April 29, 2024 • 31 mins
Ever wondered how your individual risk tolerance should shape your retirement investments? Justin Gaines and I, John Prover, crack the code on aligning your financial temperament with your long-term planning in our latest podcast episode. We shed light on the common misconception that your age is the sole driver for risk tolerance and provide you with an engaging exercise to help you gauge your own comfort with market swings. It's about more than just numbers; it's about understanding your personal reaction to the market's highs and lows and how this should inform the crafting of your retirement blueprint.
We also tackle the crucial task of balancing your portfolio as you sail towards your retirement horizon. Navigating through a case study, we illustrate the significance of protecting your hard-earned assets while still capturing the growth opportunities of the stock market. Justin and I guide you through creating a financial "floor," securing your essential needs before venturing into more unpredictable waters. Join us as we navigate through the strategies designed to offer stability and peace of mind, equipping you with the knowledge to manage your retirement investments proactively, no matter the weather in the financial markets.
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Episode Transcript
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Speaker 1 (00:00):
Welcome to the Balanced Blueprints podcast,
where we discuss the optimaltechniques for finances and
health and then break it down tocreate an individualized and
balanced plan.
I'm your host, justin Gaines,here with my co-host, john
Prover.
In this episode, john and Idiscuss retirement accounts and
asset allocations, how theyshould be adjusted based on your
risk tolerance and your age.
Thank you for listening.
(00:22):
We hope you enjoy.
We're going to talk aboutdiversification of your
retirement accounts.
Thank you for listening.
We hope you enjoy better whenthe client responds if I
summarize it well.
But the key part here is thatwhenever you're investing for
(00:48):
retirement, you're always goingto think about your risk
tolerance.
Everybody always asks youwhat's your risk tolerance?
And we both know from ourrelationship that I have a much
higher risk tolerance than youdo, even though we're the same
age.
And that's where the risk ofjust because we're the same age
or in the same age bracket, thatdoesn't mean that we have the
(01:08):
same risk tolerance.
So a lot of this blanketfinancial advice isn't good
advice for your specificsituation if it doesn't match
your risk tolerance.
So one of the exercises I usewith my clients to very easily
determine what your risktolerance is is you'll ask
yourself if I had money in thestock market and for just easy
(01:31):
round numbers, we'll say I have$100,000 in the stock market and
tomorrow it goes down 50%.
So I had 100, I put 100 in.
Now it's at 50.
Do I want to get out of themarket in that situation and say
like this is not for me way toomuch risk?
Do I let it sit there and buildover time?
(01:51):
Or do I want to buy more andput more money in in hopes that
I can buy it at a discount andit'll grow faster because of
that?
The way you respond to that willhelp you in determining what
your risk tolerance is.
If you pick option one that youwant to pull out, you have a
lower risk tolerance.
(02:11):
If you would set it there andjust write it out, that's a
moderate risk tolerance, and low, we would say is conservative.
Middle of the road, we'd say ismoderate, and low, we would say
is conservative.
Middle of the road, we'd say ismoderate.
And then if you're somebodywho's like I'm gonna put more
money in and hopefully I'mbuying at a discount and we'll
go from there, that's somebodywho's a little bit more risky.
(02:33):
So you you tend to fall in theuh, conservative to moderate
category, and then I definitelyfall into the risky category.
Speaker 2 (02:45):
Yeah, I think I've at least learned enough at this
point where, like my initialthought when you said that was I
gotta leave it in because if Isell I lose that.
So, like that was my initialthought.
Speaker 1 (02:56):
So we've moved slightly towards right and
that's why I said when we firstmet you were definitely yeah
ultra-conservative.
You would have invested like aseven-year-old man when we first
met, but now you're fallinginto that moderate category.
And it's one of those thingsthat, as you learn things, you
(03:17):
will move into what I call yourmore appropriate risk tolerance.
Appropriate risk toleranceBecause another portion of your
risk tolerance and why I sayappropriate is most financial
advisors will keep you within acertain range of your risk
tolerance.
And that's because a20-something invests differently
(03:38):
than a 50-something.
Who invests differently than a70 or 80-something?
And the reason that is isbecause of time horizon.
The amount of time that theyhave before retirement is longer
or shorter, potentially to thepoint where it's even zero, and
so when they need that money andwhat the time horizon is for
(03:59):
each dollar in their account ison that range.
And the reason that range isimportant is most retirement
accounts are invested into thestock market.
The stock market is the numberone area that people go to and
invest in.
But, as we know, the stockmarket goes up, goes down, goes
sideways.
It's very volatile.
It changes every single day,it's at a different value, it's
(04:21):
constantly moving, and so you'llhear people say, oh, you know
you should invest in the stockmarket because it always goes up
.
Now, the reason that they canget away with saying that is
because, if you look atgenerally speaking, if you look
at any time period, what I wouldsay is you look at any 20-year
time period, the stock markethas increased in value.
(04:43):
Now, if you look at shortertime periods, the market market
has increased in value.
Now, if you look at shortertime periods, the market may
have decreased in value.
And that is why time horizonmatters is because if you are
trying to time the market, youdon't know if it's going to go
up, down or sideways.
And if you do, give me a callbecause we need to talk, that's
(05:04):
fair.
Give me a call because we needto talk.
That's fair, because you wouldbe the wealthiest person out
there, because you'd be.
You know shorting stocks in thedown market and buying
everything up and going fromthere and your upside potential
would just be massive.
But nobody has that crystalball, nobody has the ability to
do that.
They usually call that insidertrading, which is illegal, which
does happen, it does happen.
But don't give me a call ifyou're that insider trading
(05:24):
which is illegal, which doeshappen, it does happen, but
don't give me a call if you'redoing insider trading, because I
don't want anything to do withthat.
But if we look at averages,that's really the only thing we
can do is we can look at 80, 100years of stock market history.
Let's look at averages.
So we'll talk in terms of bearand bull markets.
Today, bear markets are whenthe market's going down, bear
(05:45):
markets are when the market'sgoing down, bull market is when
the market's going up, and soyour average bear market lasts
1.3 years, so that's 16 months.
Your average bull market lasts6.6 years, so you know six and a
(06:07):
half, a little over six and ahalf years.
Now, what that means is that,and that's why, because of those
time differences, that's why,over time, the market has just
continued to increase Right, andI believe during those bear
markets it's about a 38% declineon average, but during the bull
(06:27):
markets it's like a 336%increase incline.
Now, part of that's because youknow, if you looked at year
over year so that's the totalduring those time periods If you
looked at year over year, whatthe rates of return are, while
one's's positive, one's negativethey're probably going to be a
lot closer in values, and that'sbecause one's over 1.3 years
(06:50):
and one's over 6.6 right.
