Welcome to Something More with Chris Boyd. Chris Boyd is a certified financial planner, practitioner, and senior vice president and financial advisor at Wealth Enhancement Group, one of the nation's largest registered investment advisors. We call it Something More because we'd like to talk not only about those important dollar and cents issues, but also the quality of life issues that make the money matters matter.
Here he is, your fulfillment facilitator, your partner in prosperity, advising clients on Cape Cod and across the country. Here's your host, Jay Christopher Boyd. Welcome to Something More with Chris Boyd. I'm Chris Boyd here with Jeff Perry and Russ Ball, all of us from the AMR team at Wealth Enhancement. Thanks for joining us. And today we're talking about the portfolio pitfalls, five mistakes you can't afford to make.
When we think about financial planning and portfolio management, it's a big part of what we think about. There are a lot of things to consider when it comes to your investing. So we're going to talk about a few of them. And candidly, there's so many possible things to think about that you can really, there's a lot of opportunities to go wrong when it comes to investing. So we'll at least try to help you identify some of the things that you should pay attention to. You may know some, you may not.
So. Chris, why don't you think one of the least talked about, but maybe most valuable things that a good financial advisor does is helps you not make those mistakes. Yeah, that's right. You know, just avoiding mistakes is a big way to get ahead. Right.
Looking over the list, you know, if you're a, and we're going to go through these five and maybe a couple more, but these are things that, you know, the average Joe or Jane, when they're not a student of the market or they're reacting emotionally, or they're watching the news or to their neighbor that come up and, you know, they're, they seemingly make sense at the time in your mind, but, you know, history is proven that most of these don't.
Well, and I think particularly the first one, when it comes to the, the notion of timing the market or doing an all in or all out kind of a mindset, this one is one that is such an easy one to make that, you know, we look at the world and the news is bad and there's an election looming, there's a war happening, there's. Tariffs. Tariffs these days, right? There's all kinds of variables that, you know, pop up and create anxiety. This time it's different. This time it's different.
Yes. Well, I think it's, it's, it's not to say that there aren't times when we should reassess our tolerance for risk. And there's a difference in thinking about saying, I, maybe I just don't want to go through as much decline, which is inevitable when I have investments that have risk. And candidly, everyone who invests has investments that have risk. It's just a question of what risks you're deciding to endure. I'll give you an example. What I mean? Oh, I don't want to have risk.
I'm going to have CDs. Well, guess what? You, you have risk. You have different risk. You have risks of inflation or you're exposed to the risk of asset depletion because you're not making as much that opportunity risk in a sense that you're, you're giving up performance ultimately by trying to be more safe. You may actually put yourself at more risk of running out of resources because you're not getting as an adequate rate of return to, to meet your needs over time.
That's not to say that that can't be a way they say, I want that low risk. That's fine. But you might have to do more to protect yourself from these other kinds of risks that compared to someone who would invest in a more diversified manner. Let's say I don't want market risk. You know, that's an understandable concern. People worry about that.
And they think about these, these variables you know, the news of the day that creates that anxiety and say, you know, they have the inclination to say, I'm, I'm just going to get out. I'll get back in when things settle down, you know, never happens. Things are never settled by No. And usually if they are, you've missed the, a meaningful part of your performance because markets anticipate, they don't wait for something to be resolved before they start to move.
So you know, when you time the market, we've talked about this many times, I feel like I'm broken record here, but you have to be right twice, right? You have to get out when markets are high, but you have to get in when markets are low. And that's where most people falter when they try to time things because they're not ready to get in because they're of their anxieties that are still out there.
So, you know, better to think about, look, if you, if you feel anxious, you know, if you want to make some adjustment on the edges, I think that's a way to scratch that itch without necessarily doing damage, you know, that you can, you can moderate your exposure to risk without saying I'm all in, or I'm all out. You know, as I started off, you know, sometimes your tolerance for risk changes as we age, we tend to want to have less. So, okay.
