TRANSCRIPT
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#5 - What are Your Investing Principles?
Wendy McConnell: Welcome to the Simply Retirement Podcast with your host, Eric Blake. I'm Wendy McConnell Now, tell me a little bit about this quote.
Eric Blake: This quote definitely applies to today’s topic, talking about investing. In the last episode, I shared our principles for financial planning and some guidelines that people can follow, whether they're exploring using us as a firm or just trying to come up with their own principles of financial planning. When it comes to investing, people tend to make it much more complex than it needs to be. That's today’s theme, sharing some thoughts and principles that people can follow. I was thinking about our last conversation and trying to come up with a better comparison, and what I thought of was comparing it to our health, especially after a holiday or a period where you're not doing everything you need to do. Principles are something we can come back to and reset to get ourselves back on the right track. If you think about your health, if I’ve gotten a little off track, what can I do? I make sure that I exercise an hour a day. I make sure I'm drinking eight glasses of water, getting enough protein, and eating the right foods. Those are the principles of getting yourself back on track with your health. That's really what I want to convey with these principles of investing, just like we did the principles of financial planning: I want to give people a frame of reference to come back to when they feel like they're a little uncertain or we go through a difficult market as we saw in 2022. Whatever's on your mind or worrying you, what can you come back to so you make sure you can get yourself back on the right track?
Wendy McConnell: Well, I don't know why you felt the need to call me out for my bad eating over the holiday, Eric. I mean it was just unnecessary.
Eric Blake: Oh, I'm right there with you. I got back in the gym today, getting the walking in, getting the steps in, 10,000 steps — all those different principles that are helping get us back to where we want to be.
Purpose ➡ Plan ➡ Portfolio
Wendy McConnell: So, what are our investing principles?
Eric Blake: Everything starts with a plan. Principle One is identifying your financial purpose so you can develop a plan to accomplish it. When we talk about purpose, we mean what's important to you about money. What do you want money to do for you? Develop a plan to help you accomplish that, and then build an investment portfolio that aligns with your purpose and your plan. That's always going to be the principal one.
Align Your Investments with Your Time Horizon
Wendy McConnell: We need to align investments with the time horizon. This is something you’ve talked about before.
Eric Blake: I talk about this a lot. When you're thinking about your investment strategy, you want to align your investments with when you’re actually going to need the money. We believe that owning a diversified portfolio of long-term investments for your long-term objectives and short-term investments for short-term objectives is going to offer you the highest probability of achieving your goals. Back to the quote we used at the very beginning, this seems simple, but it's also a time-tested strategy for making sure that we're aligning your investments with your purpose and your goals.
Wendy McConnell: The thing to keep in mind is that this is for the long haul, so when we see volatility, we don't just abandon the plan.
Eric Blake: Retirement is always going to be a long-term, long time horizon, even if you’re 65 and about to retire. We expect that you're probably going to live 20, 25, or 30 more years in retirement, so that’s always what we consider a long time horizon. But you may have short-term goals. If somebody is younger and they want to buy a house or they want to buy a vacation property in retirement, we want to make sure we're not putting those dollars in a stock portfolio or long-term portfolio that might have some volatility. Again, referring back to 2022 where we saw a pretty big decline in the market, you don't want your short-term goals placed at risk by a short-term volatile period in the market. We want to make sure we're aligning your investment strategy with your goals.
Stay the Course
Wendy McConnell: We’re staying the course with the plan we’ve put in place because we know that there's going to be volatility. We have that in mind when the plan is created.
Eric Blake: Exactly. Principle Three is to stay the course. We know volatility is a natural part of investing. A lot of people think of risk when they think of stocks. They think the market's going to go down at some point, and that's absolutely true. It can go down again. But there's never been a permanent decline in the stock market, and I don't expect there to be one in the future. But all investments involve some type of risk. Even with CDs, there's some amount of risk historically. Yes, they provide a fixed rate of return and you've got FDIC insurance, but in many cases, the return you're going to get on a CD may or may not keep up with inflation. In many cases, it doesn't, especially with the inflation that we've seen recently. You also have the bank. We've seen the challenges that some of these banks have faced, and that puts your money at risk also. Again, you have FDIC insurance, but who wants to rely on FDIC insurance for their money? You have to keep in mind that every type of investment has some level of risk. We don't want to let short-term volatility impact our long-term decisions and drive us to make emotional decisions when it comes to our investment strategy.
We Prepare, We Don’t Predict
Wendy McConnell: When it comes to predicting what's going to happen in the market, we do that all the time, right, Eric?
Eric Blake: Many people do, but we want to prepare —we don't want to predict. We expect bear markets to happen, but we don't know when they're going to happen. So, we prepare both mentally and financially for whatever may come next through relevant ongoing communication and easy-to-understand, simple strategies. This doesn't have to be extremely complex. We want to keep it all as simple as possible.
We Manage and Minimize Expenses
Wendy McConnell: Let's talk about the portfolio that we're having managed and how much it costs.
