Joe Anderson
ABOUT Joseph

As CEO and President, Joe Anderson has created a unique, ambitious business model utilizing advanced service, training, sales, and marketing strategies to grow Pure Financial Advisors into the trustworthy, client-focused company it is today. Pure Financial, a Registered Investment Advisor (RIA), was ranked 15 out of 100 top ETF Power Users by RIA channel (2023), was [...]

Alan Clopine

Alan Clopine is the Executive Chairman of Pure Financial Advisors, LLC (Pure). He has been an executive leader of the Company for over a decade, including CFO, CEO, and Chairman. Alan joined the firm in 2008, about one year after it was established. In his tenure at Pure, the firm has grown from approximately $50 [...]

Brian Perry

In addition to overseeing Pure’s investment offering and platform, Brian works closely with Pure’s financial advisors, helping provide them with the tools and resources necessary to serve their clients and continue the firm’s mission of providing the highest quality financial education and planning to as many people as possible. He has been actively involved in [...]

Published On
August 20, 2019

An inverted yield curve has often led to recession. Pure Financial Advisors’ Executive Vice President and Director of Research, Brian Perry, CFP®, CFA, discusses the current state of the markets and the possibility of recession, and he helps Joe and Big Al answer some listener questions from our 2019 YMYW podcast survey: are structured notes ever a good product? How can you make the most of small retirement contributions? How do you grow a portfolio, when should you rebalance, how should you invest, and what’s a safe withdrawal rate?

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Show Notes

    • (02:09) Brian Perry, CFP®, CFA on Recession and the Inverted Yield Curve
    • (11:53) Are Structured Notes Ever a Good Product?
    • (15:26) How to Use Asset Allocation to Make the Most of Small Contributions
    • (21:18) What’s a Safe Withdrawal Rate When the Portfolio Is Earning Less Than 4%?
    • (28:14) How to Grow a Portfolio Without Too Much Risk?
    • (31:30) Should You Rebalance on a Schedule?
    • (36:39) Why Invest in International Stocks Since They Swing Very Wide?
    • (42:00) When to Invest in TIPS?

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Now, let’s get down to business. The yield curve has inverted, and in the past that has often led to recession. Today on Your Money, Your Wealth®, Pure Financial Advisors’ Executive Vice President and Director of Research, Brian Perry, CFP®, CFA, discusses the current state of the markets and the possibility of recession, and he helps Joe and Big Al answer some of your questions from that podcast survey: are structured notes ever a good product? How can you make the most of small retirement contributions? Plus, how do you grow a portfolio, when should you rebalance, why should you invest in international stocks, and what’s a safe withdrawal rate? I’m producer Andi Last, Joe Anderson, CFP® will be joining us shortly, and here with Big Al Clopine, CPA is Brian Perry, CFP®, CFA:

02:09 – Brian Perry, CFP®, CFA on Recession and the Inverted Yield Curve

Al: Brian, there’s a lot of concern about the market. What happened this last week. So that’s why we thought we’d have you, our director research on first thing. Kind of try to nip this in the bud. So first of all, how are you doing?

Brian: Doing awesome.

Al: Good, good

Brian: Better than the market.

Al: Better than the market. Okay, well let’s talk about that because this wasn’t maybe the best week in the market and so what are some of the reasons we had such big declines?

Brian: Well, I think for starters, let’s put everything into context. Because Wednesday was the largest decline of the year and the 4th largest decline in history as measured by points on the Dow Jones, down 800 points. Sounds like a big number. But remember as the Dow has gone up in value over time, points tend to lose their meaning. So 800 points is a very large move, but only about 2.5%.

Al: Got it. Well and I think it’s interesting to note that the market even with this latest down is quite a bit higher than it was in June.

Brian: Yeah, that’s right and we’re still in the middle of a very good year, so far. As for stocks and again who knows what happens tomorrow or next week.

Al: I think that’s another missed point. If you go back to the beginning of the year, people may not recall, but we had a pretty good decline in December. And so our starting point in January was relatively lower, we’re quite a bit better than that, even with the most recent declines.

Brian: Yeah and human nature being what it is, a lot of people right now see market volatility. We’ve had several big declines in the last couple of weeks and a lot of them face the temptation to get out of the market. And yet you only have to flashback to, as you referenced December, where a lot of people again were probably tempted to get out. And then we subsequently saw mid double-digit returns from December through the middle of this year.

Al: So thinking about this last week, certainly one of the things that’s come up in the press and has become a reality, is this whole thing about an inverted yield curve. So what does that mean?  First of all, and that should we be concerned about it?

Brian: So what’s interesting about financial markets is that periodically something that is generally esoteric comes to the forefront and becomes front-page news, like the USA Today, and stuff like that and an inverted yield curve just refers to the fact that usually when you lend the government or a corporation money the longer you lend it for the higher the return you get. And people usually if you’re going to buy a 3-month bond you don’t get as much return as if you buy a 30-year bond. That’s the normal shape of the yield curve and an inverted yield curve refers to a phenomenon when shorter-term yields or returns are higher than longer-term. So in other words, right now you can get more money lending for 30 days than you can for, let’s say 10 years. And that’s relatively unusual.

