Ken Moraif  

Did you know that if you take too little risk or too much risk, you actually could run the risk of running out of money? In this episode of the Retirement Planners of America Podcast, we’re going to discuss both sides of that and help you to see how much risk you should take. Hello RPOA nation, and welcome back to another episode of the Retirement Planners of America Podcast. I hope this finds you healthy, wealthy and wise, and in this episode, we’re going to be talking about how much risk is appropriate for you, and we’re going to go into a discussion of the different levels of risk and how, also how to control risk. Okay? And I want to refer you to, if you haven’t watched it or listened to it already, to our podcast on the RCFP, the retire, the retirement cash flow plan, easy for me to say, in the retirement cash flow plan, we go through the whole gamut of how we calculate, the rate of return, the amount of risk, all of that. In this episode, we’re going to talk about the next step in that process. Okay, so if you haven’t watched that one or listened to it, make sure you do even if you’re out of order, do it anyway. Okay, so again, this week, this, this episode, Jeremy. We’re going to talk about how much risk. And by the way, this is Jeremy, my producer, of my co host, yes, indeed, formerly known as Jer Bear. I’m actually never gonna let

Jeremy Thornton  

you I’ve been able to tell every time we start

Ken Moraif  

Jer Bear, yeah, I wish we could keep Jer Bear, but he, ladies and gentlemen, he does not want me to call him Jer Bear, therefore I will not ever use the word Jer Bear when I’m addressing you, other than to remind everybody of your former right? You’re the artist formerly known as Jeremy, right? Okay, so this week, yeah, so we’re going to talk about the different kinds of risk, and then also we’re going to talk we’re going to illustrate, you know, how diversification and those kind of things help in that regard?

Jeremy Thornton  

Absolutely, yeah, and I think it’s super helpful to remind people that this is not a one time deal again, that that RCFP acronyms abound in our industry, is something to be done frequently?

Ken Moraif  

Oh, yeah, updating the retirement cash flow plan. We want to update it at least twice a year. Yeah, because things change, right?

Jeremy Thornton  

So, so updating that and then this again, is just kind of attached to that. We didn’t want to make a two hour long video, essentially talking about the whole thing.

Ken Moraif  

We don’t, all right,

Jeremy Thornton  

my attention span isn’t that great. But yes, so Okay, so talk about risk, and what risk is appropriate to you, and kind of how I guess the market looks at and how we specifically look at that.

Ken Moraif  

Yeah, before I do that, I have to make my compliance department happy. Okay, and so I have to say that the opinions expressed on this show are my own, nobody else’s, although they ought to be, as far as I’m concerned. And future results are not guaranteed by the past. And what else am I supposed to say? Diversification is not a strategy without risk, and also that there’s no one size fits all. So in case anybody didn’t know that had never heard that before, we just did it, just to make sure that we’re on that. Yes, yeah, I was always love compliance. You know, they’re like the show downer. You know, those they do that. But anyway, yes, so the amount of risk. So our philosophy is that you should only take as much risk as is necessary to accomplish your financial goals, right? Okay, and so the we keep mentioning the RCFP, so I apologize for that, but, but basically what that helps us to understand is, you know, how much risk do you need to take to accomplish your goals, right? And so once we’ve determined that, then the exercise we’re going to do on this episode is to help illustrate why that amount of risk is appropriate. But here’s I’ll give you an example. Let’s assume for a moment that you won the lottery. I like that idea. You like it, yeah, so far, so good. Yeah. Okay, so you win the lottery, and this isn’t the Powerball where you win, I don’t know, $10 million No, okay, you’re gonna win $1 billion

Jeremy Thornton  

No, is this a Saudi Arabian like Powerball,

Ken Moraif  

so you’re going to win $1 billion and so now you want to invest that for your retirement. Okay, so we want to determine how much risk do we need to take for you? Yes, okay, so the way that we determine it is by using. The retirement cash flow plan that we talked about, right? Okay, and in that exercise, let’s say that we find out that you want to spend, and I know this is going to be hard for you to be able to do, but you’re going to have, you’re going to spend, you want to spend $9 million a month. Wow, that’s it, yeah, oh yeah. That’s where you are, that’s right. So, so that’s $108 million a year for your cost of living, yeah? But you’re thinking I have a billion dollars, right? So that’s not me. That’s nothing, right? Well, that’s actually taking out 11% of your money. Okay, yeah. So if that’s the case, then we have to take a higher level of risk to be able to satisfy that 11% that you need to take out right now, what we would encourage you, because we believe that you should only take as much risk as is necessary to accomplish your financial goals, right? And in this example, if you’re taking out 11% every year, yeah, even though you’re a billionaire, right? I would suggest to you that you’re going to run out of money. I mean, think about it. If you’re taking out, let’s shrink it. Let’s call it 10% a year. You know, without any gains, just straight up math, it’s about 10 years your money’s gonna last, right, right? And you’re, you know, 10 years from now, you’ll still be a young man. Yeah, right, right, yeah. So what we would instead suggest that we only take as much risk as is necessary to accomplish your goal. So Jeromy, let me ask you, could you okay? I’m really gonna ask you to sacrifice you Okay, okay, but could you live on $1 million a month?