Eric Blake: There are different ways of thinking about investment strategy and investment cost. A lot of this is going to be dependent on whether you're trying to manage your own portfolio or working with a financial advisor or asset manager. One of our principles as a firm is that we want to manage and minimize our clients’ expenses on their portfolios. We believe that a diversified portfolio of low-cost funds and ETFs is typically going to serve you best over the long run. The other thing, of course, is taxes and transactional costs. The unfortunate nature of the news media is that they're always encouraging you to do one thing or the other. If the market's doing well, react. If the market's not doing well, react.
From some of the studies and statistics I've looked at, the more trading that's involved, the worse your returns are going to be. Sticking with a low-cost, low-transaction portfolio has historically proven to be very successful.
We Follow Our Own Advice
Principle Six is that we follow our own advice, whether as stewards of our client’s financial lives or for our own finances. It wouldn’t make sense for me to recommend something to a client and then be doing something completely different with my own finances or thinking about things completely differently, taking a short-term approach, or trying to predict the market. I know a lot of financial advisors who are smart and know about investing and financial planning, yet they do the exact same that their clients do, overthinking their investment strategy. Back to our quote, keep things simple. More than likely, doing so will keep you on the right track. We try to follow the exact same principles with our own finances as we recommend to our clients.
Taking Action
Wendy McConnell: So, what should we do? Spell it out. What are the things we need to be doing right now?
Eric Blake: The first thing is to tune out the media. Don't listen to the experts. When you're talking about what you hear in the news, it's always ‘act.’ It's act on this, act on that. If inflation is high, do this, if interest rates are going up, do this, if interest rates are going down, do that. Tune out the media if you know you have the right investment strategy for your goals and what you're trying to accomplish. We've got short-term money for our short-term goals. We've got long-term money for long-term goals. In most cases, there’s no reason to react, overreact, or react emotionally if we know we have the right investment strategy in place to meet your goals. Nothing's guaranteed, but following that principle is going to give you the greatest probability of meeting your goals.
Wendy McConnell: The thing to keep in mind when it comes to the media is that, a lot of times, they’re interested in creating some fear because it keeps you coming back to them for more. What about when it comes to the experts? Do they not know what they're saying, or are they giving bad advice, or is it that nobody really knows?
Eric Blake: I think you have to understand their objectives. In many cases, whether it's clicks or wanting people to watch, they're not necessarily making their money — especially on different stations or different shows — from investing. They're making money from advertising dollars. How do they get advertising dollars? By getting more clicks and getting more views. Staying the course doesn't really do that for them.
Telling people not to do anything and that they should stick with their long-term strategy doesn't get clicks and doesn't get eyeballs on the page. Instead, it's, “Hey, you need to buy this particular stock. It's going to do this over the next 12 months.” My opinion is, that they don't know that that's going to be the case, but by putting it out there and getting people talking about it and watching their show or reading their website and articles, that's where they’re making their money. They're not making money by helping you. They're making money from other sources,
Wendy McConnell: Ulterior motives, right?
Eric Blake: There's always some underlying motive behind everything.
Wendy McConnell: So, you're saying that the strategy needs to be simple?
Eric Blake: I think so. Again, whether you're working with an advisor or doing your own investing, can you explain your investment strategy in simple terms? I think it's even more important if you’re working with an advisor. Do I understand my advisor's recommendations and their advice when it comes to investing? Do I understand my investment strategy? Could I explain it in a couple of sentences? My philosophy is that the more comfortable and knowledgeable you feel about your investment strategy or financial plan, the more likely you are to stick with it. If you really can't understand it or explain it within a couple of sentences, you probably don't understand it well enough. Getting back to our original quote, when things get difficult, that's when it comes back to you.
That's when you say, am I really doing the right thing? The market's down 25%. Do we have the right pieces in place? Am I doing the right things? You start to second-guess yourself.
If I have a goal that's four years away, and I've got money set aside specifically for that purpose. It doesn't get exposed to the stock market at all. The strategy or philosophy we use with our clients is that if it's a goal that's less than five years away, that money probably doesn't need to be in the market anyway because if we think statistically, there are always one or two years within a five year period that are down. Murphy's Law says that the year that it's down is the year that you're going to need the money. We prefer to say that if you have a goal that's less than five years away, you probably don't want to have your money exposed to that type of risk.
Wendy McConnell: So, for people who want to use a financial advisor because they don't understand a lot of what’s going on, you feel they should be able to have it explained to them in a way that they find simple?
Eric Blake: Absolutely. You're really in trouble if the financial advisor can't explain it in simple terms, but unfortunately, our industry does that a lot. They'll talk over their clients’ heads to make themselves feel important or to make it seem like they're a genius investment guru. I'm not saying they're not. There are great investors out there. Warren Buffet is on everybody's list of great investors. But Warren Buffet's a billionaire, and not everybody can do the things he can do, right? If you don't feel like your advisor can explain their investment philosophy or investment principles in simple terms — the way I hope we've done here today and on our website — there’s a strong likelihood that at some point you're going to go in a different direction. You're not going to have the confidence you need when the market is down to say, “I know I've got my short-term money set aside. I don't have to worry about short-term volatility as much as I would otherwise.”
