Investing is simple.
You acquire assets to profit from their increase in value.
Yet, so many people overcomplicate it, and change their strategy whenever they feel uneasy about the markets.
They stay stuck with their portfolio, unsatisfied with their returns.
Even if you have the best investment strategies in place, you will never have full control over the outcome.
What you can do is inform yourself, so you can decide how to invest your money to generate wealth.
In this episode, you’ll discover what behavior ruins any plan to make successful investments, what to do instead, and an overview over tried and tested investment strategies.
Show highlights include:
- Why the urge to be in control may be holding you back from successful investments ([0:45])
- Why the bond market offers great opportunities (even if it seems to be going down right now) ([5:40])
- How structured products can enrich your portfolio by reducing the risk of volatile assets ([10:05])
- Why dollar cost averaging and annuities can work for you (and when it’s better to forego them) ([12:05])
Do you want a wealthy retirement without worrying about money? Welcome to “Retire in Texas”, where you will discover how to enjoy your faith, your family, and your freedom in the State of Texas—and, now, here’s your host, financial advisor, author, and all-around good Texan, Darryl Lyons.
Darryl: Hey, this is Daryl Lyon, CEO and co-founder of PAX Financial Group, and you’re listening to Retire in Texas. Hey, I just want to remind you that this information is general in nature, and it’s not intended to provide specific investment, tax, or legal advice. Visit PAXFinancialGroup.com for more information.
I kind of think that a lot of us feel that our investment strategy is stuck, like “I need to be doing something different,” and so you look at all the performance that “I have to do something different.” Just know that that feeling of needing to do something different is, I want to recognize that because that’s not uncommon. [01:00].6]
You know I nerded out on behavioral finance for three years. I mean, that’s all I studied, all I read. I hired a professional Harvard guy, he taught me everything about behavioral finance. I’m not a neuroscientist or a psychologist or anything, but I studied behavioral finance enough to try to understand what’s really messing up. How are people not building up wealth?
I couldn’t get it because I’m such a rational person to the degree that I’m like, Okay, hey, save money. It’s just not difficult. Just save money. This is very practical. But human behaviors are getting in the way of good decisions and I couldn’t understand it. It seems very intuitive to many people, but I had to study it, and one of the things I want to mention is that in a market where something like our investments seem broken, absolutely, we always want to be in control and do something. That’s just it. We just have to do something, and even if it doesn’t make sense, we feel better by doing something. [01:52].8]
I do this all the time when I’m in traffic and you do it, too. There are three lanes and you you’re just sitting in one lane, and you just feel like you’ve got to shift lanes, or I go to my Waze app and a lot of times I go from New Braunfels to San Antonio, it’s longer to go maybe down 46, but 1604 is in traffic or something. But I’d rather go 46 because I’m actually in control. I’m driving. I’m not sitting behind somebody.
So, I get it all the time. I’m always asking myself, why do I want to be in control? And we always want to be in control, and that’s what we’re dealing with right now with our investments, so you probably want to fire your financial advisor. And we’re very thankful. Actually, this year was interesting because we had a lot of clients that came back to us, which is probably one of the most fulfilling things that I’ve ever had as a financial advisors, because it hurts personally, there’s no doubt it hurts personally, when a client leaves. I’ve learned to get better at not owning that, but there’s that degree of like, Ugh. But what’s even cooler is when a client comes back. [02:55].1]
We haven’t really had any issues this year in terms of client attrition. We had actually really good retention and we had a lot of growth. But I do know without a shadow of doubt that anybody out there has thought, Maybe I should find a new advisor or I need to do something different with my investments, and that’s because we have to be in control.
First, I just want to say that I get it that our portfolio feels stuck and that we’ve got to do something different, and I’m going to address that today because there are some things that we might be able to do. Check with your advisor, though, because some of this stuff may or may not be for you. The real tricky part is, why in the world would we do something right now when the stock market is down? We would just basically permanently capture those losses and never get to experience any upside, and you know what’s going to happen. You know what’s going to happen. As soon as you sell anything, the market is going to go right back up, because, of course, it’s happened to you 10 times before over your life, so the last thing you’re going to do is sell something at the bottom.
But I say all that because let’s just at least know what our options are, so that way, when we’re ready to do anything different, we have an idea. I’m going to give you a few options here for us to at least consider, sit down with your advisor and talk through this. [04:03].2]
I still think that owning companies and stocks is the best wealth accumulation tool in the history of the world, and you’ve got to understand 200, 300 years ago, 1,000 years ago, if we want to look up that. I mean, you were a serf. You were a peasant. There was no way to get out of that. There was no wealth that was going to be transferred down to you. There was no way you could get out of the generational financial issues, and now the stock market created a vehicle where anybody could transform their generational wealth in one generation through the stock market.