Al: Yes, it is unusual because typically I mean if you think, about it the longer you’re gonna have your money tied up you would expect to get a better rate of return. I mean that’s just as logical.

Brian: It makes all the sense in the world. I mean there’s more risk and there’s more opportunity cost and generally if higher yields are found in shorter-term lending that in longer term lending, what that means is that people think rates are going lower. In other words, they think that, hey by lending money next year I’m going to get lower returns and I would get lending money today. And so future rates are lower. What that means is they think rates are going down. Usually, that means they think the economy is going to slow.

Al: So what does that mean for the stock market and how we think about investing?

Brian: Really it goes back to the economy. Because ultimately the stock market is a function of corporate profits. And if you look historically, inverted yield curves have often led to recessions. Now there’s a question, open question whether it’s a cause and effect thing or it’s simply a sign that we’re going into a recession. But historically the most common way to measure an inverted yield curve is the 3 month Treasury to the 10 year Treasury. There we’ve actually been inverted for some time now, for the better part of this year. More recently, the 2 year Treasury increased in yield to the point where it yielded more than the 10 year Treasury. That’s happened 5 times since the 1970s. Subsequent to each of those 5 inversions, we’ve entered into a recession. But, the most important point is that the difference in time between when the yield curve inverted and when we actually run into went into a recession on average was almost 2 years.

Al: So, in other words, we have this inverted yield curve and what happened this last week was the 2 year Treasury is now lower rate than the 10 year. That’s what changed this last week. It spooked the market and a lot of things I think are spooking the market right now. But perhaps this will lead to a recession. Perhaps not. Hard to know. But it doesn’t necessarily. Even if it does lead to recession, then it doesn’t necessarily happen right away.

Brian: Correct. And again, the future is unknowable. But if you look at past history, there’s been a several year lag on average. And the other thing is that stocks on average have been up about 15% in between the time when the yield curve inverts and when we enter into recession. So getting out immediately hasn’t necessarily been the answer in the past. Going forward, who knows but time has proven again and again that markets are very, very difficult to get right with precise forecasting.

Al: So I’ve got this article that was written by Eugene Fama and Kenneth French, 2 very smart individuals on investing. And essentially, they were trying to tie inverted yield curves to expected stock returns and basically trying to tie these inverted yield curves with much lower returns or even negative returns. And interestingly, what they found, and they went back I think as far as 1975 and there were 6 different  inverted  yield curves during that point, what they found was that there really is no evidence that there’s a negative stock premium, meaning that there’s no evidence that you’re better off going right into T bills and then getting out of stocks.

Brian: And I think maybe the yield curve is a pretty esoteric topic, but pulling it out of the weeds, the reason people worry about the inverted yield curve is they worry about the economy going into recession and there’s a lot of reasons as you mentioned to worry about the economy, whether it’s trade wars with the U.S. and China or declining interest rates in general, are a sign that people think the economy is going to slow. But let’s not lose sight of another reason that interest rates could be falling and that’s that internationally, yields are very low. A lot of bonds in Europe and other places in the world actually have negative returns and that’s a slightly mind-boggling concept. But basically, if you buy government bonds in Europe, you have to pay the governments for the privilege of owning those bonds. You get no return you actually have to pay money. And so given the choice between paying somebody to hold your money essentially or getting 1% or 2%, 3%, whatever it is in the United States, the U.S. suddenly looks like a pretty appealing option. Therefore there is a fair amount of money flowing into U.S. bonds, which is one of the reasons that yields are falling, which is prompting then the inverted yield curve.

Al: So to me, it’s hard to understand how there would be negative interest. I mean why wouldn’t you just invest in like a CD in the United States?

Brian: If you’re in the United States you probably would. But if you’re international investor, if you live in let’s say Germany or something like that, you have to worry about exchange rates too and you know so it becomes a function of what return can you get in, let’s say Germany, versus what can you get in the United States. But you have to take into account the fact that you have to convert your euros into dollars and then back again. And without getting too far down the rabbit hole, usually, those exchange rates are adjusted for the relative differentials in yields. So what happens is that investors in places like Europe, don’t really have a whole lot of choices and in fact, some of the large banks in Europe are now charging people to hold their money. So if you want to keep money at let’s say a UBS or something like that, and you live in Europe, you may have to pay for your savings account.

Al: And that’s something we have not seen in the U.S…

Brian: No and you know frankly, I hope that we don’t because if you think about it, people have been worried about rising interest rates in the United States for the better part of 10 years. The question of what if bond rates rise? Am I going to lose all my money? And the reality is, high interest rates are the best thing that can happen to people because the higher rates they get the higher the returns from their overall portfolio. So to me, in a lot of ways the risk is not higher interest rates, in the U.S., it’s lower interest rates.

Al: So I have another question for you. I don’t want this to be too much of a hot potato, but this is the headline that I saw on Thursday morning, it says ‘Trump, Navarro, Peter Navarro, are the only officials in the White House blaming the Fed for volatility, sources say’. So, we know that Trump came out and said that it was the Fed chairman Pell’s fault for all this volatility, what do you make of that comment?

