What Has Worked May Not Continue to Work

“Hey Mike, enjoyed the book, but am having a hard time changing my portfolio. What I’m doing seems to be working. Why should I switch now?”
 
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Episode Transcript

Mike (00:05):
Welcome to how to retire on time, a show that answers
your retirement questions. Saygoodbye to that oversimplified
advice you've heard hundreds oftimes. This show's all about the
nitty gritty. Now that said,remember, it's just a show, not
financial advice. It'seducational.
So do your research. As always,text your questions to (913)
363-1234. Again, [phone].Let's dive in. David, what do we

(00:29):
got?

David (00:30):
Hey, Mike. Enjoyed reading the book, but I'm having
a hard time changing myportfolio. What I'm doing seems
to be working. Why should Iswitch now?

Mike (00:40):
This is a classic conundrum that what has worked
will continue to work. So let'sjust have some fun playing out a
couple of scenarios. Okay?Farming, you hired a bunch of
people way back in the day, andeverything was done. So you had
a stable job because you had topick the crops.
Right? That's how farming wasdone until the tractor came

(01:00):
about. Replaced a lot of jobs.Right? Creative destruction.
Yep. Right? Things evolve overtime. Another way to look at
this is real estate investingwas great until when? 2008, and
then it didn't do so well.
Another way to look at this isright now, I think I saw the
path to college has had a littlebit of interruption. So

(01:23):
according to the research, quoteunquote, whatever that means

David (01:28):
Uh-huh.

Mike (01:29):
Forty one percent of college graduates for 2024
actually got a job.

David (01:36):
Oh, that seems low. Yeah. Because when growing up, we were
told like, hey, you go toschool, and then you graduate
and you get a job.

Mike (01:44):
Yeah. It it works. Right? Yeah. Until it doesn't.
Right. 30% of college graduatesin 2025 have a job.

David (01:53):
Oh, it's going down.

Mike (01:54):
So the idea that what has worked in the past and going to
college did work in the past.Yeah. Having a stable job with
manual labor was very dependablein the past. Things have evolved
over time. Farming has evolvedover time.
I think Tesla now makes carswithout any human actually doing

(02:16):
anything other than justoverseeing in case something
happens. Yeah. So I wanted topaint that picture in different
lights because too often we havethis assumption that in
investing, if you're justinvesting and it's working, that
it will keep working. Allinvestments are predicated on
the companies that you'veinvested in. So if they

(02:40):
experience creative destruction,that sucks for you.
Yeah. I don't know any other wayto put it. Uh-huh. Look at what
happened to ATT when the cellphone came out. It didn't do so
well.
Look at Cisco when Cisco was ontop of the world in 2000, and
then we realized maybe we spenta little bit too much money in

(03:00):
infrastructure, and they felloff. So the hardest thing one of
the hardest things a human hasto do is to question its
success. That's kind ofcounterintuitive. Right? Yeah.
Questioning your success. Okay.What has worked? Why would you
wanna expend any energy intofiguring out why what's working

(03:21):
may not work moving forward?

David (03:23):
I mean, you look at an NFL team, they have to change
their playbook every singleweek. Right? What worked last
week will not work next week.

Mike (03:29):
I mean, that's different. I guess that's a great analogy
because different teams aregonna play different ways,
different economies, differentenvironments. You're going to
have to adjust along the way.Mhmm. If you wanna be good, or
you can be like some teams thatalways lose.
I say that with, you know, a bitof my heart being torn because
growing up in Seattle, theMariners are still the only team

(03:50):
that have never been to theWorld Series. They almost made
it this year.

David (03:54):
Yeah. Nope. Yeah. My heart was with them as well.

Mike (03:58):
So now let's completely shift to another part of this,
because this is behavioralinvesting is really what's going
on here. It's not about beingrational. It's about greed.
Well, I really really wanna keepmaking more money. I really want
this thing to keep going.
So how do you such a a hardtransition, a hard turn here,

(04:19):
but how do you catch a monkey?You ever ever googled that?

David (04:24):
I've never googled it. I've never been in a position to
have to catch a monkey.