It’s really freakishly unbelievable, if you think about it, and I think we often take it for granted. I was talking with my friend just the other day from Eastern Europe, and they don’t have a mechanism like that. We take it for granted. Then years ago, and I think it was in the ’20s or ’30s, the idea of a mutual fund where you don’t have exposure to one stock and you can package it in such a way that it diversifies, amazing. That’s just amazing innovation that now you can participate in the markets without losing it all, and so we take that for granted. [05:10].7]
I still believe that, in five years from now, we’re going to find that the stock market, generally speaking, is going to reward everyone the most. That’s my thesis. That’s what I believe because I believe, in five years, that people who own good companies are going to be happy to have owned those good companies. But there are some alternative solutions that we’ve got to look at, because the ride to get from here to there is not going to be fun. It’s going to be bumpy. We’ve got the Federal Reserve. We’ve got geopolitical risk. We’ve got crazy people making political decisions. So, what are some solutions?
First of all, I want to revisit the bond market for a second, because we really haven’t had a good bond market for a long time. The reason we haven’t had a good bond market is the bond yields have been really low. The Federal Reserve recently raising interest rates was very aggressive. They did it over the course of nine months, and as a result, bonds are starting to pay differently again. [06:01].6]
A bond is a loan, so you loan money to AT&T, and AT&T promises to pay you back in 10, 15, 20, 30 years, and then they give you your money back, but while you’ve lent them money, they pay you interest every six months. That interest, maybe a few years ago, was 2%, so you were getting 2% and lending them $10,000 and they’d pay it back to you, and down the road, that really was just okay.
But now we’re seeing bonds starting to pay 5%, 6%, 7%, which is an expense to a company to get access to capital. I mean, there’s no doubt, AT&T, as an example, they’ve got to believe that they can sell more wireless packages and their return on investment for wireless packages exceeds that of the bond yield, right? That’s the game. If their wireless packages, the return on that investment is not as much as the bonds that they’re paying out, then it just doesn’t work, but they will. The bond market will have companies. The companies will pay interest to you as an investor and you’re going to like it, and we’re in a transition where you’re going to start seeing these bond yields. [07:08].0]
The problem is the Federal Reserve is still raising interest rates. They’re not done yet, and as they continue to raise interest rates, bond prices go down. Now, it’s not a permanent downward pressure, so that’s interesting. I want to get into this, but maybe I’ll do a separate podcast on how the bonds work, but it doesn’t frighten me too much when bond prices go down because I don’t consider it a permanent transaction.
Again, I’m sorry I’m teasing you out, but just know that the bonds will go down as the Federal Reserve raises interest rates, but as long as you have a long time horizon in five, 10 years, I believe that you’re going to navigate through this. I like to use fund managers in this space, because I think if you look at the research here, PIMCO did some research. Of course, PIMCO is the king in this space, and I don’t endorse them, but they just did some research on this and really found that bond funds really do bring value. [07:59].5]
So, I want you to revisit the bonds in your portfolio is what I’m trying to say, and maybe I’ll do an entire podcast. You let me know if you think that’s going to be something that would be helpful to go through a podcast on bonds. But when we’re changing up our investment strategy, one thing you need to look at and talk with your advisor about is “Hey, do I need to revisit my bonds?”
A lot of people have a [60:40] portfolio, 60% stocks, 40% bonds. Look at that 40% piece of the bonds and it might be worth revisiting that. I think, in this marketplace, things are changing. I’m spending a lot of time talking about bonds right now and I’d love to dive into this deeper at another podcast.
Okay, I say this a lot. The problem is I really like talking about this, and you’re listening. That’s the cool thing. If I were to talk to my kids about this, I don’t think they would listen for two seconds. One day they will. One day they’ll care, right? “Dad, tell me about bonds.” I don’t know.
Okay, what’s another one? Let’s stay on this bond theme for a second, because I think a bond is alone and you can lend to publicly-traded companies, but what I’m looking at is in another space called the private markets, which is in between family businesses and publicly-traded companies. There’s this other marketplace that are privately-held companies. Think of H-E-B. [09:16].8]
H-E-B-, you cannot buy their stock. They’re privately held. Great company. They need money to expand, right? Maybe they have X amount of cash, but they don’t want to spend all their cash, and so they borrow money. They go to the bank and the bank says, “This is how much we can lend. We can only lend you so much,” so they need to borrow money, too, to expand, so they have to go to the private markets and borrow money.
There’s a way for it and it’s not impossible. It’s not like anything that we’re doing special, but there is a way to be able to get bonds in that private market, and getting access to that private market provides a little bit better yield. That’s an interesting space, too, that I’m looking forward to, the private market bond space. [10:03].8]
Looking at that, also, I think this might be one of the bigger ones to consider, structured products. Structured products, and I’ve mentioned them on the previous programs, but they’re really designed by banks to help the consumer get exposure to the stock market, without taking on a bunch of risks. What they’ll do is the bank will take a group of stocks. Let’s call it the S&P 500, the 500 largest companies in the world, and then the banks will put options together, puts and calls. You don’t have to know about that right now. We can talk about that later.