Brian: You know I’m not going to comment on anything that some politicians say because God only knows. But I think that the truth of the matter is that in a lot of ways, Trump has backed the Fed into a corner where they may have wanted to cut rates sooner than they did to support the economy. But given his pressure on them, they had to prove their independence by keeping rates high and continuing to increase rates. So I think in a lot of ways some of that badgering is actually counterproductive.

Al: I suspect you’re right.

Check out Brian’s video on the yield curve inversion and the likelihood of recession in the podcast show notes at YourMoneyYourWealth.com. It’s actually an excerpt from a more in-depth video called Preparing for a Bear Market: A Comprehensive Guide to Bear Market History, Predictions, and Investing. If you want a deeper dive, that’s in the show notes too, along with our recent podcast episode with Liz Ann Sonders from Scwhab talking about how best to invest in the face of a recession. Click the link in the description of this episode in your podcast app to go straight to the podcast show notes – you’ll see all these resources in there the episode transcript. Yes, we have transcripts! Now we’re going to keep Brian around a little bit longer to answer some of the questions you submitted in the podcast survey. If you have questions, compliments, complaints or stories, go to YourMoneyYourWealth.com, scroll down and click “Ask Joe and Al On Air.”

11:53 – Are Structured Notes Ever a Good Product?

Andi: This one came from William. William asked ‘are structured notes ever a good product or should they be avoided?’

Brian: So I’ll give a quick answer and then a longer answer. The quick answer is no, they are never a good product. And yes, they should be avoided.

Al: oh, okay.  Next question.

Brian: I mean let’s put it this way. Charles Schwab – and I haven’t checked this in a year or two, but as of a couple of years ago, and they are very large firm – would not sell structured products to their clients. And I think that that says a lot because Schwab is a financial supermarket that will sell almost anything to their clients. And the reason that they wouldn’t, is because they tend to be extremely complicated, difficult to comprehend and understand. And then to have high fees built in.

Al: So I remember hearing about them, first time maybe about 10 years ago, and on the surface they sounded all right. What don’t you talk about how they’re sold and what they are and maybe a little bit deeper as to why to avoid them.

Brian: So basically a structured product is usually either a bond or a C.D. So it’s some sort of fixed income underlying vehicle and then they’ll attach derivatives to it. And the derivatives will be linked to some sort of indexes and so a common one might track the performance of the S&P 500. But a lot of times they get more complicated than that. So the return of one of these things could be linked to let’s say, the performance of the S&P 500 minus the performance of some European stock index. So you’re betting basically on the differential between those two. We’re talking on the podcast today about the inverted yield curve. Those are pretty common where the return might be some multiple of the difference in the yield curve and they tend to be targeted towards whatever is in the news or whatever is popular and the problem is that the formulas look attractive because a lot of times there is a teaser rate where the first couple of years might have a very high coupon where, hey you’ll get x% for the first couple years then it’ll be linked to these indexes. And then when you start to look at the indexes, a lot of times the return that you’re hoping for is extremely difficult to receive in anything other than historically abnormal market environments. You also have problems around illiquidity. So a lot of times these things are issued in very small issue sizes. And so if you want to go sell it, you’re going to take oftentimes a very significant haircut and trying to sell it. A lot of times they have pretty significant markups when they’re sold initially at new issue. And then there’s also credit risk and so you don’t think about it because you’re thinking it’s the S&P 500 but they’re usually issued by a bank or some sort of financial institution and you’re now a creditor of that institution, just like you would be if you own a bond. There’s nothing wrong with that, but you just need to be comfortable and know that you do have some sort of credit risk outstanding. It’s common that these will be linked to maybe, let’s say the U.S. Treasury yields. You’re not a creditor of the U.S. Treasury where there’s no credit risk, you’re a creditor of Morgan Stanley or Merrill Lynch or whatever bank issued them.

Al: So is there any good points?

Brian:  In my honest opinion, no. I will admit and rather ashamed and probably somebody should be sticking a pin in me, in my Ouija doll, is that back in the day, in the 90s, I actually structured and traded some of these. In general, there were very high commissions that we would put in them. They were overly complicated and a lot of times they don’t perform the way people would hope them to, because they’ll have caps and floors that really limit the upside on them. In general, if people are trying to achieve some sort of diversified portfolio and different exposures, they can do it with more traditional assets because when you look at complicated products, Wall Street’s never really made something more complicated to benefit the consumer. It’s generally just a way to hide additional fees.

Al: So we can say that you saw the light, huh?

Brian: I saw the light and I came to the fiduciary side of the business.

15:26 – How to Use Asset Allocation to Make the Most of Small Contributions

Andi: Next question. This one comes from Joseph. No location given. I don’t think it’s Joe Anderson, because it says “I’m 35 years old, married and I work for U.P.S. As a part-timer, I do take advantage of the 401(k) Roth, contributing 9% weekly, which overall is up 11.11%. It is a small account, still growing but many others ask the same thing. How can we maximize our accounts with such small funds being contributed? I allow Morningstar to manage my account, but always wonder if they are allocating in this scenario of a recession or following the herd chasing the big highs of the market. Just looking to be responsible in the long term. Maybe I’m overreacting. Thanks”.