Maybe you move yourself down a notch on the asset allocation mindset. Maybe that's an appropriate response to circumstances without going overboard and really trying to time the market of getting all in or all out. If you have the right time horizon and risk tolerance, your best bet typically is to stay the course, you know, be invested. But sometimes it's challenging to know if I've got cash and I have these worries, should I invest today? Should I wait? Have I missed the moment?
I'll wait for it to decline and then I'll get in. These are not generally the, it's so easy to fall prey to these kinds of mindsets that you tend to miss a lot when you do that. So, Russ, what's some of the ways that people can try to respond to these kinds of concerns? Well, I just want to acknowledge what you're saying in the idea that, you know, even in my investing career, it's very easy to get caught up in the present moment and like, what's going on in the news?
What's going on with the, you know, big investment bank prognosticators that say, like, this is a good time to invest. This is not a good time to invest. And it's like, okay, like in that moment, yeah, let me not put all my money into the market because like, there's these predictions that these things are going to happen and they know what's going on. And of course, the market just kind of does its thing.
And then you turn around and you're like, well, if I had invested that money, it would have grown to X amount. You know, we're in a moment where it's easier to forget that sometimes it's difficult to be an investor. You know, when you look at the last 15 years, yeah, there've been disruptions, but they've been short-lived. You know, if you were an investor in the 2000s, you had big declines that lasted multiple years, 2000, 2001, 2002.
The recession took on, we had terror, we had a lot of reasons why markets were driven lower coming off the dot-com boom, you know, irrational exuberance. And so you got to a point where it was a three-year slog and it was tough to be an investor to see accounts go down 50%. Well, the good news is the market bottomed and they started to come back and then they came back.
And then we had 2007, the mortgage crisis, the beginning of the financial crisis, another period of time where markets went down and cut in half, in that case, in short order because of worry of systemic crisis, right? Was the financial system really in jeopardy? Fortunately, cooler heads prevailed, some good policy decisions helped to mitigate those risks. And we've had, you know, we had a very prolonged low interest rate environment.
I was talking with someone the other day and they're saying, gosh, I miss those low interest rate environment for the mortgages and stuff. And it's like, well, but that was the backdrop of a real problem, a struggling economy. We don't really want that. I understand nobody wants higher mortgage rates, but at the same time, we don't necessarily want the need for this zero interest rate environment because it was really implying the economy was struggling.
So we've kind of gotten past a lot of that, but we've been through experiences where, you know, it takes many years for the market to recover to its prior highs. But over the last 15 years, maybe not so much, right? It goes down in the pandemic and it comes back within a year, within months. You know, we have these disruptions and they're not long lived. So, you know, I think we do have to recognize that that's not always the case that we have this rapid recovery.
And so it's understandable when people want to be protective of principal because they may not want to endure, let's say, a three year decline and then maybe a three or four year or five year recovery, you know, whatever it might be. And that can happen. So that is reasonable to say, oh, maybe I'll scale back my risk if I'm really worried. Oftentimes we hear it, we all hear this, Jeff, right?
With retirees who say, I don't know if I'm going to even be around that long, you know, like five years, long-term, what's long-term? I don't have long-term, you know, who knows, right? They may actually, but they often think in terms of, well, I don't know how long I have, so therefore. And sometimes that frees people up to say, oh, I can take risk. I've got enough. I don't need to worry about it. And other times I don't need to take risk.
Why should I worry about having to have the stress of the market? You know, that kind of mindset. Big picture, we want to be measured, deliberate, not drastic in our makeup, in our movements, in our revisions of our portfolio. You want to comment on some of this, Jeff? You know, I think you had a good outline of the markets, ups and downs. And, you know, think about if you were dollar-cost averaging all those years, you know, when do you get in, right? We'll talk about that first, maybe.
If you were dollar-cost averaging in those ups and downs, you were buying more shares of your investments, mutual funds or whatever, at lower prices. It would have been a good, great time. You know, when you're younger and you see these downturns, you should almost get excited, right? Because you're buying things on sale and you don't have to worry about, is this a good month to invest? Just invest every month. So slowly building your, accumulating your assets. And on the way out, similarly.
