Jason and Bob discuss risk and diversification.

Below is the full transcript:


Announcer: Welcome back America to Sound Retirement Radio where we bring you concepts, ideas and strategies designed to help you achieve clarity, confidence and freedom as you prepare for and transition through retirement. And now here is your host; Jason Parker.

Jason: All right America. Welcome back to another round of Sound Retirement Radio. I’m so glad that you’re here especially for those people right here in Kitsap County and for the folks driving down the road in Seattle this morning. Thank you for making Sound Retirement Radio your place for expert retirement advice. Some of your are just getting ready to retire, some of you have recently retired. We love hearing the stories. Thank you for emailing us and just keeping us posted.

 My good fortune to have Mr. Robert Harkson, Bob Harkson. Certified financial planner on the program with us. He’s our lead advisor at the Gig Harbor Office. Bob, Welcome back to the show.

Bob: It’s great to be here, thank you for inviting me on.

Jason: Yeah. Our episode today is number 105. The question that I want to ask. That we are going to get into in just a minute is why are you diversified. We’ll talk about that, but before we do I like to get the morning started right by renewing our minds. Here’s a verse from Ephesians 4, verse is 31 and 32. I love these because it’s instructional on what to get rid of and then what to have more of. It’s kind of neat. But it says: “Get rid of all bitterness, rage and anger, brawling and slander, along with every form of malice.” That’s what we’re supposed to get rid of and then it tells, here’s what we’re supposed to do, it says: “Be kind and compassionate to one another, forgiving each other, just as in Christ God forgave you.” That’s awesome.

Bob: Yeah. A great way to live.

Jason: Then of course I’ve got a joke here for you Bob. I know how much you enjoy my jokes. One to share with your grandkids. This is why couldn’t the pony sing himself a lullaby?

Bob: I have no idea.

Jason: He was a little horse. He was a little horse. All right. Why are you diversified? I want …

Bob: Don’t quit you day job Jason, Okay?

Jason: You know, speaking of day job, which probably a lot of people know. Most people know, I mean the book was a best seller, Sound Retirement Planning, the book was a best seller. I’ve been doing this radio show for 7 years now. Obviously you do a search in iTunes under the phrase retirement we are one of the top 10 podcast around the country. People just think “Oh, this guy Jason is doing a radio show”, but my day job is actually not radio, is not writing books, my day job is helping real people transition through retirement. As a retirement income certified professional, a certified retirement financial advisor. I’ve been in this industry for a long time helping real people create real plans as they transition through retirement. Speaking with a lot of people all around the country. I don’t even know if people know this Bob. We work with folks all around the country via Skype. They don’t even have to be right here on our neighborhood. We can help them create a real solid plan as long as they’re in the United States of America, which is pretty cool.

Bob: Absolutely.

Jason: I want to talk about this question, why are you diversified? And frame it in a recent speaking event you and I were doing together. During that speaking event I asked everyone in the audience to raise their hand if they were diversified. You know what? Every single person in the room, guess what they did?

Bob: They raised their hand.

Jason: Everybody raised their hand, because everybody is diversified. Then it made me ask the next question. Why are you diversified? I want to dig into that a little bit Bob. Why do you think people are diversified?

Bob: It’s a couple of reasons. One is because they hear that phrase a lot and they think they should be. Who they’re working with says you are. The other thing is you don’t want to have all your eggs in one basket. I mean, I’m diversified because I don’t want to lose everything by putting all my bets on one or two or three different things. I want to have it spread across a large basket of investments.

Jason: That gets to the next question which is why? Why do you want to spread across a large basket. I don’t you want to put all your bets on one thing?

Bob: Talking to a friend who has just lost a friend who’d put all his money in WorldCom, Enron and GM. They all went bankrupt. He had too few assets and he just listen to what some friend said and he lost it all.

Jason: He lost it all. The bottom line there is the reason people diversify isn’t because necessarily they’re trying to make more money. The reason they diversify, I would say most people diversify, is because they don’t want to get wiped out if something sideways.

Bob: Absolutely right.