Al: All right Brian. So we’ve got we have Joseph that has a U.P.S. account and it’s he’s got 401(k) dollars, 9% of his pay. We don’t know how much is in the account, but he tells us it’s a smaller account which is fine. And he wants to do the right thing investment-wise and I would say my first response is, it doesn’t really matter whether it’s a large account or a small account, the same fundamentals apply. And I think one of the first things Joseph, you need to do is take a look at what the funds are ultimately for. In other words, if you have a pension plan or you have Social Security, how much more do you need from your portfolio to be able to cover your expenses? And that’s going to help you decide and when you need that portfolio, maybe its next year, maybe it’s 10 years from now, maybe it’s 30 years from now. I don’t really know, but at any rate, that’s going to help you decide. Now you do say that you’re 35 years old which will generally mean that you’ve got a ways until retirement. So you probably want to have a little bit more aggressive portfolio than someone maybe that’s 65 that has less time to kind of have the ups and downs of the market. What would you add to that, Brian?

Brian: For starters, I’d agree with you 100% that just because it’s not a large amount or regardless of the size of the amount, that shouldn’t change somebodies investment approach. I think a common mistake is that people invest differently when it’s not what they consider a large sum and maybe they take more risks. And so a lot of times, the smaller the portfolio we see, the more aggressively it’s avoided. And maybe that’s because people feel like they need to get very high returns to meet their financial goals and they’re kind of swinging for the fences. In this case, if Joseph is 35 years old, he’s got time on his side and that’s his best friend. So the idea of finding some sort of reasonable asset allocation makes a lot of sense. As far as positioning for a recession, I think that at some point we’re gonna have a recession. And then he talks about the big highs of the market and at some point we have big highs and we’re gonna have both. And if he’s 35, over the next 30 years of investing for retirement let’s say, he’s going to see multiple recessions and multiple great bull markets. And I think it’s building a portfolio that will get him the returns he needs to meet its financial goal, with a level of risk where he’s not going to panic during those bear markets or those recessions.

Al: And I think that’s the key, because I think what happens let’s say he did a fairly aggressive portfolio, and by that I mean mostly stocks and maybe even certain kinds of stocks that tend to have higher rates of return but are more volatile, like small companies, like value companies, like emerging markets, for example, and let’s say his portfolio goes down a lot and then 5 years later it’s back to what it was. It’s like well, this doesn’t work. And unfortunately, we see that all the time. Now what does happen over the long term is if you stick with that sort of approach, you’ll do rather well, but not everyone can stay in their seat.

Brian: And he has the big benefit, Joseph does, of contributing on an ongoing basis, and so this may sound strange and it’s a difficult concept to really grasp on to, but a bear market is the best thing that could happen to Joseph. Since he’s still contributing and he’s still buying in, a bear market will allow him to dollar cost average. He should actually hope stocks go down for the next 10 years. That’s going to leave him with more wealth at retirement than a bull market would. As strange as that may sound. So I think one of the big dangers he would face is that he might be too conservative. Sounds like he’s a little bit nervous and he’s a little bit worried about the state of the market and I think the big danger for him obviously being too aggressive might be a danger but being too conservative is a danger.

Al: Absolutely, so would you have him favor equities? And would you have him favor smaller companies, in value at least, a little bit? Maybe not all in, but a little bit?

Brian: Yeah, I think so. I mean certainly, it’s individual depending on somebody’s risk tolerance. But at 35 and again, assuming these are retirement funds, having a proportion and probably more than half in equities makes sense if you look at a 20 to 30-year time horizon. And the research shows that over time smaller companies tend to outperform larger companies. You know additional research value companies outperform growth and frankly, he probably wants global diversification too, where things like emerging markets will provide higher returns, a more volatile ride, but higher returns across time.

Al: It’s interesting when you consider emerging markets and when you look back almost any 20 year period it’s at the top or near the top of best returns. But it was a crazy ride to get there. So when we look at emerging markets, it’s kind of like yeah let’s have some of the portfolio, but not too much that’s going to upset you.

21:18 – What’s a Safe Withdrawal Rate When the Portfolio Is Earning Less Than 4%?

Joe: We got Cynthia from Houston. H-Town. “Hi. I’m a faithful listener of your awesome podcast for the past several years”. Well, thank you, Cynthia.

Al: That’s nice.

Joe: So here’s Cynthia’s question. ‘What is a recommended withdrawal rate in retirement for a portfolio that is composed of the following’? So she’s got “40% C.D.s money market accounts earning  2%, 2.5%, 40% in a balanced stock fund with some bond exposure, 20% in slightly higher riskier growth funds. And my point is, is I don’t feel like the 4% withdrawal rate will be appropriate when a major chunk of the portfolio is earning less than 4%. Thank goodness we don’t plan to withdraw more than 2% per year. But what do you guys think? Thanks a big bunch”.  Cynthia, I think that is very well thought out and one of the more articulate questions. You can tell she’s a listener. Because I don’t think most people even know what the hell 4% rule is.