Mike (04:27):
Have you ever seen a monkey outside of the zoo?

David (04:29):
No. I guess it's prevalent in like Southeast Asia
though. Right? Yeah. I haven'tbeen there yet.
So Funny. But I've heard aboutthey're just all over, rampant.
Yeah.

Mike (04:37):
So monkeys are a funny breed Uh-huh. Creature. One of
the ways you can catch a monkey,and I'm not a zoologist, but you
read about these things, isyou'll take a coconut, you'll
carve it out, and you've got alittle hole, and you put
something curious in thecoconut. Uh-huh. And the
coconut's tied to something sothat you can't run away with the
coconut.
And the monkey will reach inthere and grab the object that

(04:58):
it wants. Yeah. But because themonkey's hand turns into a fist
with an object inside, it nowcan't pull out of the hole. It's
stuck. Uh-huh.
So a rational monkey would justlet go and leave because it's
exposed to predators or humansdoing scientific studies on it

(05:18):
or whatever. Yeah. But no,because they don't wanna let go,
they hold on to their detriment.Now think about all of the
stocks that you're emotionallyattached to or the idea that you
just buy and hold the S and Pfive hundred or the Nasdaq one
hundred or the Russell twothousand or the Dow Jones
Industrial or whatever favoriteETF or stock or investment of

(05:43):
your choosing is.

David (05:44):
Mhmm.

Mike (05:45):
Are you holding on because of an emotional reason? Is it
rational? Can you argue it? Whendoes it not work? Are you
prepared for that?
Are you looking for when itdoesn't work? These are things
that are not natural for humanbehavior. We don't naturally
wanna do this.

David (06:00):
Yeah. So that's a big hurdle to overcome.

Mike (06:02):
Huge hurdle. So many people will say, well, it keeps
working. I wanna hold on alittle bit longer. Uh-huh. Okay.
If the markets were to tank 20%,would it have been worth it?
Some will say yes. Some will sayno. And that's okay. You wanna
have the conversations becauseno one can actually time the
market.

(06:22):
You're probably gonna be eitherway too early or way too late.
Very few people get it right.And the ones that do, the self
proclaimed philosophers, if youlook back at their record, it's
probably pretty horrible, butthey're gonna focus on the one
or two times that they got itright and brag about that. Mhmm.
That's like me bragging about myhole in one, which is true.
I got a hole in one on a PGAgolf course. I think it's PGA.

(06:46):
Yeah. The PGA was there once.Uh-huh.
So that counts. A hole in one.I'm not that good of a golfer.
So am I gonna brag to peoplesaying, got a hole in one. I'm a
better golfer than you.
No. It was a horrible shot thatjust happened to roll in.

David (07:01):
And so if we equate that to, success in in predicting the
market, quote unquote, It'sYeah. Really just a shot in the
dark that you get luckyoccasionally.

Mike (07:09):
Yeah. We all get lucky occasionally. But the thing I
really wanna drive home morethan anything else is just
because you've had somethingthat has been successful,
there's no guarantee that itwill continue to be successful.
As they say, past performance isno indicator of future returns.
That goes for your portfoliothat you're managing on your own
or not.
Now it's okay to hold on to somepositions and continue to ride

(07:35):
out the mania. It's okay towanna take some risk because
risk really is when do you needthe money? And if you don't need
the money for a couple of years,then maybe you wanna hold on to
some of it. But if you'reretired, the dynamic, the
environment, the needs change.And so that's what part of the
book is really focused on how toretire on time.

(07:56):
Do you have enough assets from aprotected source that if the
markets were to go down, youcould pull income from it while
your other accounts havesufficient time to recover.

David (08:06):
And is that the need that changes there? Like needing
income?

