Transcrioption
Welcome to the Millennial Money Moves Podcast. On this episode, Blake and I are diving into the basics of investing.
We really wanted to set a good foundation for the listeners out there, so you know when we talk about a stock or a bond, or use the term equity and fixed income, that you know exactly what that means.
We also wanted to highlight, again, the importance of the investment options in your 401k plan, as that’s where most of us build the bulk of our wealth. We hope you enjoy this episode.
This content is purely educational, and does not tend to be financial advice or financial planning. Please consult your professional financial advisor or tax professional to receive tailored advice to your personal situation.
Babin Wealth Management is not responsible for action taken by listeners based on educational content provided. If you would like to receive personal financial advice, please reach out to Babin Wealth Management directly at babinwealth.com.
Let’s make moves. Welcome, everybody, to another episode of the Millennial Money Moves podcast. I’m your host, Sean Babin, with me as always, Blake Bandani.
Good to see you, Blake.
The one and only. What’s going on, Sean?
I love the one and only. I think that’s what he had, Sean.
I’ve done it every episode. I can’t stop now, right?
Megan was like, well, the one and only, huh? Okay, okay.
I need some hats and t-shirts for that phrase now.
Yeah, dude, you should. We’ll get you. We’ll get it.
Well, actually, that could be like Babin Wealth Management, the one and only.
I’m going to have to trademark that, but good to see you, Blake.
We’ll give you some royalties off that deal for sure.
Appreciate it. Appreciate it.
Good to see you too, man. I’m glad to be back at it again. This is our eighth episode, dude.
How cool is that?
Oh, look at us.
I read a stat that 90% of attempted podcast or a podcast don’t make it past three episodes.
Hey, round of applause.
We did it. So yeah, man, this is going to be a fun one. I’m going to actually let you kind of run with this, run with the intro, kind of switch seats a little bit.
And you’ve explained to the listeners what we’re trying to get after in this episode. I can’t wait to get peppered with some question. Let’s have some fun.
That’s why we’re doing it.
On a side note, hopefully people took some advice and maybe dived in a little bit into the market here, even in the down market when there was a fire sale, because this is the time to buy, am I right?
Dude, it’s been wild. It’s been 3% up, 3% down, 3% up, 2% down. It’s been an interesting week since the last time we met.
Good though, it hasn’t gotten any crazy lower, but it’s gotten a little better. But yeah, I think we hit it nail on the head there, in those panic moments where you want to do exactly the wrong thing.
Just kind of close your eyes for a week or two, maybe a month or two, and inevitably just kind of that anxiety or frightfulness of the country just kind of goes away, and we all kind of just move on to business as usual.
It’s crazy how that works, huh? But knock on wood, it doesn’t get any lower here.
So, but hey, what I wanted to do for this week is, obviously, we’re talking on these podcasts, but I’m also listening to them, and maybe I’m tuning my own horn here, but I think we sound great, of course.
But I think it would be good to maybe slow it down, and some listeners may not have any investment background, any exposure to our industry.
And I think we toss out a lot of terms, the easy ones you can stay along with, like the market, what’s the market doing, what’s a down market.
But I thought it’d be pretty cool, and just listening to you and how you approach your practice as a financial advisor, just getting it from your perspective of like, what are we really saying?
What are some of these terms that we toss around that really don’t second nature to us, but maybe to a listener, they’re like, what are they even talking about?
And I think that maybe it would be awesome to unpack a little bit of that and dive into it. Because again, I feel like you’ve done an awesome job of really showing our listeners the lens of a financial advisor.
But some of that terminology can get a little confusing. What do you think about that?
No, I love it because you’re right. And like in my client meetings, I ask people like, all right, tell people, hey, this is your time. So if I’m talking over you or if you’re not understanding it, like you have to slow me down and ask me.
It’s like in class, like don’t be scared to raise your hand kind of thing if you’re not understanding what’s going on. So we obviously don’t have that kind of feedback. So you’re right.
I think we get very comfortable in our acronyms and our jargon that we use every single week. And so yeah, I’d love to just take a step back, go a little bit deeper, and clarify. I would imagine some of it is like what is a stock?
What is a bond? What is we hit it on the last one, you made me put a dollar in the jar. Asset allocation.
