On this episode, Michael and Matt explore the concept of portfolio asset allocation—and how to take emotion out of your investment decisions. 

If you’re someone who’s interested in maximizing gains and minimizing losses in the stock market, this episode is for you. Michael and Matt cover what it means to time the market, how to build effective investment strategies, and how to stick to a long-term investment philosophy.

How You Can Steal the Show

  • Learn the importance of dollar-cost averaging. 
  • Understand what dynamics to consider when thinking about how to allocate your assets.
  • Measure and mitigate the degree to which your emotions impact your investment decision-making.
  • Anticipate and plan for long-term factors that impact your wealth.
  • Think twice before wearing a blazer with a t-shirt that says “Sassy.”

Listen to more episodes of Steal the Show from this season and previous ones at https://stealtheshow.com/podcast/

Learn more about Michael’s public speaking training company, Heroic Public Speaking, at https://heroicpublicspeaking.com/.

Learn more about Matt’s specialized financial services firm, Valley Oak, at https://www.valleyoakcpa.com/.

In this episode…

  • At 23:28, Michael mentioned two of Heroic Public Speaking‘s programs. More information on HPS GRAD can be found here and more information on HPS CORE can be found here. And you can always email questions@heroicpublicspeaking.com if you have any questions about either of those programs.
  • At 50:40, Michael mentioned that he is a “maximizer” in this episode. That is one of Michael’s 5 Strengths from Gallup’s CliftonStrengths assessment.
    • You can read more about that here.
    • You can also see the 5 strengths of each team member at HPS, including Michael’s, right here.
  • At 1:03:59, Michael mentioned the book, The Simple Path to Wealth by J.L. Collins. You can find that here.

Other episodes of Steal the Show mentioned in this episode are…

  • [Listen Here] S4E3 Setting up Your Business Operations, Personal Operations, and Bookkeeping for Financial Success (references at 38:34)
  • [Listen Here] S4E4 Increasing Cash Flow Through Savings and Efficiency (Plus, Debt!) (mentioned at 19:22)
  • [Listen Here] S4E5 Turning Your Business Into Your Own Family Bank (mentioned at 56:46)
  • [Listen Here] S4E6 What To Do With Additional Savings? (mentioned at 19:29)
  • [Listen Here] S4E7 Money Advisors: the Good, the Bad, and the Ugly (mentioned at 33:16 and 45:29)

Transcript

Michael Port (00:00:05):

Hello, and welcome to Steal the Show with Michael Port, a podcast from Heroic Public Speaking. I’m your host, Michael Port. This season’s theme is Speakers with Money. I’m joined by my very good friend, Matt Rzepka, the Owner and Chief Wealth Strategist at Valley Oak, a specialized financial services firm. Together we’re exploring some of the most common and daunting challenges facing speakers, entrepreneurs, and small business owners when it comes to finance. Now to be crystal clear, I have no conflicts of interest here. I don’t stand to make any money at all from you adopting any of the educational content you hear on this podcast. My company is Heroic Public Speaking. We’re a public speaking institution based in Lambertville, New Jersey, and we provide world-class training to aspiring and working professional speakers around the world. I don’t sell anything related to financial services. Matt, however, does, and you are welcome to hire him. I do. I will not be compensated however, in any way at all, if you do. I’m doing this purely because I love this topic and I think everyone in our industry can benefit from learning more about business and personal finance. That’s it. Alright, today, we’re discussing asset allocation, so let’s get right to it. Matt, how you doing?

Matt Rzepka (00:01:29):

I’m doing great, sir. Doing great.

Michael Port (00:01:31):

Are you ready to talk about portfolio asset allocation?

Matt Rzepka (00:01:35):

Allocating assets is always a wonderful discussion.

Michael Port (00:01:38):

So let’s do it while we’re sitting on our assets, then having a little chat about portfolio asset allocation.

Matt Rzepka (00:01:45):

Let’s do it.

Michael Port (00:01:45):

You know, I have speaking of ass, I have this funny shirt that says sassy because the very first publication I was ever in was called Sassy Magazine. And the irony is that my high school prophecy was modeling for Tiger Beat Magazine and Tiger Beat Magazine and Sassy Magazine are basically the same type of magazine for teenage girls.

Matt Rzepka (00:02:05):

Nice.

Michael Port (00:02:05):

So that was what people expected of me coming out of high school. Look at me now, mom. So the t-shirts says sassy. And one day I just threw a blazer over the t-shirt And I didn’t look in the mirror after I threw the blazer over the t-shirt and then a couple hours later, someone kind of taps me on the side and says, Hey, Michael, you know, the, the word ass is right in the middle of your chest. I was like, look down. I was like, oh my God, I’m really embarrassed right now. Clearly not so embarrassed that I won’t talk about it on the air for thousands of people to listen to that slightly embarrassing, but hopefully slightly humorous story.

Matt Rzepka (00:02:42):

If we can’t laugh at ourselves, who can we laugh at?

Michael Port (00:02:46):

Yes. Well, actually that’s the problem. I think we laugh at other people more than we should, and we don’t laugh at ourselves enough.

Matt Rzepka (00:02:52):

Yes.

Michael Port (00:02:52):

So that’s what we are doing here. We’re just laughing all the way to the bank.

Matt Rzepka (00:02:56):

Yes.

Michael Port (00:02:57):

So speaking of the bank, what is asset allocation?

Matt Rzepka (00:03:01):

Asset allocation is a very important concept when it comes to investing in the stock market to make sure you can allow yourself to be a good investor in taking emotion out of the equation. So it does a couple things for you. It allows you to get performance from a lot of different categories within the stock market. And then based on that allocation, so let’s say you put 20% in five different categories. You let time pass. Some of those categories are gonna make money. Some of those categories are gonna lose money and you want to find a system to continue to bring them back to that starting allocation. It forces you to be what I call a good investor. So selling high, you wanna sell when you make money and then buy when you’re down. You wanna buy when something’s low. So asset allocation gives you a process to make that happen automatically and taking emotion out of the equation.

Michael Port (00:03:51):

Well, let’s talk about emotion a little bit before we go on. How influential is emotion in somebody’s ability to produce both short and long term gains through any type of investment?

Matt Rzepka (00:04:05):

Emotion plays a gigantic role and often causes you to make bad decisions because emotions and investing are almost always opposite mentalities. Where you’re thinking, you know, when the market’s charging and it’s as high it’s as ever been everybody gets really gung ho about putting in more money and doing more things. And again, there’s no way to know for sure, but it might be the worst time if you’re walking into a bear market. So you have to come up with a strategy and a process that takes as much emotion as possible out of the equation from an investing perspective.

Michael Port (00:04:37):

Yeah. It sounds like you are talking about avoiding market timing in your investment decisions.

Matt Rzepka (00:04:44):

Yes.

Michael Port (00:04:45):

Now, could you give a quick definition of market timing? So people understand what that is if they’re not familiar with it. And then I wanna discuss where and for whom that type of driver is helpful. And where and for whom market timing is actually really problematic and can get in your way of producing long term gains.

