None of This Counts As Comprehensive Financial Planning

Paul Winkler: Hey, welcome. It is “The Investor Coaching Show,” and I am Paul Winkler, talking about money and investing. And man, Evan Barnard is here. Evan.

Evan Barnard: Yes, sir.

PW: Last show of the year.

EB: Telling you.

PW: Whoa.

EB: And nothing’s happened this year to talk about.

PW: How many years? Twenty-three years on Nashville airwaves, 23 years. Man.

EB: Over.

PW: How exciting. So I’m really looking forward to this because we’ve just been having a ton of fun lately just talking about stuff in the news. I love year-end type of stuff because there are all kinds of things to talk about, with people and what’s going to happen next year, that type of stuff, that type of junk. Yeah, I mean, thinking about the show for 23 years.

EB: Yeah.

PW: I’ve been here for 16. I can’t believe that I’ve been here for 16 years now.

EB: That’s true.

PW: Yeah. So when the show just started out, it was like we were typically, you hear investment firms advertise all over the place — on TV, radio, every place — and that’s where we were, and all of a sudden as you start to study some of the academic research, you go, “Oh, we can’t do that anymore. We can’t do that.” And that’s how the show started.

EB: Right.

PW: It was literally somebody from the Chamber of Commerce, and it was somebody in the radio industry who heard me talking. I was President of the Chamber, and I was just blabbing about investment stuff, and it was like, “Whoa, you need to be doing a show.”

And I said, “Great, how do you do that?” And that’s how that all came about. So yeah. So we’re going into, was it year 25 coming up?

EB: Yeah. I think it has. Wow. Yeah, that’s crazy. Crazy to even think about that.

PW: A quarter-century on the radio, Nashville airwaves.

EB: There you go.

PW: So yeah, pretty exciting.

Retirement Benefits

PW: So a lot of stuff to talk about. Oh, there was a question that came in, I think it was the last hour — we’re just hearing stuff coming in. Somebody was asking about social security and the income, I think it was at 60 years old or something like that.

And I thought I would just correct a couple of things that were being talked about. Thirty-five years is the amount of years that they look at for social security. Ten years has nothing to do with anything except for just eligibility for benefits, so that 40 quarters that is talked about.

As far as 35 years goes, they look at your income, and they take it up to current. And then you get what is called your average index monthly earnings.

So they look at income that you earned 35 years ago. They take it up to current 34 years ago. They take it up to current based on cost of living increases.

So a lot of times people will work in retirement, or they’ll work into their kind of retirement years, and they think I’m going to increase my benefit because my income is higher. Let’s say, right now maybe I work at, let me just throw out a number.

Let’s say I’m 64 years old, and I work, and I think, Well, I’m going to work, and I’m going to increase my benefit by working for a couple more years. When in reality the income that they have right now is on an inflation-adjusted basis because you might earn $40,000 and that is less income than $7,000 was way back when.

EB: Right.

PW: So you may not be benefiting any by earning $40,000 because your income of $7,000 or $10,000 a long time ago is actually more in inflation-adjusted dollars.

It has a higher value than that $40,000 does now, so it will not increase your benefit unless it replaces income that’s inflation-adjusted.

EB: A low-earning year.

PW: Right. In the past.

EB: Relative, yeah.

PW: Number one.

Benefits Based on Income Lost

PW: Number two, for social security purposes for income, if you have earned an income of over $22,000, it’s $22,000 and some change. If you earn an income that exceeds that before your full retirement age, the way that is figured out is it is age 67, if you are born in 1960 or later, then if you’re born in 1959, it is 66 and 10 months.

EB: Ten months.

PW: And then if you’re born in 1958, it’s 66 and eight months, so it goes down two months for each year you’re born before 1960 is the way that works. If you take income that is greater than that $22,000, they’ll take away a dollar for every $2 that you earn over that threshold.

But here’s the thing: When you hit the full retirement age, they will increase your age from a standpoint of calculating benefits based on the amount of income you lost. So if you lost one year’s worth of income, and let’s say your full retirement age is 67, they will act like you’re 68, which increases your benefit by 8% to do that. So it’s kind of complicated, but for the person that asked that question, I thought I’d just give a little bit more of a full answer regarding social security and how that works.

EB: And just to clarify, just even thinking about the answer, you don’t improve your social security status by losing some social security, by having the higher income above the threshold. You just don’t penalize yourself.

You get it back, but it’s not like you make more money by losing some benefit for a couple of years and moving it back.

PW: Yeah, it takes you a while to recoup.

EB: Yeah.