Jeremy Thornton  

Man, that sounds like I’m living off a spam and crackers.

Ken Moraif  

Yeah, I know, I know that’s rough. It’s tough, yeah, but if you could live, yeah, on a million dollars a month, on a mere $12 million a year, yeah, that would be 1.2% of your total money. Yeah. So in one scenario, you would run out, and in the other scenario, you probably would never run out. Yeah, so the amount of risk you take that we determine is important. Generally speaking, we like to keep the risk level and the return so there’s that risk return relationship, yes. So the first thing I want to do is I want to go over with you what is called the efficient frontier. Ooh, yeah, doesn’t it sound cool? Yeah, I think it’s cool. So I’m going to open up my computer here. Okay, so Jeromy, what I want to do here is I want to show you on on the screen what is called the efficient frontier. Yes, okay, and this helps us to determine how much risk you know how to construct a portfolio that is appropriate for you given the risk that we want to take right now. Keep in mind that the first part of this, as I just described a minute ago, is that we want to take the least amount of risk possible, right? So in the example that I gave, and you’ve got your billion dollars and you want to spend 9 million a month and take 11% out I’m going to tell you you can’t do that. Yeah, all right. Now you can fire me for that, but I’m of no value to you if I just tell you what you want to hear absolutely okay. So the first thing I would say is, no, no, no, no, we cannot. You can’t sustain an 11% withdrawal rates. You know for the rest of your life that I would feel very uncomfortable with that. I would try to push you down. Yes, you know, and I exaggerated with the million, because I know you could never on a million dollars a month, all right, that’d be too tough for you. But you know, maybe we can get it down to, you know, two or three or $5 million a month, and get it down to maybe, you know, 6% 4% somewhere in that range as to what your withdrawal rate is. And so if we do that, then we have a much better chance of having your money last as long as you do, which is our goal? Yes, right? We have two goals for our clients. One is, we want your money to last as long as you do, right? And secondly, we want you to have financial peace of mind, yes. And by the way, just as an aside, I think I’ve told this story before, but you know, when we were deciding on that, you know that tagline, I’ll call it of We want your money to last longer than you do, yeah? We surveyed our clients, we always do, and we asked them, we said, you know, what do you think of that? Yeah? And they said, we hate it. You hate it. Why? Why? Why would you hate your money lasting longer than you do? That sounds like a good thing, right? Yeah, well, because I want the last check I write to bounce, I’ve done my work here is done. You know, the kids can fend for themselves. So we said, All right, well, what if we change it to we want your money to last as long as you do? Yeah. And then they were like, there. I like that one much better. So that’s why we use that instead. It doesn’t mean that we can’t design a plan with the goal being that you have more money than you have today. Yes, but it was kind of a funny Yes, it was funny. Okay, so anyway, so this chart here that I’m showing you is called the efficient frontier. And the reason why it’s called the efficient frontier is because this curve that you see here, okay, basically shows you different percentages and so up and down. And on the left hand side, that’s the return right. So the higher up you go, the higher your return is. And then along the horizontal axis, the farther you go to the right, the more risk you’re taking. Okay, so what you can see here is, for example, is that 100% stocks is the highest risk portfolio, yes, you know, in this example, and the least risk is, interestingly, is a 30 stock and 70 bond portfolio, yeah. And most people would think of bonds, 100% bond portfolio as the least risk. But as you can see here, when you look at the efficient frontier, it actually isn’t okay, yeah. So a boomerang effect. It’s kind of looks like a boomerang, yeah. So one thing you’ll notice here is that the the one that has the least amount of risk is this 3070, I call this the alchemy of diversification,

Jeremy Thornton  

okay, the philosopher’s stone here, yes, yeah.

Ken Moraif  

And, and the reason why this happens is because that’s the value of diversification, yes, okay, because, as we’ve noticed in previous years, you know, the bond market doesn’t always go up, right? And the as we’ve also noticed, the stock market doesn’t always go up, so they kind of zig and zag, you know? And so if you combine the two, then in many cases, over time, what they can do is they can take the edges off the top, the spikes on the top side, and they can also potentially take the spikes on the bottom side as well and smooth it out, yeah. And then that reduces your overall risk, yeah, okay. And so that’s why the lowest risk portfolio over this period, and this is, according to the source here, as you can see, is BNY Mellon. Is the 3070 30 stock, 70 bond, yeah. So for somebody who wants to take the least amount of risk, that’s what we would maybe recommend. Okay, so as you go up the curve, you can see that you can go all the way up to 6040, 7030, 8020, depending. So if we’re looking at how much return we want to make, right? So we’re looking at the up and down here, what we want to do is say, Okay, if our goal for your cost of living that you want to support with your billion dollars is, you know, a certain percentage. Then what we do is we say, okay, that percentage, let’s say, is right here, and that coincides with the 6040 portfolio, yes. And so that’s the one that we would probably use for you, right? Because it’ll give us the highest probability of achieving that goal. Yeah. And

Jeremy Thornton  

we’re talking about when we say 6040, and 3070, things like that. We’re talking about the amount of your investments that are in the stock market, which in this case, we’re talking about the s, p5, 100, and the amount that is in the bonds

Ken Moraif  

market. Yeah. And in this example, where you there, we’re using the US bond aggregate index. There you go.