Matt Rzepka (00:05:06):

Market timing is simply trying to figure out when the best time to buy or sell in the market is based on how you feel. Because we’ve been doing so well, I think the market’s gonna go down. So I’m gonna sell out and go into a safer asset or cash asset, or, you know, I think the market’s charging and I want to keep charging so I wanna put it in now because now is a good time and it doesn’t take into effect time horizon goals. What your risk tolerance is. It’s just, I’m thinking I’m gonna outsmart the market. There’s research upon research upon research that timing the market is impossible. And yes, you may get it right some of the time, if you continue to do it, you’re gonna get burned by trying to time the market and get in and get out. You want to get into the market, figure out your allocation, figure out your risk, and make it a long term decision.

Michael Port (00:05:53):

We are not making our decisions based on external factors that are outside of our control, that we can’t predict. It’s one thing to say, well, we should buy low and sell high, but of course we don’t really know where low and high is.

Matt Rzepka (00:06:08):

Correct.

Michael Port (00:06:09):

So if we’re not professional investors and we’re investing for long term security for our retirement, as opposed is to trying to make money this week and then live off that money like a day trader might, then we need to make sure that we have a philosophy that supports our investment activities. And also a way of avoiding getting carried away with most recent news or the hot meme stock or whatever it is.

Matt Rzepka (00:06:42):

Buy the dip.

Michael Port (00:06:43):

Yeah.

Matt Rzepka (00:06:43):

That’s the big thing right now, buy the dip, buy the dip. The problem is, is you don’t know how big the dip’s going to be. And it’s worked fairly well the last few years for people that are employing that strategy, but the dip may continue dipping. One time, you try to buy the dip and then it’s gonna work against you. So short term trading short term timing is really, really tough.

Michael Port (00:07:03):

Matt, how about we discuss and first define of course, dollar cost averaging before we get into any more discussion around asset allocation or portfolio design, et cetera. Let’s talk about dollar cost averaging since the concept of market timing just came up. I think that’s an important concept for everybody to understand if they are not yet familiar with it.

Matt Rzepka (00:07:25):

Yes. Dollar cost averaging in by nature- most people are doing dollar cost averaging. If they’re participating in a employer sponsored retirement plan of some sort, and they may not know it. Dollar cost averaging is simply putting systematically certain amounts of money over time into the various investments that you choose. So if let’s say you had a lump sum of cash, a hundred thousand dollars, and you were like, I want to invest this money. You have the choice of putting all $100,000 to work immediately, or say taking five months or four months to put $25,000 at a time strategically into those same investments over time. So that you may benefit hopefully from the volatility or swings in the market over those four months versus taking on the risk a hundred percent right at day one.

Michael Port (00:08:12):

So for most people who are looking at long term investing, and that’s gonna be most of the people who are listening to this show. And in fact, that’s what we’re focused on this season.

Matt Rzepka (00:08:22):

Yes.

Michael Port (00:08:23):

Long term approach to building your wealth and preparing yourself for whatever your version of retirement is. Most people should be doing that. I definitely do that. What if somebody has a big chunk of change that they finished a big contract and they’ve got a big chunk of change, or maybe they just inherited a little bit more money or they sold a property, et cetera. Let’s just say it’s a hundred grand. Should they take that and dollar cost average it out over the course of say a year, which again, would just be an arbitrary amount of time? Or should they take it and contribute to their investment vehicles based on the same philosophy that they would, if they were dollar cost averaging? Do you have a perspective of one over the other?

Matt Rzepka (00:09:05):

The timing of how long you dollar cost average over is a little bit of a personal decision. At a minimum, if you’re gonna dollar cost average, I would do at least three months. The intent of dollar cost averaging is to take the swings of the market and reduce your risk. The correction commentary happens once a year. So people talk about a stock market correction like a birthday. At least once a year, you should expect if you’re in stock market based investments, that you’re gonna see a dip of at least 10%. That’s kind of the way to remember a correction. 10% isn’t necessarily a bear market, it’s just a downturn in the market of 10%. Well, what happens if you put that a hundred thousand in and you walked right into that correction, you’re gonna lose $10,000 immediately. If you took three months to take $33,000 a month and you walked into the correction, well, round two of that investment’s gonna buy at that 10% lesser value to give you better cost on your long term performance. So three months is a minimum. Six months is probably the most common for a length of time for dollar cost averaging. 12 months might be a little long, just depends on the amount of money and the potential downside you want to avoid. So if it’s a bigger pot of money and you’re worried about a 20% or 30% decline, you may want to take more time to do a dollar cost averaging strategy.

Michael Port (00:10:21):

Okay, so I take a slightly different approach because anytime I have a larger sum that I wanna invest, I always put it into the portfolio in the same allocation that I have for everything else to keep balanced in the way that I’ve determined is best for us now going into the future. Because I don’t know what’s gonna happen next month or the month after the month after. It could drop 10% today and go up 11% tomorrow. We don’t usually see those kinds of swings in a broad based index fund, but you certainly would see it in, in a stock and a particular stock.

Matt Rzepka (00:10:53):

Sure.

Michael Port (00:10:54):

But that’s a lot of volatility, you know, for example, small cap stocks, the index, I think is the Russell 2000 just recently over the course of just a few days dropped over 10%. I think it was 11.47% or something like that. And that’s correction territory for one asset class, the total stock market. So I don’t know, is it gonna go down more the next day or the next week, or I’m gonna know if it’s gonna go up. So I just figure, I wanna get in as early as possible and then ride for the long term off into the sunset. Because I don’t wanna even begin to start trying to make assumptions about what might or might not happen with the stock market. I just know that over the long term, and since I’m looking long term horizon, if it drops two days after I put it in, I’ll make that up in a number of years. I’m not looking for the return right away. So what do you think about that particular approach?

Matt Rzepka (00:11:49):

That ties right back to the emotional component of it. And you always have to factor in what you’re gonna think and feel emotionally when you’re making those decisions. You shouldn’t be worried about that short term dip if you’re a long-term investor. But what it does is it tends to spook people. If they make a full investment right away, and the market trends downward right after they did it, then they start to question their long term strategy. And that’s the one thing you don’t want to do. Additionally, we often talk about dollar cost averaging on a month to month basis, but you could also dollar cost average weekly.

Michael Port (00:12:21):

Yeah.

Matt Rzepka (00:12:22):

In recent times we’ve had lots of market volatility movements up movements down. You could get a lot of benefit just doing a weekly dollar cost averaging to say, Hey, every Wednesday, we’re gonna start to deploy a portion of this capital until it’s fully invested into our original intended allocation.

Michael Port (00:12:37):

Yeah.

Matt Rzepka (00:12:37):

That’s the goal is to get to that allocation as quick as possible and let the investments do what they do over the long term.

Michael Port (00:12:43):

Yeah. Plus if I had, let’s say I had a hundred thousand dollars that I wanted to invest. If I don’t put it all in the market right now, and I just sit on the cash, let’s say, I decide to dollar cost average it out over the course of a year. Well, let’s just say it’s $120,000 to make it easy. So if it was, you know, $10,000 a month throughout the whole year, if we keep seeing an environment of high inflation, that money is losing money. That cash is becoming less valuable. You know, if we see another 5% or 10% inflation that cash will have less buying power by the end of that period of dollar cost averaging. So in an environment of high inflation, do you think it makes more sense to make that larger contribution as soon as you have the money?

Matt Rzepka (00:13:23):

I would probably never go over six months on a dollar cost averaging strategy because you might miss the best part of the market. And again, if then you came into a bear market after that happens you’re gonna feel more of that. And it takes a little bit longer to recover. So six months would certainly be my longest. And then again, I would probably opt for a weekly type of strategy inside of a three or six month period.