Exactly. That's where I was going. Go ahead. Okay. Sorry. That notion that we do think markets are going to rise over time. You know, the broad direction trend of things is to, to increase in value. Companies will be more profitable ultimately. So you were talking about dollar-cost averaging and that, that works on the way out too. It does. On the way in. So sorry to interrupt. No, there's no need for much extra on that.
Just other than just sticking to your plan and dollar-cost averaging in or out, you know, slow and steady, have a plan, rely on your financial plan and you will not have to worry about those things. I think the, you know, the concept or the mistake of not timing the market is maybe been, should be emphasized in the past, I don't know, 10 years or so when politics is driving so much of our conversations and, you know, our emotions.
And so if you were worried about President Biden, when he was elected, that the stock market was going to be terrible, you were wrong. And if you were worried about when President Trump was elected, the stock market was going to crash. You're wrong because the market isn't really about, it's affected by policies that pass in Congress and that are of the president, but long term, the market's about corporate earnings and the trend of interest rates, right? I mean, how many times do we?
Yeah. That's right. And so policy certainly helps or hurts, you know, tax policy or fiscal policy or stimuluses, they affect those things. But ultimately, you know, we talked about this coming up to every election. The data is clear that it really doesn't matter long-term what political party is in power, that it matters. We've had these conversations with clients. That's right. As you said, Obama's coming into power.
People, I remember Republican clients were like, oh my gosh, everything's going to hell. Let's get out. You know, Trump comes, was it Trump after Obama? Yeah. Trump comes into power and, you know, the Democrat clients are like, oh my gosh, this is going to be terrible. And Biden and so on, right? You go back and forth and just this anxiety that you outlined. So if you get out at the beginning of any of those administrations, you lost an opportunity to have a good four years of returns.
Whichever, whichever one it is, pick one. So, you know, Mr. Bolu of Vanguard coined the phrase, it's financial investing is successful based upon your time in the market, not your timing of the market. And to Russ's point earlier, you know, you see the talking heads on TV and you can be totally convinced because they're at their comments that you got to get out or you got to get in because this is it. This is, this time is different. And this guy, a woman knows what they're talking about.
And it's just, it's just not proven through history that. We spent a lot of time on the first of these five mistakes. You know what? It is the biggest, it's the biggest one. Yeah. I think it's the biggest, it's worthy of that extra time. But let's go on to talk about some of the other mistakes. So what are some of the other ones that we want to talk about? Another one we want to talk about is, well, I don't know if I want to talk about it.
I'm going to have a maybe contrary view to the materials that we have, but a mistake is not having enough international exposure. Yeah. So it is common. It is, no matter what country you live in, it is the norm to have a home country bias. Uh, you, you prefer the companies, you know, and, uh, are your national brand familiarity, right? Um, and the U S uh, the U S represents a very large percentage of the world economy.
U S companies do have, in many cases, these mega cap companies that have international, uh, earnings. So they have an element of international exposure, but, um, there is an argument to have international investments, uh, differences in, um, multiples differences in types of industries. Um, the, uh, impact of, uh, currencies, uh, there's, there's, um, reasons to think it might be appropriate.
Now, you know, the, if you were to compare, uh, an all stock portfolio that is, uh, comprised of, uh, of the all country world index, let's say an index that is, uh, developed economies around the world. Uh, you might expect to have somewhere around 60, 65% United States and 35 or 40% non-U S uh, most investors do not really have that, uh, reflected in that way that they've put their international exposure. If that's by cap weight exposure across the, across the globe.
Um, so, um, well, I think it's common for people to have, um, a U S bias. Um, and we run into people who want only U S, but, uh, we do think it's, there's virtue in having some non-U S we're seeing that this year is one of the reasons, uh, you want some, uh, that being said, we've also seen over the last decade, um, U S has dominated performance over many of the international funds that you might utilize.