Slow me down. So yeah, I love it, man. And I’m going to let you run with it, buddy.
Yeah.
And to your point too, it’s like in this podcast setting, we’re not looking at anybody, but in a traditional meeting when you’re sitting across someone or maybe it’s a virtual call as well, you can tell when you’re kind of losing them.
But we can’t really see that here. So I think the first thing I wanted to pick your brain on and start with is we talked a little bit about when the market’s down, it’s a good time to buy. Right.
Well, we always use the term buy and just buy into the market. But like, what are exactly we buying into? I think we should start with.
Right. Because there’s a lot of different ways you can take advantage of that down market. And I think when we talk about buying in, maybe we’re just assuming our listeners understand that.
But are we saying buy into specific companies, which aka, correct me if I’m wrong, stock? Or what about buying into our other favorite term, mutual funds, right? Like, let’s unpack that a little bit and really dive into what that all means.
When we look and me personally, I look at the Apple stock app, right? On your iPhone, you see these these greens and you see these reds and you see these down percentages. And typically, they’re showing you the index to specific companies, right?
So if Apple is showing you down 10% in the red, right? Part of what we’ve been pitching is, well, maybe it’s a good time to buy specifically Apple stock. Is that fair?
Potentially, yeah.
I mean, I’m not I’m not one I won’t on this. Yeah, it’s going to be tough for you to get me to say, like, buy a stock, like, buy a specific stock. So general themes.
But yeah, so like, yeah, when something’s down big, hey, does that make sense? I don’t know.
Yeah, wait, and I’m not saying like, hey, Sean, tell the viewers, they should be buying these specific companies.
But in the hypothetical scenario, when we say buy into this market, when it’s down, you have some options of what you can actually buy into, whether you trust Apple or Google or Tesla.
I guess my point of the question is like, there is a potential where you can buy specific stock of those companies so that when those markets turn around for those indexes to those specific companies, you bought in at a certain value of that company,
and now it’s flipped upside down and now it’s positive again. So you almost just gained equity from that. Is that fair?
Yeah, exactly. And I think what we’re going to hint here is kind of the overall theme of the whole podcast, is there’s so many options, there’s so many things to do in these moments. Do I just buy Apple?
Do I put that money I have in savings into Apple, just to stock the company that as an individual, or do I put it into an index fund, or do I put it into a mutual fund? There’s just so many different options of what to do with your money.
So yeah, I love where we’re going. It’s going to be tough to unpack because it’s just too many options. Yeah, no, for sure.
But I guess to the point of that is like, what I’m getting at is like, you don’t necessarily have to buy a specific company when we say maybe it’s a good time to purchase in a down market.
There are things out there called mutual funds, or ETFs, right? So, I’d love to unpack a little bit about what’s…
You can’t use the term safer or guarantees, but the idea of these mutual funds versus buying specific companies is that these mutual funds are managed by specific fund companies.
So, you’re basically buying into that fund company and their money managers who decide what companies they are actually purchasing within that mutual fund. Is that fair to say?
Yeah, exactly. And so, that’s, again, a tough thing from a consumer standpoint is, hey, I know stocks are down. Do I just buy into Apple?
Do I put this into this mutual fund? Do I put this into this ETF? And so, even an ETF and a mutual fund aren’t as just simple as like, hey, this is a mutual fund.
It could be a passively, it could be a passive index fund where it’s just following a certain index.
It could be an actively managed mutual fund, meaning the managers of that mutual fund are trying to outbeat said benchmark that they made up, and a benchmark is an index.
So, some people out there believe that they can outbeat markets, that they can manage a fund that will do better than the S&P 500, and they’re going to try their damnedest to do that.
So, yeah, man, it’s a loaded question, but yeah, keep going with it. Is that helpful?
Yeah, so let’s pause there. Let’s pause there, like a passive index, right? A lot of times, a novice or a beginner investor is going to hear this term S&P 500.
Right?
Oh, just put your money in the S&P 500.
Don’t look at it for 40 years. Well, what are you actually putting your money into? Right?
And that’s, to your point, a passive index where you can track and follow these top 500 companies in the US. So now you’re not just putting your eggs in, let’s say, specifically buying Apple company stock.
Now you’re buying into these mutual funds that behind the scenes are purchasing Apple, they’re purchasing Google, they’re purchasing Amazon.
