Take Back Retirement
Why You Shouldn’t Aim for Perfection in Investing
In this episode we speak of the issues and fears people, especially women, tend to have around investing and how often times that fear or uncertainty leads to a late or complete lack of action taken in investing. We believe that there’s no “perfect” time to enter the market and that “time in the market is more important than timing the market.”
It’s important to look at investing as a long-game and know that even substantial dips in the market recover and yield overall great gains in the long run. This is apparent when looking back at the previous 20+ years of the S&P 500 and noting the early-2000s Dotcom crash followed by an even bigger stock market crash 7-8 years later, followed by COVID years later. In spite of these crashes and dips in the stock market, the overall trend is growth over time.
Despite the natural human tendency to avoid uncertainty and risk, the best time to enter the stock market is usually now.
Tune in for all the nitty gritty details
- Joe from Jersey” was hesitant to invest because he was always waiting for that “perfect moment” that may have never came. (4:14)
- The professional investors know that nobody will get every call right in this “game of numbers.” (5:42)
- “Time in the market is better than timing the market.” Money invested should be long term money. (7:15)
- Jeff Gundlach considers 70% a high success rate, even with an entire staff of researchers. (10:43)
- Even professionals know that it is impossible to call investments correct all the time. (13:00)
- The biggest barrier to being a good investor are the thoughts in our heads. (13:55)
- “Being right early, feels an awful lot like being wrong.” Leaving the stock market. (16:10)
- It is really almost impossible to time when to get out of the stock market. (17:10)
- Explaining the charts of the past years of the S&P 500. (18:39)
- Just because you know something, it doesn’t mean that the investments are going in that direction. (20:38)
- DALBAR tracks investment performance including the average return of mutual funds, stocks, bonds, cash, hedge funds, and more. (21:14)
- Choosing the “right” investment. How fear of making the wrong choices causes people, especially women, to make no investment decision at all. (25:05)
- No matter how good or bad the decisions are that people make, there will always be a small segment of return that simply depends on luck. (28:12)
- Look at the expenses of the investments that you are in and focus on diversification. (31:42)
Stephanie McCul…: 00:06 Welcome to Take Back Retirement, the show for women 50 and better facing a financial future on their own. I’m Stephanie McCullough. And along with my fellow financial planner, Kevin Gaines, we’re going to tackle the myths and mysteries of quote unquote retirement, so you can make wise decisions toward a sustainable financial future. Through conversations and interviews, you’ll get the information and motivation you need to move forward with confidence, and we’ll be sure to have some fun along the way. We’re so glad you’re here. Let’s dive in.
Kevin Gaines: We had this client. We’ll call him Joe, from Jersey, who came to us about a year after the stock market bottomed in ’09. The stock market bottom to ’09. He came to us beginning of 2010 and he said, I’ve got this cash that I’ve been waiting for the perfect time to get back into the market. We’ve had this bounce. I want it to come back down and buy it when we reached the bottom again. So, we said, ‘that’s probably not the best idea.’ We talked to him why. He goes, ‘no, this is what I want to do.’ So, we said, ‘all right, we’ll see what we can do.’ Well, we kept watching the market and it kept going up and up. Occasionally we’d get a little dip and we’d say, ‘hey, a little dip, we can at least get a little bit of money into the market.’ And he goes, ‘nope, all or nothing got to do it. Got to do it, got to do it.’ I think it took him about 18 months later and he decided, nah, he can do this on his own. He was still about 95% cash at this point. But gosh, darn it. He was going to continue to invest. Did he ever get back into the market? Don’t know, but he missed basically two years of investment returns. Pretty much anything he would have invested in. He probably would have been higher but he had to have perfection, and he had to make the perfect call.
Stephanie McCul…: Coming to you semi live from the beautiful Westlakes office park in suburban Philadelphia. This is Stephanie McCullough and Kevin Gaines of Sofia Financial and American Financial Management Group. Say, ‘hello,’ Kevin.