So when you're looking at yourtime horizon, if you're going
into retirement, you want toavoid a bear market as much as
possible, because if you have amillion dollars and it goes down
, we'll round up and say it's40% decrease.
So a million dollars and itgoes down by 40%, that's
(07:11):
$600,000.
Now to get back to the fullmillion you need an almost 80%
return to recover from that, 80%return to recover from that.
So really the question becomesin a bear market, how long does
(07:33):
it take to get back to even?
And on average it's 19 to 24months, so around two years,
just under to at two years,which means from the start of a
bear market to break even thepoint at which it goes down.
So so you started here.
The point at which it goes downand to get back to where you
were is anywhere from two tothree years okay and that's
(07:55):
that's time that you didn't makeany money.
You just, you know you lostmoney and then came back to even
, and that's if you don't touchit yeah so with my clients we
look at allocation mixes.
Speaker 2 (08:06):
And every financial advisor.
This is not just a me thing.
Speaker 1 (08:09):
Every financial advisor is going to look at
allocation percentages how muchof your investments should you
have in the market and volatileasset allocations and how much
should you have in fixed assetsor retirement assets that aren't
going to be able to have thesebear and bull market
fluctuations?
Typically, those fixed assets,as we call them, will have
(08:33):
guarantees or set interest ratesthat are either FDIC insured or
they're backed by insurancecompanies.
It might be bonds, municipal orprivately held bonds but things
that have set interest rates.
You know what you're going tomake Now.
It's going to be a lot lessthan what you could make on an
up market, but it's also a lotmore than you could make on a
(08:56):
down market.
So you're trying to protect thatbecause you've worked all these
years, from your 20s until your50s, we'll say you've worked
all these years you've had maybe10%, 20% in fixed assets, 80%
in the market, some people even100% in the market, but now
you're sitting at $1.5, $2million, $1 million.
(09:20):
You do not want to go from amillion down to 600,000 because
you know you're just cut.
Now you have three years,essentially based on averages.
You'll have an average of threeyears to be able to get back to
even, which is not a good setup.
Not a good setup Even if you're, you know, low risk, medium
risk, high risk.
Even if you're a risky person,10 years before retirement, a
(09:41):
40% dip you may not have theability to buy in enough, or
just the stress of thatsituation is less than ideal.
Yeah, and ultimately, whatwe're doing is when you adjust
the allocation from a 10% to 20%allocation to, in your peak
retirement years you'll have100% allocation.
(10:02):
Years you'll have 100allocation.
But as you're increasing thatamount, that amount is being
adjusted as you get older inorder to lock in returns, so
that you lock in a portion ofyour retirement plan, because we
know that that money has got aguaranteed interest rate.
It's not going to go down.
(10:22):
We can we guarantee that itmight only keep pace with
inflation, but we've guaranteedthat portion of it.
So you know, like with thisclient that I'm working with,
they're in that 10 to 15 yearsfrom retirement, depending on if
they want to retire at, youknow, 65 or 70.
And so we're looking atadjusting a portion of their
(10:46):
accounts into these fixedaccounts because they have
enough.
If they retired today theywouldn't have enough money to
get through retirement.
But if they retired in 10 yearswith the same dollar amount that
they have now.
They would be slightlyunderfunded.
But if we get that fixed assetrate of return on their accounts
(11:09):
they would be funded completelyand have no issues retiring.
So with that situation, theydon't need to get those market
rate of returns on all of theirmoney because they're pretty
much golden in their set Rightand so if we run some quick
numbers, we'll say that theyhave 1.2.
(11:31):
So if their current marketvalue is 1.2 million and the
market turns bare, say inDecember because we're still in
a pretty good bull market rightnow from going up a pretty good
bull market right now from goingup, say it turns bear after the
election in December, rightaround Christmas time, it goes
bear.
If that were to happen, end of2024, they'd be at 1.2.
Speaker 2 (11:55):
We're saying they'd be at 1.2.
Speaker 1 (11:56):
They'd probably be a little bit above that, but we
don't know what rate of returnthey would get from now until
then.
So we just say they're at 1.2,December 24.
By April of 26, if we'relooking at averages, that 1.2
will have gone down to 745,000.
And it wouldn't get back to 1.2until January of 2028.
(12:20):
So that would mean fromDecember 24 to January 28, a
three-year time gap.
You would not have made anymoney, you would just stay
completely flat.
Now the opposite is but whatabout a bull market?
I could have been up during allthose years.
Yes, absolutely.
(12:42):
But what I always say to myclients is you could, but could
you retire at $745,000 ininvestment accounts?
In this individual situation, itwould be very, very tough to do
and fully fund the retirementaccounts, and in most people's
situations it would be very,very tough to do and fund their
retirement accounts.
(13:02):
And so what I've proposed withthis client is that we move 75%
of this into a fixed account butstill leave a quarter of it in
the market.
Now if we did that, what do thenumbers look like?
So we still have 1.2 inDecember, but it would only drop
(13:23):
down to 1.1 by April of 2026.
So instead of losing $355, 5000, we'd only lose 100 000 and
then, at the same time period,where they normally would have
broke even and they would havebeen back to 1.2 in january of
(13:43):
28, they'd be up to 1.35.
That's in a down market.
In an up market, that's in adown market.
In an up market, they stillwould have, since we're using a
75% number of that 1.2, this Ididn't put in the email, so let
me just quick calculate this.
So they still have $300,000that is in the stock market that
(14:04):
they're able to get ready toreturn on, and so they're still
going to get their you know, 3%,4% on their fixed asset not
taxed.
Some of their retirementaccounts still growing tax
deferred.
That's still going to increasesteadily.
And so in a bull market, say itdoesn't go, bear it maintains
bull, they're still going to getthose massive rate of return on
(14:25):
the 300,000.
And so now their 1.2 might go to1.4, 1.5 by that 2028 number,
but they're still in a downmarket, they're not impacted,
and an up market they're onlypositively impacted and that's
(14:46):
only because of asset allocation.
They can still be as risky asthey're being now in that 300
000 that's still in the market,but by by adjusting your asset
allocation because of their ageand because they're 10 years
away from retirement, adjustingthat asset allocation and just
taking 75 out of the market,leaving 25 in.
They've now secured theirdownside risk and now have the
(15:10):
ability to continue to makeupside if they'd like yeah, yeah
, for me that's a great middleground.
Speaker 2 (15:16):
I mean again, as we talked about the beginning,
switching more into a moderatemiddle ground type uh response.
That's just best of both worldsof where I'm no, I'm secure'm
secure and that still gives mesome.
You know, I won't kick myselfof like, oh, I pulled everything
out, but if it does go downI'll be glad I secured some.