Al: That’s probably true.

Joe:  And the 4% rule, in my opinion, is only really should be used to help you to determine how much money that you should have. It’s not like pull 4% out of your portfolio every year. Because it’s going to be a little bit different depending on the market, depending on your life, and so on and so forth. But I think we were talking earlier that people retire with $500,000, that are pulling out $60,000 a year. So for them they can just kind of back into the numbers to say, you don’t want to pull out any more than 4%. So that helps on the accumulation side, I think. So if I’m striving towards a goal and say I want to pull out $40,000 per year for the rest of my life, how much money roughly should I have in a portfolio? Well, it’s $1,000,000, but then once you retire and start pulling dollars out, I think the 4% rule doesn’t work.

Al: Because there are so many different variables and I would say the 4% rule, which came around 30 years ago, give it give or take, maybe 40.

Joe: Bill Bengen, early 70s?

Al: Here was the thinking, was a 65 year old retires and is going to live 20 years, maybe 25. And has a 60% stock portfolio, 40% bond portfolio. And the analysis that was done basically said you have a pretty good probability that you’re not going to run out of money. So there’s a lot of things there. Certainly Cynthia, when you have a portfolio that’s not a 60/40, 60% stocks, 40% bonds, so you’ve got more safety which is totally appropriate because you only need to pull out 2% per year. But based upon your investments is going to somewhat dictate how much you pull out. But it’s a whole lot of things too like longevity. Some people may live into their 90s, other people have health issues in their 60s and they could probably pull out more potentially if they only need the money for 10 or 15 years. But I think Joe, what you’re saying is that this is really something you kind of want to look at year in, year out. It’s not a hard and fast rule, and that’s when you’re in retirement, you’re pulling out a certain amount of assets and then you’ve got to figure out, is this working? Am I starting to deplete my assets? And if so, you’re pulling out too much or maybe you don’t have the right investments or any of number of things.

Joe: The math is right. She’s like, well if I pull out 4% and I’m earning 2.5%, then it doesn’t work.

Al: Wouldn’t you say it this way, that your rate of return from your portfolio, expected rate of return plus inflation?

Joe: Well Bill Bengen said 60/40 split hypothetically they run thousands and thousands of iterations of what the stock market did. Monte Carlo simulations of several different iterations of when markets were good, when markets were bad and when you pulled money out, when markets were really bad and when you pull money out and markets were good. They did all sorts of these you know, simulations of withdrawals, and they looked at if I pulled out 2%, 3%, 4%, 5%, 6%, what was my probability of success that money lasts me 30 years. And so 6% was probably the target expected rate of return. So you pull 4%, it does 6%, the 2% combated inflation limit tax.

Al: I said that backwards. So your rate of return minus inflation might be an approximation of what you should pull out. What you can pull out.

Joe: Sure. So inflation right now is fairly low but as that goes up. So maybe she can pull out 2%, of course, she can pull out 2% for the next probably 5, 10 years. But then as inflation continues to creep up on you, depends on where’s the money at? Is it in a taxable account? Is in a Roth account? Is it in a tax-deferred account? How much are you actually pulling out? Because this could be $5,000,000. Well, 2% of $5,000,000 is a pretty big number, which could cause a lot of tax or it could be you know $1,000,000 and she’s pulling $20,000 out a year. So I mean there’s all sorts of different variables there. I think she’s right on, it’s like if I got a conservative portfolio, I don’t wanna be pulling out 4%. And thank God I got to pull out 2%. But 2% might be high as well.

Al: If she’s earning 2.5%. I agree with that. You also touched on the sequence of returns which in other words, you may have very good years after you retire. In which case you can probably pull out more. You may have very bad years. Maybe you have 3 or 4 years of bad returns, just right after you retire. And in that case, if you’re pulling out 4%, the whole thing may blow up. That’s why we’re saying it’s kind of a rule of thumb to figure out how much to save in the first place. I think that’s right. But then on a year in, year out basis then you’ve got to look at the market conditions, your own situation, what your investments are, where they’re located, are they all in retirement accounts? You’re paying higher taxes? All of these things factor into really what you can successfully pull out of your portfolio. And it might be different. Year in year out.

Joe: It probably will. And because she might want to travel one year. Next year she doesn’t want to travel. You know stay in H-town. Maybe she comes to San Diego, visit us. So when you’re retired, it’s Saturday every day. You get a lot of time off. And so sometimes people spend a little bit more money than they anticipated. So she’s thinking 2%. I don’t know if she’s retired or not, but you know she’s pulling out 2% now. Next year she could pull out 5% and that might just be totally fine. Totally suitable. Who cares. So it’s just looking at what your goals are, what are you trying to accomplish, the 4% rule is really just a rule of thumb. Any time you look at rules of thumb, it’s a good gauge, but you want to probably dive in a little bit deeper just to get very specific on what you can and cannot do.