Kevin Gaines: Hello, Kevin.
Stephanie McCul…: Today, we’re going to talk to you about investing and this tendency that we have to want to pick the perfect investment or the perfect time to invest. A lot of the women I talk to have this fear of getting it wrong. They’re scared. So, scared of picking the wrong thing or the wrong time that they end up not doing anything. Kind of like Joe from Jersey. The reality is – spoiler alert – there ain’t no such thing as perfect. There’s no perfect investment. There is no crystal ball that’s going to tell you, when is the perfect time to get in. So, it’s kind of one of those things you can’t win if you don’t play. And interestingly, it is a human trait. The fear of regret is large. And I think this is one of the issues that we have. ‘All right, I’m going to take the plunge. I’m going to invest in my 401k. I’m going to pick a mutual fund.’ [gasp] ‘What if I picked the wrong one?’ Right, Kevin? I think it is a natural thing.
Kevin Gaines: It is. It’s very much human nature that the fear of something is greater than the desire for the reward. To go further on your point. Yes. It’s a well-known behavioral thing that people would rather avoid a loss than enjoy a gain.
Stephanie McCul…: Yes, yes. Losses. We feel them much more acutely than gains. That is proven.
Kevin Gaines: Right. To use the old Jerry Seinfeld joke, they did a survey that the number one fear people have is public speaking. Even more so than death, which led to the Seinfeld joke of, ‘so people would rather be in the box than talking about the box.’
Stephanie McCul…: [laughter]
Kevin Gaines: But it gets to the thing that people just don’t like it. They don’t want to make a mistake and they don’t want to have to deal with the pain.
Stephanie McCul…: So let’s talk a little bit more about Joe from Jersey, right? So, Joe comes to us 2010. The market had bottomed out 2009. Of course, in March of 2009, no one knew that was the bottom. And yet with hindsight, looking back, we can be like, ‘oh, okay. It’s been a pretty nice rally since then.’ So here he is thinking I have this money. It’s been sitting in cash. ‘What if I invest it now? And the market goes back down again?’ You think that’s what was going through his mind?
Kevin Gaines: I think that was a lot of it. Yeah, it was, ‘I know how much lower it can go or I think I know how much lower it can go. So, I don’t want to buy it now.’ But then you just never end up buying it, quite possibly.
Stephanie McCul…: Right. So, what happens is he’s sitting in cash earning next to nothing and the market went up. What was the run-up Kevin in around the 10 years after 2009?
Kevin Gaines: So the S & P was… I remember the S & P 500 low was 666. It was the devil’s bottom.
Stephanie McCul…: [ohhhh] The devil bottom. [laughter]
Kevin Gaines: So where are we today? We’re at 3,800 give or take.
Stephanie McCul…: 05:19 Right. So, if Joe, from Jersey, we haven’t talked to him in years, but if he’s still sitting there with his cash, he’s kicking himself. So how do know? What do you do about this fear of picking the wrong time to get in?
Kevin Gaines: Well, I wish I could say ‘here’s the perfect solution that’s going to work for you every time.’ Here’s what I can tell you. You’re not alone. Everybody has these concerns, including professionals. Probably what differs with most professionals, because there’s a lot of bad professional investors out there strangely, but, especially the good professional investors from most other investors is that they understand this is to use the phrase, a game of numbers. You’re not going to get every call, right. And the calls you do get, right, you’re not always going to get it correct at the exact moment. And that’s tough. When we think of investing, it’s like, ‘oh, well, I’m going to invest in the S & P 500.’ I’m going to buy the index fund. And that’s what most of us will do. We’ll just take $10,000 to invest.
Kevin Gaines: We’re going to put $10,000 into the index fund or put it on to Apple or whatever we’re going to invest it in. But professionals understanding they’re not going to nail the bottom or the perfect price. They stagger their money in. For example, they’ll sit there and they’ll buy, 25% of what they want to spend then. And, they’ll see how it goes for a day or two or a week or two or whatever. And then to put some more in and then some more. Whether the price is higher or lower, they layer it in. And that actually gets to something that we talk to clients about a lot, and I know you’ve had many conversations on this – what is called dollar cost averaging.
