Seasons of Investment Diversification

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This is the Truth Network. Welcome to Finishing Wealth, brought to you by CardinalGuide.com, with certified financial planner, Hans Shiel, best-selling author and financial planner, helping families finish well for over 40 years. On Finishing Wealth, we'll examine both biblical and practical knowledge to assist families in finishing well, including discussions on managing social security, Medicare, IRAs, long-term care, life insurance, investments, and taxes. Now let's get started with Finishing Wealth. Welcome to Finishing Wealth with my good friend and certified financial planner, Hans Shiel.

Today's show, I'm really interested to see where this all goes because the title of it is Seasons of Investment Diversification. So that's pretty big words, but nonetheless, if we could think about that, I've been a member of the Christian Businessmen's Committee, which is now just called CBMC all over the place for probably 25 years. And one of the first things that they taught us coming in is that every man needs to have a diversity of friends, specifically three.

And it's kind of interesting because we're going to be talking about three different kinds of investment diversification today. But so if we've got a diversification of friends, they said, every man needs a Paul, meaning somebody that's more mature in the faith, somebody that has phenomenal biblical understanding and those kinds of things. So it's nice to have a Paul in your life. And they said, every man needs a Barnabas, which you might know Barnabas was the son of encouragement and somebody that, similarly, you do life with them and they're kind of your counterpart or whatever, the iron sharpens iron kind of guy. And then the third person that they felt like would be good in diversification for us would be a Timothy. In other words, somebody that we could disciple, somebody that we could pour into. So you had somebody that was a little bit younger than you in the faith, somebody that was about where you were in the faith and somebody that was more mature.

But as interesting as I was thinking about today's show, how over the years, there were different seasons of that, right? So when I became a Christian in 91, I didn't, you know, there weren't a lot of Timothy's that could get a lot from me because I had next to no biblical understanding. And I had done life really poorly up until that point.

You know, I wasn't just ready to do a whole lot of discipling because I hadn't done a lot of discipling myself. I had a great deal more need for my Paul and my Barnabas was good. But as life has changed and I've gotten older and older and all of a sudden my Pauls, you know, they go into a different phase of life where they're no longer pouring into me quite so much, but more, you know, just friends.

But all of a sudden, you know, in this season, Timothy's are really nice to have around to share, you know, things that you went through and things that you have learned in the Bible and your relationship with Christ and prayer and all those kinds of things. So I would have thought if somebody had asked me when I was 31 that, yeah, this is going to stay the same, but it doesn't even come close to staying the same and such it is with your investments, right? Your management of them, how you manage them, your goals with your investments, all that stuff changes over time. I mean, I was telling you the story about my youngest son who's 22 and I really admire that he's got an interest in investing. He's studying to become an engineer. Of course he wants to start playing around a little bit in stocks and create some investments. And he asked me, and I'm very encouraging with this, and he really, like a lot of young folks, he's got a small amount of money and he's really putting a lot of energy into like, what should I invest this in? And that's good because he's a smart kid and he'll probably one day, he'll be telling me how to do this stuff.

You know, I'm just thinking about it and I didn't really tell him this. I did the research, gave him some encouragement, pointed him in a direction, put him with some of the younger people that work with me in the business who he knows. But just really thinking is, it really doesn't matter what he puts it in because the real effect for him at 22 is that he actually puts this $2,000 into investments, okay? And if he puts it into diversified investments, you can do that through a mutual fund.

So he's going to be diversified right away. He's not going to be diversified amongst his types of investments because he's not, he doesn't even want to talk about bonds or he doesn't want to spend two minutes learning what bonds are or anything that doesn't have the chance of going way up and probably shouldn't at 22. He's got a lot of years to save this money and invest this money and enjoy the returns in the market. So I really started to think about, well, what if he, let's say he puts this $2,000 in some growth stocks, what if he lost 10%, okay? And what if he went down to 1800 bucks?

I mean, losing 10% when you only got 20 grand, it's only 200 bucks. And still big money to him, but it's 200 bucks. But what that's done is it's opened up the door that he can now buy stocks that used to be 2000 for 1800 bucks. So that's almost a good thing for him because if next year he's got $4,000 to invest out of his new job, he can buy, he can invest more money at lower rates because ultimately this money's going to be where it is 20, 30 years from now.

And it's going to be up. And the lower he can buy the stuff, you can almost make a case, if we sat here and talked long, that'd be a good thing for him to lose 200 bucks in the next year. So, right. And the other thing that's going on since he's a young man, he's continued to contribute. That's the key to the whole thing is the contributions over time. And so when we talk about diversification just within stocks, you know, what we're doing here is we're saying, you know, it's kind of like the old thing your mother or your grandmother told you is don't put all your eggs in one basket. Don't go buy one stock or two stocks. Diversification says that, and the rules a lot of people have written is you need more than 20 in a portfolio to be properly diversified so they can put all the risk factors on that.

