Jason and Emilia discuss the Brexit vote and mistakes to avoid with your retirement plan.
Below is the full transcript:
Announcer: Welcome back America to Sound Retirement Radio, where we bring you content, ideas, and strategies designed to help you achieve clarity, confidence, and freedom as you prepare for and transition through retirement. Now here is your host, Jason Parker.
Jason: All righty America, welcome back to another round of Sound Retirement Radio. My name’s Jason Parker, it’s my good fortune to have Emilia Bernal on the program with us. Emilia, welcome back.
Emilia: Hello, how’s everyone doing today?
Jason: All right, so Emilia as you know we like to get the morning started right. One of the best ways I think we can do that is by having a verse to renew our mind. This comes from First Timothy, 6:17: “Command those who are rich in this present world, not to be arrogant nor to put their hope in wealth which is so uncertain. But to put their hope in God, who richly provides us with everything for our enjoyment.”
Jason: That was pretty good, yeah. That’s not just pretty good, it’s really good. You’ve got a joke for us, why don’t you share it?
Emilia: I do, okay. It’s kind of going on the topic of today. What do you get when you cross a librarian with a stock market analyst?
Jason: What, what do you get?
Emilia: All of the information you need, but you can’t understand a word of it.
Jason: I was going to say something incredibly boring.
Emilia: What were you going to say? I have no idea what I would have said. When I heard that one I was like, “I have no idea.” Then again, I don’t know too much about stocks, which I hope today we’ll get some more information on.
Jason: Yeah, well we’re going to be talking about…. and specifically we want to bring in the big news, which was Britain’s decision to vote themselves out of the European Union. That’s creating a lot of volatility for folks, so the title of this episode if you want to go back and listen online because we archive all of these programs for our listeners enjoyment. You can visit episode 098, episode 098 and it’s called, “Brexit and your retirement plan.” With that, let’s talk a little bit about this.
Emilia: Definitely. Jason what are you opinions of the UK vote to leave the European Union?
Jason: Well everybody’s got an opinion, and there’s a verse that I love in the bible. It says, “Seek and you will find.” I think we tend to find what we’re looking for. For all the naysayers out there, all the people looking for negatives, I think they’re going to find those. For all the optimistic people out there, I think they’re going to find the good news in all of this. I tend to try to look for the positives, of course we don’t want to bury our head in the sand and ignore realities. The bottom is you’ve got a group of people who voted for their freedom and independence because they don’t like the idea of other people spending their money, or telling them who can come in and out of their country without having more of a say in that decision making process.
I think any time there’s a vote for freedom, and a vote for independence, that is a good thing. I think ultimately what’s going to end up happening, while there’s been a lot of volatility in the short term, I think one of the big concerns about Britain and the UK leaving the EU is that I think they’re going to experience a lot of success. I think they’re a very well to do people, they’re very intelligent, very smart. I think they have a long history of robust economy. I think once the dust settles on this thing and people kind of figure it out, I think they’re going to say, “Geeze, Britain’s a pretty awesome place, United Kingdom’s a pretty awesome place. I think they’re going to add a lot of value to the rest of the world. I’m actually excited about it.
I think one of the risks that exist there is that the European Union has become pretty fragile all of a sudden. I think if I were part of the European Union, if I was British, if I lived in Britain I might say, “Hey, you know I’m tired of bailing these guys like Greece out as well. I don’t know if I’d want to keep throwing my money at some of these ideas that are supposed to be good for all people.” I’m really excited about it, I think they’re on the right track, I think that ultimately it’s going to be a good thing. Here’s what I know is that people don’t like uncertainty. Anytime there’s a lot of uncertainty it tends to create fear, and when there’s fear people do irrational things like what we’ve seen in the stock market recently, just a lot of people moving to cash, moving out of stocks and moving into bonds.