So it almost makes you feel a little bit less risk averse because now, rather than just going all in on a specific company, you can follow these mutual fund companies that purchase these companies behind the scenes, and you kind of see the benefits
Exactly.
You’re owning all 500 companies, and they’re, you know, different, they’re weighted differently. Like the largest ones are obviously more over, you’re owning more of that than the small, you know, than the 500 largest one.
And that’s how index funds, they can be price weighted, they can be market cap weighted. And so, yeah, you get to own that whole basket of those 500 stocks. And what I love about that is you don’t have to go pick these things.
They’re picked for you. And if they fall out of favor, meaning if you buy into that 500th company, and the next year, that year doesn’t do well when it falls out of the top 500, then whatever replaces it, you’re kind of buying back into it.
So it takes kind of the guesswork out of having to pick stocks, certainly. But yeah, it narrows the range of returns, too.
So you’re not going to have as much upside in an index fund versus just saying buying Tesla or Apple, for example, but you’re limiting your downside, too, because you’re casting that wider net, having that diversification.
Right. So again, even in a down market perspective, maybe you don’t necessarily have to go in, and we keep picking on Apple. But I mean, it is one of the largest companies in the world.
But maybe you’re not comfortable just putting in a thousand, ten thousand dollars into Apple specifically.
But there are mutual funds out there that will have these portfolios that include Apple stock as a majority of it, but also maybe have some other sprinkled companies. So you’re not just relying on Apple to turn it around.
You can have some eggs in another basket with other companies. Right.
Exactly. Yeah. You’ll have companies you’ve never heard of.
You’ll be buying into a company like NVIDIA well before it’s NVIDIA, potentially. And then you’ll get rid of some companies as they kind of fall out of favor, too.
I think that’s the most fascinating thing, I think, with the stock market is like, no one is king for forever. You know, there’s many, many examples of companies that you thought would last forever. And then times change.
I mean, Kodak is one of the ones that we use a lot of times in kind meetings, like shit back in the 80s and 90s.
Like you thought, you know, the camera was the thing, like everyone was going to obviously have one, and that company couldn’t be replaced.
And then, boom, an iPhone came out, or a flip phone with a camera came out, and that thing just went into bankruptcy. And that kind of allows you to kind of limit your risk for sure in owning kind of a broad basket index, like an S&P 500.
And you can buy them in an ETF or a mutual fund. If you want to get into those differences, we absolutely can, too, because they’re pretty similar, but there’s some little nuances to those different vehicles and different investment purchases.
Absolutely. So to that point, though, you hear a lot of times, like especially if we’re getting a lot of millennials here, right? Well, you have time.
You have time horizon. Just stay focused, locked in on equities. Well, what are they telling you?
They’re telling you keep purchasing, not necessarily stock of companies, but keep being aggressive with buying these types of funds that are backed by these huge companies.
Because over the next 20 years, hopefully those companies continue to grow as they’ve already shown in the previous 10, 50.
So if you hear that term equity exposure, we’re just implying that you’re actually putting most of your investments into companies that not everything is guaranteed. Maybe that company does go belly up. So you’re taking that risk.
But when you use some of these large companies that have created a footprint that really show the consistent trends year in and year out, you’re kind of tying your investments to those companies, aka investing in equities.
Did I say that fair as a novice investor myself or what?
Yeah. Anytime you buy stock, you’re now an equity owner in said company.
Right.
Even when you buy a mutual fund or an ETF, which owns hundreds of different companies, that mutual fund or ETF is a shareholder of all those different companies, and you are therefore a shareholder too.
So yeah, that’s the whole point is that’s what’s really driven the entrepreneur, which is business owners, drives capitalism. That drives growth. People inventing things, fixing problems that we have, and turning into bazillionaires because of it.
And if you are a part of it, meaning an equity investor, then you should make money off of the entrepreneurship backbone or capitalism backbone of this country.
And it’s proven for the last hundred years that that is a really healthy way to leverage your money. You know, S&P 500, again, we use it.
I know we kind of, we use it all the time because it’s what most people understand, the largest 500 companies in the US. That’s averaged a little over 10% since its inception, going back to 1923.
So that is a heck of a return for, I wouldn’t say the average person, but people who are just trying to build their wealth. You know, there’s a lot more speculative ways to make a lot more money.