Jason: Don’t put all your eggs in one basket. Some of the reasons this sayings have been around for so long. Because it’s not … people aren’t diversifying because they’re trying to make more money. They’re diversifying I would say for the most part because they are afraid of losing money. But when everyone in the room raises their hand and says “I’m diversified” We got to start questioning “What you mean you’re diversified? What does that mean? You bought ten different mutual funds? Does that mean you’re diversified? You have 60% of your portfolio in bonds and 40% in stocks? Does that mean you’re diversified? What are you diversifying for in the first place? What is it that you’re trying to protect against?” What I want to do because I think the reason people diversify is to help minimize downside risk. I think that’s the ultimate reason.

 I want to just talk about some of the risks that people face today that we’re aware of. Then, also the solution, things that people can be thinking about of doing to help understand these risks a little bit better. Not just understand them from a big conceptual point of view. But understand them how it’s going to specific impact their decision, their lifestyle. Bob, I’m going to throw the bomb into your court. What’s a concern that people have right now? As you’ve been meeting with real people that are either retired or getting ready to retire.

Bob: I think they’re very fearful of a downturn in the market. We’ve been in a bull market since 2009. It’s one of the longest in history. I think folks are thinking “Okay, should I make a shift? Am I too far exposed?” We meet with clients and a lot of them come in with well diversified portfolios. But, they have a lot of money in the market, they have a lot of money in bonds, they’re thinking “This could go a different direction and if it does I don’t know what to expect. Am I okay? Is this the right thing to do?”

Jason: The third longest bull market in the history of the stock market and Janet Yellen recently came out, let me tell you what she said about it. She said: “Stocks have increased to a level well above their medium of the past three decades. Stocks have increased to a level well above their medium of the past three decades.” Holy smokes are you kidding me? The federal reserve chairwoman comes out and says stocks are expensive. That get some people’s attention.

Bob: You bet.

Jason: One of the other things we heard of Donald Trump recently came out and he said he’s gotten out of the stock market.

Bob: He may have his reasons. I think that has a lot of impact on people. But it could be a big mistake on his part.

Jason: I absolutely agree. I think Donald Trump’s decision to get completely out of the stock market, that’s a true accounting of what has happened. Boy, what a huge mistake for the average investor that can be at this point. But there’s so much fear that’s driving people. I want to try to address as much as this fear we can, because when people are making decisions from a fearful standpoint they’re not going to make good decisions. We got to put this out on the table so everybody understands what the fears are. Another fear, obviously it’s a big one, is as we look around the globe and we see this economy that’s just struggling in so many ways. In Japan, where they’ve gone through massive quantitative [inaudible 00:07:53] they just can’t seem to get the economy to grow at all. This negative interest rate that people are willing to say “Hey, we’re going to give the government a loan” in some of these other countries “And in exchange from me giving them a thousand dollars, I’m going to be satisfied receiving less than what I gave them in return.”

 There’s a lot of fear in the market place for people to be willing to accept not only no rate of return on their money like they get in our country, but actually less than their principal back. Why in the world Bob, would people be willing to get less than their principal back to be in a safe instrument like that?

Bob: Fear. Fear of losing their money.

Jason: Fear of losing. They are more afraid of losing a large sum of money or they’re fearful of deflation? I mean, right? I guess that would be one positive scenario if you negative yields on these bonds. There’s deflation, you can end up in a good situation. We’ve got these events unfolding around the globe, then you look at something like the Brexit, where Britain decided to leave the European Union. People are saying “Hey, If this ends up working out well for Britain, which frankly I think it probably is going to, because any time you have a group of people that take more control of their freedom, more control of their borders and more control for their spending, that’s usually a good thing for in economy” This probably is going to work out for them, but the concern is what if the European Union starts to just kind of disintegrate, fall apart, people say “Hey, it worked well for these guys, let’s hit the road also.”

Bob: It’s an unknown, we don’t know.

Jason: It’s an unknown, it’s a concern, it’s a fear. Then you’ve a got a Nobel prize winning economist like Robert Shiller coming out with his CAPE ratio. Go ahead and talk for a minute on CAPE.

Bob: The CAPE is a Cyclically Adjusted Price-to-Earnings ratio. What is says is you compare the value of the stock to the company’s earnings. Traditionally, historically, a normal market is about 16 to 1. We’re now above 24 to 1.

Jason: It’s actually 27. I just looked that.

Bob: 27 to 1. There’s only three times in history where it’s been higher than this. We’re getting there. Of course, what happens after that you can guess. There’s a significant downturn in the correction in the market.