Michael Port (00:13:45):

Yeah. It seems like many of us do dollar cost averaging in part simply because we don’t have all that money at once. We are getting it on some sort of regular frequency. Either it’s because we take profits from our business every quarter. So you’re getting it quarterly. So every three months. Or you’re getting a paycheck every two weeks. And so, you know, you’re contributing to your retirement accounts or your brokerage accounts every two weeks, because that’s when you get it. Or you get it every two weeks, but then you just do it at the end of the month. You know? So sometimes it’s just by default because we don’t have the money yet.

Matt Rzepka (00:14:20):

Yeah.

Michael Port (00:14:20):

That’s how most of us will approach it. And it’s a reasonable strategy. And I think that it’s just important that we just don’t hold back and hold onto it, worry that the market’s gonna go down right now, if it’s not money that we are gonna use in the short term. And if we do need the money in the short term, we, they shouldn’t be putting it into equities in the stock market. Would you agree?

Matt Rzepka (00:14:40):

Correct. Yeah. You wanna make sure you’ve got your access to capital formula and your long term formula figured out. And if this is money in that long term bucket, you wanna find out how to get it deployed for a long term result, as quick as possible.

Michael Port (00:14:52):

I’m gonna ask you one of those really dumb questions, which is, who should be thinking about asset allocation or portfolio asset allocation? Meaning is this for everyone or is it just for some people?

Matt Rzepka (00:15:05):

It’s really for everyone. And I highly encourage you if you have retirement accounts or other are investment accounts, to make sure you understand what the asset allocation is. Especially in times, you know, as we record here today and where the market’s at currently, what often will happen, or I’ll refer back to say a year 2000 or year 2008 downturn, when asset allocation is so detrimental is after a run up in the stock market and people haven’t been disciplined to go back to their original percentages. So let’s say I only want 60% in stocks. And when I make that initial decision stocks just continue to grow and grow and grow. And my 60% stock allocation becomes, say, 80% or 85% because there’s been so much growth. Well, then we walk into a bear market. It, if you haven’t gone back down to your 60% allocation, now 85% of your money is subject to the stock downturn.

Matt Rzepka (00:15:59):

And that’s what you don’t want. So without doing proper asset allocation, you’re exposing yourself to risk that you may not realize. The other thing we see a lot too, is you do what your friend does or do what your neighbor does. So a lot of, especially retirement plans specifically, they will give you funds that will do some of this asset allocation for you. If you don’t want to get into the weeds and figure it out. But you want to at least know, I have my asset allocation handled and understood in some capacity so that you don’t wake up with a shock if we have a bad bear market.

Michael Port (00:16:28):

Yeah. Actually in my case, I probably should do what my neighbor is doing because my neighbor just sold a business for 30 million dollars.

Matt Rzepka (00:16:35):

Nice.

Michael Port (00:16:35):

So I’m gonna try to do that as well. If anybody would like to offer me 30 million for hero public speaking, I’ll pretend that I don’t wanna sell it, but I’m happy to sell it to you for 30 million.

Matt Rzepka (00:16:44):

Nice.

Michael Port (00:16:45):

But anything less than 30 million, no way. Okay. So you touched on rebalancing actually, when you mentioned, well, if you believe that your portfolio asset allocation should be 80% stocks, 20% bonds, or 75% stocks and 25% bonds, or 60% stocks and 40% bonds. I’m gonna get into that in a minute and then discuss recommended portfolio asset allocation for different types of folks, but before we do, I just want to ask you to touch on the various dynamics of portfolio asset allocation. Because I’ve heard you talk about two different dynamics that we should consider when we’re thinking about portfolio asset allocation.

Matt Rzepka (00:17:28):

Yes. A lot of what we’ve talked about so far is strictly related to the stock market. You also can have asset allocation just as a percentage of your wealth goals and your net worth. What do I have in stocks? What do I have in small business? What do I have in real estate? What do I have in crypto? You know, all these different categories you want to be thinking about those target allocations as well, because as the world gets more connected and more technologically advanced, you wanna understand how to continue to diversify types of assets in case the stock market doesn’t produce at as high of a level going forward. Some other people out there right now are predicting that returns might be less the next 10 years. Well, how, how do you continue to make sure you’re keeping up with inflation? You have other types of assets as well. And those are just a few of the other asset allocation things you can think about from just your personal net worth and other assets beyond the stock market.

Michael Port (00:18:21):

So dynamic, one, would be from a pure stock market investment perspective across all assets that you own in your portfolio that’s exposed to stocks and bonds, I suppose.

Matt Rzepka (00:18:33):

Yeah. Do I have small, medium and large companies? Different variations of bonds? What are my allocations to all of those want to be?

Michael Port (00:18:40):

Yeah.

Matt Rzepka (00:18:40):

And make sure that I start with a number, let them do their thing and then rebalance back to a number.

Michael Port (00:18:45):

Right? So that’s basically stock and bond market investing.

Matt Rzepka (00:18:48):

Yep.

Michael Port (00:18:48):

And we’re gonna to get into a little bit more detail about that shortly. And then the second dynamic sounds like asset allocation on percentages of your net worth. So you’re looking more holistically at your financial position or situation, your estate, your net worth, whichever term helps you see the big picture, the 30,000 foot view. And so you’re taking into account all of the different types of assets you either own outright or own with some liability, you know, some debt associated with it. I use the word liability, because we did an episode on, you know, liabilities versus debts. I take the second approach. I’m assuming you do too.

Matt Rzepka (00:19:29):

Yes. Well, we touched on, on this in a previous episode, but if your personal net worth asset allocation as your primary asset, 80% is your business, and only 20% to other assets. And then you don’t sell your business for what you hope when you’re ready to retire. Your retirement could be very different than you had hoped.

Michael Port (00:19:49):

Yeah.

Matt Rzepka (00:19:49):

And so that’s where that dynamic number two really helps you get a safer ground around, Hey, what if something doesn’t plan out or pan out as I thought? I’ve got other assets to keep me on track with the eventual goal of where I want to be later in life.

Michael Port (00:20:04):

Yeah. Like for example, let’s say somebody invests in real estate, they buy houses and they rent them out. So somebody’s been doing that for a number of years and let’s say they’ve got 7 or 10 properties. Well, they’ve got a lot of their overall portfolio invested in real estate because they’ve put a lot of money into these properties. And then if in their stock market portfolio they bought a lot of REITs, real estate investment trusts, well then they might be really overweighted in real estate. And as a result, if a real estate market correction or crash of some kind occurs, they’re much more exposed because they’re overly weighted in that particular asset class, whether it’s in stocks, you know, in some sort of fund that buys different real estate investments or different real estate company stocks, or whether they just own their own property or multiple properties that they use for business purposes.

Matt Rzepka (00:21:08):

Yeah. I love that example because that’s where you have two very different types of real estate assets, one that’s stock market focused and offered to multiple investors. And then you’re maybe individually investing in real estate. And if you don’t track that, you may realize, Hey, I’m, overweighted there. And I don’t want to be because if something goes wrong in real state, it could hurt me way more than I expect.