Wendy McConnell: So be wary of the advisor who says, “Let me worry about that.”
Eric Blake: I wouldn’t necessarily put it in those terms, but just being able to explain it is important. If I were to ask you, “What's your investment process? What's your investment strategy?” and your answer is, “Well, I think we're doing this, and I think we've got some money over here, and I think we're doing that. I don't really understand why we have it in there,” that’s more than likely a problem. That's going to come back to you and create worry when you're in a difficult period. A lot of this comes back to what to do during difficult markets and do we have strong principles we can come back to.
It's just like we talked about with health. When we get off track, we start eating better. We get our 10,000 steps in. We get our hour in the gym every day. We drink the right amount of water. Those are the principles you come back to if you get out of alignment with your health. We need to have those same types of principles when it comes to our investments, and we need to have something we can come back to when we encounter difficult periods. There's never been a permanent decline in the market, but when you're in the middle of a 25% or 30% decline, it feels like there's never going to be an end to it. Historically, every bear market has come to an end at some point, but when you're right in the middle of it, it can be worrisome. Quite honestly, it can be scary. If we have those principles we can come back to and say, “We've got a strategy that's designed to help us meet our purpose. We've got a plan in place that's helped us to achieve that purpose. Our investment strategy aligns with that. We should be in pretty good shape.” Aligning our investments with our time horizon brings us back to realizing that short-term money probably shouldn't be in long-term investments.
Wendy McConnell: When it comes to figuring out whether to go it on our own or hire an advisor, what’s the timeline as you approach retirement?
Eric Blake: It depends on your circumstances. A lot of people in their thirties and forties want financial advice and might be looking for a financial advisor who focuses on the accumulation phase. Once you're within five years of retirement, that's when you need to start evaluating what your retirement income strategy is going to look like and whether your financial advisor understands income planning. It's a whole different ball game when we're talking about pulling money out after you’ve spent the last 40-plus years accumulating. You can be successful just through discipline and habits, saving consistently into your 401k every single paycheck. That'll get you a long way. But when you get to the point of asking to start taking money out, that's a different process. Now we're talking about taxes. We're talking about coordinating with Social Security. We’re asking what the right timing is for taking Social Security benefits. Do you start as early as possible? Do you delay as long as possible? If you delay it, where is your income going to come from in the meantime?
Once you're within about a five-year window, you’re in what I call the retirement red zone. That five years before retirement is when you need to start thinking about whether you feel like you have the knowledge and the time to learn the income planning aspect, or whether your financial advisor understands retirement income planning aspects, or whether you need to start looking for a financial advisor who specializes in retirement income.
That's what we do. Our primary focus is working with folks — and primarily women — who are in that transition phase of getting into and through retirement. That's where you need to feel confident that your advisor understands all the implications, especially if you've gone through a divorce or you've been widowed, that's where these decisions become even more important. I talk about those three primary factors of a successful retirement for women who are transitioning into retirement on their own. It's all about minimizing taxes, maximizing Social Security, and investing smarter. I always come back to those three bullet points,
Wendy McConnell: That stuck in my mind a little bit. You said the retirement red zone. You want to get through that and then be able to spike the ball, right?
Eric Blake: Exactly.
Wendy McConnell: Sorry. I'm a bit of a football fan.
Eric Blake: I'm a huge football fan as well. So, when you get into the red zone on the football field, which is 20 yards in, that's why they talk about what happens now. The field gets shorter. The decisions become even more important. You've got less room to work with. All of that applies to the retirement conversation. We've got less time to work with, we don't get any do-overs for the most part. Once you've decided on Social Security, you're pretty much stuck with it, though I have an episode coming up where we'll talk about some of the potential do-over strategies. For the most part, once you've made the decision, you're stuck,
Wendy McConnell: Let’s talk about what's coming up for the next episode.
Eric Blake: We're going to talk about the 10 questions to ask your financial advisor if you're approaching retirement, and there are a lot of great questions out there. The CFP has a list of 10 questions on its website. There are lists of 10 questions everywhere! These specifically go to whether your advisor understands IRAs and distribution planning and the most effective ways of getting money out of your retirement accounts versus putting money in. I'm really excited about this episode.
Wendy McConnell: Looking forward to it. In the meantime, how can people get in touch with you, Eric?
Eric Blake: Go to www.blakewealthmanagement.com. We have a lot of free resources there. You can sign up for our weekly newsletter that goes out every Thursday at 9:30 am Central time. We've got a number of other resources. Our principles, our financial planning principles, are there for you to review. Our investing principles are there for your review. To learn more about our process, click the Start Here button. It'll walk you through our Simply Retirement roadmap process and let you see exactly how we work with folks who are considering asking our firm to help them navigate the retirement process. If you're interested in scheduling a 15-minute introductory phone call, you can do it right from that page.
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