And it's got to get that big. And so if one of these goes ways down or goes out of business, it's not going to be devastating to you. You can make it up with the rest of them. That's diversification within stocks. And you can get that by buying from a fund or going into an ETF. I mean, there's lots of ways now to get exchange traded fund.

Okay. They're actually what we use to buy. There's some comparisons to mutual funds, but you're buying a whole basket of stocks. You're spreading your risk out and getting your investment return of a whole list of stocks in either a mutual fund or an ETF or something of the sorts. Within your 401k, you're diversified in your stocks just by the fact that they don't let you buy individual stocks unless it's the company that you own.

The company you work for sometimes will have a way to buy stock of them. But for the most part, you're investing in funds, which is diversified because it's across a whole lot of companies. And then it's across industries. It's across continents. It's across US, Europe, merging markets, China. So diversification just means that you're in a number of things that are somewhat the same, but they behave differently. And it's something that you want to do, but that's just within stocks. And so when we start talking about people at retirement. Different.

You're actually in the complete opposite of what your son was at that point, not unlike the Timothy thing that you're no longer contributing possibly, right? Sure. And so that makes a huge effect.

Plus you lose 10% and it's no longer 200 bucks. Yeah. Let me tell you about the typical person coming in. Okay.

They're reading our books, reading my book, just however they meet us. And then they decide, okay, so we're wanting to do a financial plan or retirement plan and help us prepare for retirement. Say the typical person, most of their money is still in a 401k.

Okay. Most of their total financial assets. Now this isn't everybody, but a lot of them, when you start adding up what they have in terms of money, it's still in a 401k. And most of them have done well with that 401k.

Otherwise they wouldn't be coming into us. Now that may not be several million dollars, but I consider doing well. Somebody's got two, three, $400,000 in their 401k.

They've done well and it's certainly well to them and a little bit scary to a lot of people. They're just looking at it, man, I got that much money. And if they didn't have the 401k plan, they probably wouldn't have that much money. So most of them have spent little energy doing their 401k by design, but really they don't have a good long explanation of how they got to where they've gotten to. And it really doesn't matter because I'm not looking for that in my clients.

It just is what it is, but just by the nature of you coming in here, you now are, you know, you're bringing the decision to us and you're saying, I want to make this right for my retirement. And most of the time most of the time they've got way too much money in stocks given the season they're in. Okay. And what I mean by that, a lot of them are 80% in stocks, 90%.

When I ask questions, a lot of them say, oh, those bond funds, they're just paying nothing. I don't want those. Okay. You know, and then I see you've got some money in the cash account. Yeah. And I try to keep that low. That's paying even worse than the bonds.

I mean, that's paying next to nothing. Yeah. Those stocks, they've been doing great, you know?

Okay. And they have, and you, you know, it's hard to argue with success. And what a lot of these folks forget is they've been contributing to this thing every year since they joined the plan.

I mean, it's 20, 30, 40 years. They've been putting in money every year, substantial money. And that's one reason it's gone up and up and up and up and up and up.

And then their company matches some of that. So that's even more money going in that has nothing to do with the investment performance. And then over the last 12 years, it's made a lot of heroes out of people, a lot of investment pros. I mean, if you threw some money in the market in 2009, which most of you that have had a 401k, that's 20, 30, 40 years old, you had X amount of money in 2009, and that's grown to what?

It's double or more. So when actually your 401k might be 300% more because you've contributed and then whatever money was in there has grown substantially because the market is just consistently up and up and up and up and up. So you come into me and usually your expectations for investment performance are too high.

I mean, so we're going to need to go to break here in a second. So we'll pick this up, but I want to talk about diversification and I want to stay on the title. And it's really diversification and risk management and helping people get to a place that'll be good for them so they don't have to live their retirement looking at the TV and the newspaper and whatever else and just seeing what the stock market's doing every day. And then worrying about bad things from the market. That's no way to spend your retirement.

There you go. When we come back, we'll have more on seasons of investment diversification. And, you know, that's all about, you know, creating that income. It's all in Hans' book, The Complete Cardinal Guide to Planning for and Living in Retirement there at cardinalguide.com. Of course, we'd love to hear your comments and all that's right there. Just contact Hans at cardinalguide.com.