Michael Port (00:21:30):

Or another example might be very often, investment advisors will suggest that people hold in their portfolio, a percentage of international stocks. So if they’re recommending, you know, someone buy an index fund and again will get more into this soon, they’re like, we think you should have a portfolio that 60% stocks, 40% bonds. And we want 40% of the stocks to be international stocks. So we’re gonna recommend you buy the, you know, Total World Index Fund or Total International Index Fund. But actually they would own a lot more than 40% of the international or the European market or whichever index they’re buying because most of the top 10 biggest companies in America do sometimes the majority of their business overseas. So even if you’re buying very large US companies, you have exposure to international markets because their revenue, their success is in large part dependent on what’s happening in the European economies that they’re in.

Matt Rzepka (00:22:39):

Yeah. I think when it comes to foreign versus domestic investments today, you’ve gotta really open your eyes around what impact that has on your asset allocation, because it’s a global economy today.

Michael Port (00:22:51):

Yeah.

Matt Rzepka (00:22:51):

Used to be much different even 20, 25 years ago saying I’m allocating to US and I’m allocating to international. We weren’t as connected because the internet wasn’t charging like it is today. And didn’t have all of us doing business so easily as it is done online. So you definitely wanna open your eyes to that for sure.

Michael Port (00:23:08):

Great. And so in a minute, we’re gonna go into the different types of asset classes you could buy in the stock market and in the bond market. And then we are gonna ask Matt about what he recommends for portfolio design for a number of different types of people. Because I think that you’ll see yourself in at least one of those examples.

AD BREAK (00:23:28):

But before we do, I just want to take a quick break to say that this episode of Steal the Show with Michael Port, and I am Michael Port, is brought to you by HPS GRAD, one of the signature programs at my company, Heroic Public Speaking. And I think it’s fair to say HPS GRAD is the most substantial and complete public speaker training in the world. It’s like a graduate program for the world’s most transformational speakers. Now, maybe you’re ready to start delivering more compelling performances every time you step on the stage, or maybe you want to increase your speakers fee, or maybe you need a proven repeatable process for developing and rehearsing your content. In HPS GRAD, our students learn how to do all of that and much, much more. HPS GRAD is an intensive program broken into two terms consisting of both in-person and virtual learning experiences. Students are immersed in rigorous speech writing and performance training, and they get to know us and our team, form long lasting friendships with one another, and completely transform their speaking and performance abilities. Now HPS GRAD is only open to students who’ve previously completed our free training program, HPS CORE. And to learn more about HPS CORE and HPS GRAD, visit HeroicPublicSpeaking.com. If you wanna learn just about GRAD, go to HeroicPublicSpeaking.com/grad-school. That’s HeroicPublicSpeaking.com/grad-school.

Michael Port (00:25:01):

Okay, Matt, let’s talk about different types of asset classes in the stock market and in the bond market. Now we could do that for the next week because you can keep slicing and dicing…

Matt Rzepka (00:25:12):

Yes.

Michael Port (00:25:13):

…into smaller and smaller asset classes, but let’s just hit the general ones. And then let’s talk about some typical effective portfolio design options for our listeners.

Matt Rzepka (00:25:25):

Yes.

Michael Port (00:25:25):

So what are the primary asset classes in the US stock market?

Matt Rzepka (00:25:31):

The primary asset classes there, you’ve got large cap, mid cap, small cap, and then you’ve got a lot of variation inside of there.

Michael Port (00:25:38):

Before we go to the variation on large, mid, and small cap. Let’s define cap.

Matt Rzepka (00:25:42):

Yeah.

Michael Port (00:25:42):

Capitalization capitalized. Because I remember the first time I started looking at the market, I was like, what is all this cap? And now the kids use the word cap. Do you know that?

Matt Rzepka (00:25:51):

I didn’t know that, yeah.

Michael Port (00:25:52):

Yeah. Like if they say something and someone else is like, for real, like really that happened. They’re like, yeah, no cap. I think. Although every time I try to explain one of their expressions that they’ve explained to me, I murder it. I do it terribly. We’re not using it in the way that the kids are using it. What does large, mid, or small cap mean in the US stock market?

Matt Rzepka (00:26:14):

Capitalization represents like what size and how much dollars are represented in the overall marketplace. But you may have heard recently some of the cap goals or cap targets that some of the really big boys have hit, you know, a trillion dollar market capitalization. Meaning between all the shareholders and assets and valuations of the company. I don’t know if it was Apple who was first.

Michael Port (00:26:38):

Yeah, I think it was apple.

Matt Rzepka (00:26:39):

But we hit trillion dollar valuations in terms of market cap. So it represents the size. So large cap is your very big market capitalization. Mid-cap are your mediums. So they’re kind of middle of the road, but certainly sizeable companies, but they don’t really operate in the same categories as the large ones. And then the small ones are the growth ones. The way I like to explain those is they’re trying to become mid and large. They want to get in there. Their whole focus is growth, growth, growth. That’s what small cap is really doing. Hey, we’re starting out. We think we’ve got a great idea and we want to grow as fast as possible.

Michael Port (00:27:11):

Now isn’t that a little tricky though, to use the word growth for the small cap companies. Because when we start slicing down into more sort of segregated asset classes, we have growth versus value in each of the different market capitalization companies. Typically some of the assets that are, that will offer the biggest returns for you over long periods of time are small cap value funds or stocks, individual stocks, because they’re often undervalued. Like the price is lower than it might be for the value that that company is gonna produce. I don’t know if that’s the right way of defining it again. This is not my area of expertise. But I know that we break down these different capitalization companies into growth and value. So how should we think about those types of breakdowns as well when we’re thinking about asset classes?

Matt Rzepka (00:28:00):

Yes. Growth versus value is really thought of, growth pretty self explanatory. I want to see the price or the company grow hopefully as fast as possible. Value is gonna be more of the way I define it, a consistency level. I want to come in, you know, if I’m doing a large cap value, I might be looking for a dividend or steady performance or just, you know, more consistency out of that large company versus a large company that’s trying to grow maybe a lot more volatile up and down. So that’s how I look at growth versus value. And then when you get into the mid and the smalls, you have to really look at again, bargain, shopping. Midcap value, they may be undervalued because maybe everybody doesn’t know about them yet. Or maybe they have a new product that they’re gonna launch and that’s gonna take them into more of a growth category. But consistency versus growth is really how I break those two down.

Michael Port (00:28:53):

Mm. So, okay. Now what about in the bond market? What are the various asset classes or the highest level segmented asset classes in the bond market for fixed income vehicles?

Matt Rzepka (00:29:04):

Fixed income often referred to as bonds. The bond market is just as complex and vast as the stock side of the equation. A bond by definition is just a debt instrument where a company needs to raise some capital. So they offer a bond out to a purchaser and that purchaser gives them the money and in exchange for that money. They give them an interest rate and incomes dream, so to speak. So there’s all different grades of bonds from all different sizes of companies. There’s something you may have heard called junk bonds. You know, you really have to do some research around the types of bonds you may be in. If you’re buying individual bonds, you want to be very aware of what that is. They’re all gonna pay different interest rates. You also have government bonds, municipal bonds. municipal bonds are more local state and government type bonds.

Matt Rzepka (00:29:51):

So very, very complex. Don’t let it overwhelm you. You know, I, I say it’s complex, but don’t let that stop you from learning about how some of those things work. What are the pros and cons? The simplicity of a bond is that it typically pays interest two to four times a year based on how the offering is written. And then the government, you may hear government bonds talked about a lot on TV or in other various internet spaces because a lot of the things we deal with in life are based on government bonds like mortgages, for example. There’s indexes and treasury rates and all these things that govern how much mortgage rates go up and how much mortgage rates go down. That’s all based on the issuance of bonds and people buying those bonds and earning those interest rates.