Stephanie McCul…: So that’s a way to kind of put a little formula on it, as opposed to trying to make the right call and following your gut, your instinct and guessing which day is the best. And it kind of guards against this fear of regret. If you’ve got again, the $10,000 to invest, you can decide ‘I’m going to put in 5,000 this month and 5,000 next month,’ or ‘I’m going to put in 2,000 this month and 2,000 next month and 2,000’ until you get your whole 10,000 in. But the whole idea is you decide the dates ahead of time. And of course, some bad headline hits, the market tanks. You could always move it up, but there’s no guarantee that this actually works out in your benefit, right? You kind of have a 50/50 chance that it’s going to be up or it’s going to be down by then. But at least you’re picking two dates or five dates as opposed to one, and kind of putting all your hopes on one. Now, a scientific investor would just say time in the market is better than timing the market. Just get your money in there. Because here’s the thing. Any money that you’re investing in the stock and bond markets should be long-term money, anyway. So, chances are that movements we see over the next month or so hopefully should be a blip when you’re looking at 10, 15, 20, 25, 30 years of experience.
Kevin Gaines: That’s a great point that you bring up Stephanie, which is the idea of time horizon. Spoiler alert, the people you see, the talking heads you see on TV, their time horizon for the most part is not 20 years. Might 20 minutes, might be as long as 20 weeks. But for the most part, they don’t necessarily have the same time horizon that you do.
Stephanie McCul…: You mean you shouldn’t be too worried about what they say?
Kevin Gaines: If you’re investing for what I like to call fun and profit, you’re just in there, you’re just, trading just to say, ‘hey, let me give it a shot.’ Okay, fine. Try to follow what they say. And half the time you’re still going to be wrong because they’re wrong half the time. But yes, a longer-term horizon. You’re not worried about fill in the blank. Think about it. If you’re investing for 20 or 30 years. Let’s take a step back. You invest in 2000. Pretty much near the market top, right before tech wreck.
Stephanie McCul…: Dot com crash.
Kevin Gaines: The dot com crash. You’re buying in at a market high or near it.
Stephanie McCul…: You don’t know that at the time, but…
Kevin Gaines: You’re still well ahead of the game. Everything that’s happened in the last 20 years, you start off big stock market crash. You go about another, seven, eight years? You get a bigger stock market crash. Then you go about 12 years. COVID shows up. And the stock market goes down 30% yet again. And you know what? You’re still a lot better off. Your investment account is still a lot higher today than it was in 2000.
Stephanie McCul…: 10:17 Right. Back to your point about the professional investors though, right? The ‘fun and profit people’ versus ‘this is your nest egg.’ This is your crucial money, right? You got to take what they say with a grain of salt, because often they’re not playing with their own money. And like you said, they have a different objective than most of our clients do. Most of our clients, their money is their future support for themselves and their families. This is crucial.
Kevin Gaines: So I was listening to this interview the other day and it was between two professional investors. One guy, Jeff Gundlach, who owns DoubleLine Capital. He is one of the more well-known investors out there currently. And he was talking about success rate in what is termed macro investing, which is the big picture, the global economy, interest rates, things along those lines, not necessarily company-specific calls on IBM bonds or Tesla stock or whatever. But he was saying that he has a fairly high success rate in making these calls about the broad economy. 70%. And the other investor said, ‘that’s great. Most of us, you know, we’re happy with, 50, if we get into the sixties.’ He goes, ‘that’s really good.’ And he goes, ‘yeah, but understand what that means. I’m wrong a third of the time.’
