Yes, There Can Be TOO Conservative! | Series 6.5

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Welcome to the EnjoyMore30s Family Finance

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podcast. The only podcast dedicated to making life more

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enjoyable for young families by hitting on the financial topics

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that tend to weigh on us, stress us out, and distract our focus

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from simply enjoying life.

Joseph Okaly: 00:00:16

Hello, and welcome once again to the EnjoyMore30s

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Family Finance podcast. Every week I'm here talking to you

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about money because I want you to be able to take steps

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forward, gain some kind of confidence and therefore remove

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that financial anxiety so you can really just focus on making

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your life and the life of your family more enjoyable. This

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series is all about the new year and the new you. So Setting Your

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Compass for the New Year is a great title right? As always, if

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you do like what you're hearing, please I ask always to

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subscribe, follow us on Apple podcasts, wherever you listen.

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When you click those stars, when you leave those reviews, it

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really helps us reach other people out there just like you.

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So far this season, we've covered setting your compass

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with your spouse, so joint goal setting, then we discussed the

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importance of actually paying yourself first, giving some of

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that money that you worked really hard for every day to

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yourself to reach those goals that you've set. And then we

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covered bucketing your goals. So setting separate accounts for

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each goal you you have because we want you to be able to easily

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track easily achieve them. And finally, last week, we cover one

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of my favorite topics money blocking, which is setting funds

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aside ahead of time to make sure you do more of those daily

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things massages, Starbucks, going out to eat, that make you

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happy. So if you've missed any of those episodes yet,

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definitely check them out soon.

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Today's episode is titled Yes, There Can Be TOO Conservative!,

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where we're going to cover how paying yourself first and

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separating out your goals is you know, all well and good but if

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you're using inappropriate types of investments for certain

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goals, they may take much longer to achieve or even worse,

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perhaps you may never achieve them at all. The goal for

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today's episode is to better understand when to be more

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conservative, and when to be more aggressive, and how to do

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so in a more balanced spread out kind of a way.

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Now the word investments isn't exactly soothing to most people.

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If you hook somebody up to an anxiety machine, and you said

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the word investments, I'm guessing that there'd be some

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kind of thing that registered on that anxiety scale. It's not

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exactly a word that's used in a lot of bedtime stories. It makes

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people a little uncomfortable, even scared to some degree. I

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mean, anything that's associated with a potential to lose money,

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and not fully understand perhaps even why it happened, it's

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unsettling. That's completely understandable. So when we built

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this ship that we've been trying to build this whole season, to

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sail out towards our goals, there can be more of a better

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safe than sorry kind of mentality that develops. Sure,

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we don't want to be reckless in the ocean and sink to the bottom

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of the sea but at the end of the day, we also have to get to

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where we're going before we run out of food and supplies. So

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there's a balance that we have to hit. And that's why the

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previous bucketing episode is so important, because you are

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arranging your accounts to where you can invest each more

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appropriately for their individual time horizons. If

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you're saving for retirement, and the car you're buying next

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year, and the second house you want five years from now and the

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daughter's wedding, and you're using one account to do all of

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that it can't possibly be appropriately invested for all

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Money that you need in the next one to three years, yes, that

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should likely be invested in a bank type of account. Almost no

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growth, but no loss of what they call principle, which is a fancy

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way of saying the money you put in yourself already. Outside of

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that, though, using a bank or cash type savings vehicles for

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goals that are for 5, 10, 20, 30 years out is almost certainly

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not appropriate. This is where we've run into people being too

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conservative. We have had multiple clients that have come

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to us when they're about to retire and they say, you know,

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"why do I have so much less saved than my co workers? We

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started at the same time, we put in the same amount and they have

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just 2, 3, 4 times more than I do". And so we look at their

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statement. And what we find is that it's all invested in what

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they call a stable value fund. That sounds great, right? It's

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stable, it's got value, that's a great fit for where I want to

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put my money. But it's really just a fancy way of saying

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sitting in cash earning almost nothing. They use the completely

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wrong vehicle for trying to accumulate assets for retirement

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over that last 30 year period. So let's say to illustrate this

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point, we look at two people that are saving $500 a month

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right now as an example. One person is invested say

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moderately, and let's say that moderate comes out to a 7%

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return and another person is invested basically in a cash

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type account, and they receive just 1% long term. After five

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years, it's a little bit of a difference $5,000. $35,000

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accumulated verse 30. After 10 years, it's now over $20,000

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difference. After 20 years, it's now over $120,000 difference. So

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you see that big jump. Finally, at 30 years, it goes to over a

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$400,000 difference. $610,000 vs $210,000. Stable value vs being

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invested appropriately, I would say, for the last 30 years for

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that long term retirement goal. So too conservative can often

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mean not hitting your goals or certainly hitting them a lot

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more slowly than you otherwise should have.

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Now there's a big difference between 7% and 1%, right? So

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let's look at this another way. Now instead of 7% vs 1%, let's

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look at 7% vs 9%. So much less of a spread. So potentially what

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a moderate account versus let's say a very aggressive account

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may have as a long term difference. Again, after five

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years, not too much of a difference $37,000 vs $35,000.