Michael Port (00:30:33):

Yeah. I’ve always found bonds a bit confusing. You’ve got this yield and then the interest rate. And sometimes when one goes up, the other goes down and it’s confusing, which is which, so I don’t buy any individual bonds period. The only individual bond we own is a $250 bond that my grandmother who passed away at a hundred three years old gave to Jake when he was born.

Matt Rzepka (00:30:54):

Yeah.

Michael Port (00:30:55):

And that just sits in the safe and it has like a gazillion years before maturity. So we’ll see what that does by, you know, I just buy index funds. I buy all the bonds that are out there and we’ll get into that in a minute. The thing that really helped me understand bonds just from like the basic simple, even a five year old could understand it, is that sometimes governments and companies need money to do the stuff they wanna do. And sometimes companies will go to investors to try to raise that money. But you know, governments don’t really go to, Hey, invest in our company. Like it doesn’t work that way. So the federal government state government, when they need money, they’ll issue a bond. We are essentially loaning them the money. And they’re saying, look, I’ll give you this guaranteed interest rate on this loan for a period of time. And same thing with the company. But you know, you have companies that are of different sizes, different strengths. So it’s really tricky when you start buying individual company bonds. Because if you don’t really know what you’re doing, you can end up buying a bond for a company that’s not here in six months.

Matt Rzepka (00:31:58):

Yeah. Credit worthiness and strength of company are extremely important with bonds. You know, so think about COVID for a second and think about the airline industry. You could have gone out and bought some individual bonds from some airline companies that were paying you 8, 9, 10, 11, 12% interest. Really attractive interest rate. But what if they file bankruptcy? Then you gotta worry about, am I gonna get paid at all? Not just my interest, but my original principle. That’s really the risk from a credit worthiness perspective on bonds, that if you’re buying an individual bond, you absolutely want to understand those things. Bond funds and bond indexes help you mitigate some of that risk because you’re pooling lots and lots of different bonds together. So that if one of those bonds goes belly up, or one of those companies goes belly up, you’re not fully taking on that risk to your own assets.

Michael Port (00:32:45):

Perfect transition, Matthew. Thank you so much, because what I wanted to talk about was the different types of vehicles you can invest in. People hear index fund, then they hear mutual fund, then they hear individual stock, individual bond, bond fund.

Matt Rzepka (00:33:03):

ETF.

Michael Port (00:33:04):

Yeah. ETF, right? An exchange traded fund or a fund of funds. Forget about it right now. You’re all over the place. Then they hear hedge fund and they’re like, well, should I be in a hedge fund? The answer is no, unless you’ve got a family office maybe. And then you’re like, I don’t know what to do with this extra 8 billion dollars. Maybe give it to this guy in his fund and see if he can do something. But the rest of us, probably not. So let’s start with the difference between an index fund and a mutual fund.

Matt Rzepka (00:33:34):

Yes. So a mutual fund is probably the longest running fund type of category that you’ve maybe heard of. And a mutual fund is a pool of investments inside of a corporation. This was very popular and started a lot back in the seventies and eighties when you couldn’t buy stocks online. You had to go to a broker. It was very hard to get investments into the stock market without going through the Wall Street channels. And then on top of that, you had to buy individual stocks if you were doing that. And that tended to be very risky for folks because one individual stock can go up and down in value way faster than a pool of stocks together. So this mutual fund concept was born and then you could own many, many different stocks inside of this corporation. And then you as the investor own a share of the corporation or the mutual funds.

Matt Rzepka (00:34:27):

So it’s mutually together and you have a small percentage of the fund. That also is why mutual funds trade in terms of their price at the end of day value from the market. You can’t day trade mutual funds. Mutual funds have a lot of inner workings and reporting and they price out at the end of each day. And then that corporation, like American funds would be one, Vanguard. There’s all kinds of mutual funds out there, but there’s fund managers then buying all those stocks and you’re just buying a share of what that corporation is producing.

Michael Port (00:34:57):

Now we should make a distinction between passively managed index fund.

Matt Rzepka (00:35:02):

Yes.

Michael Port (00:35:02):

And an actively managed mutual fund. It’s a little confusing because an index fund is still a mutual fund. It is a fund made up of many different stocks or bonds depending on what kind of fund it is or both. So can you define a passively managed index fund versus an actively managed mutual fund?

Matt Rzepka (00:35:23):

Absolutely. The passively managed indexed fund is really already using indexes that exist. So groups of companies that are pooled together. So the easiest reference that maybe everyone can relate to is either like the Dow Jones Index or the S&P 500 Index, that’s all predetermined. So the index fund only has to go in and pull those indexes together, which can keep their costs very, very low.

Michael Port (00:35:50):

So for example, Vanguard as well as most other companies, although Vanguard is my favorite company in the world because it’s a not for profit and you know, Vanguard and John Bogle changed the world for individual investors. The reason that most index funds and mutual fund prices have been going down over the years in large part because Vanguard is pushing those prices down for many, many years. And people have had to keep up. So that’s wonderful. But you know, there’s the S&P 500, which is an index. And it’s just saying, look, here are the 500 biggest companies on the US stock exchange. You could put together a fund of those 500 and call it, say the Vanguard S&P 500 fund. And they are only buying the companies for you based on how much you buy into this fund. That are in that index and they distribute your purchase evenly across the index. Is that accurate? Do you think that’s reasonable description?

Matt Rzepka (00:36:46):

Yeah, absolutely.

Michael Port (00:36:47):

And the same thing is true for say the Russell 2000. That is a small cap index and as many more companies than the S&P 500 in it. They may put together an index fund that is a small cap index fund and it buys all the companies that are considered small cap companies in the US stock market. And, you know, they may just say, well, we’re gonna slice that even further and make an index fund that is a small cap value fund. So it’s only buying the companies that are considered value companies versus growth companies. But nobody is picking winners or losers. The managers are only buying the index that they are tracking. You’re not hoping that this one person who manages this fund is gonna have the ability to predict the future and is not buying or selling what’s they think is gonna be winners and losers.

Michael Port (00:37:41):

Instead, you’re just tracking the market, whatever the market gets, you get. Although even people who just buy passively managed index funds, even when they have a reasonable portfolio stock to bond asset allocation ratio, they will often underperform the market because they market time.

Matt Rzepka (00:37:59):

Yeah.

Michael Port (00:37:59):

So they won’t actually get the full performance of the market because they’re buying when they probably shouldn’t be buying and they’re selling when they probably shouldn’t be selling because they’re emotionally driven and they’re getting out when things get a little scary. And they end up selling at a loss or they get in at the wrong time because everybody’s hyping it up. So they buy at a premium and then it takes a lot longer to recover or to earn gains on that because they bought at a premium. So when you’re in index funds, you generally wanna sit and wait it all out until you’re gonna need it. And then we’ll talk more about actual retirement strategies. And we did an episode where we talk about bucket strategies in retirement and what to do with that money that you’ve amassed over the years when it’s time to start actually accessing it. But in this case, I just think it’s important to remember that you still have to get out of your own way even if you’re taking the passively managed index fund route. Now, Matt, can you explain mutual funds, how they work, and also what the track record is for most mutual funds?