Jason: Price-to-Earning for some of our listeners that aren’t following this personal finance investment stuff all the time is just a real fundamental way of evaluating whether a stock is an individual or an index as a whole is fairly valued, inexpensive or expensive. According to this CAPE ratio Nobel prize winning … Nobel prize winner Robert Shiller came up with says that historically the stock market is pretty expensive. That’s what Janet Yellen also came out and said that over the last three decades stocks looked to be pretty expensive. Then, the alternative Bob, would be if people are worried about that volatility, it must be a very a logical decision to make. If you’re worried about stocks what do you do? You put more money in?

Bob: Bonds.

Jason: Bonds. Are bonds a good value today?

Bob: I would probably say no. Because we have historically low interest rates, which means is if you own a bond and interest rates go up even a small percentage or a percent you can have a significant loss in the value of that bond if you have to sell it. I’ll guarantee if you own a bond mutual fund, you’re going to see a drop in the value of that fund. Which will take some people by surprise. Because people consider bonds as safe. But as we saw in the last downturn in the great recession. We saw bonds drop significantly out of fear. If you look at it … We can look at these things over a long period and say “Yes, this is a good balance” But we’re in a point right now that if you buy bonds and interest rates would inevitably go up, you’re going to lose money on those bonds.

Jason: If interest rates go up and the other key is you sell your bond before maturity.

Bob: Exactly.

Jason: I mean, you can hold the bond to maturity and you’re not going to lose anything. But you’ll see on paper it’s going to look ugly. But think about this, I mean, I just was looking up for the 10 year yields, 10 year bonds on US treasuries were 1.58% percent, less than 2% is what you get for holding a 10 year bond. A 30 year bond 2.28%. Now imagine you’re 60 years old, do you think many 60 years old are going to want to get themselves in the position where they have to lockup their money for 30 years to get 2.28%? It gets them from 60 to 90.

Bob: With a high potential of the value that bomb dropping?

Jason: Yeah. Obviously there’s some reasons for the fear that people are experiencing. I remember Alan Greenspan back in 1996, he used a phrase that became famous, he used the words irrational exuberance. Actually it became the title of Robert Shiller’s book, that Nobel prize winning economist we’re just talking about. He got such a kick out of it that he used it as a title for his book. This was before the .com bubble, right? 1996 Alan Greenspan said things are looking expensive. He was three years ahead of the fact. He was three years out. The other thing that we need to take into consideration Bob, not just in addition to these global threats, these economic threats, our leadership problems that we have in our country right now, it seems like we’re having a hard time getting anything, anybody do agree on anything, you can get anything productive done, which is very disheartening.

 The other thing we need to just think about is the impact that technology is having on our economy, and on jobs. I just read this morning that Cisco was laying off 6000 more employees. Now this is at a time … We’re seeing this with a lot of technology companies, we’re seeing Microsoft with layoffs, Cisco with layoffs, these aren’t just the only two. At a time when the economy is supposed to be improving and technology is supposed to be leading the way, that’s a little bit concerning when you see these high … These are good jobs for this new economy that we’re on, this technology. When we see those going away that’s a concern. But then, there’s just these news that Uber is going to launch their first 20 driverless cars in Pittsburgh. What that means is that they’re going to have cars that are going around picking people up without a driver in them.

 Imagine what that’s going to do to a portion of our economy. Anybody that drives a semi-truck across the country or locally. Anybody that drives a delivery truck. Anybody that’s a taxi cab driver. Anybody that’s currently an Uber driver. Can you imagine five years from now, all of a sudden all those jobs are gone.

Bob: It’s going to be of significant impact. This change is going to have a radical impact on our economy.

Jason: The great thing is I think it’s going to make it safer, I think it’s going to make us more efficient. But there’s a lot of people that rely on those jobs. This whole world that’s changing so fast that it’s very intimidating for people. Then you just look at the national debt. 19 trillion dollars of national debt and that debt is growing by our deficit, which is about 500 billion dollars a year. That’s another point of contention. It’s a point of concern, it’s a point of fear. Frankly, like I said early Bob, when there’s fear people are going to make bad mistakes, because fear is an emotion. When people are making emotional decisions about what they’re doing is a bad decision.

Bob: Yeah, fear is a terrible investment strategy. One of the things that I’ve discovered in being a financial planner, in being in this business for 12 years is that when you make decisions based on fear, you oftentimes make the wrong decision.

Jason: Absolutely.

Bob: I mean, look at the housing market right now and how prices are being … I have a daughter looking for a house right now and it’s up to market for 275 it gets beat up for 300 thousand. I stop and I think “Is this a good time to buy a house?” Because there’s a feeling like “I can’t get it now, I’ll never get in, I’ll never be able to afford, interest rates are low.” But we’ve said that before, it’s the same thing with the market. There’s an exuberance out there and you say to yourself “This is a time to be cautious, to be very thoughtful about what you do.”

Jason: Yeah. What we want to encourage people to do? Because we want to give them with some confidence. With want to give them a greater sense of clarity. We just recently rolled out a new tool that I’m really excited about because I think it’s going to help people be in a position that they don’t have to operate out of fear of the unknown. Are they doing it right? What does diversification mean? Why are they diversified in the first place? If you go soundretirementplanning.com. Let me set the stage for this. Let me help people understand why this came about.

 In 2009, right after the financial crisis took place, the Federal Reserve came up with a series of what we call stress tests, where we can take, they’ve done this every year now since 2009, but they say “Look, we’re going to look at these banks assets and we’re going to create different hypothetical scenarios to say if these things were to happen, does the banks have the reserves on hand that they can weather that storm without the tax payer come and having to bail them out again?” That’s what the stress test are all about. Every year, we take our banks and the Federal Reserve puts these adverse scenarios together and they say “Hey, if housing drops by 25%, how is that going to impact the bank’s assets? If oil doubles how’s that going to impact the bank’s assets?” There’s always different economic scenarios that we can take people through. “Unemployment jumps up to 10 or 12%, how is that going to impact the bank’s assets?”

 Because as tax payers we want some accountability, we don’t want to have to bail these institutions out again, right? This is one of the ways that we came up with some reform to try to make sure that we as tax payers are not in that situation again. We now have the ability to do something very similar for people. We can take their retirement assets, their investments and stress test them. This is something that they can do directly from our website. If they visit soundretirementplanning.com over on the right hand side of the screen there’s a short video that you can watch. It talks about macro economic uncertainty and might be some terminology or some language in there that people don’t understand, but right under there it says “Stress test” and you can stress test your portfolio.

 That’s going to accomplish two things for people. I’m so excited about this, Bob. Because for people that are just getting ready to retire, that have all of this uncertainty. If we can know ahead of time what the risks are that they’re taking within that investment portfolio, when we can help they define that risk and also match that up with the risk tolerance to say “Hey, this is going to work out okay, you’re within the level that you should be” I can just see so many people breathing a deep sigh because so many people have been sold these mutual funds, they’ve been sold these annuities, they’ve been sold all these stuff and they don’t really understand. They think they’re diversified but they are not really sure if they are. This tool is going to help them.

 Two things that it’s going to do. Number one, we’re going to ask about 20 different questions to help understand how comfortable that person really is with risk, and again, this is a self assessment tool that they can do online by themselves. You just go to soundretirementplanning.com, click on the button and 20 questions to understand their comfort level with risk. Then, after that, the second piece to it, it makes it very powerful is that people can go and they can take these different mutual funds that they’ve purchased through these different investments, these different stocks. They can actually put the ticker symbol in, they can put the dollar amount in, then they can get an analysis done that shows them how much risk they actually have in their portfolio. But this is different than what most people do, most people just use Morningstar, which is kind of a backward looking saying “Hey, here’s what happened in the past” this is a forward looking stress test analysis to say “If these different economics scenarios unfold, how is that going to impact their portfolio” Are you excited about this?

Bob: Absolutely. I mean, it’s one of the things that’s most revealing to the clients. Then it’s just a disparity about how they’re invested and how they feel about risk. Sometimes there’s a big gap. They came out saying “I had no idea that it was that different.” For them to get a realistic picture of how they’re really invested and in a very objective picture of how they feel about risk, you want to max those as much as possible. Often there’s a huge gap.

Jason: Yeah. I was sitting with some folks the other day and one of the questions … Because we talk about risk from a lot of different angles, right? We really want to dive into that question. These folks came in, they had about 500 thousand dollars of investments, that money was going to be needed to supplement their retirement income strategy. I asked them the question I said “If we were sitting here one year from today and your 500 thousand dollars is now only worth 400 thousand dollars, how would that make you feel?”

 I remember the wife looked at me and she said “Jason, I’d feel sick” she said “I’d feel like I needed to go back to work at that point”. If you’ve got somebody that’s going to feel sick and they feel like they have to go to work, back to work, because you’re down 20% in one year and you have the ability to show them ahead of time “Hey look Mr. Or Ms. Jones, a 20% loss” Ms. Jones it’s just a hypothetical name that I’m throwing out there, of course I’m not sharing any real people’s information here but “a 20% loss in one year in your portfolio structured in such a way that if these different economic scenarios unfold you could be looking at a 40% loss in one year, we’ve got something we got to fix, because you’re not going to be comfortable with 20%, you’re surely not going to be comfortable with a 30 or 40% decline.”

Bob: Bottom line, also a important thing in life is it you sleep at night. I mean, if we look at our portfolios and at our retirement we want to have some confidence in the direction that we’re going. We don’t want to have any huge surprises. We should know what could happen if you have an investment in certain scenarios. Because that prepares us to make proper decisions. I think objectively looking at how we feel about risk and the amount of risk that we’re willing to take, looking at how we’re invested. Then, trying to match those two up is really important.

Jason: Yeah. We’re certainly no telling people like “Go be a Donald Trump and get out of the stock market completely” That would be insanity I think. I mean, the stock market has been the best place to outpace inflation and keep your [inaudible 00:21:58] money working form for the long term. I’m getting back to the core philosophy that we’re always teaching, time is the cure to the volatility of the stock market. The more time you have the more risk you can afford to take. Let’s match assets to liabilities and make sure you’re not taking money out of the wrong pots at the wrong time. I mean, that’s common sense as far as I’m concerned. But common sense isn’t always common practice unfortunately, that’s not the way that a lot of people do this.

Bob: I’ve had clients come in and say “I need to get in the market; I don’t want to miss any more of this upswing.” You know, we’re six years into it. When in 2010 they refuse to get in and I say “You know, we need to be very cautious about this” You see this exuberance and everybody’s making money, your buddies are telling “I made this much this year in that stock” and so you want to jump in. No, step back and be objective about it.

Jason: Well, people are looking at all these things that we’ve talked about. All these reasons to be fearful. They’re using these as an excuse to go to a cash position. In the meantime the market is up again this year. They’re sitting on the sidelines, their money is basically losing purchasing power because their bank is not paying them anything to have it sitting in a bank account. They’re missing out. The real question becomes “When you’re going to get back in?” Are you going to get back in when the market makes a 5% correction? When you’re going to make a 10% correction? A 20% … What is that trigger that’s going to say “Okay, now is the time.” See, there’s got to be a better way than just gut feeling approach to how this all works, there’s got to be. You and I know there’s a better way because we help people do this all the time. We help people put together a good plan so that they’re now worried about this kind of stuff.

 But there are a lot of people driving down the street this morning, Bob, here in the Seattle area. There’s people listening to this program all over the country. I’ve learned that a good question is going to take people a lot further than trying to give them the answer. The question that I pose this morning is “Why are you diversified? What does that mean? What is it that you’re trying to accomplish as a result of that diversification?” Now we have a tool to help people really understand it. They visit soundretirementplanning.com on the right hand side. They can watch a quick one minute video that explains macroeconomic risks. Then, they can get an analysis of how much risk they’re comfortable with and they can put in their specific positions to have a forward looking analysis done to say “If different economic scenarios happen that’s how it could impact their portfolio.”

 For most people that might be too much, we can help them with the planning process, but I just realize we are out of time. Thanks for being a guest.

Bob: All right.

Announcer: Information and opinions express fear. I believe to be accurate and complete for general information only and should not be construed as specific tax, legal or financial advice for any individual. Does not constitute a solicitation for any securities or insurance products. Please consult with your financial professional before taking action on anything discussed in this program, Parker Financial its representatives or its affiliates have no liability for investment decisions or other actions taken or made by you based on the information provided in this program. All insurance related discussions are subject to the [inaudible 00:24:51] ability of the company. Investing involves risk. Jason Parker is the president of Parker Financial, an independent [inaudible 00:24:58] Wealth Management firm located at 9057 Washington Avenue Northwest, Silverdale, Washington. For additional information call 1-800-514-5046 or visit us online at soundretirementplanning.com.