Frankly Emilia, I think a lot of this has been a long time in the coming. We’ve been talking about the fact that the market has been overvalued. We look at the price to earnings of the market on a cyclically adjusted basis, we’ve been talking about that for a long time. We’ve been talking about the fact that the bond markets have 0 interest game right now. I mean 10 year treasury bonds, if you were to lock your money up for 10 years you’re going to get about 1.5%, which is pretty lousy. There have been a lot of things that have been leading us to this moment, but I think as we kind of start to bring this into focus because all of these world events, all of these stock market events. While there may be different additions of what’s happening, of economic events that trigger a lot of fear, trigger sell offs. That’s what the market is, it’s always been this way, it’s always been a very dynamic, very volatile place.
I think, I’m excited about having this conversation with you. Ultimately the bottom line is this, if you are the type of person that looks for the good in things, I think you’re going to find the good. I think that’s exactly what we’re going to find with the UK’s vote to leave the European union. One other thing I want to say on this too because I know we’re in a political time here and I don’t want to turn this into a debate of conservatives verse liberals. There was a piece that was written in the Wall Street Journal, a historian had written a commentary about President Obama’s speech. President Obama gave a speech telling the European union that if they left that …. telling the British people that if they left the EU that they would be put to the back of the queue for trade deals.
This article was written in the Wall Street Journal just a couple of days before Britain and the UK went to have this historic vote. I have to tell you, I think that probably made some people really mad frankly. To tell a group of people that they’re going to be put to the back of a queue because of a vote that they’re making, especially with a country that has always stood by America, I think it just really probably made some people mad. I’ll be curious as how history plays out, and how this is recorded. The words we use have significant impact. If there’s one thing that I know is that fear, when you threaten a group of people and say, “Hey, you’re going to be put to the back of the queue,” fear can maybe cause people to move into uncertainty, and not take action. An emotion that I thinks even stronger than fear is anger. When you make somebody angry they will overcome that fear. I think that’s one of the things that happened here.
I think the UK was angry at some of the outside influence that was trying to shape their vote. I think it was reflected in the outcome.
Emilia: That’s what I just going to say. When you push somebody it makes them want to strive even more. Like you said, there may be a lot of good coming from this, and let’s hope that things will look up for them. We’ll see where that goes. As you mentioned, the Brexit vote has created a lot of volatility in the stock market. How should people be responding to that?
Jason: Especially as it pertains to people’s retirement, because the mistake that so many people make with their investments, and with their finances is that they make emotional decisions. The reality is if you hadn’t taken steps before all of this unfolded, the last thing we want people to do is go out and sell everything and move to cash, especially at a time …. the markets sold off last Friday, it was 600 points and then Monday it was down 300 points, and then we saw a little bit to the upside this week as well. We don’t want to see people go out and make a mistake with their finances. It gets me back to this idea that you want to have a good retirement plan, and a good retirement plan will take into consideration different aspects of volatility. By having a good plan you’re helping to protect yourself from making a poor mistake. A poor mistake I think in this case is to panic, and to do something foolish, especially if you’re within the few years of retirement.
Now, there are probably people driving down the road this morning Emilia, here in the Seattle area that are listening to this that are 40 years old. I would say for those folks they don’t need to do anything different, I mean they just need to keep investing, keep buying stocks, investing in companies that they believe in, and products that they enjoy using, stay broadly diversified, and don’t worry about shot term blips on the radar. You always hear this, over the long term the market goes up, the challenge for most retirees is that their time horizon shifts once they retire. Now what they have is what they have, and they may not have time to recover from a significant market selloff. For people that are within 5 years of retirement, they definitely need to be thinking a little bit different about how they’ve been investing their money. We wouldn’t want them to make any changes to that strategy until they’ve actually created the plan first, and have the plan help them make better decisions about how to invest.
Emilia: Well great. You mentioned making mistakes and panic was one of the mistakes that you mentioned, but what is the biggest mistake that people can avoid when it comes to retirement planning?