(15:38):
And I mean, but I imagine somepeople it really stuck on that
number of well.
If I, if it is an up market andI don't you know put any in
fixed well instead of 1.5, Icould be at2 million.
But you know, it's like at yourage and it just comes into, I
guess, greed of like, how it'snot like greedy in a sense, that
(16:01):
you want to take from others.
But how much do you need tomake when you know like you're
all set?
So why do you need more thanyou need?
Speaker 1 (16:09):
Right, and that, and ultimately not understanding
risk tolerance and notunderstanding these numbers is
what drives people to not playwith their asset allocation
properly.
They're thinking, yeah, but myupside potential is this?
My upside potential?
Ok, but the problem is, is thatif you take, in my opinion, the
10 years before and the 10years after retirement are your
(16:31):
most important years, becauseit's where you can lock up and
guarantee that you know howretirement's going to go and
make sure that you have thatsecurity, like we potentially
will do for this client.
Or you play the gamble game andwe're talking averages here.
So if the average is 6.6 for anup, 1.3 for a down and 2 to get
(17:00):
back to level, say that it runsthat cycle.
It's 6.6 up 2.
Typically it would go up, downand then flat.
You know, back to flat and thenback up again.
So say it's 6.6 years down, 1.3.
So now we're at 7.9 and thentakes another two years to get
back up.
So there's your nine years.
your nine years is the cycleyeah and so that's why I'm
(17:24):
saying you're 10 there, you're10 before, you're 10 after.
The most important because?
Because most retirementaccounts, if you only in that
20-year period, if you only havetwo bear markets, your
retirement accounts generallywill be okay, because the amount
of increase that you had priorto the decrease and then back to
even doing that twice stillputs your accounts well above
(17:47):
where you need to be at forretirement, assuming that 10
years before retirement you wereat a position where a healthy,
conservative rate of returnwould have funded your
retirement.
If that is your scenario, twodown markets the numbers show
don't negatively impact yourretirement.
Three down markets, though, canreduce your retirement income
(18:09):
by 20 to 40 percent.
That's huge, and that's yourincome for all of retirement can
be reduced by 20 to 40 percent,which, for some people, could
be the difference between beingable to retire and not being
able to retire.
Okay, we have enough here.
Let's adjust our allocation to75-25 and you have an up market
(18:38):
your allocation, naturally,because your investments in the
market are going to outpace whatyou had allocated.
Proper financial planning wouldsuggest that you should then
take out of your 300,000 thatgrew.
You should take a portion ofthat to rebalance your account
to a 75-25 split.
Speaker 2 (18:53):
Yeah, that makes sense.
Speaker 1 (18:55):
But what I would tell a client that is very
risk-tolerant is we did thecalculation and we know that 75%
of the old account balance wassufficient Right.
You don't need to move thisamount over.
You should, If we're following,maximizing your retirement,
(19:16):
maximizing your guaranteedincome in retirement we should
reallocate.
However, if you want to play itmore risky, in my opinion that
is when you play it more risky.
Speaker 2 (19:25):
Yeah.
Speaker 1 (19:26):
When you've already balanced the account, you
already know that you're goingto be okay in retirement.
There's an opportunity here topotentially be better off.
There's also an opportunity tobecause we've already guaranteed
our level.
There's not really anopportunity here where if we
take on more risk, it's going tonegatively impact us.
It's only going to negativelyimpact us from the new level of
high that we're putting at risk.
We've already secured our floor.
(19:47):
Putting at risk, we've alreadysecured our floor.
And so if we then go to a 60-40split, it's not as much of a
concern, because the 60%, whileit's a lower percentage, it's a
lower percentage of a larger pieis still the amount of money
that we need in order toguarantee the retirement.
Speaker 2 (20:04):
It's funny because I feel like this concept and I'll
probably fumble through this,but this concept is understood
if, say, someone is younger andthey have a lot of debt and they
haven't paid off their debt andthey're like, oh okay, well, I
can't afford to buy I shouldn'tsay not everyone, but I can't
afford to buy a brand new car.
But it's like we get into, it'slike my basic needs aren't
(20:24):
covered yet, so I shouldn'tspend extra than I need to Like
Maybe I should buy a used car,and as I'm saying this, I know a
lot of people don't do that.
Actually, they get leases andoverspend.
But point being is, I feel likeit's easier to understand in
that scenario than like oh, inretirement I have this
collection of money.
I just have so much right nowin general, even though I can't
(20:46):
touch it.
It's like the same philosophiesI should secure my basic needs
and then, yeah, play with anymoney you want.
If I lose all of that, I havemy basic needs covered and it
kind of sucks, but I'm okay.
Speaker 1 (20:59):
The hardest part for most of my clients when they're
younger is that they don'tunderstand how the market
operates and they don'tunderstand how to get into the
market.
But then if they've gotten intothe market and they're closer
to retirement years, they'veseen how the market's done over
the last 30 years and they tryto say and it's confirmation
(21:21):
bias they look at the market andthey say it's done this much
over this time period.
Why would I get out of this?
It's done so well for me.
Yeah, it makes sense that's thesame argument, though we'll use
the car analogy.
So you've had, you bought a carbrand new, you've taken really
good care of it and you've keptit for 10 years and it's treated
you really well, and you havean opportunity to buy another
(21:45):
car at a really great price.
Say it's the say it's anidentical car, identical make
model.
It's just it's the say it's anidentical car, identical make,
model, it's just upgraded 10years, but it's the identical
quality, identical vehicle.
It would be the equivalent ofsaying I don't want to get rid
of this car because it's takenme and my kids to all the sports
games, to all the dancerecitals, to all these great
things.
Why would I get rid of this car?
(22:06):
I have so many memories with it.
It's done so for me, but weknow with the car that if I hold
on to this, eventually it'sgoing to break down.
Speaker 2 (22:14):
Right.
Speaker 1 (22:15):
The same is true in the stock market.
Eventually, the market is goingto correct Always.
If you look at historical 6.6years up, 1.3 years down.
And so what we don't want to dois we don't want to try to time
the market.
And that doesn't matter whatyour age is.
You should never be trying totime the market.
If you're trying to time themarket.
Everybody who tries to time themarket loses money.
(22:37):
You want to talk to a daytrader and you have a day trader
who's trying to get you intoday trading.
All day trading is trying totime the market.
All you have to ask a daytrader to get them to be very
upset with you and not know howto respond and just blow up and
just be very upset is ask themwhat their compounded annual
growth rate over the last threeyears is and ask them what their
(23:01):
compound annual growth rateover the last five years is.
There is not a single daytrader in the world who has
performed consistently over timenot not one.
Because you can't time themarket if you could, you would
be a gazillionaire.