28:14 – How to Grow a Portfolio Without Too Much Risk?

Joe: We got Nancy from Chula Vista. She writes in ‘how can retirees with pensions best allocate their stock and bond mutual funds to grow, yet not be too risky? As a newly retired teacher with a pension of $300 a month with a pension and $300 a month Social Security, how can I stop myself from checking my IRA daily and watching it go up and down, by $500 some days? This is a zero-cost mutual fund, 60% stocks, 40% bonds. Money is not needed right now but maybe in the future or as a legacy. It’s about $90,000″. Okay, Nancy. It doesn’t sound like she needs the money.

Al: No, Not really.

Joe: Throw your computer out your window.

Al: But if you can’t help yourself, then switch your allocation. Once you go 40% stocks and 60% bonds or when you go 30% stocks. So it’s not going to be so volatile and you won’t have to worry about it so much and you’ll still get some growth, just not as much.

Joe: She wants a legacy. 60%, 40% is fine.

Al: I know, but she can’t handle the ups and downs, so that’s what I would do. I would flop it. I would go 40% stocks, 60% bonds. Done.

Joe: I don’t know. But she’s still going to look at the thing daily. She needs to meditate. Maybe do some yoga.

Al: But then it’s only going to go down $300.

Joe: Find a hobby. That’s a problem with retirees right now. They start paying attention to their money and then they’re taking a look at them. They’re logging on every day and then they freak out and then they’re not happy. You don’t need the money and you’re retired, you’re a teacher. Robby was a teacher for 4 years and you, Nancy, you probably taught for 30 years. God bless you. You deserve to go out and have some fun. Spend that $90,000. That’s what I would do, is put it in cash and spend it. Go on a trip.

Al: But she wants some growth because she might want it for later or a legacy.

Joe: Well you know what. Take the grandkids on a trip and give that legacy to them while you’re living.

Al: Yeah. Enjoy it.

Joe: That’s what I would do, Nancy.

Al: Not me. I would go 40% stocks, 60% bonds.

Joe: But you don’t have a pension, Alan.

Al: I know. I’m imagining though. That would be nice. Well, so I’m imagining if I had a pension and got $300 a month on Social Security.

Joe: And she’s WEP-ped out. That’s why it’s only $300.

Al: I understand, but I assume the pension is decent. And she because she’s living off of that and she doesn’t need the money. So I would just go more conservative in my growth. That way I get some growth that it would not be as volatile and eventually, I would try to train myself not to look at this daily.

If you’re watching your portfolio like a hawk every day, maybe don’t check out this week’s episode of YMYW TV – it’s called Threats to Your Retirement Income. Joe calls this one the doom and gloom episode of YMYW. Then again, it does come with Retirement Income Strategies, a free companion white paper with ideas to help you keep your head above water in retirement. Both the doom and gloom and the strategies are in the podcast show notes. You know, along with the episode transcript. Click the link in the episode description in your podcast app and you’re there.

31:30 – Should You Rebalance on a Schedule?

Joe: Got DJ from Oregon. He’s like “this is quickly becoming my favorite podcast”. Wow. Awesome DJ. “I like the styles. So don’t tone it, don’t do anything. Don’t. Don’t tone it, don’t tone it down, or change.  You got it, buddy. I like that the topic spread over several areas, taxes, investment, retirement, estate, real estate. Yep. OK.  And not just focused on retirement. Is it best to reallocate on a schedule like every two years or just do it whenever your diversification percentages exceed a certain threshold?” Is it best to reallocate on a schedule, so he’s talking about rebalancing, I believe.

Al: That’s what I get too.

Joe: So reallocate would be probably changing everything. Rebalancing would be keeping the same investments in the overall portfolio, but then buying and selling, is how I would see that.

Al: It could be.

Joe: But we’ll say rebalancing.

Al: We’ll say rebalancing.  So do you rebalance every two years and you let it go? Or do you rebalance, maybe you check it more often and when you get within certain designated percentages of variance? In other words, if you’re trying to have 10% of a certain asset class and goes up to 12%, do you sell some and get back to 10%? Or if it goes down to 8%, do you buy some to get back to 10%?

Joe: So DJ, here I’m going to give you the real skinny here on all of this. Rebalancing is key. It’s important. If you did it every 2 years, is it going to be a big difference, if you did it by bands, or if you did it bi-quarterly, or if you did it annually? Probably not. The key component, I believe, a rebalancing is to keep your risk in expected return parameters in check. So, like we were just talking about before, you have a disciplined process of making sure that you’re buying losers and selling winners. It’s just the exact opposite of what we want to do. We want to continue to buy the winners because those are going up and we want to continue to sell the losers because those are going down. Like international stocks, Man they’re going down,  they’re terrible. And let’s just get the hell out of them and buy all USA. I mean how many times have we’ve heard that over the last couple of years. But if you go back to 2000 through 2010, and if you just owned USA, you’re down 10% for 10 years. You had $1,000,000, 10 years later, you got $900,000.

Al: And international stocks were up 150%.