But if you can dump money from your K, your paychecks into a vehicle that can do 10% a year long-term average, then that’s a heck of a way to double your money every decade. And that’s the whole point of being an equity owner. Now, you’re right.
It does come with risk. We’ve seen it this year alone where, you know, you could be down 10, 12, 15% in a couple of days if kind of the shit hits the fan, so to speak.
Yeah, well, and exactly right, right? Like new administration, we’re going to hammer tariffs. Apple manufactures a lot of their products overseas.
So now there’s going to be a huge hit to their sales volume now that they’re expecting less consumers to want to buy Apple because they’re going to have to up, you know, hike the prices of things now that there’s tariffs involved, right?
So that’s kind of the idea of like you’re taking the risk by putting money into these companies, and administration, regs, laws, they can turn things around.
So if you’re expecting this money today, it’s a little bit more of a gamble because who knows what can happen. Another aspect that I love that I think has gotten a lot of popularity is this QQQ. I think it’s technically an ETF, right?
All the commercials from the NCAA tournament.
That’s good.
And it’s actually a pretty cool concept, though, because from my point of view as a novice person that doesn’t look at the market, doesn’t really trade on a daily basis, is, you know, NVIDIA sounds pretty cool, right?
And we know tech is the movement, right, with AI and where we’re going with our society. But do I really want to trust NVIDIA? I don’t even know what I’d be putting my money into.
So then these mutual fund companies and just money managers create these funds that not just put all their eggs in one tech company, they go out and they kind of observe some of the top tech companies.
And now you can put your money into that portfolio, right? So it’s again, that aspect of there’s nothing wrong with going in and buying NVIDIA, you know, Tesla, whatever you want.
But then QQQ, that money manager is actually looking at the entire market and saying, well, NVIDIA looks strong. But what about these other tech companies that you may not know about?
And now you’re kind of diversifying your investment rather than just putting all your eggs to one company, right? Yeah.
And the whole investment landscape is extremely commoditized. So what Blake is alluding to is what we call a sector.
So the technology sector, you can buy a financial sector, you can buy a utility sector, you can buy into the energy sector, you can buy into the consumer staple sector, consumer discretion.
They’ve segmented stocks in so many different ways that are more consumable, meaning more attractive for you to purchase. But the whole stock universe in the US is probably 3,500. Let me Google this.
I’m actually curious now. How many? All right.
So there’s currently about 4,300 publicly traded companies in the US. So that’s not as many as I think people might assume.
Well said.
Especially when there’s so many different things you can buy, there’s far more mutual funds and ETFs in the marketplace than there are publicly traded stocks. So let’s look that up, too. Okay.
So here’s as of 2023, there were over 3,100 ETFs in the US alone. So almost, and that’s just ETFs. If we did ETFs and mutual funds, let’s see.
There’s, looks like over 10,000. So 10,300.
Crazy. So now you’re sitting here as an investor. Where the hell do you start, right?
Exactly.
And that was my job for a long time.
When I was working as an analyst was, it’s taking screens of all those different ETFs and mutual funds and trying to figure out which ones best fit for our clients, you know, which ones were the most cost effective, which ones had long time, you
know, track records, didn’t just pop up in the last couple of years, which ones had the performance that matched kind of what the index are trying to… There’s a whole bunch of due diligence that goes into it.
But like the Qs that you mentioned, the triple Qs, you know, what’s their line? Like the future might be scary, but not investing in it is even more scary. Something like that.
Like you didn’t hear about the Qs 10 years ago, and that’s because technology stocks have done so well in the last decade that that fund just makes so much money hand over fist that now they’ve got commercials all over the town.
But yeah, it’s a tough landscape to navigate.
It is. But again, back to the whole idea of like the novice investor, like you hear these success stories of like people that own Microsoft in the 80s, and they stay on and help.
Buying the Apple, like getting the check.
Exactly.
We put our money in some fruit company, and like that line always kills me.
But that’s the point, right?
It is like, well, if you’re not too worried about tapping into this and needing the cash, why not ride the wave and see what that money looks like by investing in that company that you think has potential growth become the next Microsoft, Google,
etc. And that’s the risk you’re playing, because there’s also a lot of companies that don’t make it. So that money that you were pumping into them from a stock purchase, if they go belly up, there goes your investment.
