In this week’s episode of Retire in Texas, Darryl Lyons, CEO and Co-Founder of PAX Financial Group, brings it back to basics – but with a twist. In a time when market noise is louder than ever, Darryl offers a clear, foundational look at the four main investment types: stocks, bonds, cash, and alternatives. Whether you’re a seasoned investor or just getting started, this episode delivers timeless principles, real-world context, and fresh insight to help you make better long-term decisions.
Darryl explains why owning companies still offers the best opportunity for long-term growth, why cash isn’t as “safe” as it feels, and how innovations like private equity are reshaping the investment landscape. Most importantly, he challenges listeners to rethink risk, recognize the power of compounding, and stop letting fear keep money on the sidelines.
Key highlights of the episode include:
- The four building blocks of any portfolio – and what each one really means for your future.
- The difference between growth and income stocks, and why mid-size companies may offer a “Goldilocks” sweet spot.
- What bonds are, how they pay you, and the hidden risks in both high-yield and investment-grade debt.
- Why cash loses value over time – and how behavioral biases cost investors more than they realize.
- How alternative investments like private equity and structured products are changing the game for everyday investors.
Whether you’ve been in the market for decades or are still holding too much cash “just in case,” this episode helps reframe the investing conversation around clarity, confidence, and long-term thinking.
For more insights or to connect with a PAX Financial Group advisor, visit http://www.PAXFinancialGroup.com.
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Transcript:
Hey, this is Darryl Lyons, CEO, Co-Founder of PAX Financial Group. And you’re listening to Retire in Texas. This information is general in nature. It’s not intended to provide specific investment, tax, or legal advice. Visit PAXFinancialGroup.com for more information. Okay, so this particular podcast is going to be educational nature. And you’re probably going to start listening to and go, man, this is super basic, Darryl, I don’t need this but hang with me because there’s elements of information that are woven through the basic format of this that are interesting, and I think are worthy of your attention.
But I really want to explain, I want to go over the very basics of investing in this podcast, because there’s some stuff that is getting lost in translation in the marketplace. So, let’s talk about the four major types of investments. You have stocks. Number one stocks. Number two bonds. Number three cash. Those are like your main three. Then you have something called alternative investments.
I will get into that in just a second. But stocks do not forget that is ownership in a company. You own a piece of Apple. You own a piece of Microsoft. A lot of times we forget that we’re owners of companies and that there’s executives and CEOs that are driving the company to grow, to sell more products.
They have their job on the line, they have incentives, and they’re some of the smartest minds in the entire world. And they’re paid to grow a company that you own. Oftentimes we think of stocks as this nebulous thing on a computer, but you actually own companies. I’ve got a whole bunch of them on my computer right now.
I’m looking at and, sometimes they do good, sometimes they do bad. But long term, historically they’ve averaged depending on what you’re looking at, there’s different time periods between 10 and 12%. And the reality is, is that by owning these companies over time, that 10 or 12% just compounds and compounds. You earn that 10% on the previous years and on the previous years and the previous years.
And that just compounds and it absolutely works and like some time in our lives, we learn about the idea of compounding, and then we forget that it’s like magic. We just forget. Do not forget that compounding absolutely works. Even if you’re 65, do not forget you still have 20 or 30 years of life left. Do not forget that compounding works and do not forget that when it comes to investing, stocks are still, and this is an opinion, the best game in town.
Why? Because you have ownership of a company and ownership implies a degree of risk. That’s higher than any other type of investment, bonds or cash. And when you have more risk, the general truth is you get a higher level of return. You get rewarded for that. And so that’s the general. These are general truths that exist that are just like embedded in nature in terms of greed and fear and math.
So, stocks historically have performed very well. And in my conviction, because we’re buying, we’re owning companies that are producing products and services that we need. And the people that are running these companies are incentivized to grow. It is in all of our best interests to own stocks long term. I actually question that conviction over my, I see I’ve been studying this since 95.