So when we come back, some more fancy farming. Hans and I would love to take our show on the road to your church, Sunday school, Christian, or civic group. Here's a chance for you to advance the kingdom through financial resources by leveraging Hans' expertise in qualified charitable contributions, veterans aid and attendance, IRAs, Social Security, Medicare, and long-term care. Just go to cardinalguide.com and contact Hans to schedule a live recording of Finishing Well at your church, Sunday school, Christian, or civic group. Contact Hans at cardinalguide.com.

That's cardinalguide.com. Darrell Bock Welcome back to Finishing Well with certified financial planner, Hans Scheil. Today's show, we're talking about seasons of investment diversification. And, you know, I find it fascinating, really, some of the things that I've learned that could happen just within that 401k, we've been talking about 401ks here for, you know, the last few minutes, that really you kind of can get the best of both worlds when you understand there's other products available than just cash or bonds or stocks. Hans Scheil I mean, your typical 401k, like I said, I mean, most people that are in their 60s that come to us are late 50s. And we're going to give different advice to the late 50s people that aren't going to retire for a few years than we are the 60s people than we are the mid 60s people that are going to retire in a month. I mean, all those people are going to get different advice because we personalize this.

So whenever I generalize, don't think that you're just going to hear a parroting of that if you come in to see us. So the people that are in that general, so they're, they're either at retirement, or they're approaching it, and they're going to show us their money, once they hire us, and we're gonna get out all the statements and just generally speaking, most of their money is in their retirement accounts. And then secondly, of the most of the money in the retirement accounts, most of that is in is in stocks.

Okay. And then the other two alternatives are either bonds or bond funds and cash. And then a lot of them will have some type of a fund for alternatives so that if you wanted to put some money in oil or gold or, you know, and there's a call for that, you know, put four to 7% of your money when you're younger. And there's some reasons and management, but let's just, let's stick with bonds, stocks, and cash. And most of them have more money than they should for a person of their age in stocks. And then that also has created high expectations. So they're just thinking, you know, eight to 10% a year is really what they need to make.

And some of them are just conservative enough to seven. And, you know, and then there's a lot of places put out financial plans that just show 7% every year from now till you're 100. And stock market returns just don't work that way. And it just, what I would just say is, is that for somebody that's been invested mostly in stocks, they've lived through the last 12 years of growth in the market every year, and then added to that, they've been contributing, they're not really doing the math, it just makes their investment returns.

You put those two things together, it just looks like the thing just goes up and up and up and up and up and up and up and up and up. And that's really what it's done. But now when retirement hits, you're going to you're going to stop contributing because you're going to be drawing social security and or maybe delaying that, and you're going to stop contributing and then you might start distributing or pulling out money to live on because you're retired.

So it's a whole different picture. And it also, when you stop contributing, and even for this person that's 58 that's just coming to us and they're in this situation and they tell us they're going to retire at 65 in seven years, well they're just assuming that their account is going to go up from 58 to 65 just like it's been going up. And then they're going to have even more money at 65 and that's already, they've kind of calculated that and that's what they're basing the decision of 65 on. So a lot of what we need to do with clients coming in is level setting.

It's just working with their expectations and you know showing them how well they've done and then showing them how well they're going to do because this doesn't have an unhappy ending. So they may have high expectations of returns but they may not understand everything that's available for them in retirement like social security. I mean you add up, if you're married, you know two social security checks as a base maybe if you're lucky enough to have a pension or some other savings or you're going to do some part-time work. I mean this retirement savings is not going to be like a hundred percent of what you live on for most people.

That's first good news. Then there's taxes. So when I really spend time with people and ask them a lot of questions what I really find out is I want to lose nothing on my investments. I want to pay as low taxes as I possibly can and how much I make on my investments, it's kind of important.

I want the people that are managing it if it's us to do a good job. But you know when we really sit down and look at it, how's that going to change their life if they had a windfall on their stocks? And when you just look at a lot of retired people, not very much. So when you get into the season of retirement, what you really want is predictability, safety, security, regular income. You want to make spending patterns or in such a way that you don't spend your money down so much that you run out of money when you get older.

You want to make sure if you die that your spouse is in a good position with these savings and with the retirement income. So people's priorities change and if they don't change then that's a lot of what the process is just to ask people a lot of questions. So we get into diversification and say well how does this all tie back to the subject? Well because bonds are paying such low interest rates now, I don't know if you've even looked at that or you look at your 401k statement or the part that you do have in bonds, go back and look at that and just look at those bond funds and see what kind of interest they're paying. And it's so low and look what you're earning on your cash portion of that because everybody's got some cash in there. You're going to find that if you're getting earnings in your 401k, most of it's coming from the stocks and that's a lot of reasons that people are saying well if what you're telling me is to diversify my investments and to diversify more in bonds, I don't want to do that.