So that’s where it’s like, it’s tough to maneuver that as a novice investor and want to put money into that. But that’s where the idea of like a mutual fund comes into play where you don’t have to just put it all into one company.
You can spread it out and have these money managers that do this for a living track that for you, right? Yeah.
And I think when you’re first starting to invest, that’s what you think it is, is buying five, six stocks. And you want to be successful. You want it to pop.
You want it to make you a bunch of money. And so, I remember starting out, I only had a couple thousand bucks, and well shit, if I was going to go buy 10 stocks, then I can only put 100 bucks in each one. So, I was like, I’ve only got a thousand.
Let’s just pick one and put all my money into it, because I don’t want to diversify this thousand bucks across 10 different ones, because they collectively might not do as well as this one individual. And we’re just wired to think like that.
Right.
We want those in the equity space. That’s where we’re trying to make money. That’s where I’m trying to make my clients’ money.
And that’s where we have many of those stories of people who have hit it big. And we want to be that next success. We want to pick the next NVIDIA, the next Apple, the next Microsoft, and the next Tesla.
And we just think, you know, we get ideas that this is the one, or you work for that company. Something like that happens. You get very emotional to it.
And like you’ve said, more times than not, it’s not the case.
But then switching gears, because you’ll hear a lot in our industry, fixed versus equities in these portfolios where you can invest into these mutual fund portfolios that help diversify.
So you’re not just all in on equities and buying company stock, but also getting more of a conservative, if you want to say, guaranteed returns with the fixed income sleep, right?
Exactly. Yeah. And this is our asset allocations conversation.
So how much stock is your equities, or you’re owning these individual companies. And then what we call fixed income is kind of your bonds portion of your portfolio. And this is your debtor now.
So a bond is, let’s use Apple again. They don’t issue debt because they have so much cash. But let’s say they issue debt, and they say, hey, we’re going to issue some Apple bonds.
We’re willing to pay you 4% because that’s the market rate if you give us $1,000.
So they could be a one-year bond, a five-year bond, a 10-year bond, a 20-year bond, however long, but every year, they’re going to pay you that 4% on how much you buy in those. You know, you look at different qualities of the companies.
Apple is going to get away with only having a low interest rate versus some unknown companies that are a little riskier companies.
They’re going to charge, not charge, they’re going to pay you more because it’s going to take more of a risk for you to give your money to them, hoping you get it back. So, they might have to pay you 7% versus an Apple that can only pay you 4%.
So, in the bond space, it’s very much, you know, that’s your safety net for your portfolio. It would tell people the stocks are your gas, your gas pedal, and then your bonds portion, that’s your seatbelt.
So, like when the gas pedal is broken or we go off the gas, like you’ve got your seatbelt there to kind of keep you in.
And that’s where, you know, we kind of transition people over time as to that fixed income space, reducing the risk of their portfolio.
As they get older, as they get closer to different goals, whatever the case might be, we kind of reduce that exposure to stocks because they can be volatile, as we’ve seen in the last month, whereas the fixed income typically holds up pretty well,
unless rates are rising. And that’s a whole different conversation about the-
That’s another time.
How price changes and fixed income works.
In your example, you used corporate bonds, right? But what about, you’ll hear the term T-bills, or what’s the government bonds, right?
Yeah, treasuries, T-bills, you know, the Ginnie Mae and Fannie Mae, like mortgage-backed securities, kind of debt instruments too. So yeah, the US government issues tons of debt, as we know. We’re all well aware of that.
You know, portfolio managers buy them. You know, a lot of my clients own a lot of them. Like typically, they should be the safest investment in the world.
That’s kind of what they’ve touted themselves. They’re all backed by the dollar, they’re backed by the full faith and credit of the US government. Under normal circumstances, that’s like, you know, pretty much as, you know, it’s as good as gold.
So they’re very safe. That’s why a lot of people buy them. They don’t yield a ton.
You know, right now, they’re maybe at three and a half, four, four percent on like 4.6 on like a 10 year. And then versus a corporate bond typically will pay a higher yield. So we’re talking about yield.
Yield is just what that company is willing to pay you for them to borrow your money.