Speaker 2 (23:21):
Yeah, well, I think that's a perfect analogy because
even even say the car doesn'tbreak down, but you decide to
keep it and you get hit byanother car.
I mean, that's what covid was,you know, it's like there's even
outside variables that likeright.
Speaker 1 (23:36):
You have no control over it.
So my argument with theallocation piece is keep the car
.
It has a bunch of memories.
Keep the car.
Maybe it's a collector car andit's got value so, and you know,
maybe it's not a collector car,it's just one that you have a
lot of emotional attachment toput it in the garage, drive it a
little bit, keep it around, buthave something else that's
(23:58):
going to guarantee you safety,transport ability to get from
point A to point B, ability toget to your medical appointments
, something that is reliable and, you know, has a minimal chance
, if any, of breaking down.
Speaker 2 (24:15):
Just sell everything and buy a crotch racket.
Speaker 1 (24:19):
You can do that with your 20s.
You can buy a crotch racketwith your 20s.
That's true If you end uplosing a leg, you have the
ability at that time period tolearn how to walk again.
Speaker 2 (24:30):
I know.
Speaker 1 (24:31):
With an amputated leg .
You don't have that ability atthat time period to learn how to
walk again.
I know, you know, with anamputated leg, yeah, you don't
have that ability when you're 50, 60.
It's not that you don't havethe ability, it's going to be
much more difficult, it's goingto be much harder.
The same philosophies are truein your retirement accounts.
Speaker 2 (24:47):
So my only other question I guess I have is I
know we kind of talked aboutthat nine year window and and I
know we're not supposed to timethe market, but could you make
more or less risky situationsbased off?
I mean, if on averages it'snine years, couldn't you see
like bigger cycles, so not likeshort timings but longer time?
Speaker 1 (25:08):
so that's that's why we want to start and that's why
I say so I say a 10-year windowbefore and after, so a 20-year
window, but 10 years before, 10years after.
And the reason being is that wedo want to do that, in my
opinion.
In my opinion, you want to look10 years before your retirement
.
We want to look at how much ofthe account you have and what
the market's doing and where wethink the market's going to do,
(25:31):
and we have that conversationwith the client.
What does the client think isgoing to happen with the market?
And then, based on what theythink is going to happen with
the market, that's how wedetermine.
Is it a 60% allocation to fixedassets?
Speaker 2 (25:43):
or is it an?
Speaker 1 (25:43):
80% allocation to fixed assets.
If we think we're going intotumultuous times and the
market's going to be crazy we'regoing 80 tumultuous times and
the market's going to be crazywe're going 80% fixed assets.
But if we think we're at thebeginning of some really good
years here and the market'sgoing to do great, I think for
the next three to five years gowith a 60% allocation and then
(26:05):
that way you have more in themarket but we've still
guaranteed 60% of our retirement.
Speaker 2 (26:10):
So you're not timing it in a sense of day-to-day,
month-to-month and I'm dumpingall my funds in it.
You're timing it in a sense ofwhat stage is it in and I have
to allocate some, so whatpercentage?
Speaker 1 (26:22):
And it comes down to, and the percentage mindset is,
it's a risk management technique.
Yeah, you want to look at.
With what degree of certaintydo you think the market's going
to go up?
And then how much do you thinkit's going to go up?
Because this is what financialadvisors are doing with their
own money is we sit here and wego?
(26:44):
Ok, in the next year do I thinkthe market's going to go up,
down or sideways?
And then you apply a percentageto it because we don't know for
certain.
So, like right now, I would sayyou know, between now and the
end of the year, I think themarket will go up and I think I
have a 70 degree.
(27:04):
You know 70% certainty of that.
And then I'd say you know,maybe there's a 20% certainty of
it being flat and there's a 10%certainty of it going down, and
then assign values to thatPercentage.
You know, I think you know upis 10%, flat's obviously a 0%,
and then down, you know, if itgoes down, maybe it'll go down,
(27:26):
we'll say 10%.
That makes it really easy.
You can then multiply thosepercentages and see what you
anticipate the market to be.
70% times 10 is a 7%, 0, andthen 10% at 1.
So you think that on average,based on your calculations,
you're saying the market's goingto go up 6% based on your
degrees of certainty ofcertainty.
(27:53):
Based on your degrees ofcertainty, you can then look at
asset allocation percentagesinto those accounts to see how
that projects over time.
That's very high level and youwant to have a financial advisor
walk you through thoseconversations if you're going to
have them.
But that's why I want to catchyou 10 years before retirement,
because if I catch you 10 yearsbefore retirement, if you're at
100% in the market and you're 10years before retirement, we're
(28:15):
going to make some sort ofchange.
Maybe it's a 50-50 split, maybeit's a 40-60 split.
We're going to move somethinginto fixed assets.
But the question becomes whatpercentage?
And that's going to be dictatedbased on what we think the
market's going to do over a longperiod of time.
We're never trying to time themarket over a short period of
(28:37):
time.
We're doing it over a longperiod of time and we're still
putting a degree of certainty ofit's not going to work out how
I think it's going to and thenallocating cards out because
realistically that you're doingthe same thing with even a 75-25
split.
You're still saying, ultimately,at that point in time we're
(28:57):
concerned about down markets,but we're still saying the
market has a higher percentageon average to go up than it does
to go down, so let's leave somemoney in there.
But if it goes down it's notgoing to greatly impact us, but
it has the potential to impactus positively.
If it goes up, right.
And then if the market goesdown, we leave it in there and
(29:18):
we allow it to self-correct.
But if it goes up, wereallocate and we take some of
those earnings and move it intothe fixed asset and we just
harvest that.
We just harvest the fixed assetearnings over and then allow it
to keep going and because wehave a long time horizon, if it
goes down it's no concernbecause on average it's going to
go down for 1.3 years and backup in two years.
(29:38):
So in three-year timeframethree to three and a half year
timeframe we'll be able to getback to ground zero Because we
have 75% of the money over here.
We can take distributions ofincome, retirement out of the 75
percent and allow that money tohave three years to get back to
even.
But if we have everything inthe market and the market goes
(30:00):
down 10, we're not going to getback to even in three years
because we have to continue totake retirement draws out of
that, which is compounding ourdecrease in value.
Speaker 2 (30:12):
Yeah.
Speaker 1 (30:14):
So it allows us.
We're buying time horizon bydoing an asset allocation into
fixed assets.
Speaker 2 (30:25):
Yeah, that seems like a great strategy, great middle
ground because you can adjustbased on risk tolerance.
Speaker 1 (30:28):
Right, and that's why it's.
You know this is.
Asset allocation is the numberone most important topic as you
build your retirement accounts.
Funding them in the initialstages is the number one, most
important thing.