So, but the reason we are diversified is because we don't know in a given year, whether there's going to be better returns from this way or that way. So we want to have a blend of things. It's, it's really hard or impossible if you're a diversified investor, not to have foreign exposure.
Um, if you invest, you know, in the S and P 500, for example, which is, you know, a part of most people's investments, even if they don't know about it, um, 41% of the revenue of those S and P 500 companies are from non-U S sources, 59 are from purely U S sources. So even if you choose not to like overtly choose not to want to have foreign exposure, you have foreign exposure by how the U S companies are impacted by their businesses overseas. Yeah. It's, it's funny.
I, I, uh, remember going to a talk, this was probably 20 years ago and the portfolio manager was saying, well, you know, uh, on the one hand, we've got Procter and Gamble, it's a U S company, but it derives. And I don't remember what the number was, but, um, you know, 60% of its profits from overseas or whatever number is, forgive me for not remembering.
And then they were like, but Unilever, well, that's a foreign company, but that gets most of its profits from the United States, you know, whatever. So, you know, it's an interesting dynamic where you can run into these kinds of scenarios where it's, um, it's not as, as, uh, clear, where it's domiciled doesn't mean it's, you know, and, but there's currency components of that. Cause as you make profit overseas, but then you, you turn that into dollars, what happens and so forth.
Right. So I'm not sure. So when I was suggesting that this mistake was not having enough foreign exposure, I think the point is that a lot of people don't have any, you know, and it's reasonable to think that you should have some and you should have how much, maybe that's part of the art of your portfolio. It's not necessarily a science always. Right. Right.
Uh, another common mistake that people make and you touched on it in the beginning of your comments, Chris is taking on too much risk near retirement. And, uh, I guess you could even say, uh, as you age, right. You know, it's just not, it's not just because if you retire at 65, which is a lot of people are retiring before that. Yeah. You know, as you noted, you have decades likely to be an investor, to be an investor.
Even if you're 65, we project males, you know, we're just doing a, unless we have a reason. Otherwise when I'm projecting cash flows, we're predicting to 92 for a male and 94 for a woman. So, you know, you're 27 years or 29 years that you will be needing to have that money last maybe longer, hopefully longer. And why, why those ages we, we use the top 25 percentile, those who make it to retirement, what's the life expectancy for men and women.
If you're in the top 25 percentile, you get to the early nineties, 92, 94. So you are a long-term investor to your point. That being said, I think it is a fair critique to think that there are oftentimes people will try to race through the finish line, the finish line being their retirement. And it's go, go, go, go, go. I got to build that nest egg full speed ahead. Damn the torpedoes full speed ahead.
And there can be times when, you know, you have a bad timing and you know, you're about to retire. And then the market goes down, you know, 25, 30 percent and it takes three years to recover. That might cause you to have to push your retirement a year or two in the process to recalculate your numbers. So you don't want to be, you don't want to be ignoring your allocation as you get closer to this retirement.
As you said, it's not as though you suddenly retire and you take everything off the table, but you don't necessarily want to overstate your risk. And I think there's a common inclination to be very aggressive with investing because prior to this time you're thinking I'm, you know, dollar cost averaging I'm putting in and that kind of mindset. And I've seen it recently.
We had a conversation not long ago where it's just that kind of thing where you get a little nervous that someone's got, you know, the bulk of it is stock and you know, they're a year or two away from wanting to pull the trigger. And maybe that's, maybe that's getting to the point where we start to want to scale back a little bit. Yep. And, you know, developing a liquidity bucket is we like to talk about. Yeah, that's a really good point. Such an important part here.
If you're going to be withdrawing stock and you're retiring for your income, that's one story. But if you have a liquidity bucket, meaning money that's segregated away from equity investments, maybe even away from bond investments, just cash. And that's where you're going to be drawing on a year or two, but you could draw a year or two on those funds without any market risk. Maybe that's a different story, right? Yeah, absolutely.