And if I’m an investor, I hear, well, okay, the government’s saying, if you give us $1,000, we’ll return 2% on that over the next 10 years, right?
Yeah, they’re going to pay you 2% every year. That’s typically stated as an annual rate is, and then at the end, they’ll give you your $1,000 back.
So you’re going to get 2% every year for however long that term is, and then you’re going to get your full money back in that last year, when it matures, is what they call it, when that instrument matures.
Matures, right?
And then so that’s the key, because if you are closer to retirement and you’re not going to be making income necessarily, who knows, but not your traditional job anymore, it is almost nice to say, well, I don’t want to play around with a down 10%
market, up 3, down 5, all throughout the year, when I can just get this guarantee from our government that, hey, I give them this 1000 bucks, I’m going to get this returned safely. And the idea is, well, why does the government issue so much debt?
Well, there’s a lot of faith in that. If the government can’t pay back its debt, there’s again, bigger fish to fry than your retirement because something’s going wrong with our country. But that’s the idea of that being conservative and safety net.
Is that fair?
Yeah, that’s exactly it.
So like, if people are relying on their investments to live off of, you know, they’re in those retirement years, taking that monthly distribution from their accounts, that’s why we go from like maybe all equity portfolio to like a 70-30 split,
meaning 70% stock, 30% bonds. And that 30% in bonds is kind of what we’re pulling from each month for them to live off of.
So we can live with the volatility of the stock market and 70% of the account, but 30%, we’re like, you know what, we need this to be here for us. We’re taking monthly income.
And then if 30% gets too low, like they’re withdrawing and now it’s gone from 30 to 20, that’s when we do what’s called a rebalance of their investment account and we’ll sell the stock to replenish the bond portion of that portfolio so they can
continue to keep withdrawing. But yeah, we’ve basically removed 30% of the growth portion and put it into that seatbelt or safety net portion. They can comfortably live off of it.
And that’s what, you know, in these volatile times, we try and remind people, like, that’s why we have that there. Like, it’s set in place for you to keep taking your money.
Yes, your account balance is lower than it was two months ago, but we still have this portion over here for you to live off of for the next year or two. If nothing happens or if it keeps going down, you’ll be fine.
So yeah, that’s how you reduce the risk of taking the full blunt of kind of the volatility of the market is adding more fixed income products to kind of offset the volatility. That’s typically when the stock market… No, go for it.
And there might be some 40 year olds, mid thirties that are like, hey, I kind of want to just start pulling out, which is it is what it is.
But that’s why the common sense here and the rule of thumb is well, in your early age, if you’re not really anywhere near retirement, why do you need so many guarantees when you’re going to be missing on potential huge market gains?
What’s a 4% return or 2% return on a government bond when the market just skyrocketed 15%? Why would you want to give up that potential? Well, because I might have lost.
Yes, but you’re not relying on this money. So let it ride out back to our podcast before.
It’s like when you start getting to that point in your life where now you need to start thinking about how you’re going to take income every year, you’re not going to work as much, then there’s the conversation.
But again, I don’t like to give any guarantees. But if you’re not relying on that, why even put any money into some of these fixed income portfolios, right?
Yeah, it’s reliance on it. It’s also goals related. So people may be in their 30s and 40s who have invested for the last decade, maybe to buy a home.
It’s like as you get closer to that purchase date or closer to whatever you need those funds for, that’s when you should be dialing down the risk. Like we do it for the kids in their college savings accounts.
Like when they start young under pretty much 12 years old, we’re investing very aggressively in those college savings accounts.
But when they are become a senior in high school or junior in high school, we’re dialing that risk down dramatically because we know they’re going to need that money for the next four or five years to pay for those, to pay that college tuition.
So yeah, it’s goals related, it’s retirement related, it’s all about, again, that’s all investing is. There’s a goal behind it. The most basic is to make money, but what are we making money for?
And that’s what you have to connect the dots with when you’re trying to figure out how much risk you’re trying to take.
If you’ve got so much money that the reliance on your money is pretty much zero in your retirement, or you can fund all your goals and you want to take 10 grand, 20 grand, 100 grand, whatever that means to you, and go pick and have fun with stocks,
we tell people that all the time, but we don’t allow them to do that until we know that they’re going to accomplish everything that they’ve told us they want to accomplish financially. And so when they get to that point and they’re like, you know
But no, that was great because that was the idea of this episode is like, you know, you hear people talk about fixed and equities, but like, what are you actually doing?