Joe: 150%, 200%. So it’s like OK, if hindsight’s always 20/20, should it have been a better idea just to stay in the U.S. over the past 10 years? Of course. But we don’t know what’s going to happen over the next 10 years. So going back to DJ Should he rebalance? I don’t know, how much money do you got, DJ? If you got $50,000. Don’t worry about it. If you’ve got $5,000,000, then you probably want to have a little bit more, sophisticated strategy or process. But I think sometimes rebalancing is a little bit overblown. Some planning firms, like ours, we look at this stuff every day. And if it’s out of balance by the band. Oh, we’re all over it. If we waited 2 months and didn’t get it done, it wouldn’t mean squat. To be honest with you, I mean it’s like maybe 10, 20 basis points. For the average American, rebalancing is important, but you listen to your buddy Rick and he’s like all you got to do is buy bands and this is what our firm does blah blah blah come and bust with us. But I don’t know, for DJ in Oregon chillin’, I don’t think it’s that important.

Al: Here’s what I like about what you said DJ, is that you’re thinking about rebalancing at all. Because Joe, how many times have we met with people that, oh I got this allocation my 401(k) 30 years ago, never looked at it. And it’s like well, maybe you’re better off particularly I would say as you get closer to retirement. Because when you get closer to retirement what tends to happen if you don’t rebalance, is you get more and more stock allocation because stocks tend to grow more than bonds. And now all of a sudden you’re taking more risk and then the day after you retire there’s a market correction and you’ve got you have way too much in the stock market and you’re thinking can I get my old job back.

Joe: Sure. But let me argue with that. That person that had that same allocation didn’t touch it, it didn’t look at it, didn’t put bands on it, rebalance and started messing around with it.  So you had those two people. Thirty years later, someone that never looked at it versus the guy that’s jacking around with it every day, who’s got more money after 30 years?

Al: The guy who didn’t touch it.

Joe: Yes

Al: I do know that. It’s just that you were taking more risk. And see, I guess my point, and I’m coming full circle, is that the longer you have till retirement, you’re actually better off just going all in equities. And don’t worry about it, just let it be, as much as you can stomach.

Joe: Total U.S. stock market fund, total international fund. Boom. 60%, 40%, both of that, all equities. Let her go.

Al: But as you get close to retirement, this becomes much more critical. You have to have a certain amount of safety because you’re going to be drawing from those portfolios.

Joe: But it all depends. I mean I don’t know how old DJ is.

Al: True.

36:39 – Why Invest in International Stocks Since They Swing Very Wide?

Andi: Now speaking of international, you do have a question on that as well.

Al:  International?

Andi: That was JT in San Diego. He said, “I’d like a better understanding of international markets in relation to the U.S. markets. Part of my current portfolio includes international/regional exposure. My view is to stay with U.S. markets and leave out the international/regional markets since they swing very wide.”

Joe: Swing very wide. Does that mean? What?

Al: Is that it means they swing very well?

Joe: Yes. Does that mean it’s more risky? Is that what he’s saying? I mean they like the standard deviation of international stocks are higher?

Al: I think he’s implying they’re more volatile, which is not true.

Joe: It’s not true at all. Maybe over the last couple of years, you might have seen the swings going not in the direction where you’d like.

Al: So the truth is that the U.S. stocks versus international, if you just take that as your two comparisons. Let’s just start there, which is kind of what you’re asking. There are times when U.S. outperforms international and there are times when international outperforms U.S. in effect. Really, if you look at the last almost decade, U.S. stocks have done better than international. But if you look at the decade before that, it was exactly the opposite. So with that logic, is international going to be the place to be through the 2020s, we have no idea. That’s why you want to have both because they both tend to cycle at different times.

Joe: There’s a higher expected rate of return right now for international in emerging markets stocks than there is in U.S. stocks.

Al: Because they’re lower priced. Exactly.

Joe: When you want to buy things, high priced or low?  Low priced. And so this is recency bias. So we look at our portfolios, we see what is doing well, what has not been doing well and we want to continue to load up on the things that are doing well. It’s a very hard discipline to follow.   It’s like well I don’t want any of that. I don’t understand international. I mean if you think of it, you can’t look at just international and U.S. either. That doesn’t make a lot of sense.

Al: There’s a lot more categories than that.

Joe: You’ve got to look at big strong, large companies. Then you look at mid-sized companies. Then you look at small companies. That’s kind of where you start. So if I look at big strong, large market capitalization companies in Europe versus U.S. I mean is one better than the other?

Al: They’re about the same, but they do tend, if you look at them as a whole, U.S. will outperform sometimes and international will outperform. And I think sometimes people invest in international as a bloc because they think it returns better investment. But no it’s the same. It’s just that they cycle at different times. Now if you get smaller international and emerging markets and you compare that to large U.S., than the International over the long term will outperform just because it’s smaller and more risky and more volatile. But you definitely want to have both. We could have had this conversation 3 years ago, and so we might have said well, international stocks are due. Which is what we’re kind of saying right now. On the other hand, we’ve had another 3 great years the US. So it’s why you don’t go all in or all out. You have a globally diversified portfolio to capture everything.