Number two, once you've numberone, once you've actually
started investing, is yourallocation percentages.
Speaker 2 (30:48):
Sweet, anything else.
Speaker 1 (30:51):
That's the basics on asset allocation I think.
Speaker 2 (30:54):
Thanks for listening to our podcast.
Speaker 1 (30:56):
We hope this helps you on your balance freedom
journey.
Speaker 2 (30:58):
Please share your thoughts in the comments section
below.
Speaker 1 (31:00):
Until next time, stay balanced.
Welcome to the Balanced Blueprints podcast,
where we discuss the optimaltechniques for finances and
health and then break it down tocreate an individualized and
balanced plan.
I'm your host, justin Gaines,here with my co-host, john
Prover.
In this episode, john and Idiscuss retirement accounts and
asset allocations, how theyshould be adjusted based on your
risk tolerance and your age.
Thank you for listening.
(00:22):
We hope you enjoy.
We're going to talk aboutdiversification of your
retirement accounts.
Thank you for listening.
We hope you enjoy better whenthe client responds if I
summarize it well.
But the key part here is thatwhenever you're investing for
(00:48):
retirement, you're always goingto think about your risk
tolerance.
Everybody always asks youwhat's your risk tolerance?
And we both know from ourrelationship that I have a much
higher risk tolerance than youdo, even though we're the same
age.
And that's where the risk ofjust because we're the same age
or in the same age bracket, thatdoesn't mean that we have the
(01:08):
same risk tolerance.
So a lot of this blanketfinancial advice isn't good
advice for your specificsituation if it doesn't match
your risk tolerance.
So one of the exercises I usewith my clients to very easily
determine what your risktolerance is is you'll ask
yourself if I had money in thestock market and for just easy
(01:31):
round numbers, we'll say I have$100,000 in the stock market and
tomorrow it goes down 50%.
So I had 100, I put 100 in.
Now it's at 50.
Do I want to get out of themarket in that situation and say
like this is not for me way toomuch risk?
Do I let it sit there and buildover time?
(01:51):
Or do I want to buy more andput more money in in hopes that
I can buy it at a discount andit'll grow faster because of
that?
The way you respond to that willhelp you in determining what
your risk tolerance is.
If you pick option one that youwant to pull out, you have a
lower risk tolerance.
(02:11):
If you would set it there andjust write it out, that's a
moderate risk tolerance, and low, we would say is conservative.
Middle of the road, we'd say ismoderate, and low, we would say
is conservative.
Middle of the road, we'd say ismoderate.
And then if you're somebodywho's like I'm gonna put more
money in and hopefully I'mbuying at a discount and we'll
go from there, that's somebodywho's a little bit more risky.
(02:33):
So you you tend to fall in theuh, conservative to moderate
category, and then I definitelyfall into the risky category.
Speaker 2 (02:45):
Yeah, I think I've at least learned enough at this
point where, like my initialthought when you said that was I
gotta leave it in because if Isell I lose that.
So, like that was my initialthought.
Speaker 1 (02:56):
So we've moved slightly towards right and
that's why I said when we firstmet you were definitely yeah
ultra-conservative.
You would have invested like aseven-year-old man when we first
met, but now you're fallinginto that moderate category.
And it's one of those thingsthat, as you learn things, you
(03:17):
will move into what I call yourmore appropriate risk tolerance.
Appropriate risk toleranceBecause another portion of your
risk tolerance and why I sayappropriate is most financial
advisors will keep you within acertain range of your risk
tolerance.
And that's because a20-something invests differently
(03:38):
than a 50-something.
Who invests differently than a70 or 80-something?
And the reason that is isbecause of time horizon.
The amount of time that theyhave before retirement is longer
or shorter, potentially to thepoint where it's even zero, and
so when they need that money andwhat the time horizon is for
(03:59):
each dollar in their account ison that range.
And the reason that range isimportant is most retirement
accounts are invested into thestock market.
The stock market is the numberone area that people go to and
invest in.
But, as we know, the stockmarket goes up, goes down, goes
sideways.
It's very volatile.
It changes every single day,it's at a different value, it's
(04:21):
constantly moving, and so you'llhear people say, oh, you know
you should invest in the stockmarket because it always goes up
.
Now, the reason that they canget away with saying that is
because, if you look atgenerally speaking, if you look
at any time period, what I wouldsay is you look at any 20-year
time period, the stock markethas increased in value.
(04:43):
Now, if you look at shortertime periods, the market market
has increased in value.
Now, if you look at shortertime periods, the market may
have decreased in value.
And that is why time horizonmatters is because if you are
trying to time the market, youdon't know if it's going to go
up, down or sideways.
And if you do, give me a callbecause we need to talk, that's
(05:04):
fair.
Give me a call because we needto talk.
That's fair, because you wouldbe the wealthiest person out
there, because you'd be.
You know shorting stocks in thedown market and buying
everything up and going fromthere and your upside potential
would just be massive.
But nobody has that crystalball, nobody has the ability to
do that.
They usually call that insidertrading, which is illegal, which
does happen, it does happen.
But don't give me a call ifyou're that insider trading
(05:24):
which is illegal, which doeshappen, it does happen, but
don't give me a call if you'redoing insider trading, because I
don't want anything to do withthat.
But if we look at averages,that's really the only thing we
can do is we can look at 80, 100years of stock market history.
Let's look at averages.
So we'll talk in terms of bearand bull markets.
Today, bear markets are whenthe market's going down, bear
(05:45):
markets are when the market'sgoing down, bull market is when
the market's going up, and soyour average bear market lasts
1.3 years, so that's 16 months.
Your average bull market lasts6.6 years, so you know six and a
(06:07):
half, a little over six and ahalf years.
Now, what that means is that,and that's why, because of those
time differences, that's why,over time, the market has just
continued to increase Right, andI believe during those bear
markets it's about a 38% declineon average, but during the bull
(06:27):
markets it's like a 336%increase incline.
Now, part of that's because youknow, if you looked at year
over year so that's the totalduring those time periods If you
looked at year over year, whatthe rates of return are, while
one's's positive, one's negativethey're probably going to be a
lot closer in values, and that'sbecause one's over 1.3 years
(06:50):
and one's over 6.6 right.
So when you're looking at yourtime horizon, if you're going
into retirement, you want toavoid a bear market as much as
possible, because if you have amillion dollars and it goes down
, we'll round up and say it's40% decrease.
So a million dollars and itgoes down by 40%, that's
(07:11):
$600,000.
Now to get back to the fullmillion you need an almost 80%
return to recover from that, 80%return to recover from that.
So really the question becomesin a bear market, how long does
(07:33):
it take to get back to even?