Jason: I think the biggest mistake overall, the biggest mistake is always going to be not making an emotional decision. We tend to be so driven by our emotions. When the markets going, “Well we have more money and we want to invest,” and when the markets going down we want to put money into bonds, and move to cash, and there have been study, after study, after study that show that the average individual investor invests at exactly the wrong time. They tend to buy when the markets high, and they tend to sell when the markets low, and they just get this wrong all the time.
The key to remember is that time is the cure to the volatility of the stock market. The more time you have the more risk you can afford to take. It’s one of the core concepts that we teach in my book, it’s in the webinars that we conduct online, and the classes that we teach locally. Time is the cure to the volatility of the stock market. The more time you have the more risk you can afford to take.
Emilia: Yes, absolutely. Let’s get back to the basics of a good retirement plan. Can you share your thoughts on this?
Jason: Yeah, I really thought that this was important to get back to the basics. I remember reading a book by Coach Wooden, coach John Wooden. He’s considered one of the greatest college basketball coaches of all times. In that book they said that at the beginning of every season, when he had his basketball players come in, the very first thing he would so is he would show his basketball players how to tie their shoes.
Emilia: Hmm, interesting.
Jason: I mean talk about getting back to basics, right? These are guys that are college age men, and the very first thing he shows them is how to put your socks on, and how to tie your shoes. The reason was, he said, “One of the number 1 reasons that they have to sit people is because they get blisters on their feet. If they can avoid some injuries by having people’s shoes laced up right then they get more play time, and they win more games. I think the same thing is true for retirement planning. There are just some basic fundamentals that we need to be thinking about. First of all remember, retirement is all about cash flow. It’s your income that will determine your lifestyle in your retirement, not your net worth.
To have a good income plan or a good cash flow plan requires a couple of different things. You have to make some assumptions about inflation because we know the federal reserve really wants inflation, they have shown a commitment to showing interest rates low, and printing money, and quantitative easing and all this stuff they’re committed to doing until they get inflation. We need to plan on there being inflation in the future, and really when we use that term inflation, really all we mean is that the dollar that you have today is going to have less purchasing power than it’s going to have tomorrow, or next year. We just need to know that you’re going to need more dollars in the future to be able to maintain that same standard of living. We want to be planning for inflation.
From a cash flow standpoint it’s not just important to understand the income that we have coming into the plan, which is obviously important. We want to look at how to maximize social security, how to maximize pensions, guaranteed income sources, those are really important. We also want to have a good idea of how much money’s flowing out. You want to have a good budget in place. One of my favorite tools for budgeting for people that don’t like to actually sit down with a spreadsheet and do this, is Mint.com. Mint.com is owned by Intuit.
Emilia: Yes, I just got on that myself.
Jason: It’s a really wonderful tool because you can put your debit card in there; if you use a credit card put that in there, but your spouse’s debit card in there. Then what it does is it pulls all of these different data points into 1 place and it helps you understand where all of your money’s going.
Emilia: It really does, yeah.
Jason: Yeah, use that for 6 months before you retire and you’re going to be amazed at how much money your local grocery store gets. At least I was when we used that. Mint.com is a great resource. The bottom line there is make sure you have a good budget, just know where your money is going.
Emilia: Yeah, and I think that’s really important like you mentioned. I just got onto Mint, I’m still in my working years of course so how is investing in retirement different than investing during your working years?
Jason: That’s a great question. We create a cash flow plan, we have a good budget, we’re solving for inflation, we make assumptions about a low rate of return, and we create what I call a, “Year by year cash flow plan.” I’ll just remind our listeners because some of this may sound so foreign to them, I’m using these words all the time. We created a video series, a tutorial if you will to walk people through what a good retirement cash flow plan should look like. If they visit the website, SoundRetirementPlanning.com, on the right hand side of the screen there’s a little box. It says, “The sound retirement planning blueprint.” That’s a 4 part video series, we actually added a bonus video so it’s actually 5 videos now. You can go through that entire course to understand what it takes to actually create a good retirement plan.