I’ve questioned that conviction myself, like whether or not that was true or not. And I’ve come to the firm conclusion that it is, there’s different types of stocks to own. This is where it can kind of be nuanced and confusing. Small companies, midsize companies and large companies. And over the last five years, the large companies have done incredibly well, to my surprise, in a lot of ways, because the small companies typically have more risk.
And so, you would think intuitively, because they have more risk, they’re going to get a better rates of return. That hasn’t happened in the last five years, but it’s always one of those things where it could reverse course all of a sudden. I don’t know if it will. I’ve always been interested in that midsize company because it’s kind of like the best of both worlds.
Not only do you get a company that is big, but it’s not too big. So, think about it. If you got large companies, these are big companies, harder to move, big ship, small companies, lots of risks. It’s that midsize category. I’ve always had a lot of interest in that space in the market, and I’ve always likened H-E-B, the big grocery chain, to a midsize company.
It’s not international, generally regional. And although we think of it big in South Texas, globally, it’s not big now. They’re privately held. So, you can’t own them as a publicly traded stock. But it gives you an idea of what a midsize company might look like. Still big enough, but not too big. Kind of a Goldilocks position in the stock market.
Midsize companies. Well, then you’ve got other decisions to make. Do you want a growth company or an income company? Well, what’s the difference? First of all, you don’t really see this categorization that often. But a growth company will take the profits, and they will reinvest it. Usually in stuff like research and development. You think of like biotechnology and pharmaceutical companies that don’t distribute their profits to the shareholders.
They take those profits and then do more research, versus income companies. These are companies that part of their game plan is to pay out some of that income to us. Shareholders are owners. If you look over the last several years, historically, we’ve seen these dividends represented by the S&P 500 to be about 4%. They’ve dropped under 2%.
So, less dividends are being paid out than usual. But it’s still an important part of a portfolio. And it also kind of indicates the behavior or the maturity of a company that doesn’t necessarily need their profits to grow but would rather pay out shareholders. The third category I’d like to talk about in the stock space is whether or not we want to own international versus domestic stocks.
This is a consideration that’s often a tricky one. And so rather than trying to place a big bet, we usually allocate about no more than 25% of an investment portfolio to international. So, check your stuff and make sure it’s right around there or less. In the early 2000s, I believe I’m pretty right on that time period. We were almost 50% international, 50% U.S.
Why were we that way? Well, because the dollar was declining, and it made a lot of sense to own international investments. Specifically, one space called the emerging markets. That would be like Brazil, India, Russia and China. Those were doing really well compared to the US markets, really well. So, we were overallocated. In the last several years, it’s really hurt you to own too much in international.
So, we’ve generally seen a lot of portfolios, 15%, 20% international. And it’s caused a little drag. But we don’t want to lose that diversification piece. So, you can own stocks in the U.S, you can own stocks internationally. Interestingly enough we have one. And this is where it goes a little deep. We have one international basket of stocks that are called ADRs, account depositary receipts.
And it actually gives us the ability to own international stocks without the currency risk. So that’s a whole other conversation. You can talk to your advisor about it. But it’s one that we use periodically okay. So that’s, stocks is the major one. Still, I have a lot of conviction in owning companies. But what if you don’t want to own a company?
You lend money to AT&T or Microsoft. So that would be like a business decision that they want to make. They want to not get any more shareholders, but they need money for data centers or whatever. And so, they go to the marketplace and say, we’re going to issue bonds, and a bond is a loan. So, you lend them money.
And as a result of lending them money, they pay you back. It depends on the terms. Let’s say they pay you back in 20 years. So, you lend them $10,000, they pay you back in 20 years, and they pay you a 4% interest rate. So, every year you get a little coupon that used to come in the mail, used to clip your coupons.
And it was a nice little income for 20 years. And as long as AT&T or Apple or whoever doesn’t go bankrupt, you would get your money back at that term. And it was a kind of a nice deal. And historically, those bonds have not done as well as stocks. Why? Because of risk. Risk really defines the return profile. So, if Microsoft goes bankrupt, the first person in line to get their money out is the IRS.