They’ll package it and present it to you as an investor and say, “Okay, we’ve developed an agreement that we are offering to our clients and we’ll give you,” and I’m making this up so don’t hold me to it, “we’ll give you 80% of the stock market upside or 60% of the stock market upside,” however, they do these agreements. [11:02].0]
You say, “Okay, what am I getting as a tradeoff?” Then they say, “The benefit is we will split the difference on the downside. If it goes down 10%, you’re down five, I’m down five,” and you’re like, Hmm, okay, that’s interesting, sounds like a reasonable business decision, and so you sign an agreement called a structured product.
There’s thousands of variations of them, and you have to do it with a company that’s quality, because if the company can’t follow up on their agreement, then it’s worthless, but these structured products will allow a lot of people who have cash on the sidelines or maybe just retired to get some more upside and some limit on downside.
So, we’re seeing the structured products become more and more important in this new marketplace, especially for those people that are really concerned about stocks and need to get some return on their investment, so look at the structured product piece and see how that might fit in your portfolio. Just know that there’s risk. There’s liquidity risk and there are some tradeoffs, and your financial advisor can walk you through that. [12:03].4]
Okay, again, you’re listening to Retire in Texas. I am going over, if your investments are stuck, how to unstuck them. I also want to say that if you’ve got cash, I do still like dollar-cost averaging in this market. Now, keep in mind, when you dollar-cost average, you’re betting against odds. That’s an important element when we talk about investing versus gambling.
In gambling, the odds are always against you, always. Now, you can move those bad odds a little bit less bad through some skill, but they’re still going to be bad in gambling. In investing, the odds are always for you long term; 70% of the time, the stock market goes up. I look at the statistics every year. I mean, it doesn’t deviate much; 70% of the time the stock market goes up historically.
If you have cash and you want to get in the market, dollar-cost averaging, let’s say you’ve got 100,000 and you want to put it in over the next six months, that’s okay. That means you’re not going to be wrong. But it’s not likely that it’s going to come out as good as though you put it in right away. [13:09].8]
I’ve done dollar-cost averaging forever since 1999. I’ve been doing it not just me, but for my clients, and almost always I revisit the dollar-cost average and I’d say to myself, “I wish I’d have just put it in. I wish I’d just put it in.” Now, it doesn’t really mess up the game plan. It’s not a huge issue if you make that mistake. It really isn’t. But most of the time the market goes up, and when you’re dollar-cost averaging, you’re only placating yourself, your own fears, and that may be fine, but just know you’re betting against the odds. The odds are you’re going to say, “Man, I just should have put it in.”
But it’s hard to do. I’ve got clients with millions and millions of dollars and they’re like, You’re going to tell me to put it all in right now? And I look at them and I say, “I don’t want to be wrong either.” I’ve done that many times as well, where people have given me millions of dollars and I’ve put it in to work, and then the next week stuff happens. I mean, that’s happened to me. I mean, I’ve been doing this forever, so it’s been so many times and it’s so hard. [14:05].7]
So, I like dollar-cost averaging, too, because it makes me sleep at night as a financial advisor, but at the end of the day, when I look back and I do a postmortem review on my decision making, usually I should have just put it in, but it’s just hard to do in this marketplace. If you have got cash sitting on the sidelines, just know dollar-cost averaging is a solution and you have control over dollar-cost averaging. You’re like, Okay, instead of dollar-cost averaging over a year or six months, let’s just do four months. Okay, all right, now we’re hedging our bets a little bit, but dollar-cost averaging is a great way to get that cash off the sidelines.
Let’s talk about equity-indexed annuities. You know me, if you’ve seen any of my stuff over the years, I’ve been a critic of equity-indexed annuities, but if you want to get your portfolio unstuck, it’s not a bad solution. We’ve been pretty good and pretty judicious as an organization on when did we adopt equity-indexed solutions. [14:57].3]
I say I, but it’s really we have constructed, as an organization, the compensation structure so that the advisors here do not have this huge disincentive of equity-indexed annuities, because I believe the problem with equity-indexed annuities is not necessarily been their construction, but they pay these insurance agents so much money, they’ll pay them 10%, and so the agents have this huge incentive to sell equity-indexed annuities and I see it on the radio all the time, or hear it on the radio, and you do, too.