I have one other note on this and Jeff, you've talked about this in the past too, where, you know, you'll get a job, you'll stay in that job for a long time, have your 401k and you have a S&P 500 fund in the 401k and then kind of just don't touch it and just wait until you retire. And then if that's the case, if you're not really like rebalancing or you don't have that target fund that does it for you, you could be really subject to that sequence of return risk.
And the year after you retire, you're still in that 401k, you haven't rolled it over and you're all in S&P 500 and then the stock market goes down. So that's another plug to just keep track of your investments in your 401k. It's not really just like a set it and forget it forever type of thing.
An analogy to this, if you're not ready for retirement and maybe you're saving money for your college, for your children, is you're save, save, save and invest in a 529 and you're getting close to the student going to college. As our listeners might know, this is very relevant to my family at the moment. And the funds that have been invested have been doing really well, but you're going to have to start paying tuition bills. Do you leave it in that market exposure?
And maybe the bill comes due and we just had a 20% market correction, which is normal. So it's the same kind of thinking when you're getting into a new phase, whatever it is, it doesn't have to be retirement. It doesn't have to be college spending, but it's prudent to de-risk a bit so you don't get caught by market timing the other way. We talked about market timing. Right. I think that's really important not to overstate your risk tolerance.
If you're timing, you have a finite time on when that college tuition bill is going to be due, right? Okay. I can maybe put it off a year or two because of, you know, bad market conditions and, oh, well, maybe we'll save it for junior year instead of sophomore year or whatever, you know, that kind of thing.
But yeah, you want a portfolio that probably should be gradually reducing risk exposure so that when the time comes that you need those funds, you're not totally subject to the whims of the market. Right. Think about if you were in that situation and you're saving, you know, through the 2000s and your child's going to school in 2007 or 8, you have a period there of several years that you were going to wish you took your...
More recently, I remember seeing someone who hadn't been in an age-based plan and their student in 2020, their students in college. Right. Well, you know, fortunately for them, you know, markets recovered. Right. But it doesn't always, as we said, you know. Yeah. So that's a great point. So that whole issue of taking too much risk. I think a lot of times there was another item was mentioned here was the issue of interest rate risk. Market timing with interest rate risk, right?
Yeah. What's going to happen and how does that affect my bond portfolio and how should I be positioning my bonds? Trying to take too much duration risk potentially can be a challenge. I think this is one of those examples where bonds, more often than not, clients will say, I just don't get bonds. I don't understand. It's not that it's all that complicated. I understand what a bond is, but I don't get how the whole bond market works.
You know, this whole relationship between interest rates and prices. And it's just, it's a little bit confusing at times. Right. And when you think about the risks, okay, there's interest rate risk and how that can affect a bond pricing, but there's also credit risk and how that can affect bond pricing. And so oftentimes we'll see people take too much of one type of risk or another. Tracing yield perhaps.
Tracing yield, taking on too much credit risk, or maybe going longer term on their bonds, trying to get more yield and taking on more interest rate risk that can fluctuate as interest rates move. So this is again, I think one of those instances where working with someone can probably add value. If you just buy the aggregate index, you know, you may not be exactly where you want to be on the yield curve. And there may be reasons to make adjustments over time with what's going on in the market.
So not having enough inflation protection is the last mistake that the article we were referencing, which was a Morningstar article. We'll share that with our listeners and podcast notes. What do you want to say on this? I mean, stocks, great way to manage interest rate, the inflation risk, right? Typically, historically, yeah. Tends to help mitigate that risk. We tend to get better returns and therefore outpace inflation.
When it comes to specifically on the bond side, there's a couple of bonds designed to keep pace with inflation. They don't always work the way investors expect, a little bit convoluted, but you can think in terms of inflation protected treasuries tips or an I-bond. Everybody went out and got I-bonds a few years ago when inflation was really high. Yeah. We keep running into that. I was smiling because Russ and I keep with people who had them when the 9 % rate hit and it was pretty exciting.