PW: It really does because of the benefit increase of 8%, if you lost a full year’s income. You think about it: Just because your benefit went up by 8%, from then on, you’re going to have to live long enough to recoup that benefit. Right?

EB: Yeah. Most of the time it’s like 12 years or something like that.

PW: Yeah. So it’s just a hope that makes it a little bit more understandable. And that’s something like if you have questions, you want to really think about your question.

We don’t do calls on the show, but you can text our line, and we’re here. It’s (615) 965-5777 is how you ask questions.

Misguided Beliefs of Financial Advisors

PW: So there are a lot of things that are being talked about. Now, we talk a lot about investing on here. One of my favorite articles from the entire year, Evan, because I was thinking back on this whole year, What are some of the favorite things that I had run across for the show here?

And one of them was, “Your standard of living in retirement is largely determined by this surprising thing.” That was the article that Mark Hulbert put out there. And the basic thing is this.

So often financial planners, we love financial planning, every one of us degree planners, multi-degree, many of us, and every office run by a fully degree, either charter financial consultant, or certified financial planner, so I’m not against financial planning. I am against financial planners that talk about financial planning with no degrees, but that is another story.

EB: And don’t plan.

PW:

The reality of it’s a lot of times the planning that they put out there, the information they put out there is just wrong. 

So it’s just a little bit frustrating because the industry standard is not high enough. And you hear me talk about that all the time, you can actually call yourself a financial planner without a degree. And that is one of the things.

There was that one study, another one of my favorites for the year, about the misguided beliefs of financial advisors, which was the study where they actually looked at financial advisors’ portfolios, finding that they were making mistakes with their own money and their point being really, and I would add to that, their point being that if you’re going to hold somebody to the status of fiduciary that they have to keep your best interest first, but they’re not keeping their own best interest first. How are they going to do that?

If they can’t even keep their own best interest first and invest based on the academic research and stay disciplined and do the things that the research shows that you ought to be doing to prudently manage a portfolio, if they can’t do that for themselves, how can you hold them to that standard for you? And that’s what I loved about that particular study because it was a huge study of advisors, and it was done by two different universities. I think it was a third university as well.

EB: That was just this year. Wow.

PW: I found it this year.

EB: Oh, okay.

PW: I found that study this year. Yeah, that was when I found the study.

But yeah, it was a couple of years ago that it was done, but I found the study this year. It may have been released a little bit earlier.

Read the Fine Print

Now, my other favorite article was that one, “Your standard of living is largely determined by this surprising thing.” So a lot of times when you hear about financial planning — and again, I’m a big fan of the process, I think it’s absolutely critical — the focus is on taxes. How you save taxes in retirement is one of the big things, and it’s an important thing, but that’s no question, that’s an important thing, but there’s a lot of focus on that.

When do you take your social security benefits? Yeah, I have taken, I have entire coursework, and I have degrees regarding social security as a lot of us do, so we get that. That’s important.

But the most important thing was really how you did in terms of your investment portfolio. And they said that’s a surprising thing which I think is so funny. Yeah. Oh my goodness.

That’s so shocking that your retirement success is based on that. But how often do investment people focus on everything but that?

EB: Right.

PW: They don’t talk about how they’re managing money. And one of the things I’ve said is that we’re focusing on the fine print.

EB: Correct.

PW: And Evan, we talked about that.

EB: We have.

It’s interesting that in our society there is so much fine print that we have now created a habit of ignoring it. 

And some of it you could say you ignore it at your peril on your cell phone privacy agreement or something like that, but a lot of it is fluff. The fine print when it comes to your investing and how your investments are structured and how they’re benchmarked, are they using academic principles or are they using smoke and mirrors? That’s a huge impact.

PW: Yeah. So how do you know it’s smoke and mirrors? Well, that’s something I want to talk about right here.

One of the things I tell people to do is read ADVs, and I have a new pen that I came out with with a magnifying glass in it. It’s really cool, and I love it. And on it says, “We read the fine print.”

So if you don’t read the fine print, we do. But here is something that I tell people to look at if you’re working with an investment firm: Read the prospectus, number one, of funds that you own.

If you see verbiage like this, that the fund manager looks for undervalued markets, they look for securities that are being overlooked, or you look for, maybe they’re doing technical analysis is something you might see inside the prospectus. And it’s the same thing on the ADV as well.

EB: Or opportunistic.

PW: Yes, that’s a big one.

EB: Opportunistic.

PW: Yes, absolutely. You’ll see that type of thing.