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After 10 years, up to a $10,000 difference. After 20 years up to

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a $70,000 difference. Now, again, you saw that jump not as

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much, but still a little bit of a jump. And then lastly, after

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30 years, it goes all the way up though now to a $300,000

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difference. $915,000 vs $610,000, just like before. So

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even a few percentage points, long term can add up

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significantly. And that's why it's so important to be using

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the right bucket for the right goal. And the right risk

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tolerance for the right timeline. Too conservative can

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also then mean using say moderate for a 30 year time

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horizon, assuming that they can emotionally handle the

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aggressive portfolio that would have been more appropriate, or

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at least working with someone so they could get educated to be

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comfortable to that point.

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The other point to take away here is why it's important to

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use that bank account for your short term goals. You can see

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after five years, there's not too much of a difference for any

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of these scenarios, or either of those scenarios, I should say

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that we just went through. So again, if it's just a two year

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or three year kind of a thing, it's probably better to have

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that money in cash, because there's not that much of a

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difference in the interest overall and if the market

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happens to drop, you, you don't want to lose, say 20% of what

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you might have, depending on how you're invested, and not have

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that money for the car, have that money for the wedding, or

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have that money for the house, if they're occurring in the

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short term.

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The thing overall with investments is that those that

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are spread out are a diversified, meaning again,

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that's a fancy way to say that they're more balanced, because

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they have a lot of different pieces to them. So let's say

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some smaller companies, some larger companies, maybe some US

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companies, some foreign companies and bonds, which may

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initially sound intimidating, but can actually easily be

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obtained through what they call an allocation fund that I've

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discussed before. So pretty much every major investment company

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out there that you know, that you see has these allocation

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funds now. So if you are using a diversified strategy, maybe

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through an allocation fund, or if you're working with an

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advisor, they might have their own diversified program, then

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the thing with investments is that time is the most important

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factor. So you don't really you don't need to know any of that

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other small company, large company, you don't need to know

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all those things. You just need to remember, hey, I want to be

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spread out, I don't want all my eggs in one basket with how I'm

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invested. And hey, if I'm not using an advisor, I can use an

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allocation fund to help spread that money out. Or I can find an

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advisor that actually does that and they could do it for me.

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So let's get back to the last point in there as well, which is

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time and how that's the most important factor. If we look at

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the S&P 500, which you probably heard that said before the S&P

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500 did this or did that. This is essentially just a blend of

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the 500 largest US companies. So not exactly what I would say is

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overly diversified but what you hear the grumpy guy on TV

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referring to as 'the market'. You can quickly see the

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importance of time when it comes to investments. Over the last 91

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years and the most recent data I could find ended 2018, so almost

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the last 91 years as of today, but you'll still get the same

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point, there was a 73% chance that any one year in there for

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the last 91 years ending 2018 would be positive. So if you go

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out to three years, you get to an 83 chance 83% chance, excuse

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me of being positive. If you go out to five years, it goes all

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the way up to 87%. 10 years is all the way up to 94%. And

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again, this is just for the S&P 500 which is not necessarily

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certainly in my opinion, the most diversified way you can be

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building out a portfolio.

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So there are a couple main takeaways and we covered a lot

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today. So let's circle back to the goal of this episode. The

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goal is to better understand when to be more conservative,

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when to be more aggressive, and how to do so in a more balanced

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spread out way. That's it. So if you look at your different

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goals, you can spread them out into different accounts, those

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different buckets you've hopefully set up, and see when

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1 year, 5 years, 25 years, and then

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structure how conservative or aggressive again in a

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diversified balanced way, either through maybe an allocation

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fund, or speaking directly with an advisor to help you. The

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investments should be in each one of those accounts.

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So thanks for tuning in today. As always and join us for next

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week's episode called Insure for Catastrophe, Not Inconvenience!

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for sure on this one, where we're going to cover the

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mentality that I would recommend when looking at which pieces of

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this trip we're designing are the most important to insure.

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Overall if you're able to implement what we cover today,

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then that is fantastic. As always, you have less to worry

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about them before get focus more on enjoying life. If you are

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wanting help with these things or you have questions, you need

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things to be clarified, just check out the ASK JOE section on

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the show's website, EnjoyMore30s.com. That's

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EnjoyMore30s.com. Until next week. Thanks for joining me

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today and I look forward to connecting with you again soon.

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The conversations on this show are

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Joe's opinions and provided for general information purposes

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only. They do not constitute accounting, legal, tax, or other

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professional advice for your specific situation. You should

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always seek appropriate advice from a financial advisor,

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accountant, lawyer, or other professional before acting upon

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any content or information found here first. Joe is affiliated

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with New Horizons Wealth Management LLC, a branch office

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of TFS Securities, Inc., and TFS Advisory Services an SEC

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Registered Investment Advisor Member FINRA/SIPC.