Kevin Gaines: We’re sitting here talking about trying to, time to market to get in at the exact market bottom or get out at the market top, or what have you, and professional investors who claim they have this. I mean, there’s no reason to doubt them when I say the word claim, but he says he has this great high percentage and it’s only 70%. And he does this all the time. Huge staff helping him with all the research, access to other research outside of his firm, getting all this data together, coming to these conclusions, using all of their collective experience. And they’re still wrong a third of the time. So why should any of us, including us two who are sitting here talking, why should we think that we’re going to be able to not only call investments correct all of the time, but to do it at the exact moment we should be doing it?
Stephanie McCul…: Yeah. I mean, come on 70%, right? You go to school and take a test and get 70%. You’re maybe getting a C minus. And he’s proud of this 70% and the other guy’s like, ‘wow, that’s amazing.’ So, I think the message to listeners is, even the professionals know that it’s impossible to get this right all the time. And they’re making thousands of decisions in the course of a year. Our clients are making a few key decisions, right? ‘I inherited this money from grandpa. Should I invest it now or should I invest it in 12 months?’ There’s no way to actually know and be able to predict it. We don’t have to worry about being perfect.
Kevin Gaines: And that just gets back to one of the values of dollar cost averaging is how it helps you psychologically. Because quite frankly, whether it’s going to be the right move or not, we don’t know. But if it helps you maintain the discipline and eliminate sleepless nights, then there’s actually a merit to it, even if you end up going in at a quote unquote higher cost over time.
Stephanie McCul…: Yep. So, like so much in life, the biggest barrier to being a quote unquote good investor is between our two ears. It’s all in our heads, right? And I love the research that shows that humans are prone to making these errors. Which makes us – to me, it lets us leave the shame and blame behind and think, ‘oh, it’s not a character flaw. I’m not an idiot. I’m just a human being.’ So, Kevin, we’re talking about timing to get into an investment, but we also have people who feel like they need to figure out when to get out of the market. And I think this is driven by your neighbor down the street who brags that he just knew [Kevin’s laughter] that the stock market dip was happening and sold everything out the week before. So, there’s stories out there that kind of feed the belief that, ‘oh, it’s possible to know. And we should get out if something bad is going to happen.’ Have you seen this too?
Kevin Gaines: Oh, I’ve seen so many different versions of this. And again, not wanting to spend the whole episode bashing financial media and let’s be honest, financial media is not the worst term we use to describe these guys.
Stephanie McCul…: We call it financial pornography.
Kevin Gaines: Fine, financial pornography. Exactly.
Stephanie McCul…: [laughter]
Kevin Gaines: 15 :10 And they’re great for trumpeting, dragging out whoever made the last great call. There is somebody out there who at the end of March of 2020 said take every last cent you got and buy the market. There was somebody who did that. Probably a few people who said that, and that’s probably buying them about five years’ worth of appearances. To come out like, ‘this is the guy who, or the girl who called the bottom of the stock market and yeah! Yeah! Yeah!’ They do this all the time. They bring out these people that made these, one great call.
Stephanie McCul…: Right, they’re on the cover of the magazine, they’re on CNBC, whatever it is.
Kevin Gaines: I mean, they don’t tell you that they were saying the same thing for the previous 12 months.
Stephanie McCul…: Yes. That brings up a very good point. Years ago, I was at a conference and they bring out these professional investment manager people. And I love this guy’s honesty because he was talking about his performance for the past year and maybe it wasn’t the best. And he was trying to defend it. And he said, ‘we believed,’ I don’t remember what section or sector of the market he was talking about, but, ‘we believed that was going to go down. So, we sold it.’ He says, ‘we were right. We were just right about 12 months early.’
Kevin Gaines: [laughter]
Stephanie McCul…: Yes. Let’s say it was the banking sector that went down, but they sold it 12 months before it went down. And of course, it went up in the meantime and I love this quote he said, and it sticks with me to this day. He said, ‘being right early, feels an awful lot like being wrong.’ [laughter]
Kevin Gaines: Absolutely.