So you’ll see verbiage, anything that smacks of that, they’re going to find things that are hidden gems or diamonds in the rough or something like that, anything that smacks of that for you, then you’re recognizing that they’re using fundamental analysis, which is where they’re analyzing companies, and they’re looking at the balance sheets. And I haven’t found one, I have reviewed the firms that advertise around the national market and I’ve actually looked at their ADVs, I think you have too as well, Evan.

EB: Yeah.

PW: I haven’t found one yet that doesn’t have that in it.

EB: No, I haven’t either.

Fundamental Analysis

PW: So that is a big deal, fundamental analysis. Now that’s basically stock picking in layman’s terms.

I’m picking stocks that I think are going to do better than other companies. Recognize that a company doesn’t want to pay any more to use your money than anybody else, and recognize that you are competing against other very, very well-informed investors.

Every time you buy a stock, you are buying it off of what is called a market maker that does nothing but buy and sell that stock all day long.

EB: Hundreds of thousands of shares.

PW: Yeah, you’ve got to be better than them. You’ve got to be smarter than them. You’ve got to be better informed than them.

Research shows that dart throwers do a better job. And you’ve seen the stuff where the dart throwers are doing a better job.

Now the other thing is technical analysis. And you’ll have chartists, and I like the old thing where you have the academic that basically said that they’d like to compare them to astrologers, but they hated to give astrologers a bad name.

EB: Right.

PW: So you’re looking for patterns is what you’re looking for, which sounds kind of goofy in of itself when you think about it.

EB: I’m looking for patterns. And they have great names, though. “A head and shoulders top formation.” We’re getting ready to have, I mean, just all this kind of stuff.

PW: No, you’re absolutely right, Evan. You hear that type of terminology, and you go, “Wow, it sounds really sophisticated.”

EB: Oh, yeah.

PW: And I used to jokingly talk about it, but now Bangladesh is in the news for all different reasons, but that may be, I’ll talk about that later. Oh, I’ll talk about that later. I may talk about that later.

But there was this thing, they did a study, and they were looking for what was the best predictor of the S&P 500 market direction, and it was butter production in Bangladesh. And you go, “What? Butter production in Bangladesh. That’s silly.”

Yeah, exactly. That’s the point. It’s silly. You can find patterns in anything was the point that they were making.

Equal-Weighted Funds

PW: So what happens is that this is typically what passes as investment advice. Well, a few years ago you couldn’t help but hear people talk about equal-weighted S&P 500 funds.

EB: Yeah.

PW: Right? And this is what you got to do. And this is something that I’ve talked about. This is a problem, and I’ll talk about it a little bit more here on the show today, but it’s just funny when they started talking about equal-weighted index funds.

Now there’s a problem with equal-weighted. Now what an equal-weighted index fund for those of you who are sitting there going, “I have no clue what you’re talking about, Paul.”

Typically, funds are cap-weighted — capitalization-weighted. So if I have a stock fund with two stocks in it, one is a $3 billion company and one is a $1 billion company, and I invest $4 in that mutual fund, they will put $3 in the $3 billion company and $1 in the $1 billion company.

Now here’s the issue: Where do we expect more return? Smaller companies. Where did you put more money? Bigger companies. 

And that is a problem. So when we’re investing, that’s why we want to have different funds in different asset classes, and we’re going to have something on diversification that you got to hear because finally the media’s talking about it. Thankfully, and this is something you’ll hear and go, “Oh yeah, Paul, that’s something you’ve talked about.”

But here is the thing: They said, “Oh, let’s do this. Let’s have an equal-weighted S&P 500 fund. You got 500 companies, and instead of putting more money in Apple and Nvidia, Microsoft and Amazon and all these big companies, let’s put money equally in every one of the 500 companies.” And they started talking about this like crazy a few years ago.

EB: Yeah.

PW: And it’s like, “Oh, everybody’s got to have this.” And I said, “Hey, wait a minute. Here’s a problem. You have a lot of trading to keep this fund equal because once one company is not 1/500th of the index, it’s 1/200th of the index, you are now to sell some of that and buy the thing that is 1/700th of the index.”

So you’ve got to constantly be trading this thing, and you have a lot of hidden trading costs.

Why Equal-Weighted Funds Didn’t Work

Well, here is basically how that whole thing has worked out. So check out this clip right here:

Speaker 1: I’ve seen a bit of a divergence lately, Scott, where the Dow has underperformed, certainly the Nasdaq and the S&P 500, which is heavily influenced by these tech stocks. That’s one thing people are paying attention to. Also, the equal weight, which is sort of a way to look at the general average stock has underperformed as well because big-cap tech has been in the driver’s seat.

PW: So what has happened is, “Oh, this hasn’t worked out so well.”

EB: Right.