Matt Rzepka (00:39:00):

An actively managed mutual fund involves money managers. It involves a main company that’s running the mutual fund and it involves a lot of discretion. So the discretion comes to what stocks and bonds do we buy if it’s buying bonds or for it’s only buying stocks. Like a growth mutual fund might only buy stocks, but you’re leaving all of the decisions up to the money managers. And then on top of that, because the mutual fund has to employ money managers, they have to file a lot more compliance related items. They have income distributions kicking out on an annual basis, whether you want them to or not, especially if it’s in a taxable account. What tends to happen is mutual fund expenses run a lot higher than an index fund or ETFs or other things that are basing them on just a strategy or a system or a process. So that’s then been the trend the last, you know, 20 to 30 years is really examining what are the true cost of a mutual fund and making sure that if you’re going into those mutual funds, they’re delivering you enough return to outweigh the cost that that mutual fund is charging. Or if not, you may want to consider an indexed or a more passive strategy with much lower cost and systematic rebalancing. So that’s the type of analysis you wanna think about.

Michael Port (00:40:16):

Okay, I’ll, I’m gonna hop up on another soapbox, because I have some cynicism about many of the mutual funds that are offered in the US. I’m sure around the world, but I only know this market. I have a lot of friends who are mutual fund managers. So I, you know, no, but I do. I actually, one of my closest friends is an analyst at one of the biggest funds in the world actually. And I was telling him about all my cynicism and why I think most mutual funds are actually created. And he’s like, you know, you’re insulting me and everybody who does what I do. I was like, well, yeah, I guess I am, but I don’t mean to insult you specifically. And I just say that just to preface it. I don’t think all mutual fund managers are bad at their jobs. I think there’s a lot of really smart well-educated people who are in that field. And they’re often good people who, who really do believe that they can beat the market and want to provide a great return for their investors. I think there are many, many people like that. Whether they can, or can’t actually doesn’t matter, meaning they might have the best of intentions, but it doesn’t mean that they’re gonna beat the market. Or if they went to Wharton or Harvard Business School, it doesn’t mean that they’re gonna beat the market. Or if they have a very expensive suit, doesn’t mean they’re gonna beat the market.

Michael Port (00:41:27):

But here’s my cynical theory. I think many mutual funds are established to look sexy and really provide income for the fund managers, the institution that is carrying this fund, through the fees that they charge. Because they earn fees regardless of whether or not the fund does well.

Michael Port (00:41:50):

So I have a friend who is one of partners and founders of a hedge fund. And one of the things that’s cool about is hedge fund is that they only take a small percentage of the return unless it’s above a certain percentage. So the fund has to make a certain percent in annual return for them to get their big money. And at that point you go, okay, great, because there’s some pretty aggressive goals there. But for most funds it doesn’t work like that. John Bogle, one of the things he said and I’ll paraphrase, as he said, the biggest risk to the individual investor is the tyranny of fees. And the more you pay, the less you get. Generally when it comes to stock market and bond market investing. So let’s get into that a little bit. Now, before we talk about recommended portfolio design, because I think it’s important that people understand how they pay for these types of investments and what’s inexpensive and worth it and what’s expensive and not worth it.

Matt Rzepka (00:42:50):

Yeah.

Michael Port (00:42:51):

So Matt, can you just talk a little bit about what the general fees are for say a Vanguard total US stock market fund, which would have all the stocks in the whole us market in one fund or an S&P 500 fund, which is just the top 500. How do the fees generally work for say a Vanguard fund like that?

Matt Rzepka (00:43:09):

Fee warfare has existed for a long time. And now thankfully, it’s just becoming more transparent and people are becoming more aware. And that’s been the warfare on Wall Street. It’s a disclosure game. They’ve had to disclose certain things, but then you can find out more later and it’s just a legal war at that point. So lower fees are always better for your performance. If you’re gonna pay higher fees, you better make sure you’re getting higher performance. But we as Americans and humans, what we typically do when we’re paying a higher fee, we pay the higher fee and then we don’t monitor. We don’t check. We don’t look at it. And then that’s where the fee can erode your return significantly over the long term. So like the hedge fund guys, the, the 2 and 20s, you may have heard that 2% fee and a 20% of profit.

Matt Rzepka (00:43:51):

That’s a pretty big fee. So if you’re paying something like that, you better be getting a return that justifies it, or you’re losing a lot of your money unintentionally. So on the fee side for like Vanguard or indexes, or ETFs, you’re looking at the lowest cost options on the market. You may pay anywhere from, I’m gonna use a basis point reference, five basis points to 15 basis points. So what that means is 0.05% is five basis points or 0.15% is 15 basis points. Those are some of the lowest cost products you can find on the market.

Michael Port (00:44:22):

And, and a basis point. Matt, can you just describe like how many pennies in a hundred dollars is five basis points?

Matt Rzepka (00:44:29):

Yeah. Five pennies, a hundred basis points is 1% or a hundred pennies. Like that’s the way to think about it. If you’ve never dealt in the basis point conversation like that, it gets confusing at the start, but the penny reference is a good one. It’s…

Michael Port (00:44:40):

Yeah.

Matt Rzepka (00:44:41):

It’s basically one penny per basis point. A hundred basis points is 1%. So that’s just how you kind of do that math.

Michael Port (00:44:48):

So think about how this plays out over a lifetime of investing. Say, if you get a total stock market ETF from Vanguard. ETF is an exchange traded fund they’re made up the way index funds are made up on the exchange and you can trade them at any point throughout the day when the market’s open. They’re essentially the same type of investment. So you can get it for 0.04% or even 0.03% if you’re in one of the institutional ones. So that’s three pennies out of every a hundred dollars that you put in there. That’s what you’re paying. Three pennies.

Matt Rzepka (00:45:17):

Yep.

Michael Port (00:45:18):

For every a hundred dollars. Okay. Now imagine it was the same fund, but you were paying say 1.5% To the advisor. Who’s managing it. And we did a whole episode where we talked about advisors, the good, the bad, and the ugly. That sometimes advisors can be really helpful because they can keep you on track. And maybe that money is worth being spent. If it’s spent in a way that’s reasonable. But then in other times where the advisor’s gonna charge you a lot of money and not really pay attention to what’s happening, or actually put you into investments that are, are gonna lose to the market over time.

Matt Rzepka (00:45:50):

And if they’re charging you a fee, what are you supposed to be? Is it just investment management or are there other services in there? You know, make sure you’re clear on that again, ask those questions.

Michael Port (00:45:58):

Yeah. So you’re paying 1.5% to the advisor and that’s 1.5% of all of the assets that they have under management that are yours. So if you give them a million dollars, it’s 1.5% of a million dollars. If then the funds that you are in are another 1% expense ratio, now you’re paying a hundred basis points for the mutual fund and then many mutual funds still have a load at the beginning. A load is a fee that you’re charged when you make an investment into the fund. And many of them have stopped doing that because it’s been harder for them to get away with it, but there are still funds that do it. And so maybe you’re paying 5% on the front end of what you put in.

Michael Port (00:46:40):

Now, let’s just say you didn’t have a load, but there was, uh, 1% expense ratio on a mutual fund. But actually there are additional costs that the mutual fund incurs that are hard to see, that are not particularly transparent, but could add up potentially to another 1%.Iinternal fees, trading fees, document fees, all sorts of things that they will tack on. So now let’s just say you’re spending 2% to be in that mutual fund and you’re giving the advisor 1.5%, so now you’re at 3.5%. That’s coming off the top.