Stephanie McCul…: And that’s, I think, the problem. When clients come to us and they’re like, ‘oh, election result, I know things are going to go down. Let’s get out.’ It’s possible that things could go down. It’s possible that things could not go down, but getting out, it’s really almost impossible to time it. And the other thing is there’s always something to be scared of in investing, right? That’s why there’s risk to it. There are always a million reasons we could list why the markets could go down and Kevin made a good point the other day. He said, ‘just because there’s a lot of dry firewood laying around, doesn’t mean there’s going to be a fire. You still have to have that spark. You have to have that match.’ And we never know what the thing is that’s going to do it. Often, the next crisis comes from a corner no one’s looking at it. That’s why it’s a crisis, because it’s some big, unexpected thing.
Kevin Gaines: One of the most common things you hear is, and a lot of people say it, we all say it. ‘Stock market is too high. The valuations’ quote, unquote, valuations, ‘are too high. The market can’t keep going up.’ Valuations is the firewood. Fine, when the levee breaks and the floodwaters come pouring in, yes, the higher the valuations, the bigger, the drop, most likely. Even then, that’s not guaranteed. But still, that’s not a reason the market’s going to go down. It still needs that spark. Whether it’s a pandemic or locking up of the bond market or people realizing that internet companies are never going to make any money, going back to the 2000. You don’t know what it’s going to be.
Stephanie McCul…: Right. And there’s plenty of scary things that come and go and the markets don’t blink an eye. I love the charts, Kevin, and maybe we should share one of these. We could do a little mini video to kind of walk people through it. There are charts of kind of, the big picture of 40 years of the S & P 500 index. It looks like a mountain range, but largely going up over time. And it points out the scary headlines that came along the way. And sometimes the markets went down a little bit. Most of the time, they didn’t. There were all kinds of scary things happening in the market and the world. And the markets were like, ‘oh, oh well.’
Kevin Gaines: Here you go. Perfect example. I love this example. 2011. The S & P, Standard and Poor’s, comes out. So, in addition to having the stock market index, their biggest business is ratings of bonds.
Stephanie McCul…: Standard and Poor’s, right.
Kevin Gaines: They say these bonds, Standard and Poor’s, AAA, these are the best bonds. The chance of these guys defaulting on their debts are virtually zero. Here’s bonds that are rated C. These guys, if they were around in 24 hours, we’ll be impressed.
Stephanie McCul…: [laughter]
Kevin Gaines: In 2011, they downgraded U.S. Government debt. They said the treasuries are no longer AAA. They’re now AA.
Stephanie McCul…: So what that really means is, there’s a chance that the U.S. Government won’t pay you on the bonds you own, right? That’s momentous. Never happened before. [gasp]
Kevin Gaines: 20 :05 Yeah. From virtually no chance to a very, very small chance, but it was still the downgrade and the way most investments work, it’s more of a rate of change type thing. The fact that it moved down, not that it moved from AAA to AA, but that it moved down, that’s going to create a huge problem. Everybody saw this headline. Everybody wanted to sell. By the end of the day, U.S. Treasury bonds were priced higher than when they started the day. People bought the bonds on the downgrade.
Kevin Gaines: And the key point is here just because know something, as strange as it may sound, it doesn’t mean the investments are going to go that direction. Like I said, it sounds a little counterintuitive, but it’s true. Just because you know something, even if you do know it, it doesn’t mean it’s going to work out the way you expect it to. Playing the timing game is difficult to begin with. And even then, there’s no guarantee you’re going to get the result you would expect.
Stephanie McCul…: And usually it’s not going to work out in your favor, right? Kevin, tell us about that DALBAR study.
Kevin Gaines: So there’s this company that tracks investment performance called DALBAR, and you can go out to their website and you can normally find this. And they update it every year. And they track the average return of mutual funds of stocks, of bonds, of cash, hedge funds, the whole litany of things. And they also track average investor return.
Stephanie McCul…: What does that mean?