The second person is anybody that like a bank that might have lent the company money against a building, so securitize or collateralized loans, if there’s money left then the bond holders will get some. And usually there’s nothing left for the stockholders. So, we call that the capital stack. So, the stockholders are at the very bottom of the capital stack.
So, they take the highest amount of risk. I know that’s kind of like in your head you’re like lowest, highest. So, they take the highest amount of risk because they likely won’t get paid if a company goes bankrupt. But bonds might, and that’s why there’s a little less risk. And the return profile is a little less.
So, you can look historically and maybe 6 to 8% on bonds, depending on the time period you look at. Again, there’s some subcategories for us to unpack for a second. You’ve got long-term bonds, intermediate bonds and short-term bonds. And the longer the term usually the greater the payout. And so that’s something to consider. It’s also interesting the longer the term the more interest rate sensitivity it is.
That’s a different discussion. But you might have heard before when interest rates go up, bond prices come down. So, there’s something to think about right now because interest rates, there’s a lot of talk about interest rates coming back down. And if they do come back down, depending on how the market reacts, we could see bond prices go up.
So, there’s some interesting dynamics that are taking place in this interest rate environment and the bond market makes it difficult for us as individuals to try to navigate that, but we use some great managers, Alliance Bernstein and Pimco, that are much smarter than us, that actually know how to navigate that really well. And then the other subcategory bonds that I think is worthy of unpacking are the high yield versus investment grade.
And so, the high yield bond, they used to call junk bonds. Right. But they changed the name because no one wants to buy junk, but they’ll buy high yield. And these are companies that have their credit rating just like your own, Credit Karma credit report. They have, you know, lower credit ratings, triple B, double B. And so, as a result of them not having as good credit, you get a little bit better rate of return.
And I’ve seen some great returns in high yield. So, like 6, 7, 8, 9%, some incredible returns. But remember there’s more risks there. So, there could be problems that they could default and not pay you. And so oftentimes it’s really helpful to use money managers in this space because they’ll do their own research. So, they’ll look at the credit rating agency.
But then they’ll do their own digging and say, you know what? I know their credit rating says this, but we think it’s a good company. And they help position our clients to own high yields, with a reasonable amount of risk. But again, they used to call them junk bonds. They changed the name to High Yield because no one wants to buy junk.
And the investment grades are the ones where you know you want to put your money in. It’s pretty safe. High, high credit quality. Typically, you give up a little bit of yields. That’s okay. And the thing I like about bonds is that it’s if you own those investment grade ones, it’s pretty. The values do change, but it’s a contract between the companies.
So, you know, the value of it may change within the ten-year terms that you agree to. But at the end of the day, if you gave them 10,000 you should. There’s some nuances here, but you should get your 10,000 at the end of that term. So, no matter what the price does in the interim, that’s the contract.
So that’s what I like about bonds. They do have some fluctuation while you’re holding them. But generally speaking, they do have some predictability in the contract structure. Sometimes that gets lost when we put them in funds or ETFs, but it still does exist. The third investment that I want to mention is the cash position.
You do not want to own cash long term. We’ve seen inflation creep its ugly head. And again, you know, I come from a generation that if you do profile, my generation, like I said, I’m Gen X, we just have this like high degree of skepticism. I don’t know where it came from. It might have come from the Iraq war.
And we’re still wondering where all the weapons of mass destruction, if you look at generations, if you study generations, there’s some facts and events that dictate the attitudes and behaviors of entire generations. At least that’s what they say. But we do have a skepticism. So, I did over the years have a degree of skepticism about stocks.
Like maybe it’s just Wall Street pitching things. And then I also had a degree of skepticism about inflation. And we read about it in the 70s, but we never experienced it until recently. I just capitulated and said, okay, I can see it academically. But then we felt it in the last several years. You do not want your money in cash long term.