Matt Rzepka (00:47:16):

Yeah.

Michael Port (00:47:17):

So let’s just make it the math easier for me, just make it 3%. So if, if the market returns 10% and your mutual fund returns 10%, you have to pay 3%, 300 basis points, for the privilege of being in that mutual fund, versus say three or four basis points for being in an index fund that’s actually capturing the same amount of growth, but actually you’re getting more value in the return because you get that additional 3% or almost additional 3% that you’ve gotta pay to somebody else to get the same returns. Now it gets worse if the mutual fund underperforms the market. So the market brings 10%. The mutual fund has a return at the end of the year of 7%. And it costs you 3%. Well now you only made 4% and you were in a risky investment where you could have been in a bond that was much more secure making 4%.

Michael Port (00:48:10):

So that’s why I am the biggest fan of passively managed inexpensive index funds. Yes, there is absolute value to actively managed funds for some people in the right circumstances. And there are a few people who over a decade or so continue to produce big results in mutual funds, but we don’t know if they can do it for 30, 50 years,

Matt Rzepka (00:48:34):

Or how involved are you gonna be as the investor in looking at and monitoring your stuff? You know, your example, you just gave that mutual fund has to perform 13% return, 3% higher than the market, just to be on the same level. So if you know, you’re paying those extra fees, you better make sure have the wherewithal to compare it to what a passive index type investment would be and beat that benchmark. And if you’re not beating that benchmark, then you probably shouldn’t be in that fund. Now also you have to take the time to compare it to the benchmark and do…most people don’t get that involved in their finances. So…

Michael Port (00:49:05):

Yeah.

Matt Rzepka (00:49:05):

You, you just want to be aware of what’s gonna work best for you and how involved you’re gonna be. And then how do you compare things easily?

Michael Port (00:49:12):

Yeah. And how do you reduce stress around this? How do you make it as easy as possible, as worry free as possible, so that you know what your long term goal is? You know exactly what you’re paying, you know, how it operates and you can just go about the rest of your life and focus on the stuff that’s really exciting to you. I think that if you’re trying to outperform the market and thinking that you are smarter, or that you’ve picked an investment manager who’s smarter, then you’re always gonna be at risk of being fooled. You’re like, oh, I was wrong. I thought this guy was the best.

Matt Rzepka (00:49:42):

Or changing accounts or advisors on a regular basis. And then you may come out of the market and miss some of the market when you’re making the change. And there’s all those little risks of just not picking a strategy, making it simple, and sticking with it.

Michael Port (00:49:55):

If you start with mutual fund investments or individual stock investments, well, and you do get some gain from them over a number of years, if you realize, oh, I wanna take a different approach and move into index funds, well, you have to sell all those investments, which means you’re gonna incur capital gains taxes most likely. And if they’re short term gains, you’re gonna incur high taxes because you’re not gonna get the long term rate, you’ll get the short term capital gains rate. So I think there’s just a lot more risk in trying to beat the market than get the average returns. Because I think when people hear average, especially the kind of people that listen to our show who are ambitious, who like to be the best at what they do, they think average, I don’t wanna be average. Average is for someone else, I wanna maximize everything.

Michael Port (00:50:38):

Trust me. I am a maximizer. Ask my team. I always want everything to be the best. I want HPS to be the best, like everything. But I realized over time, average means the best for someone like me in the market. Meaning if approximately 85% of mutual funds cannot outperform the market each year, 85% of mutual funds on average do not beat market returns, that means I’d have to be clever enough to pick the only 15% who made returns that year and then know who’s gonna make them the next year and the next year and the next year, because past performance does not equal future performance. Just because someone, you know, did well last year, it doesn’t mean it’s gonna happen the next year.

Matt Rzepka (00:51:26):

And along the lines of performance, the best thing you can do for your retirement is save a lot. People chase performance, because they’re not saving enough. They’re not setting aside. You know, you’ve gotta allocate between saving and investing. But the more money out of your income that you can set aside into your strategy, the more safe and secure you’re likely gonna be long term. People are seen return because they’re not putting enough money aside. They’re spending too much of what they’re earning and that’s the most powerful thing that you can do. And then when you realize that you’re saving and putting money aside at a high rate, then you don’t have to worry about beating the market because you’re giving yourself the best boost that you can.

Michael Port (00:52:03):

Yeah. And you can also continuously buy and keep putting more money into the market to get those gains over time that the market has consistently produced.

Michael Port (00:52:15):

So advisors often talk about what percentage of your income you should be putting aside for quote unquote retirement. And usually they say 10%. But that seems woefully insufficient in this day and age, especially if people are starting late.

Matt Rzepka (00:52:37):

Yeah. The later you start the bigger, the number. The thing about that, I save 10% or set aside 10% of my income to provide a hundred percent of my retirement. How does 10% become a hundred percent? So you want that number to be as big as possible. Now, if you haven’t started saving, you can start at 10%, but try to ramp it up. You wanna ramp up that number you’re setting aside as fast as possible. Get your lifestyle to where you want, but everything you start to earn over and above where your current lifestyle is, don’t let lifestyle creep happen. Let that money go into your save means in investing strategies, because that’s gonna be your most powerful asset.

Michael Port (00:53:13):

I’ve been drilling into my kids, which probably means they won’t listen to me, but I’ve been drilling into my kids for as long as I can remember that as soon as they start earning money, you know, know out of school, I mean, they’re little money now at their jobs and they have investment accounts already. But when they are making an income, that is a full-time income after school, I really hope they put 50% of their income away starting from day one.

Matt Rzepka (00:53:42):

Yeah.

Michael Port (00:53:42):

And you might think that’s a huge number. Like if they get a job, that’s say $50,000 a year, they’re gonna live on $25,000. Yeah. When you’re 21 years old, you can figure out a way to do that. You get a place with a couple friends, you share rides, you know, you don’t buy some fancy souped up car that you can’t afford.

Michael Port (00:54:00):

And then by the time you’re 30, you’ll have enough money in there to be able to choose the kind of jobs you want and pass on the ones you don’t want. It just gives you so much more choice. And I did not do this when I was younger. And I look back and I think holy cow, I mean, when I was an actor, certainly in my early twenties, I didn’t have much money, but I still could have put money away. I mean, I made enough money that I could have put money away instead of, you know, wasting it on some of the things that I did. I think, man, if I had started back then, holy cow, because time is the greatest asset you have when you’re trying to produce returns from almost any asset class in the market.

Michael Port (00:54:39):

So let’s talk about a recommended portfolio as our last section here. For a speaker who, you know, is making a good living, speaking, maybe they’re not super famous yet, so they’re not pulling in crazy fees. But you know, they’re making some money. They’ve got enough to save. Maybe they’re able to put away 15%, 20% in that say that they’re in their forties, maybe late thirties. How do you generally recommend somebody sets up a portfolio for themselves if they’re doing it for long term returns and their retirement needs?