Kevin Gaines: So what they do is they, through figuring out through cash flows of money going in and out of mutual funds and ETFs and the stock market and all this, they kind of back into a number that says the average investor would have earned because of the timing of the buys and sells, they would have had a certain return.
Stephanie McCul…: What average investor returns means is actual human beings, what they saw on their statements, which had a difference from what the investments themselves had done.
Kevin Gaines: Right.
Stephanie McCul…: Now, why is that? Well, because people are moving in and out, maybe when they shouldn’t be. So, what does this show?
Kevin Gaines: Right. So, what DALBAR does is figuring out the average investor returns most years and those occasional outliers that works the other way, but pretty much, most years, the average investor return is significantly lower than most other investments.
Stephanie McCul…: Oh, it barely beats inflation, right? It’s like 2% when the stock market is 9% and the bond market is 5%. what actual human beings are doing, right? So maybe somebody in their 401k or, someone investing on their own, calling up and doing stocks and bonds because they’re trying to make these guesses. They get nervous. They jump out at the wrong time. They get excited after things have recovered. And then they get in. The kind of human nature way to do it is to buy when things are high and sounding good and sell after the bad headlines have hit. Well, wait a minute, buy high, sell low. That’s not what we’re supposed to do. We’re supposed to buy low and sell high. And yet it’s difficult, right? We’re not making fun of these people. This is human nature. This is emotional.
Stephanie McCul…: This is very difficult. So, we kind of are more of the opinion, ‘set it and forget it.’ Get your money in there. Right? It’s kind of like a rollercoaster ride. You’re going to go on this rollercoaster ride. Your investments are going to go up. They’re going to go down. Put a blindfold on. But even with a blindfold, you still feel those ups and downs if you’re on a roller coaster. Here’s my suggestion. Sit on the park bench next to the roller coaster with your popcorn. Let your money go on the rollercoaster ride. Don’t even open your statements.
Kevin Gaines: There you go. Well, I have to share this, whether we do the video or we just add it as a piece in the show notes. A guy I know posted a chart of the S & P 500 performance for 2020. It starts off at a low point. And it ends in December at a higher point. But as we all know, a lot of bad, scary stuff happened in February, March, April, May, June, even in July. So, what he did was he superimposed on top of that five-month period of the stock market, when the stock market was looking like a really bad EKG readout or something. And it was just a serene picture of somebody sitting on the deck, overlooking the lake with the mountains in the background. And the whole point is, it’s like, hey, if you ignore all this excitement and just look at the beginning and the end, 2020 was a very boring year in the stock market. It just went up.
Stephanie McCul…: 25:00 We’re saying don’t worry about your timing. If you’re investing for the long-term, get yourself in the game and invest. But Kevin, there’s another place that I see people worry about picking the right thing. And that’s actually in picking the right investment. Am I in the right mutual fund? Am I in the right stock? And then it kind of leads to paralysis by analysis and maybe they don’t ever go in. I think this happens to a lot of people in their retirement plans, 401ks, 403bs at work. In the old days, the default investment was a money market fund, right? Which is basically like a savings account earning very little. And you had to pick your own funds if you wanted to do something otherwise. And then they discovered that lots of people and for better or worse, especially women had a fear of picking their own funds or just never got around to it.
Stephanie McCul…: And so they were stuck with just the return of the money markets, which is not going to get you where you need to go. You need growth over the long-term. But luckily in the past few years they’ve changed so the default option in most plans is what they call a target date retirement plan. We’re not going to go down that rabbit hole right now, but it’s basically a very well-diversified selection of mutual funds, that’s got some risk to it and some diversification. But still, I think there’s this very real worry about picking the perfect investment. What do you say to that?
Kevin Gaines: [sigh] Stop worrying. [laughter] Yeah, but it’s a lot more important than that. Once again, let’s whip out another study that says, (hey, look at me.)
Both speakers: [laughter]
Kevin Gaines: There is a study and Stephanie knows this one, as well as I do.