And on average it's 19 to 24months, so around two years,
just under to at two years,which means from the start of a
bear market to break even thepoint at which it goes down.
So so you started here.
The point at which it goes downand to get back to where you
were is anywhere from two tothree years okay and that's
(07:55):
that's time that you didn't makeany money.
You just, you know you lostmoney and then came back to even
, and that's if you don't touchit yeah so with my clients we
look at allocation mixes.
Speaker 2 (08:06):
And every financial advisor.
This is not just a me thing.
Speaker 1 (08:09):
Every financial advisor is going to look at
allocation percentages how muchof your investments should you
have in the market and volatileasset allocations and how much
should you have in fixed assetsor retirement assets that aren't
going to be able to have thesebear and bull market
fluctuations?
Typically, those fixed assets,as we call them, will have
(08:33):
guarantees or set interest ratesthat are either FDIC insured or
they're backed by insurancecompanies.
It might be bonds, municipal orprivately held bonds but things
that have set interest rates.
You know what you're going tomake Now.
It's going to be a lot lessthan what you could make on an
up market, but it's also a lotmore than you could make on a
(08:56):
down market.
So you're trying to protect thatbecause you've worked all these
years, from your 20s until your50s, we'll say you've worked
all these years you've had maybe10%, 20% in fixed assets, 80%
in the market, some people even100% in the market, but now
you're sitting at $1.5, $2million, $1 million.
(09:20):
You do not want to go from amillion down to 600,000 because
you know you're just cut.
Now you have three years,essentially based on averages.
You'll have an average of threeyears to be able to get back to
even, which is not a good setup.
Not a good setup Even if you're, you know, low risk, medium
risk, high risk.
Even if you're a risky person,10 years before retirement, a
(09:41):
40% dip you may not have theability to buy in enough, or
just the stress of thatsituation is less than ideal.
Yeah, and ultimately, whatwe're doing is when you adjust
the allocation from a 10% to 20%allocation to, in your peak
retirement years you'll have100% allocation.
(10:02):
Years you'll have 100allocation.
But as you're increasing thatamount, that amount is being
adjusted as you get older inorder to lock in returns, so
that you lock in a portion ofyour retirement plan, because we
know that that money has got aguaranteed interest rate.
It's not going to go down.
(10:22):
We can we guarantee that itmight only keep pace with
inflation, but we've guaranteedthat portion of it.
So you know, like with thisclient that I'm working with,
they're in that 10 to 15 yearsfrom retirement, depending on if
they want to retire at, youknow, 65 or 70.
And so we're looking atadjusting a portion of their
(10:46):
accounts into these fixedaccounts because they have
enough.
If they retired today theywouldn't have enough money to
get through retirement.
But if they retired in 10 yearswith the same dollar amount that
they have now.
They would be slightlyunderfunded.
But if we get that fixed assetrate of return on their accounts
(11:09):
they would be funded completelyand have no issues retiring.
So with that situation, theydon't need to get those market
rate of returns on all of theirmoney because they're pretty
much golden in their set Rightand so if we run some quick
numbers, we'll say that theyhave 1.2.
(11:31):
So if their current marketvalue is 1.2 million and the
market turns bare, say inDecember because we're still in
a pretty good bull market rightnow from going up a pretty good
bull market right now from goingup, say it turns bear after the
election in December, rightaround Christmas time, it goes
bear.
If that were to happen, end of2024, they'd be at 1.2.
Speaker 2 (11:55):
We're saying they'd be at 1.2.
Speaker 1 (11:56):
They'd probably be a little bit above that, but we
don't know what rate of returnthey would get from now until
then.
So we just say they're at 1.2,December 24.
By April of 26, if we'relooking at averages, that 1.2
will have gone down to 745,000.
And it wouldn't get back to 1.2until January of 2028.
(12:20):
So that would mean fromDecember 24 to January 28, a
three-year time gap.
You would not have made anymoney, you would just stay
completely flat.
Now the opposite is but whatabout a bull market?
I could have been up during allthose years.
Yes, absolutely.
(12:42):
But what I always say to myclients is you could, but could
you retire at $745,000 ininvestment accounts?
In this individual situation, itwould be very, very tough to do
and fully fund the retirementaccounts, and in most people's
situations it would be very,very tough to do and fund their
retirement accounts.
(13:02):
And so what I've proposed withthis client is that we move 75%
of this into a fixed account butstill leave a quarter of it in
the market.
Now if we did that, what do thenumbers look like?
So we still have 1.2 inDecember, but it would only drop
(13:23):
down to 1.1 by April of 2026.
So instead of losing $355, 5000, we'd only lose 100 000 and
then, at the same time period,where they normally would have
broke even and they would havebeen back to 1.2 in january of
(13:43):
28, they'd be up to 1.35.
That's in a down market.
In an up market, that's in adown market.
In an up market, they stillwould have, since we're using a
75% number of that 1.2, this Ididn't put in the email, so let
me just quick calculate this.
So they still have $300,000that is in the stock market that
(14:04):
they're able to get ready toreturn on, and so they're still
going to get their you know, 3%,4% on their fixed asset not
taxed.
Some of their retirementaccounts still growing tax
deferred.
That's still going to increasesteadily.
And so in a bull market, say itdoesn't go, bear it maintains
bull, they're still going to getthose massive rate of return on
(14:25):
the 300,000.
And so now their 1.2 might go to1.4, 1.5 by that 2028 number,
but they're still in a downmarket, they're not impacted,
and an up market they're onlypositively impacted and that's
(14:46):
only because of asset allocation.
They can still be as risky asthey're being now in that 300
000 that's still in the market,but by by adjusting your asset
allocation because of their ageand because they're 10 years
away from retirement, adjustingthat asset allocation and just
taking 75 out of the market,leaving 25 in.
They've now secured theirdownside risk and now have the
(15:10):
ability to continue to makeupside if they'd like yeah, yeah
, for me that's a great middleground.
Speaker 2 (15:16):
I mean again, as we talked about the beginning,
switching more into a moderatemiddle ground type uh response.
That's just best of both worldsof where I'm no, I'm secure'm
secure and that still gives mesome.
You know, I won't kick myselfof like, oh, I pulled everything
out, but if it does go downI'll be glad I secured some.
(15:38):
And I mean, but I imagine somepeople it really stuck on that
number of well.
If I, if it is an up market andI don't you know put any in
fixed well instead of 1.5, Icould be at2 million.
But you know, it's like at yourage and it just comes into, I
guess, greed of like, how it'snot like greedy in a sense, that
(16:01):
you want to take from others.
But how much do you need tomake when you know like you're
all set?
So why do you need more thanyou need?
Speaker 1 (16:09):
Right, and that, and ultimately not understanding
risk tolerance and notunderstanding these numbers is
what drives people to not playwith their asset allocation
properly.