I mean, I hate to say it, but it’s absolutely foolish. And that includes, yes, you can have a little money on your mattress and a little in the safe. I get all that. But to keep a big chunk of cash in your investment account or your savings account for an extended period time, you’re absolutely losing money.
And so, you’ve got to figure out a way to muster up the courage, to work with whoever to help get you over that fear, because it is costing you a ton of money. I was working with one client, and they wanted to, they wanted to test me. They had $2 million, which is a pretty good chunk of money.
So, they gave me $1 million to invest. This was like 2022. I think that’s about right. This was when I was actually working with clients now, just providing leadership. But at the time, they gave me a chunk of money. Here’s the $1 million we want you to invest in and see how you do. And I’m going to the guy said, I’m going to invest another million on my own and see how I do.
I was like, okay, well, I guess sometimes that works out. Sometimes it doesn’t because markets have some. There’re so many factors to consider. But I invested it and there was a good year in 2022. I don’t know if we made this money, but because I don’t remember, I’m not looking at it in front of me. But 2022 is I’m sorry, 2020.
It could have been 2022. Now I go back. I don’t want to mess you up, but it might have been like 2016. The only reason I’m hesitating is because the market I remember that year had like a 20% rate of return. That year. It was a really good year. And so, we’re doing our checkup and I’m ready to like, either get fired or hired or whatever.
I was just interested to see the outcome of our competition. And I said, “So how did you do? And he’s like, well, I got scared, so I didn’t do anything. So, I was like, I wasn’t smiling at all. I was actually sad to see that this person was, you know, trying to be frugal.
And I get that trying to save money on fees. But the idea of moving money into the markets and owning stocks and bonds was so scary that they lost a considerable amount of money that year. And so, I just don’t want people to put money under the mattress, but just in your savings account. A chunk of money needs to be invested in the right portfolio long term.
The last thing I want to mention is that fourth category. This is alternatives. And if you’ve known us, we’ve been using this more and more and more and more, especially because the innovations that’s taking place in the financial industry, you hear about artificial intelligence and of course, the internet and quantum computing. Well, I have got to tell you, the financial services industry is changing rapidly, and now we’re able to access private equity like never before, which means that we can own companies like H-E-B, that are privately held, that have a different type of risk return profile that we never have before, private debt.
So, we can lend money to companies that are not public yet, structured products. There’s a previous podcast on structured products, all kinds of things, even real estate, all kinds of investments that are not in the traditional stocks, bonds and cash that provide a really interesting return profile to your investments.
We really think about integrating those alternative investments into a client’s portfolio based on the client’s unique situation. So, we don’t massively blanket. This is how we’re doing things. We look at every single client says, okay, we need to add this much in alternative investments because the very definition of the alternative investments is that the risk return profile is still being defined in a lot of ways.
And so, you don’t want to overcommit because, you know, they could zig when you think they’re going to zag. And so, we want to make sure that we gently add those pieces to client’s portfolio. But alternative investments start paying attention to that, because that’s becoming very much a big asset class. In fact, one of the biggest CEOs in the entire country was, he came out recently and said, we’re changing the name of investing going forward.
And now it’s going to be, alternatives are going to be a part of the equation because it’s such an important way for clients to manage their money. And you can look at endowments of all of these major institutions. They’ve been doing it this way for years. We just haven’t been able to access it. The same way.
And that’s changing today. So with all, how do you navigate these markets? Well, I again, I’m a skeptic. So, I hate to say it, but I’ve come full circle and diversification is legit. And there’s enough practical academic research to make that case. What I do think is that it’s important to do your checkups with your advisors, because the markets do shift.
You need to make modifications, the investment solutions do change, and your situation has change. So, I hope that educational framework helps you. You may want to rewind it because I did go through it fast. But it should help you as you think about your investments going forward, what they should look like. And as always, you think different when you think long term. Have a great day.
Resources:
S&P 500 Annual Total Return Yearly Analysis: S&P 500 Returns | YCharts
Annualized Returns By Asset Class From 1999 to 2018
Historical and expected returns – Bogleheads
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