Stephanie McCul…: This is a super famous one. If you’ve ever worked anywhere in your investments, you’ve heard of this one.
Kevin Gaines: Yes. The Brinson, Beebower Study. Which looks at source of return. They sit there and they say, ‘okay, what part of the decision process got you the return?’ And I’m trying to remember the exact percentage. Is it like 92%, 95% is asset allocation. It’s not picking the specific investment. It’s just saying, just get your stock, bond, commodity mix. Just have some sort of mix in there. Just get in the assets. Don’t be invested in cash when the market is going to the moon. Don’t be in stocks when the market is plummeting. You can’t control that. But the idea is it’s not the specific market call. It’s not buying IBM or Apple.
Stephanie McCul…: …Or this Fidelity fund instead of that American funds fund. Just get your butt in the seats. Pick a stock fund. And if it’s not the perfect one, at least you’re in the game, right? I think that’s a very interesting analysis, right? So, what they’re saying is it’s not whether you owned Coke or Pepsi or Tesla or Ford that made the difference in your return over the long term. It’s whether you own stocks at all. Right?
Kevin Gaines: Right. And as a quick little aside, 1% of the a hundred percent of the return is depending on who you talk to, they either call it unknown or they’re even more honest and just say, luck,
Stephanie McCul…: [laughter].
Kevin Gaines: There is a small segment of return that no matter how good of a decision you make or how bad of a decision you make, it may just work out. And not just investing, but also financial planning in general is about probabilities. We’re looking at what is the most likely outcome.
Stephanie McCul…: Right. No guarantees in this world.
Kevin Gaines: No guarantees it’s going to happen, but what could happen and how likely is it to happen? And is it worth worrying about?
Stephanie McCul…: Which is why the first thing we talked to any client about is ‘tell me your whole situation. Tell me your financial picture. What is the job of this money right here?’ If this is the crucial money that you need to pay your mortgage for the next two years, we are going nowhere near the stock market with that money that is sitting in your bank earning next to nothing. And that is totally fine. If this other pot of money needs to provide for your retirement, which might last 20, 25 years, and you’re 10 years away from retirement, then we’re going to talk to you about the need to go for some growth and the need to take that rollercoaster ride and get yourself into something that has a chance of growing.
Kevin Gaines: So you may hear this phrase from time to time if you talk to professionals or watch talking heads or whatever. They talk about risk tolerance is how much risk can you tolerate? And we all have different risk tolerances. Some people there can never be enough volatility. ‘As long as I got a chance to win, I’m going to invest in it. I don’t care.’ Other people say, ‘listen, the old Mark Twain line, I’m more interested in the return of my money than the return on my money.’
Stephanie McCul…: 29:55 And it’s a personal kind of emotional preference, right?
Kevin Gaines: Absolutely.
Stephanie McCul…: If the ups and downs cause you super anxiety, you have a lower risk tolerance. If you’re not worried about it, you have a higher risk tolerance.
Kevin Gaines: And that does influence in how you invest. But you also need to understand a second term we don’t hear as much called risk capacity. You can be the world’s biggest risk taker, but if you have some extra cash, but that’s earmarked for your next three mortgage payments, you have no risk capacity. If the stock market goes down and this is your mortgage money, and you don’t have any other way of getting more money, so to speak, then yes, there is no risk capacity. Conversely, you’re really worried about investing. You don’t like the idea of stuff even going down 2 cents, but you’re saving for retirement that’s 30, 40 years down the road, you have a huge risk capacity.
Stephanie McCul…: Yeah.
Kevin Gaines: And for a lot of us, it’s a battle of trying to balance these two constraints. Most of us fall somewhere in the middle, but there’s definitely two things to consider and that influences getting back timing of when to sell is when your risk capacity is low on something or a segment of your investments, probably a good time to sell. Maybe the investment was going to keep going up…
Stephanie McCul…: If things change, right? Like if money that was long-term all of a sudden, some of it needs to be short-term, right? Like, ‘ooh, I have an opportunity here and I need some money for it in six months.’ That’s not long-term money anymore. Your risk capacity for that slice of money has changed. We should get out. So, I would say risk capacity is kind of the theoretical and risk tolerance is the emotional.