I mean look at those returns. Well yeah like your cash right now is like 0.03 percent. Yeah I mean if one percent is a hundred on cash and you really got to be somebody to get this, it's 30 you know 0.3 percent.

That's what I'm getting on my cash at the credit union and my wife read that and she said oh we're getting 30 percent on this when we sold our house and I said okay you know we're moving this into our life insurance policy which we can put a lot of money in there and it's actually paying three percent which is wonderful on money that's available. But just I mean it's very low and that's not because you have a bad mutual fund or somebody's bad or the people at the bank. It's just interest rates are you know are as close to zero as they're ever going to be and you know I think on some of that federal money that they're paying that they loaned they are zero. So we're just in an extremely low interest rate so this is probably the worst time to tell people you know you need to get this 85 percent that you've got in stocks.

We need to get that down to at least 60 percent and by the time I really explain this to you, you may want to go lower than that. Well then the problem becomes what do we diversify into and if it's just bonds well if that's the only choice we got yeah then that's what we're going to do. Sometimes just getting your own money back after a bad period is plus a teeny bit is maybe not all that bad. And so what we do in our practice is we open up annuities and life insurance cash values as a couple of other alternatives. Now we're not taking all the money that was in stocks and rolling it all over into an annuity not at all but we're looking at when you need the money. We're looking at the return that we're getting on bonds and we're finding that we can do better than that in annuities and perhaps several annuities that do different things and we're able to get the guarantees so we know we're not going to lose money.

We get the safety and yet we get some promises of some returns from the insurance company. So we open up more choices to diversify but nonetheless it's just just of your investments you need to diversify and then what I'm going to add is like the home you're sitting in or living in that's real estate. I mean that's some diversification like if you own your home outright or you're close to outright or we're going to pay it off at retirement then that's a diversification because it's real estate you own that and it has a value. A business can be diversification so if there's like I own my business now you could make an argument that too much of my money is tied up in my business okay so I need to diversify away from that.

So this applies over a large area. Yeah it does and it's a different season right and you know when I think about that even you know from a farmer when it comes in time for harvest which is kind of where you are in retirement you know it's no time to pour the water on the crops you'll make them rot right well yeah and so it's no time to throw out there and go go risking a bunch of money because it now you don't have the time to make it back and as well as you're not making the contribution so it's a different season from a standpoint of it's it's time to harvest and figure out how to maximize the power of what you've worked your whole life on. Some of the simple rules of thumb is you take 100 minus your age and what's left the result is the major investment portfolio that ought to be in stocks so if you're 65 take 100 minus 65 is 35 so you know now that's just one theory if somebody like my son who's 22 if you take 100 minus 22 that's 78 okay and you don't have to stick right exactly to these rules of thumb but that's pretty smart when somebody's 80 years old take 100 minus 80 it's 20 so it's it's designed to start pretty low at retirement and go even lower over time and that's one of the reasons that putting part of your money into an annuity or strategically into a life insurance policy where you can withdraw the cash values because they're guaranteed and they're backed up by the insurance company and then they have tax advantages. All those things if you just go to cardinalguide.com or you pick up Hans's book The Complete Cardinal Guide to Planning for and Living in Retirement of course it's at cardinalguide.com and as always we're so grateful that you spent this time with us today and by all means reach out to cardinalguide.com and ask Hans a question something you might want us to cover or listen to the podcast for lots of previous shows there as we continue to attempt to all finish well thank you yeah thank you we hope you enjoyed finishing well brought to you by cardinalguide.com visit cardinalguide.com for free downloads of this show or previous shows on topics such as social security medicare iras long-term care life insurance investments and taxes as well as Hans best-selling book The Complete Cardinal Guide to Planning for and Living in Retirement and the workbook once again for dozens of free resources past shows or to get Hans book go to cardinalguide.com if you have a question comment or suggestion for future shows click on the Finishing Well radio show on the website and send us a word once again that's cardinalguide.com cardinalguide.com this is the Truth Network one of our generous sponsors here at the Truth Network has come under fire fire from the enemy fire for standing up for family values actually one of the biggest supporters of the movie Unplanned that talked about the horrors of abortion yes it's Mike Lindell you've heard me talk about his pillows for a long long time and no doubt big business is responding to Mike Lindell and all this generosity for causes for the kingdom by trying to shut down his business you can't buy his pillows at Kohl's anymore you can't get them on Amazon or you can't get them at Costco they're attempting to close his business because he stood up for kingdom values what a chance to respond especially if you need a pillow oh I've had mine now for years and years and years and still fluffs up as wonderful as ever queen size pillows are just $29.98 be sure and use the promo code Truth or call 1-800-944-5396 that's 1-800-944-5396 use the promo code Truth for values on any MyPillow product to support Truth.