One of the core concepts that I teach is if time is the cure to the volatility of the stock market, which it is because we know that over the short term the market looks very volatile, there’s these peaks and valleys if you’re looking at a chart, or the SMP500, or the Dow Johnson Industrial Average. If you step back and you look at that chart over a 15 year period of time, those peaks and valleys are still there but they’re not just so pronounced because time is the cure to the volatility of the stock market. One of the core concepts is that you diversify when you retire, now this is different than your working years and this is where a lot of people make a mistake. People still end up investing the way they were during their working years in retirement, and that’s what hurts a lot of people.
When you get into retirement what you want to do is you want to diversify your time horizon first. Money that you need in the short term, say 0 to 5 years, you want that money to be safe, secure, and guaranteed. You want less risk in money that you’re going to need to be drawing on for assets because the last thing you want to be doing is taking money out of an account that’s falling in value. Then if time is the cure to the volatility of the stock market then your second segment, so the money that we’re going to need 10 years from now, 5 years from now. Each one of those pots of money is going to be diversified differently depending on the best tool out there and also depending on the risk, so depending on how much risk people want to assume.
People have different risk appetites, and that’s why some of these cookie cutter computerized programs, they’re calling them robo advisors now. Again, I think that type of an investment philosophy can work really well for people that are accumulating assets. They have so much time, they can just have 1 big pot and everything’s diversified the same way. In retirement that could be a really critical mistake. I know of the reasons people go down that path is because they’re looking for the lowest fee structure, which I think is wise to keep your fees as low as possible. At the same time if you end up blowing your whole retirement plan because you’re so fee conscious and you’re not considering how all these different pieces are supporting in one another and working together, then that becomes a real problem.
One of the things that we talk about a lot too is creating a retirement floor. That’s a concept that I think most people can really hold onto. They understand that there has to be the bare minimum necessities that have to be met. People don’t want to gamble with the money that they need for groceries, people don’t want to gamble with the money they need to pay their property taxes, people don’t want to gamble with the money they need to be able to just enjoy life at it’s very minimum, to be able to stay in their home and pay for home repairs and those types of things, be able to get their car fixed. Those types of laid expenses should not be negotiable living expenses. A lot of the people that we meet with, some of those living expenses are covered by social security. Some people have that floor met between social security and a pension that they receive. The bottom line is you just really want to have good solid foundation of secure income so that you’re not having to make emotional decisions.
One of the things I love about the way that we help people is that people have a lot of confidence in the plan that we help them create. When this volatility breaks loose, as you know you’re the one who takes a lot of phone calls, we don’t have very many people calling us worried about what’s going on because they know that they’ve got a good plan in place. Short term blips on the radar are not a reason for panic.
Emilia: Yeah, I got a call today and they’re like, “You know what? We’re just going to stay right where we are, we don’t want to make any changes and we’ll just wait this out,” basically is what they were saying. That’s basically coming from your theory, or your assessment of how we should wait out the volatility of the market and not rush people into making any changes, like you said, panic.
Emilia: We want to avoid panic and I think most of our clients are comfortable, and they feel safe with where they’re at.
Jason: Yeah. You know what? If they don’t then that’s time to have a conversation. If our listeners are out there and they’re unsteady, they’re feeling uneasy about the situation that they’re in. Maybe there’s not enough communication going on, well that’s definitely the time to pick up the phone and if your advisor isn’t already contacting you, then go ahead and call your advisor. Just say, “Hey, I’d just like to sit down and talk about what’s going on, and make sure we still have a good plan in place.” If people don’t have that type of relationship Emilia, that’s what we do. We work as financial advisors to help people with their retirement planning. We certainly be open to a quick 15 minute phone call, just to help maybe talk through some of those things with people, if they’re feeling this unsteadiness right now.