They're thinking, yeah, but myupside potential is this?
My upside potential?
Ok, but the problem is, is thatif you take, in my opinion, the
10 years before and the 10years after retirement are your
(16:31):
most important years, becauseit's where you can lock up and
guarantee that you know howretirement's going to go and
make sure that you have thatsecurity, like we potentially
will do for this client.
Or you play the gamble game andwe're talking averages here.
So if the average is 6.6 for anup, 1.3 for a down and 2 to get
(17:00):
back to level, say that it runsthat cycle.
It's 6.6 up 2.
Typically it would go up, downand then flat.
You know, back to flat and thenback up again.
So say it's 6.6 years down, 1.3.
So now we're at 7.9 and thentakes another two years to get
back up.
So there's your nine years.
your nine years is the cycleyeah and so that's why I'm
(17:24):
saying you're 10 there, you're10 before, you're 10 after.
The most important because?
Because most retirementaccounts, if you only in that
20-year period, if you only havetwo bear markets, your
retirement accounts generallywill be okay, because the amount
of increase that you had priorto the decrease and then back to
even doing that twice stillputs your accounts well above
(17:47):
where you need to be at forretirement, assuming that 10
years before retirement you wereat a position where a healthy,
conservative rate of returnwould have funded your
retirement.
If that is your scenario, twodown markets the numbers show
don't negatively impact yourretirement.
Three down markets, though, canreduce your retirement income
(18:09):
by 20 to 40 percent.
That's huge, and that's yourincome for all of retirement can
be reduced by 20 to 40 percent,which, for some people, could
be the difference between beingable to retire and not being
able to retire.
Okay, we have enough here.
Let's adjust our allocation to75-25 and you have an up market
(18:38):
your allocation, naturally,because your investments in the
market are going to outpace whatyou had allocated.
Proper financial planning wouldsuggest that you should then
take out of your 300,000 thatgrew.
You should take a portion ofthat to rebalance your account
to a 75-25 split.
Speaker 2 (18:53):
Yeah, that makes sense.
Speaker 1 (18:55):
But what I would tell a client that is very
risk-tolerant is we did thecalculation and we know that 75%
of the old account balance wassufficient Right.
You don't need to move thisamount over.
You should, If we're following,maximizing your retirement,
(19:16):
maximizing your guaranteedincome in retirement we should
reallocate.
However, if you want to play itmore risky, in my opinion that
is when you play it more risky.
Speaker 2 (19:25):
Yeah.
Speaker 1 (19:26):
When you've already balanced the account, you
already know that you're goingto be okay in retirement.
There's an opportunity here topotentially be better off.
There's also an opportunity tobecause we've already guaranteed
our level.
There's not really anopportunity here where if we
take on more risk, it's going tonegatively impact us.
It's only going to negativelyimpact us from the new level of
high that we're putting at risk.
We've already secured our floor.
(19:47):
Putting at risk, we've alreadysecured our floor.
And so if we then go to a 60-40split, it's not as much of a
concern, because the 60%, whileit's a lower percentage, it's a
lower percentage of a larger pieis still the amount of money
that we need in order toguarantee the retirement.
Speaker 2 (20:04):
It's funny because I feel like this concept and I'll
probably fumble through this,but this concept is understood
if, say, someone is younger andthey have a lot of debt and they
haven't paid off their debt andthey're like, oh okay, well, I
can't afford to buy I shouldn'tsay not everyone, but I can't
afford to buy a brand new car.
But it's like we get into, it'slike my basic needs aren't
(20:24):
covered yet, so I shouldn'tspend extra than I need to Like
Maybe I should buy a used car,and as I'm saying this, I know a
lot of people don't do that.
Actually, they get leases andoverspend.
But point being is, I feel likeit's easier to understand in
that scenario than like oh, inretirement I have this
collection of money.
I just have so much right nowin general, even though I can't
(20:46):
touch it.
It's like the same philosophiesI should secure my basic needs
and then, yeah, play with anymoney you want.
If I lose all of that, I havemy basic needs covered and it
kind of sucks, but I'm okay.
Speaker 1 (20:59):
The hardest part for most of my clients when they're
younger is that they don'tunderstand how the market
operates and they don'tunderstand how to get into the
market.
But then if they've gotten intothe market and they're closer
to retirement years, they'veseen how the market's done over
the last 30 years and they tryto say and it's confirmation
(21:21):
bias they look at the market andthey say it's done this much
over this time period.
Why would I get out of this?
It's done so well for me.
Yeah, it makes sense that's thesame argument, though we'll use
the car analogy.
So you've had, you bought a carbrand new, you've taken really
good care of it and you've keptit for 10 years and it's treated
you really well, and you havean opportunity to buy another
(21:45):
car at a really great price.
Say it's the say it's anidentical car, identical make
model.
It's just it's the say it's anidentical car, identical make,
model, it's just upgraded 10years, but it's the identical
quality, identical vehicle.
It would be the equivalent ofsaying I don't want to get rid
of this car because it's takenme and my kids to all the sports
games, to all the dancerecitals, to all these great
things.
Why would I get rid of this car?
(22:06):
I have so many memories with it.
It's done so for me, but weknow with the car that if I hold
on to this, eventually it'sgoing to break down.
Speaker 2 (22:14):
Right.
Speaker 1 (22:15):
The same is true in the stock market.
Eventually, the market is goingto correct Always.
If you look at historical 6.6years up, 1.3 years down.
And so what we don't want to dois we don't want to try to time
the market.
And that doesn't matter whatyour age is.
You should never be trying totime the market.
If you're trying to time themarket.
Everybody who tries to time themarket loses money.
(22:37):
You want to talk to a daytrader and you have a day trader
who's trying to get you intoday trading.
All day trading is trying totime the market.
All you have to ask a daytrader to get them to be very
upset with you and not know howto respond and just blow up and
just be very upset is ask themwhat their compounded annual
growth rate over the last threeyears is and ask them what their
(23:01):
compound annual growth rateover the last five years is.
There is not a single daytrader in the world who has
performed consistently over timenot not one.
Because you can't time themarket if you could, you would
be a gazillionaire.
Speaker 2 (23:21):
Yeah, well, I think that's a perfect analogy because
even even say the car doesn'tbreak down, but you decide to
keep it and you get hit byanother car.
I mean, that's what covid was,you know, it's like there's even
outside variables that likeright.
Speaker 1 (23:36):
You have no control over it.
So my argument with theallocation piece is keep the car
.
It has a bunch of memories.
Keep the car.