Joe: I get it though. It’s like what we want to buy what we know and what we’re comfortable with. It’s like I mean I really don’t understand what you’re doing over there in Europe.

Al: It’s like it’s the same thing we’re doing here. I just I just got back from Ireland, Scotland. They work. They have fun. They go to pubs.

Joe: Yeah. I mean the emerging markets are something a little bit different you know.

Al: Well sure, because now you have undeveloped countries, underdeveloped countries.

Joe: I think our opinion is to be globally diversified in looking at different factors of size and price of the particular stocks. Region, of course, is important too. You want to be diversified across all continents and countries. But now watch the next 10 years when international does well. This is what’s going to happen to this gentleman. He’s like, screw it, I’m out. I’m going to go all in U.S. And then as soon as he does that, guess what’s going to happen to U.S. stocks?

Al: It’s gonna tank.

Joe: Then guess what’s going to happen to international stocks.

Al: It’s going to go through the roof.

Joe: It will happen every time to these people. I feel bad too. I get it. I understand. Look at the track record. Go for it. And then he’s gonna do it. And then all of a sudden as soon as this guy does it, boom it’s going to change on him.

Al: But on the other hand, it could take 3 years for that to happen. That’s where nobody knows.

For more on Pure Financial’s investing philosophy, download our newly-updated free white paper, Pursuing a Better Investment Experience. Learn the drivers of expected returns, why chasing past performance is a mistake, and how to let markets work for you. For more guidance, click the free assessment button at YourMoneyYourWealth.com for a two meeting financial assessment with a CERTIFIED FINANCIAL PLANNER that can help you figure out if you’re on track to accomplish your goals in retirement. And you don’t even have to be local to Southern California for that two meeting financial assessment, we can even do it via web meeting. Or if you just have a specific question, click Ask Joe and Al On Air at YourMoneyYourWealth.com and send it on in. You might even get a useful answer.

42:00 – When to Invest in TIPS?

Joe: Right. OK. We got writes in “To Be Risky.”

Al: That’s the name?

Joe: Is that what we’re just calling this person?

Andi: That’s the first half of their email address, because they filled out the podcast survey.

Al: What’s your online name?

Joe: To be risky was is the email? To be risky at gmail dot com?

Andi: It wasn’t gmail, but yeah.

Joe: Or something like that. I’m sorry “To Be Risky.”

Al: Do you have it like a social name that’s different from Joe Anderson?

Joe: Yeah, l like buck naked.

Al: There ya go.  We could be reading buck naked’s question.

Joe: Buck naked 45?

Al: Yeah, I got it. Alright, what’s the question?

Joe: No, mine’s Joe Anderson 001.

Al: Mine’s Alan dot Clopine.  My other one is A Clopine

Joe: I got either Joe Anderson 001 or Anderson J underscore 23

Al: 23?

Joe: Michael Jordon.

Al: Oh.

Joe: I kinda like buck naked though.

Al: Yeah, you should change it. I would never respond to it from buck naked. “To be risky,” I would respond to.  Buck naked I would delete, delete, delete, because I’d be afraid there’d be some pictures in the body of the email.

Joe:  Oh my God.  When is a good time to invest in TIPS? I could have said something else there. When inflation is not on investors’ radar or when inflation actually starts to materialize?

Al: What were you going to say?

Joe: TIPS. Treasury Inflated Protected Securities.

Al: Just curious

Joe: I was going to explain exactly what a TIP is.

Al: What is a TIP?

Joe: It’s a Treasury Inflated Protected Securities. “To Be Risky.” That doesn’t sound too risky to me.

Al: Well it’s a riskier bond than some. Wouldn’t you say that?

Joe: No.

Al: Yeah it is because it’s more subject to inflation.

Joe: Well, it’s based on the CPI index.

Al: It can go up and down more, the principal can go up and down more in a TIP, than in a regular bond, wouldn’t you say?

Joe: But it depends on how you buy them. And it’s still going to be guaranteed at maturity. It’s a U.S. Treasury.

Al: True, but if you had to sell out of it.

Joe: Yeah. When inflation is not on investors’ radar or when inflationary actually starts to materialize?

Al: When’s the best time?

Joe: I don’t know. I have no idea.

Al: You’re not a CFA?

Joe: No. I think To Be Risky is, that’s a really good question. You know what I mean?

Al: Well I can tell you our portfolios have TIPs in them at all times. Because you don’t know when inflation is going to hit. So you want to have some upside if inflation hits. End of Story.

Joe:  Great answer.  Hey, if you’ve got questions, we’ve got answers. I’m not saying there are good answers, but we’ll give you some answers.

Andi: They’ll talk about your question.

Joe: We’ll see you next week. The show’s called Your Money, Your Wealth®.


Thanks to Brian Perry, CFP®, CFA from Pure Financial Advisors for helping us understand the inverted yield curve a little better. In your podcast app, click the link in today’s episode description to read the transcript of the show, check out a ton of free financial resources, and share and subscribe to the podcast.

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Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision.