How To Create The Perfect Asset Allocation

Welcome back to the Early Retirement Podcast. I'm your host, Ari Tle, and today we are talking about asset allocation. What is the perfect asset allocation? How do you think about it? So this episode is not prompted by a listener question. It is one that I thought would be helpful. So some episodes I'll go through a listener question.

Please do keep submitting those. That's how I make these episodes that I hope you all find so helpful. It seems like it has been because the reviews keep coming in. The ratings the show keeps growing, and I have to thank all of you because I truly cannot do this without you. If you haven't already checked it out, there is an ebook, a complete guide to an early retirement.

You can always find that in the description below. You can also find a tax guide. Now, that tax guide is. Also in the ebook. So if you don't wanna do two separate downloads, feel free to check that out there. And I'm doing all of this and more on YouTube, so feel free to check out YouTube if you wanna see more video content or you wanna just see my face as I'm going through this.

I know sometimes it can be easier to follow along with numbers. For other people, they just say, Ari, I know it's on YouTube. Don't care. Love listening. On the podcast app, I can mow my lawn, I can garden, I can work out. I've mentioned this on previous episodes, but some of you are working out to this podcast.

Kudos to you. I listen to a history podcast when I work out. But that's only because I, I nerd out over that stuff. And when I'm on the elliptical or the StairMaster, that's what gets me home. It's inspiring to me to see what people went through in history. So a little bit of a weird, fun fact about me, but there you go.

Um, didn't think that was coming out, but I shared it all with you guys. So want to talk about asset allocation today? And here's where I want to start and here's why it's so important to me. Here is the best asset allocation ready, and it doesn't have to do anything with numbers. The best asset allocation is one.

You can. And one you can agree with, if you have an asset allocation that you go through, let's just pretend that you're a client who reaches out to me. Now, I would never ask questions like the following, but just humor me for the example if I said, okay. Um, John, Lisa, what is your risk tolerance on a scale of one to 10?

They might go, I don't know, I'm a four. I'm a five. Now, why do I hate that question? Well, I hate the question because maybe you had a bad day and you're like, well, maybe I'm a three. But you know, the other day I was feeling good about my finances, so I'm gonna eat. And you know, it depends on where I'm at in life.

So the risk tolerance on a one to 10, that's when we're getting cookie cutter, and I'm anti cookie cutter. I'm anti fluff, but you guys probably already know that when it comes to, okay, what do I need to think about when it comes to asset allocation? Okay, so there's risk tolerance, but here's why I bring.

At all. If I come and we say risk tolerance, got it. It's a scale, you know, between a one and 10. You think you're maybe around a five and it makes sense to you, but you say, you know what, I'm a five and it shoots out allocation for you and let's just pretend that it shoots out the software that we put in.

We, we talk about your goals and. It says, okay, John, Lisa, you want 75% equities, 25% fixed income based on this conversation. But if that allocation, the amount of stocks to bonds to cash, that's what asset allocation is. If that makes you lose any sleep at all, were not doing it. Okay. Let me be clear. We are not doing it.

The point of financial planning, the point of financial freedom is to think about money less financial freedom. Is the freedom to think about money less, not more so, I want you to know that that appropriate mix for you is not gonna be spit out by a spreadsheet. It's going to go through conversations now.

It largely is impacted by your finances and what you want that money to create for you. , but at the end of the day, it is not going to spout out a number that says, John, Lisa, you're gonna feel a hundred percent comfortable. Here is your asset allocation. Now it needs to be one you can stomach, because let's assume that the math tell, let's assume you tell me, John, Lisa, that you just want whatever the math says, you go, I emotional biases.

Take that out of it. I've got a good sense of handling my money. I can separate that. I want you to put my money to work, Ari, the best way possible. Well, great. We can do that. And let's pretend we go through it and you know, I recommend 92% equities, 8% fixed income and cash. And I'll tell you in a little bit how I actually come up with it for clients.

But what I do is I would have that conversation. And then I would ask you a series of questions about, okay, great, so here's what it can create for you. Does that excite you? And they go, oh yeah, absolutely. Ari, look, I'm gonna have millions more dollars. You're a genius because you're adding this. And I'll go, yeah, but let's look at what's gonna happen when the market doesn't do so well.

And you're gonna go, well, Ari, I don't wanna see my money go down 25, 30% in that case, I don't want that. I go, what about the graph before they go? I like that. So we want to get a good understanding of what's kind of the minimum that you would be comfortable with your portfolio going down by. And then I don't want, I don't need you to say, Ari, I'm in love with it when it goes down.

I'm not expecting a phone call from many of my clients when it goes down 20% and you go, um, Ari, I'm so excited. You showed me last time. The graphs, you know, it's down 20%, but I know it's gonna be in the future. Now if that does happen, you'd be the, my, my favorite client ever. However, that is. Unlikely to happen.

And so what I do want you to do is at least have the strategy or or the frame of mind, the understanding, if you will, that those times will occur and here's what it means for you. Long term. We could guarantee to be in cash. We could guarantee more fixed income, which will always feel better today. But over the long term, we're just missing out on so much potential.

That potential though, has to be really intertwined with how do you feel about it? So that's enough on the emotional bias side of the asset allocation. Let's talk about the finances for a moment.  of, and you'd think, well, Ari isn't the whole thing finances. This is the Early retirement podcast. Let's talk about my money.

You're not giving me tips on my money. I promise everyone, my goal is to give you the best tips around your money. And I do it with thinking about you first. So I don't just come out here for a reason and go, Hey, here's the five best ETFs I use and here's wine. Fees. And you know, I don't do that because it's not effective, because what I want is different than what you want.

And what you want is different than your neighbor and your coworker. So here's the big thing to take away is, um, a lot of people reach out to me. They come from Fidelity. Now, fidelity is a great institution. They make great products, but a lot of the advice. There that I hear about from people who reach out is they go, it's fairly cookie cutter.

Well, they'll ask me my age and maybe a few other questions and they'll put me in some asset allocation. They don't ask w The reality is, if I'm okay with that, meaning do, let's say the market does go down, I wanna have tough conversations with my clients. I don't start with, Hey, here's how many more millions you'll have by.

I start with the opposite. Here's what this is gonna mean for you. Are you gonna be okay if in a year from now we're talking, and here's where your portfolio value is? You had a hundred, you had a million dollars, and now you have 780,000. How do you feel? And if they go, all right, I just wouldn't be okay with that experience.

We're not doing it. This is your money. At the end of the day, it's an advisor's job to shut up and be your guide. Now that sounds weird. How could I shut up and be your guide? Well, if I'm not properly listening to my clients, I try to keep a. 40 60, call it talking to listening ratio in my meetings. But oftentimes it's much more than that.

Now it's not because I'm bored by my clients, it's because I need to know exactly what you're thinking, how you're feeling to really put together the best allocation. Now, one thing I'm not gonna talk about in today's episode, to detract his asset location, so not. Allocation, but asset location asset allocation says, great.

What's the right amount of stocks and bonds and cash in alternative assets for my portfolio asset location goes. Great, Ari, I heard you talk about stocks and bonds, that makes sense, but I've got different accounts. I've got IRAs and 401ks and Roth IRAs. Do I just put, if, if I have a 80, 20, 80% equities, 20% fixed income, do I just put the same amount in the Roth IRA and the same amount in the I.

No, the reason for that is it's not tax efficient. You wanna put the assets that you want to grow as much as possible in the Roth ira. Why is that? That's gonna grow for you and it's gonna grow for you tax free. Anything that's gonna provide tr a lot of interest or a lot of dividends or a lot of taxable events, we don't want you to absolutely be taxed on that at inefficient ways, at inefficient brackets at histor.

Higher brackets than where you'll be in the future, because when you're retired, it's likely your income's very low for a set number of years, then it might shoot back up again because of RMDs, which of course have been pushed back. Um, but what you need to think about with all of this is asset allocation today.

Asset location, I have other episodes on, but I'll make more because I promise I, I know it's easier and it'll resonate more when the episodes are more recent. You can always check that out. I do have episodes on that, but the age rule is what I bring up. You know, let's assume you're 60 years old. Do I need to be super conservative because now I need my assets to absolutely be there.

I'm in capital preservation mode, right? I would argue yes, yes, you are in capital preservation mode, but bonds and cash are not how you are going to preserve your wealth. Here's what I mean by that. If you said, I want capital preservation mode, Ari, I'm older, I need to get less risky. . Well, to me, when I think about less risky, I think about stocks because I don't want you to run outta money.

Now, you are probably thinking less risky means Ari. I don't want to go through money ups and downs because I don't have as much time for my portfolio to recover and. Never run outta money. That's what I don't want to happen, Ari. I want to never run outta money and I want to travel. I wanna spend time with family.

If this sounds like you at all, then please think of the following when it comes to a successful retirement. The last thing I want is for you to have a very comfortable first 5, 10, 15 years and the last 15 years be not so comfy, cozy. I want you absolutely cozy in a warm blanket. Uh, I was gonna do a commercial.

example there. I know there's like, there's no new blankets that are super big and hefty and fluffy and warm, and that's how I want you, okay? Whatever that blanket's called. That's how I want you the first year of retirement in the final year, and the only way we effectively do that is we understand how much longer do we need this.