So hopefully the viewer after that can kind of see the clearer picture of, okay, equities, I’m buying stock typically, and then fixed income, I’m getting more reliable bonds and guarantees on my money. Is that fair to say?
Yeah, you’ll see, absolutely. You’ll see people flee to safety like bonds when the market gets a little crazy like it has in the last couple months.
Right.
And so that’s inevitably going to happen. Same with gold.
And we’re going to do a whole episode on gold coming up because I think that is a very hot topic, especially lately, gold’s done really well in the last year, and people keep coming to me asking, should we buy it? You know, what are your thoughts?
So we’re going to do an episode on gold, and our belief are kind of some numbers behind it to help you understand that as an investment, or should it just be better as jewelry for you?
I’m excited to hear it because I have plenty of questions for you, but you never showed me your pile of gold bricks in your house. I’m curious where you’re keeping it all.
I ain’t got none. No gold bricks here. And no gold watches either, maybe one day.
Yeah.
Well, I’d like to end on this topic. Again, hopefully they got a better understanding of what we are talking about with asset allocations and equities versus fixed incomes. Like, what are we talking about?
So hopefully, that gives you a little bit clearer of a picture. Pick up the phone. We’re always here.
But I am curious now turning the 401k hat back on or just the retirement plan perspective. But I don’t know what the statistic is. I should probably Google it with my fingers here real quick.
I think the statistic was like over 75 percent of retirement plan assets are going to be in or already in target date funds. Right.
And I was just curious because I think you can ask ten advisors and get ten different answers about takes on target date funds specifically.
But why I think this is a pertinent topic is if our viewer is in a retirement plan, there’s a good chance that they’re just invested in a target date fund right now. Right. And I think I’ll give you my insight and pick me apart.
Tell me where I’m wrong. But a lot of times in FK plans, it’s not really designed for investors per se. It’s more just to set up a retirement nest egg.
Right. So you’re not chasing short-term gains. You’re just forcing yourself to put a little bit out of your paycheck every time you get paid to go into this retirement egg.
But you still are investing that money.
So assuming that majority of participants in 401Ks or qualified plans are not sound investors, the DOL likes this concept because a lot of these money managers and fund companies out there created these target date portfolios where based off of your
age and your target date of retirement, it’s going to skew this equity versus fixed proportion. So as you get older and you get closer to retirement, it’s going to skew more to the fixed income sleeve than it would for equities.
Kind of like what we just discussed. But there’s a lot of, and I’ve seen it a couple of times, where like, great story, but should I really be having any fixed income when I’m 30 years old, 35 years old?
And I think you answered my question prior by saying, well, it all really depends on what you’re trying to do with your retirement and cash at hand. But I mean, what is your thoughts on that, Sean?
Again, I think there’s probably pros to the fact that not most participants in 401Ks understand investment.
So, hey, if you have a fun company that’s kind of monitoring the underlining portfolios and skewing it from company stock to fixed income as you get older and so forth, that’s a pretty cool concept.
But are people missing out if they’re just kind of relying on their 401K or qualified plan and saying, well, if it’s what the plan offers, it’s probably a good thing? What are your thoughts on that?
I love the question because I think you’re probably right. I think it’s closer to 80% of people just put it in target date funds. And I don’t hate them, but I don’t love them.
They’re very…
The tough thing with the K plans is sometimes people don’t have any better options.
Sometimes there’s just not enough to choose from to build a good portfolio for somebody. So the target date fund is great at that. A target date fund will have asset allocation in stocks and bonds.
Typically, the farther out your retirement is, the further that date is. Now, you’re probably closer to 2070. It’s probably the longest you’ll see out there.
So that should be like very heavy stocks, like majority stocks. I would say 90 to 95% stocks.
And as you get older or that date gets closer, they will systematically dial down the risk or the amount of equities that you own without you even having to think about it.
Bingo.
So I think the target date funds are great for people who, one, are just getting started. Like, hey, you just got a 401k plan. Great.
You’re young. Pick the farthest date out, target date fund you can, put money into it. And then when you start building some serious wealth in that 401k, and when I mean serious, I mean anything probably over 100 grand, 200 grand.