Kevin Gaines: Yes.
Stephanie McCul…: And so that’s part of the conversations we have with our clients is bringing those two things together. Now Kevin, we’ve said, we don’t have to worry about having the perfect investment, but I want to be sure to say in general, we would advise that you look at the expenses of the investments you’re in and all things being equal, you usually want to go for something that has a lower cost to it.
Stephanie McCul…: There’s always a cost. If someone else is investing for you. If it’s quote unquote free, then dig a little deeper. And then also we are fans of diversification because, again, that crystal ball is still in the repair shop, and it always has been.
Kevin Gaines: [laughter]
Stephanie McCul…: We don’t know that a particular stock’s going to go to the moon. So, we are going to advise a, well-diversified usually, low-cost mutual fund full of lots of different stocks, because then we can capture the return of all of them, right? So, we’re not swinging for the fences. I hate those sports analogies. Why does that even come out of my mouth? Right? We’re not going for the giant headline grabbing win, we’re going for moderate, upward movement,
Kevin Gaines: Your serious money, your long-term money. You want that to be boring.
Stephanie McCul…: Yes! Boring, that’s what I’m trying to say.
Kevin Gaines: If you want to have something to talk about around the water cooler or at the cocktail party, that gets back to that phrase I used earlier. Your little side account for fun and profit. What the heck.
Stephanie McCul…: So hopefully we’ve provided you with some useful information today.
Kevin Gaines: Hopefully you got a lot out of this and hopefully you’re going to relax. This is going to take some of the stress off of saying ‘I don’t have to be perfect. Nobody else is. Why do I think I have to be?’
Stephanie McCul…: Yup. Yup. Notice when you have that fear of regret talking to you, right? That little voice in your head, and either talk to a professional, give us a call, right? We’ll talk you through it. We’ll talk you off the ledge. Find a money buddy. Find someone you can discuss these things with, to get out of your head. There’s an expression. Okay. So, I grew up sailing. I did sailboat racing in college. I was not very good, but I’ve been watching the America’s Cup trials this week. There was a big dramatic happening last week. But there’s an expression in sailing. ‘Keep your head out of the boat.’ Which seems odd, right? You’re racing a sailboat. Don’t you want to be aware of what’s happening in your boat? Well, of course you do, but ‘keep your head out of the boat’ means you have to have your eye on the race course, on the other boats so you don’t crash into anybody, but also on kind of what the wind is doing, what the tide is doing.
Stephanie McCul…: You need to have the big picture. And I think it’s a helpful expression if you’re so in the weeds, you’re looking at that list of funds in your 401k and thinking, ‘oh, I got to pick the perfect ones!’ Keep your head out of the boat, zoom out a little bit, get the big picture. You can’t win if you don’t play. Time in the market is more important than timing the market, or it’s the only thing that works because timing the market is mostly impossible.
Kevin Gaines: Absolutely.
Stephanie McCul…: All right, everybody. Thanks for being with us. Talk to you next time. It’s goodbye from me.
Kevin Gaines: And it’s goodbye from her.
Stephanie McCul…: 34:43 Be sure to subscribe to the show and please share it with your friends. Show notes and more information available at TakeBackRetirement.com. Huge thanks for the original music by the one and only Raymond Loewy through New Math in New York. See you next time.
Disclaimer: Investment advice offered through Private Advisor Group, LLC, a registered investment advisor. Private Advisor Group, American Financial Management Group, and Sofia Financial are separate entities. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investments may be appropriate for you consult your financial advisor prior to investing. This information is not intended to be substitute for individualized tax advice. Please consult your tax advisor regarding your specific situation.