Money to make income for us. So let's pretend you retire at 60. Well, we want at a minimum, 30 plus years of income, assuming age 90. I never like killing people off, but I gotta do it at some point when I do planning. Now, I must say that sounds dark. If there's certain health considerations and you go, Ari, the reality is not gonna last till 90, just historically speaking.

I wanna make sure I have enough, but it's not realistic. Well, if that's the case, Don't feel so bad actually. What can we do to spend more travel, more, give more while we're here? Don't let assets just accumulate, do something about it. Um, the other side of the spectrum there is what if you wanna plan till a hundred, 110 for any reason?

Great. Well now we need 40, 50 years of income. If that's the reality, wow. We need this income to last a long time. Which means if we're just in, in too heavy of an allocation to fixed income, to cash to bonds that historically grow less. Well, now we might look good the first 5, 10, 15, 20 years, but I'm gonna redefine what risk is.

Risk to most people is the ups and downs of the short term market. It's not fun. It's not supposed to be fun. It's never fun, but there's no such thing as free lunch. Now, if you've been investing long enough, you know that these are what allows for those amazing gains over time. But you already. . So why even say that?

Why say that? Because to me, risk is running outta money to protect against running outta money. I'm gonna re-invite you to think about yourself as a young investor. And yes, you might be 60, you might be 55, you are a young investor because you need this money for 30, 35 plus years. Now, if you were coming to me in your 85 and you need this money, To last 10 years.

It's a different strategy. I'm not going as much equity based, and the reason for that is because I wanna make sure we have this money lasting as long as possible. But on the flip side, let's pretend that you have more than enough to live off of dividends and capital gains and, and you just have plenty of income from social security, from rental income, inheritance, whatever it may be.

There's a good argument that you could have 100% stocks and be 100%. Okay. And never run outta money, even with the ups and downs of the market. And here's what comes back to that cookie cutter approach that I'm, I'm so against that a lot of firms utilize, which is, how old are you? What's your risk tolerance?

Great. Here I'm gonna spit out an allocation for you. It doesn't work that way. I have plenty of clients who have a 100% stock equity allocation and they are retired. Why do they have that? Well, they have that because they understand that they have plenty to meet their needs and their goals with this allocation.

and they're fully comfortable riding the ups and downs. They can stomach that because they understand what it can create for them. I have other clients who have plenty of money that could be in a 100% equity allocation and they go, Ari, it makes sense. I know I also have rental income and I've got a pension and my spouse has this other income source, but I don't care.

That just doesn't sit well with me. Then great. It's our job to educate, but you are always making the final decision. It should never be the advisor driving. Here's what we're gonna. The advisor's job is to drive the recommendation, show you the thinking, and they need to very clearly show you why. That is what it is in both sides, not just the rosy sides.

It's not my job to show you just, Hey, here's how many more millions you could have, even though that's realistic. By investing a little bit differently, getting one more percent of return. It can be three, four, $500,000 getting 2% more return, 5, 6, 7, $800,000. These are big differences by making small tweaks, but we have to be able to stomach it and you have to agree with it.

So what is the perfect asset allocation? It depends on how much income you wanna live off of. It depends on how much income we have to support that lifestyle, and it depends on what other non portfolio income sources exist, what income sources.  are allowing for us to meet our living expenses without tapping into our portfolio.

So that is what I wanted to go over today. If this is helpful, please do share this with a friend or someone you think could take value from it. It's always more fun to retire with friends. You don't wanna retire early and and be at your house waving across the street. It's your neighbor who's still working, who you go, oh my gosh, I wish if I just sent them the Early Retirement podcast, they could have retired early too.

So I don't think that's going to happen, but want you to know. I appreciate it when all of you share the show and I'll see y'all next week. Thank you for listening to another episode of The Early Retirement Show. If you have a question that you want answered in a future episode, you can always go to my website.

Early retirement podcast.com. That's early retirement podcast.com, and you can go ahead and submit a question that I'll look to answer in a future episode. Thank you all for listening. Please do rate it, review it, and share it with someone who you think would benefit from this information. If there's anyone out there that you know, I certainly appreciate it and I will see you all each.

Hey guys, it's me again. Please be smart about this. Nothing in this podcast should be construed as financial, tax or legal advice. Consult with your tax preparer or financial advisor before taking any action. This podcast is for informational purposes only.