Matt Rzepka (00:55:16):

Yes. At the 30 to 40 range, your time horizon is 10 years plus. My general advice is to try and take as an aggressive of an approach on the portfolio, as you can stomach. And talking through that too is key at the beginning. Let’s use an 80, 20 reference, 80% stocks, 20% bonds. You can go in there and have a small portion of fixed income. What that allows you to do. If you’re not adding large amounts of money to the account, when the market fluctuates up and down, that’s when you have to buy some of the bonds and sell some of the stocks and vice versa when the market’s fluctuating. So an aggressive portfolio at that age is certainly warranted in my opinion, unless they’re gonna make bad emotional decisions. Some of that’s talking through it with the client to say, Hey, what are you gonna do? If the market goes down 30%,

Matt Rzepka (00:56:03):

Having that conversation at the beginning is really the biggest part. That’s where most people make bad emotional decisions is nobody talked about the bear market part of the conversation. Because the bear market is certainly the minimal part. You know, it’s typically 3 outta 10 years where we have bad market cycles. So 7 outta 10 years, it’s pretty easy to manage the account. So you don’t have to worry about that allocation as much from an emotional perspective. But I would say at least 80/20, and then if they are comfortable with that risk, you could even go a hundred percent stocks. And then as you’re adding more money to the account, figure out the allocation as time passes.

Michael Port (00:56:36):

I keep an 80/20 portfolio. 80% stocks and 20% bonds. I also keep a fair bit in cash as well, just in an emergency account, but there’s a difference between emergency savings, savings for a purchase, and investing. We address this in earlier episodes, but it’s important that people first have an emergency account that they can get quick access to cash if they need it for whatever reason.

Matt Rzepka (00:57:04):

Yeah. Access to capital.

Michael Port (00:57:06):

Access to capital. And then you might say, listen, we’re saving for a house. We wanna buy a house. Well, you’re not gonna take that money and plop it into a hundred percent stock market fund because that could drop 30% in a month or so. Then you don’t have access to that capital because you don’t wanna sell it at such a loss. And it’s just kind of tied up. It’s relatively illiquid in that way. So then you might say, okay, we’re gonna save money here for that particular purchase. That’s important to us. But then your investing is going into the market. It’s going into buying real estate if that’s something you want to do. Or it’s going into whatever other type of investment you think is in line with your particular philosophy and your goals.

Michael Port (00:57:49):

So let’s talk about what you buy inside that portfolio allocation and whether it’s 75% or 80% stocks and 20% or 25% bonds or 60% 40%, if you wanted to be more conservative, that’s really not a big deal. If it’s 80% verse 70% better to save and get it in there than obsess on, you know, these small differences in your portfolio. But then you’re just trying to keep it balanced so that it always stays at that particular ratio. So if stocks shoot up and my portfolio changes so that it’s now 85% and it’s 15% bonds, well, I’m gonna do one of two things. Either my next contribution is gonna buy bonds to try to get me to try to increase my share of bonds. So essentially I’m using my contributions to balance the portfolio, or I’m selling some of my stocks and moving it into the bond funds. And I don’t wanna do this in taxable accounts, but I do do that in tax deferred or tax free accounts because there’s no tax implications for selling and keeping it in those accounts. You know, if you’re just moving it from one fund to another inside those accounts.

Michael Port (00:58:57):

But let’s talk about what you buy. For me, I keep it really simple. I buy total US Stock Market Fund at Vanguard and I own all the stocks in the US stock market. I also buy the total US Bond Market Fund, and I own all the bonds that are available to buy. And that’s the majority of our stocks and bond investments. However, I do own some additional tips which are inflation, protected securities. And there were times when I had about 5% of the portfolio, just a small cap index fund. I eventually decided to move it out of that and just put it back in the total stock market, just because I didn’t wanna think about it. I wanted to make it even easier.

Michael Port (00:59:41):

But people don’t even have to go that far, do they, Matt? They could just buy a target date, retirement fund. My expected retirement date is X let’s say it’s 2050. So you buy the 2050 target date fund. And then the fund managers will keep a portfolio asset allocation that is appropriate for that age. And you just go, okay, I’m gonna trust they can handle that. They’re not picking stocks, not picking winners or losers. They’re still buying indexes, but they are taking control of the portfolio asset allocation so you don’t need to do any rebalancing. They do that and it will automatically rebalance and keep track with your age.

Matt Rzepka (01:00:21):

Yeah.

Michael Port (01:00:21):

So what’s your perspective? How do you feel about target date funds? What do you recommend people buy in their retirement portfolios? Do you mix it up a little bit more or do you keep it really simple? What’s your perspective?

Matt Rzepka (01:00:35):

Generally try to keep it pretty simple. There are lots of options out there. We’re big fans of low cost index funds or low cost ETFs. If you get a large enough account, some stocks in there. Stocks don’t have a direct cost other than buying the initial buying. And then the eventual selling. They usually charge you a trading fee, but those fees have come way, way down again with the internet accessibility of stocks. But again, for somebody, if you’re, especially if you’re managing it yourself, I think you want to keep it very simple. I have no problem with target date funds, especially if you’re not gonna be very involved. Because the most important thing is when you get to about five years of when you think you’re gonna retire and start using that money, you don’t want to have an overly risky allocation because if you have bad timing from when you wanna retire and the stock market goes into bear market mode, right as you’re about to start using that money, it can really change your retirement.

Matt Rzepka (01:01:30):

A lot of people learned that lesson the hard way in 2008. Their equity allocations were really high. 70%, 80%, 90%. They were hoping to retire in 2008 or 2009. And then we had a 40% decline. Well that changes everything because when you start to take money from a portfolio, the rules are changed. Everything is different and you have to have a distribution strategy to manage markets, to manage income and manage pensions, manage social security, manage taxes. So within five years of retirement, you want to be very interested in what your allocation is and making sure somebody is monitoring and helping you balance that risk.

Michael Port (01:02:07):

Now I hesitate to add this because it’s a whole other can of worms, but for the cash that I keep on hand, I actually keep it in Stablecoin and I’m not a crypto investor. I think I owned a few Bitcoins a number of years ago, but I don’t anymore. But I do own Stablecoin because I can get a 9% return from Blockfi or you could get it from Gemini Exchange, but I own the Gemini USD coin. There’s some risk involved, but it’s not a volatile cryptocurrency, but it’s giving me a 9% return on my cash while it’s sitting there in a high inflationary environment. And that’s just one element of the overall portfolio that we talked about. And that’s really, really key is all the different things that you either own or are liabilities need to be considered when you’re considering your portfolio. It’s not just what you own in the market that’s important. And as Matt has discussed a number of different times in a number of different episodes, you wanna think about your bucket strategy because you want access to capital in different forms that have different tax implications at retirement so that you are as tax advantaged as you can possibly be when it comes to withdrawing that money or accessing that money.

Michael Port (01:03:25):

So Matt, we gotta wrap up, but we’ve got another episode coming up next week. You know what we’re covering?

Matt Rzepka (01:03:31):

I do. We’re gonna talk about how to keep your income, your family, and your estate safe and sound.

Michael Port (01:03:38):

Well. That sounds nice. I like safety. It is very important.

Matt Rzepka (01:03:43):

It is.

Michael Port (01:03:44):

Okay. That’s it for today. Keep thinking big about who you are and what you offer the world. And one last thing before you go, don’t stress about this stuff. Just learn a little bit at a time. What, what I’m gonna learn next, like, you know, pick up a book that you think might help you. I’ll give you an example, say the Simple Path to Wealth, great book, by J. L. Collins. One of my favorites, really simple. You’re gonna hear what we talked about. You’re gonna hear it in the book and it’s gonna be even more detailed. So that’s a great place to start. But don’t panic. Don’t worry. As my mother says, everything will be fine.

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