a great question. You know that the downsides of solar energy are of course the cost of adding the solar which depends on your sunlight, your space constraints, you know, the storage of it is expensive. You know they last 25 to 30 years but you know it, they're very expensive there so there's high upfront costs and it's of course you know sunlight dependent so there are some great tools out there that could help you determine you know whether it makes sense in your situation. One of those is just a real simple tool I wouldn't make your decision on it but it's just a great free resource is called Google sunroof project sunroof.

If you just go to, if you just type into a search engine project sunroof, you'll be able to put in the address, and they will actually analyze the sunlight that hits the roof of the house and then compare the various finance options and tell you whether or not it could make sense for you I'd start there. Well that does it for us today I'm Rob West, thanks to our amazing production team and to you for listening. I hope you'll join us again next time, right here on faith and finance. Faith and finance is provided by Faithfi and listeners like you.