They didn't realize they were variable rates. Yeah. It's not as good right now, but still, it's a way to hedge that risk and manage some of that concern with low risk money. I almost say no risk money. Nothing's no, but there's nothing safer than a government bond. It's a government bond. Think of akin to a savings bond in terms of risk level, but this has an inflation component to it. Tips also are a form of treasury, but keep in mind, there's varying degrees of maturity dates.
Most people buy it through a bundle, through a fund. You can buy them directly individually as well. These are ways. I think this is another example, though. Sometimes it's not as straightforward as it might seem. When I was looking at the materials and saw this topic about basically inflation risk, I thought of the individuals who are doing their financial plan by themselves, perhaps, and they are calculating how much they have for expenses and if they retire, where their income comes from.
They have a kind of, oh, I have enough money. Let's put it in the mattress. Not literally, but let's just take the risk off. Let's put it in the bank or spread it around these banks where there's even insured concerns that people have at banks. They just don't appreciate the impact that inflation has on your cash flow over decades. That's a big risk. In some ways, I think it's a bigger risk than some of the risks that people actually worry about.
Another one is where people will see the CD rates, which are higher than they've been over the last 20 years or more. They'll say, okay, well, if I have this much money and I put this much in a CD and I just keep rolling them into new CDs at 4% or 3 .5%, that should be good. But not really thinking that CDs aren't always going to be at that high rate. Interest rates are going to change and so are those CD rates.
Then inflation is going to continue and it could be higher than whatever percent you're projecting. Definitely, I think the article is just pointing out stocks have been historically the best hedge against inflation. Yeah. Are you really making ground with inflation when, let's say you're getting that 3.5% or 4%, but now you have to pay tax and inflation is maybe somewhere around 3 % these days, a little bit below, but getting close to 3% on the core.
Are you really making progress or are you just treading water? That's really what you should expect from a CD is really to be somewhere around the rate of inflation. I want to add one other thing before we wrap up, and that is the idea of commodities. We keep finding people thinking that the way they're going to hedge risk is through gold or precious metals or some kind of commodity exposure. As much as that can be a place where it can help manage inflation, it's not a riskless asset.
It's one of these situations where you should think about commodities in a way that's similar to a risk asset like an equity in some respects, not moved by the same forces, but there may be higher performance opportunity, but we've seen for many years where it's been somewhat unappealing returns. When it comes to commodities, it's all driven by perception of value, not by revenue and earnings and profitability.
To that point, we're going to talk about this more in a conversation with Brian Regan, our firm's senior portfolio manager, our team's senior portfolio manager in an upcoming episode. We'll talk more about gold as an investment, good, bad, indifferent, what to make of it in the future. Lots to consider. We've scratched the surface.
We talked for over a half an hour about just these five topics that can be relevant to thinking about risk and mistakes you want to avoid, but there are others and there's always more. It's not just on a macro level. There's also what's happening in the world around us, how to interpret that. It's also on the investment level specifically. It can be very challenging for someone to navigate these kinds of issues as an investor, and there's a lot of room for challenge, mistakes to happen.
It's a good idea to get some assistance along the way. Work with a quality financial advisor who is a fiduciary and can be a resource to you, both as a counsel and thinking about your financial plan, how it all fits together, but also in the way you invest your portfolio. We offer a complimentary consultation and welcome you to take advantage of that. Give us a call, reach out, and we hope to see you sometime soon. Until next time, everybody, keep striving for something.
Thank you for listening to Something More with Chris Boyd. Call us for help, whether it's for financial planning or portfolio management, insurance concerns, or those quality of life issues that make the money matters matter. Whatever's on your mind, visit us at somethingmorewithchrisboyd .com or call us toll-free at 866 -771-8901 or send us your questions to amr-info at wealthenhancement.com. You're listening to Something More with Chris Boyd Financial Talk Show.
Wealth Enhancement Advisory Services and Jay Christopher Boyd provide investment advice on an individual basis to clients only. Proper advice depends on a complete analysis of all facts and circumstances. The information given on this program is general financial comments and cannot be relied upon as to your specific situation. Wealth Enhancement Group cannot guarantee that using the information from this show will generate profits or ensure freedom from loss.
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