Emilia: Absolutely. I know you covered a lot but is there anything else to your approach on investing once people have retired? What is more on your approach as far as that?
Jason: Yeah, that’s a great question. I really think there’s 2 intelligent ways you can invest in the stock market. 1 is what I call, “Strategic asset allocation.” The other one is what I call, “Tactical money management.” Strategic asset allocation, it’s the idea of using modern portfolio theory, and efficient market hypothesis to create a broadly diversified portfolio across asset classes and sectors using low cost index funds, and then re-balancing those portfolios as necessary to maintain that asset allocation.
The other piece that compliments that is what I call tactical money management, or the active side of money management. It’s what in my book I refer to as, “The art of investing.” Active money management says that there are times when it makes more sense to take an active approach, to move to cash to try to protect the portfolio. Of course the key with that is ideally you want to make those decisions before things blow up, not after the fact. At our firm I like to say I’d rather be right 50% of the time than wrong 100% of the time. I think both a strategic and a tactical approach can make sense in people’s investment portfolios depending on their risk tolerance, and what their goals and objectives are.
In fact a lot of times what we’ll do for folks, once we create a diversification strategy across time, short term, moderate term, long term money. For the longest term money, the money that we have 10 plus years to work with, we’ll recommend that they use both a strategic and a tactical approach in 1 portfolio. Right now we’re recommending that people be about 70% strategic and 30% tactical for a lot of the people we work with. For other people it’s flip flop, for other people it’s more like a 60/40 approach, 60% strategic, 40% tactical. For some of our clients that are more conservative, they prefer to be more like 60% tactical and 40% strategic.
Again, some of this terminology and some of these words can be confusing to understand. The idea is that the 2 primary ways you can invest in the market today is more of a passive, low cost indexing method which I think is very smart as long as you’re re-balancing those portfolios. Then more of an active approach, an approach that attempts to reduce volatility but also put money to work when it looks like the volatility is turning around. I think both of those can make sense depending on market conditions.
Emilia: Yes, and I hear from our clients all the time, everybody’s situation is different. I know that you take a very specific look at everyone individually and I think our clients really benefit from that, and I think it’s the best way. The way that you approach your planning, the way we approach planning here, I don’t think I’ve heard or seen anything like that when you’re focusing on just retirement.
Jason: Yeah, I have to say what most people want to do is they just want to plug people into a model portfolio. Take a risk tolerance questionnaire, 1 through 10 and you score a 3, 4, 5, on the risk scale and then they plug you into one of their 5 model portfolios. Essentially if you’re more conservative they put you in more bonds, and if you’re more aggressive they put you in more stocks. Boy, I just think that people are not being served as well as they can. Not because people don’t want to serve them well, but because it’s just a time issue. It takes time to actually sit down with people and create a good plan. Time is a premium, it’s the one asset that we have less and less of all the time and we can never get it back once we spend it.
Emilia: When do you think people should start thinking different about their planning?
Jason: Definitely people that are right on the cusp of retirement. I know a lot of these people out there right now, they’re just about to retire, maybe they’re 6 months, a year away. The last thing in the world, I would hate to think that people are going to postpone their retirement because of some of the world events that are unfolding right now. I’d hate to think that people wait to make a change, they procrastinate so long that they end up in a situation where they lose a large percentage of their assets before they actually go create the plan. Then they do end up in a situation where they have to work longer.
We saw this happen back in 2008, in fact there’s some people retiring right now today that were thinking about retiring in 2008 but they never got there because of the market volatility that unfolded. I would say for those people especially, but really anybody that’s within 5 years of retirement, it’s very important. Emilia with that I realize we’re out of time, this episode 98 for our listeners if you want to catch us online.
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Investing involves risk, Jason Parker is the president of Parker Financial, an independent and fee based wealth management firm located at 9057 Washington Avenue North West, Silverdale Washington. For additional information call 1-800-947-9522-514-5046 or visit us online at SoundRetirementPlanning.com.