PW: We talked about it like crazy. We thought it was the greatest thing ever. And then what happened is the companies —

EB: They talk about it as the greatest thing.

PW: Yes. Not we. I’m speaking for them. Okay.

Okay. Sorry. Yeah, thanks. Yeah, keep me straight here.

But what has happened is that these really huge companies have done very, very well, so that hasn’t worked out so well. And this is something that I’ve talked about a lot lately in saying too many investors, American investors, when they invest in 401(k)s and use target date funds, they’re very heavily weighted in large companies, and they don’t recognize it.

So I remember attending, it wasn’t that long ago, I actually attended a workshop put on by a financial adviser at the request of one of my clients who said, “Could you sit in this workshop and just listen?” And it was a very, very good friend of mine.

EB: The speaker or the client?

PW: The client. And I said, “You know what? I’d do this just because it’d be fun.”

EB: Did you put a sock over your head or anything like that?

PW: No, I did not. Probably the person wouldn’t know who I was from Adam.

But they talked about diversification and said, “You just put your money in this right here, and this is diversified.” And it was talking about an S&P 500 fund.

EB: Oh, wow.

PW: I said, “Whoa, whoa, whoa. Wait, wait a minute.”

There are two different types of diversification. One type of diversification is where I diversify within an asset category. 

I own all 500 companies in the S&P 500.

Diversifying Across Asset Classes

PW: Another type of diversification is very, very different. As Mark Twain might’ve said, “It’s the difference between lightning and a lightning bug.”

EB: Right.

PW: It is diversifying across asset classes. So I own one fund that is investing in large companies, but I hold a totally separate fund that is investing in small companies, and the issue that I’ve been talking about a lot recently is that you might own total stock market funds, or you might own an S&P 500 index fund, and you think you’re diversified, but you’re not. And finally, the media has decided, “Hey, maybe we ought to talk about this.”

Speaker 2: I think one of the, dare we call, the RBIs of the day, random and interesting while I’m here. Why not? Is that the S&P 500, if you bought the SPY ETF and you think, “Don’t worry, I’m diversified. I bought the SPY ETF.” Guess what, folks?

S1: You’re not that diversified.

S2: Yeah, what she said. You’re not diversified. Thirty-seven percent of the S&P 500 is a couple of stocks. You’re basically buying NVIDIA, Apple, Microsoft, what else? Tesla?

PW: Thirty-seven percent.

EB: That’s just the top seven holdings, right?

PW: Yeah. You’ve got just a couple of stocks, and that’s 37% of your money in that fund is in just a couple of companies.

S2: A few others, and that’s it.

S1: Right. And that’s responsible for what, half of the gains of the S&P 500?

S2: I guess it doesn’t matter until it does. Bring that chart back up again. That was a fascinating chart because you do wonder, and it goes to our entire sort of macro theme here, what point in our conversation do we say valuations matter?

PW: Yeah, he’s saying, “Look at what am I buying when I buy companies?” I’m buying the rights to the earnings of the companies. I’m buying the assets of the companies.

You don’t know in foresight, you only know in hindsight whether you got hosed, and you actually went and paid way too much for something. 

You only know after the fact. But at what point do we go, “This is insane.” And you just don’t know when that point is.

Retirement and Your Portfolio

PW: So you make sure that you do own the asset category, but if that’s all you own, that can be huge trouble.

S2: Because the rest of the world stinks. And I think that’s kind of Yardeni’s point as well. Look at that.

S1: Waiting at the top 10 holdings in the S&P 500, all-time high.

PW: Yeah, you hear that?

EB: Wow.

PW: Top 10 holdings, all-time high as when we look at how much of the index it makes up, it is a huge, huge amount. And I’m just glad to hear that the media is finally talking about it.

EB: Yeah. And thinking about her other comment of, or I think it was his comment, talking about it as the valuations are at an all-time high. Don’t misunderstand what we’re saying is, as Paul said, we want that asset category in the portfolio.

Whether the valuations are going to go up more or go down soon, that we don’t know, but you want to have several other categories, talking about the diversification story, of when it does go down, I have something to rebalance with, and if it keeps going up, great. You’ve already got the category.

PW: Yeah. And I typically only have somewhere in the neighborhood of usually less than 10% of a portfolio in that asset class, and there are people that have everything there, and they just don’t realize they’ve got it there.

It makes sense to pay attention to your portfolio. 

Don’t ignore this because as that article said, your standard of living in retirement is largely dependent upon this surprising thing, which is the return of your portfolio, and that is driven by the design of your portfolio, and risk and return matter.

This is “The Investor Coaching Show.” I’m Paul Winkler. He’s Evan Barnard.

Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.