But I was struck because I was like, I know they have a place, but how can we implement them in our organization in such a fashion that our advisors don’t have this conflict? As good people as they are, I know that stuff happens, the conflicts exist. So, we constructed it to where, when an advisor makes an annuity recommendation, I know, honestly, they’re making it because they think it’s in the clients’ best interest. I feel very good about that, so now we’re having very rational conversations and the adoptions of the annuities are really working for our clients’ benefits. [15:56].7]
Basically, what it is, it’s very similar to the structured product that you put money into an equity-indexed annuity and the equity-indexed annuity gives you some degree of guarantees. A lot of times these guarantees are a function of income. That’s kind of confusing, but let me make sure I can clarify. They’re a function of income.
The equity-index companies will say—and I’m going to make this up, 100,000. I’m making this up, so don’t hold me to these numbers—“If we give you 100,000, we guarantee, it will give you $5,000 for the rest of your life, and you can live until you’re 110 and we’ll give you that.” You scratch your head and you go, “Well, 5,000 divided by 100,000, that’s 5%. That’s pretty good. What’s the catch?” That’s the financial advisor’s job to know to understand the tradeoffs, because there’s always tradeoffs. There’s always tradeoffs in these. I mean, there’s always trade-offs, so we’re going to give up upside. We’re just going to give up upside. We are probably going to give up some control. They’re not going to let you get out of a contract for seven to 10 years. [17:04].6]
But these guarantees and these annuities are becoming more and more attractive. I had somebody ask me just this morning about it and I was explaining it to him, because his question was “I’ve got a million dollars, and tell me how much I get, if I get 4% a year.” I go, “You get $40,000 a year. That’s just how that math works.”
“Oh, okay, what if I’m 65 and I live to 90, and I want it to be zero?”
I go, “Okay.” I do the math and I go, “$61,000 a year.”
“So, I get $21,000 more, if I just spend my money now.”
I said, “Yeah, I mean, you’re going to spend your own money.”
He goes, “Okay, let me understand this. I give you a million. If I can get 4%, 40,000, the rest of my life and never touch the principle?
“Okay, or I give you a million and I touch the principle, I make sure it’s zero by the time I’m 90, because I don’t want to give my kids anything, and I get $61,000 a year.” [18:03].0]
I go, “Yeah, that’s right.”
“I get 21,000 more dollars. That means I get a cruise that otherwise I wouldn’t get.”
I go, “You’re absolutely right.”
He goes, “Okay, I don’t want to leave my kids money, so I like No. 2.”
I go, “Okay.” But I said, “There is a No. 3 that we’ve got to look at.”
He goes, “What’s that?
I go, “We’ve got to look at annuity, because that’s the business they’re in, and see if they’re going to pay you even more than that.”
I think that’s a kind of a conversation that you might resonate with that annuities do have that place where we’re looking at income, which is the primary purpose of the annuity, and we find that they do have a role and we find that as a percentage of somebody’s total investible assets, they can play a role specifically in this marketplace.
Those are some, just to get your portfolios unstuck in this environment. Let me kind of recap some of this stuff. First of all, the bond market is something we’re going to have to look at. I’m going to tease you with the phrase, “short duration,” so think about short duration. Shorter bonds are probably going to be more attractive in this marketplace. Talk to your advisor about the bond portion of your portfolios. [19:06].3]
I still like sticking with stocks long term. That’s my conviction. It may not be yours, it may not be anybody else’s, but I just think that five years from now, you’re going to be happy if you own good companies, so that’s important. Then we look at structured products as a part of our solution to see if that makes sense. It’s kind of an interesting thing that we haven’t talked about before.
The private bond market is an interesting thing to look at, and then the equity-index annuities, we all have a bitter taste because we’ve heard stuff, but looking at that for income may make sense.
That’s a lot of stuff to digest. I hope that was helpful. You may feel unstuck. You may feel you need to have control. Please sit down with the advisor. Look at what your solutions are. I know sometimes switching lanes seems like it’s the right thing to do. It may or may not, but every single advisor, at least at PAX, is willing to do a checkup with you. If your financial advisor isn’t doing a checkup with you, please find somebody who will sit down with you, and make sure that they have a heart of a teacher that are explaining all the options. [20:04].7]
I think, at the end of the day, that we’re going to get through this mess. It just may take a little while, and I think, at the end of the day, that building out a good portfolio that is built– Let me make sure this is clear. Building out a portfolio that is built to accomplish your specific goals is the right thing to do.
Building out a portfolio to simply get richer isn’t necessarily an objective. Your portfolio is going to go to somebody. You’re going to leave an inheritance. I suggest you leave a legacy. An inheritance is what you leave to someone. A legacy is what you leave in someone. So, as you’re building out your portfolio, I want you to think about not only your standard of living, your spouses’, but your children and your children’s children, and then your decisions on how you construct that is rooted around the purpose of your money.
I hope that helps. Remember, always think long term. Have a great day. [21:06].7]
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