Maybe it's a collector car andit's got value so, and you know,
maybe it's not a collector car,it's just one that you have a
lot of emotional attachment toput it in the garage, drive it a
little bit, keep it around, buthave something else that's
(23:58):
going to guarantee you safety,transport ability to get from
point A to point B, ability toget to your medical appointments
, something that is reliable and, you know, has a minimal chance
, if any, of breaking down.
Speaker 2 (24:15):
Just sell everything and buy a crotch racket.
Speaker 1 (24:19):
You can do that with your 20s.
You can buy a crotch racketwith your 20s.
That's true If you end uplosing a leg, you have the
ability at that time period tolearn how to walk again.
Speaker 2 (24:30):
I know.
Speaker 1 (24:31):
With an amputated leg .
You don't have that ability atthat time period to learn how to
walk again.
I know, you know, with anamputated leg, yeah, you don't
have that ability when you're 50, 60.
It's not that you don't havethe ability, it's going to be
much more difficult, it's goingto be much harder.
The same philosophies are truein your retirement accounts.
Speaker 2 (24:47):
So my only other question I guess I have is I
know we kind of talked aboutthat nine year window and and I
know we're not supposed to timethe market, but could you make
more or less risky situationsbased off?
I mean, if on averages it'snine years, couldn't you see
like bigger cycles, so not likeshort timings but longer time?
Speaker 1 (25:08):
so that's that's why we want to start and that's why
I say so I say a 10-year windowbefore and after, so a 20-year
window, but 10 years before, 10years after.
And the reason being is that wedo want to do that, in my
opinion.
In my opinion, you want to look10 years before your retirement
.
We want to look at how much ofthe account you have and what
the market's doing and where wethink the market's going to do,
(25:31):
and we have that conversationwith the client.
What does the client think isgoing to happen with the market?
And then, based on what theythink is going to happen with
the market, that's how wedetermine.
Is it a 60% allocation to fixedassets?
Speaker 2 (25:43):
or is it an?
Speaker 1 (25:43):
80% allocation to fixed assets.
If we think we're going intotumultuous times and the
market's going to be crazy we'regoing 80 tumultuous times and
the market's going to be crazywe're going 80% fixed assets.
But if we think we're at thebeginning of some really good
years here and the market'sgoing to do great, I think for
the next three to five years gowith a 60% allocation and then
(26:05):
that way you have more in themarket but we've still
guaranteed 60% of our retirement.
Speaker 2 (26:10):
So you're not timing it in a sense of day-to-day,
month-to-month and I'm dumpingall my funds in it.
You're timing it in a sense ofwhat stage is it in and I have
to allocate some, so whatpercentage?
Speaker 1 (26:22):
And it comes down to, and the percentage mindset is,
it's a risk management technique.
Yeah, you want to look at.
With what degree of certaintydo you think the market's going
to go up?
And then how much do you thinkit's going to go up?
Because this is what financialadvisors are doing with their
own money is we sit here and wego?
(26:44):
Ok, in the next year do I thinkthe market's going to go up,
down or sideways?
And then you apply a percentageto it because we don't know for
certain.
So, like right now, I would sayyou know, between now and the
end of the year, I think themarket will go up and I think I
have a 70 degree.
(27:04):
You know 70% certainty of that.
And then I'd say you know,maybe there's a 20% certainty of
it being flat and there's a 10%certainty of it going down, and
then assign values to thatPercentage.
You know, I think you know upis 10%, flat's obviously a 0%,
and then down, you know, if itgoes down, maybe it'll go down,
(27:26):
we'll say 10%.
That makes it really easy.
You can then multiply thosepercentages and see what you
anticipate the market to be.
70% times 10 is a 7%, 0, andthen 10% at 1.
So you think that on average,based on your calculations,
you're saying the market's goingto go up 6% based on your
degrees of certainty ofcertainty.
(27:53):
Based on your degrees ofcertainty, you can then look at
asset allocation percentagesinto those accounts to see how
that projects over time.
That's very high level and youwant to have a financial advisor
walk you through thoseconversations if you're going to
have them.
But that's why I want to catchyou 10 years before retirement,
because if I catch you 10 yearsbefore retirement, if you're at
100% in the market and you're 10years before retirement, we're
(28:15):
going to make some sort ofchange.
Maybe it's a 50-50 split, maybeit's a 40-60 split.
We're going to move somethinginto fixed assets.
But the question becomes whatpercentage?
And that's going to be dictatedbased on what we think the
market's going to do over a longperiod of time.
We're never trying to time themarket over a short period of
(28:37):
time.
We're doing it over a longperiod of time and we're still
putting a degree of certainty ofit's not going to work out how
I think it's going to and thenallocating cards out because
realistically that you're doingthe same thing with even a 75-25
split.
You're still saying, ultimately,at that point in time we're
(28:57):
concerned about down markets,but we're still saying the
market has a higher percentageon average to go up than it does
to go down, so let's leave somemoney in there.
But if it goes down it's notgoing to greatly impact us, but
it has the potential to impactus positively.
If it goes up, right.
And then if the market goesdown, we leave it in there and
(29:18):
we allow it to self-correct.
But if it goes up, wereallocate and we take some of
those earnings and move it intothe fixed asset and we just
harvest that.
We just harvest the fixed assetearnings over and then allow it
to keep going and because wehave a long time horizon, if it
goes down it's no concernbecause on average it's going to
go down for 1.3 years and backup in two years.
(29:38):
So in three-year timeframethree to three and a half year
timeframe we'll be able to getback to ground zero Because we
have 75% of the money over here.
We can take distributions ofincome, retirement out of the 75
percent and allow that money tohave three years to get back to
even.
But if we have everything inthe market and the market goes
(30:00):
down 10, we're not going to getback to even in three years
because we have to continue totake retirement draws out of
that, which is compounding ourdecrease in value.
Speaker 2 (30:12):
Yeah.
Speaker 1 (30:14):
So it allows us.
We're buying time horizon bydoing an asset allocation into
fixed assets.
Speaker 2 (30:25):
Yeah, that seems like a great strategy, great middle
ground because you can adjustbased on risk tolerance.
Speaker 1 (30:28):
Right, and that's why it's.
You know this is.
Asset allocation is the numberone most important topic as you
build your retirement accounts.
Funding them in the initialstages is the number one, most
important thing.
Number two, once you've numberone, once you've actually
started investing, is yourallocation percentages.
Speaker 2 (30:48):
Sweet, anything else.
Speaker 1 (30:51):
That's the basics on asset allocation I think.
Speaker 2 (30:54):
Thanks for listening to our podcast.
Speaker 1 (30:56):
We hope this helps you on your balance freedom
journey.
Speaker 2 (30:58):
Please share your thoughts in the comments section
below.
Speaker 1 (31:00):
Until next time, stay balanced.
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