Mike (08:08):
Yeah. You've got to give up some of your gains, lock in
those gains, and then put itinto something that admittedly
will probably make less moneyoverall. Mhmm. That's a tough
pill to swallow, Andemotionally, many people
struggle with it. But when youunderstand risk mitigation,
portfolio management, and thefact that over a longer term

(08:30):
period of time, the higheraverage annual returns don't
actually advance your money asmuch as maybe a more steady
average annual returns where thevolatility or the ups and downs
maybe aren't as wide of a range,but they're more concentrated
and more consistent.
That's what selling some of yourgains on the more volatile or

(08:50):
risky stock positions are,putting it into something that
can't lose money, but still hasupside growth. I mean, the
reality is, and this is veryharsh reality. These are hard to
swallow pills, the buffered ETFsMhmm. The fixed index annuities,
CDs, treasuries, these thingsare not gonna make more money

(09:11):
than the market on the goodyears, but they're not gonna
lose as much during the downyears.

David (09:15):
So you can't have your cake and eat it too. Is that
what you're Yeah.

Mike (09:18):
Yeah. But the last part I wanna talk about here in this
question is people that believein buy and hold are half right
in thinking that it is astrategy. Warren Buffett doesn't
really buy and hold if you thinkabout it. He buys and holds

(09:38):
until it makes sense to move on.He's sold when the time is
right, and that's gonna bedependent on you and your
situation.
So he has, in the past,purchased things like Wells
Fargo or other banks, and he hassold them from certain times.
He's bought Apple, and I I mean,he changes his portfolio. Bill

(10:00):
Ackman changes his portfolio.Ray Dalio change these these are
some of the great investmentminds of our time. So buy and
hold and close your eyes andjust ignore whatever happens for
the next thirty years.
That's not really a strategybecause you're closing your
eyes. That's more of a productpitch. Hey. Buy our stock. Buy
our ETF, and close your eyes.

(10:22):
That's product sales. A strategyis I'm gonna buy it and hold it
until whatever you define as thestrategy. And it could be until
the price crosses negatively thetwo hundred day moving average,
and maybe that's an indicatorthat you consider, not a
trigger, but a consideration ofreevaluating the stock. Maybe

(10:43):
you're looking at the priceearnings, whether it gets too
hot or it's just right. Thereare different metrics you could
look at that say, based on asystem that you've put together,
hey.
Maybe I wanna reconsider thesepositions. Maybe I can lock in
the gains and look for otheropportunities.

David (10:58):
And will a DIY investor know to look for some of those
things you mentioned, or shouldthey be working with somebody?
How will they know when one ofthose

Mike (11:06):
I think it is impossible for someone to really know if
they're qualified for that ornot. Because I know licensed
financial advisors, some of themare brilliant, and some of them
not so much. I know many DIYinvestors who are brilliant, and
some of them who are ignorantwith their brilliance. And so

(11:28):
the self evaluation is verydifficult to really look into. I
mean, we we don't wanna be ourown greatest critics.
Sometimes we are, sometimeswe're not. Sometimes we ignore
the blind spots. That's justpart of being human. There's the
psychological framework calledthe Dunning Kruger effect, where
a lack of experience wouldsuggest that maybe you
overestimate your abilitiesbecause you don't know the right

(11:51):
questions to ask. Generallyspeaking, if you've been
managing assets in the marketfor over ten years, you've
probably got hit on the cheek acouple of times, and you've
learned a few lessons, and maybeyou're more informed.
Maybe you just bought and holdand really weren't paying
attention to it, and you gotlucky. It's hard to say. But the
point being is just because ithas worked, it doesn't mean it

(12:14):
will continue to work. Buyingand holding and closing your
eyes is more buying a productand hoping it works out as
opposed to a strategy that canguide you along the way. And
just remember that the S and Pgoes flat like most equity
markets do for a ten year periodof time.
So even though the markets havegone up for the last fifteen,
twenty years, which is greatMhmm. It still can go flat like

(12:37):
it did from 2000 to 2010 or 1966for over ten years, 1929 for
over ten years, nineteen o sixfor over ten years. Yeah. How
would that feel if if you heldon your positions and then you
made no money for the next tenyears? This is why I go I go
back to that statement over andover again.
You don't win by buyingproducts. You win by strategies.

(12:59):
Understanding how to make movesalong the way. That's my opinion
based on my experience. That'sall the time we've got for the
show today.
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(13:21):
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