Talk to somebody, friends, family, financial advisors, somebody who knows what they’re doing on the investment space and have them look up that fund and see what it’s like.
The amount of people that come to me who’ve been in target date funds for a decade plus, those target date funds do get, in my opinion, too conservative too quickly.
I’ll see 40-year-olds that have 70% stock and 30% bonds, and I personally think that’s way too conservative. That’s something that I put 65-year-olds in if they can handle that, or 70-year-olds can handle that kind of thrill level.
So yeah, I think it’s again one of those amazing financial situations where there’s no one size fits all. It’s all very specific to that plan. If they have no better, don’t have any better options, it is what it is.
If they do, and we can build somebody a good portfolio with the other funds available. But most people would just get that enrollment email. It kind of highlights that fund form, and they just go with it.
They don’t know what they’re doing. They’re just kind of filling out this info all alone, and they just put their money in it, and they usually don’t think to have somebody review it.
Well, my company’s offering it. It must be good, right? So I think you hit the nail on the head with that.
And I think what’s also important to understand, just from my point of view, is a lot of times these, what we call custodians or record keepers or vendors that are holding your 401k dollars, they’re in, I shouldn’t say incentivized, but a lot of
times they’re offering target date funds that their own company has ties to, where they make some additional revenue behind the scenes. So although from the perspective of the DOL, no, the plan offers target dates. We’re checking the box.
Well, what is that target date fund? What’s the name of that target date fund? So I think even though it may be a sound retirement investment option for a lot of participants, don’t just assume it’s the right one just because it’s being offered.
Fact check and double check and say, well, why is it this target date fund? Is it fitting my goals? And you may not know those answers, but you can sure as heck call someone that does and talk through that.
So I just think it’s important for viewers that are in retirement plans, that don’t care about investing, and yeah, I do 5%, I get a 5% match, and I think I go into this thing called a target date fund.
Don’t just assume that that’s your only option just because it’s in your plan, and that’s what you started out with. There is plenty that you can do.
Yep, and understand the kind of the, they call it a glide path. Understand how conservative, how quickly it gets conservative, you know? Is it 10 years, every 10 years, they’re dialing it down, every five years, they’re dialing it down.
When I say dialing it down, I mean adding more bonds, reducing your stock exposure.
You know, sometimes that messes people up too, who go into a retirement plan at 40 or 45, and their target date fund is, you know, the 2055 or 2060, and they don’t pick the most aggressive one, and now they’re in a fund that’s 70% stock, 30% bonds,
or 60-40, and they’re wondering why, you know, they’re only getting 6% when the market’s up 10. So yeah, these are those, these are definite mistakes that people make. And you, it takes, it’s simple to just to interview a financial advisor.
Maybe you already have one. Make sure if you do have one, that you’re reviewing your F1K together every year. That is what we do once a year, is give me your 401K statement.
Let me see what it’s in. Checks the box. Good.
No, it’s not good. Okay, give me all your investment lineup, and I’m going to put together a better portfolio if I can, or pick a different target date for you if I can.
So again, just financial health, like make sure you’re getting that physical for that every single year, because that’s where the bulk of most people’s wealth is.
Well said, man. And that’s really what I had for today, which is we throw out fixed and equity and asset allocations, and you’re going to hear target date funds.
And if you’re working in and you’re contributing to a retirement plan, fact check me, see what you’re invested in. If you never really looked at it before, I’m willing to bet you’re probably in some type of target date fund, right?
So Sean, I always appreciate you and just your lens and just kind of explaining how these things work, man. So I always appreciate you.
Thanks, man. I appreciate that. And yeah, don’t let, for you listeners out there, don’t let a decade plus go by and put away 15, 10% of your paycheck every month into something that you have no idea with what it’s doing.
Yeah, man. Great. Good conversation.
I hope that kind of does reset just some basic understanding. And if not, we’re just going to keep mentioning it again as these episodes go on and on. And everyone will become a professional about equities and bonds.
And the target date 401k space as these years go on with us together at the driver’s seat.
Awesome, man. Well, thanks as always, Sean.
You got it, buddy. Have a good night. We’ll see you next week.
Love you guys. Appreciate it.
Take care, guys.
See you.