Jeremy Thornton  

There’s no way I knew that. I just

Ken Moraif  

It says bonds. That’s that’s a very good question. So the protocol is that the first number is stocks and the second number is bonds. So if I say 6040 Yeah, what I mean by that is 60% stocks, 40% bonds. So in most cases, you know, for most people, what we try to get you in if you are a retired person, okay? And we call our clients that are retired skippers. And for those of you who don’t know what skippers are, well, squippers is the acronym for second childhood without parental supervision. So when a client of ours retires, we call them a skipper, and we tell them to get out of here. Stop bothering me. Go play. Have fun, enjoy. Let us worry about this stuff for you so that you don’t have to. So for our skippers, we try to keep them in the 6070, ish kind of range, yes, okay, which means that most likely, if their cost of living is too high. We need to get that down right, so that we don’t have to take a higher amount of risk to cover their cost of living, right? So again, we always say we want to take the least amount of risk possible to still achieve your financial goals, right? That’s a core value, an investment principle rather, yes. So what you can see here, then, is, on this chart, is the progression of the stocks and bonds and the return and risk equation. The next thing that I want to show you guys is this chart over here. Okay, so once we’ve determined the rate of return that we need to accomplish, right? The next thing is we look at the Calen chart, which is the efficient frontier, and it’s, it’s a scientifically calculated, right? It’s a data driven, it’s data driven, scientifically calculated, and it the efficient frontier. Is something that’s been used for decades, yes, and basically it’s the least amount of risk for the highest return, right? Given what you’re looking to achieve, right? Okay, so that’s the goal, is to take the least amount of risk possible and still get the rate of return. You’re right, right? So once we’ve determined what the portfolio is, let’s say a 6040, 7030, I want to show you something else that is really interesting, and that is, you know, how you diversify. So if you say I’m going to be 60% in stocks or 70% is, you know, what are you going to have in your portfolio? Yes. Okay, so this, this chart right here, is called the Callan chart, and maybe it’s named after Mr. Callan. I don’t know why it’s called a Callan chart, but it is. And so this is through the end of 2023 and it shows you from 2007 all the way over. And what you can see here is that each column is a year, each color is a kind of investment. At the top is the highest performer for that year, and at the bottom is the worst performer for that year. Okay, okay, so this is very instructive. So let’s look over here in 2007 you can see that emerging markets, which is the economies that are growing, hopefully rapidly, yes, like South America, Southeast Asia, those kind of things, not the established countries like Europe, Japan, United States, right? So that’s emerging markets. And so it’s a salmon color over here. And by the way, if you can’t read all the stuff on here. That’s okay, yeah, if you can, you have, like, Superman eyes, okay, you can, like, magnify. I admire you for that. But you don’t need to be able to read anything on here. Just notice the colors. Okay, so the salmon color right here is emerging market. So you’ll notice that it went up 39% right there. So something that goes up 39% what does that do? Holy cow, that attracts a lot of attention, of course. So everybody loaded up, yep, on emerging markets. Man, you got to be in that. If you’re not invested in emerging markets, you’re missing you’re missing out, right? And you don’t want to miss out. So there’s a huge buy. Well, that was a mistake, because you can see that the following year, those emerging markets lost 53% Yikes, ouch. Get out. Sell, right? So everybody then sold all those emerging markets. Well, that was a mistake, because the next year they went up. Are you? Are you ready for this 79% oh my gosh, yeah, we should buy them. Bye bye bye. Emerging markets. If you don’t have them, You’re crazy. You’re missing out. And guess what happened next? Boom, it went all the way down, and it was down 18% and now it’s all it’s sell. Well, you may say, Okay, well, that’s a salmon color. Well, this gray box over here, this is core fixed income. So these are bonds. This is the aggregate I was talking about earlier. So in 2008 it was the best performer, because the stock market was crashing, right? We’re scared. And they were buying bonds, right? They were trying to find safety, so they bought bonds. And bonds was the best performer you should be in bonds. Buy bonds. Buy bonds. Well, you can see that it went to the bottom, and then it went back up to the near the top, and then it went back down to the bottom and it went back up to the top. Gray box in it too. So that, and if that’s not a convincer. Let’s look at large cap stocks. Okay, this is the thing that, you know, we’ve seen the fangs, for those who remember, which is what, Facebook and Amazon, etc. And then the Magnificent Seven, which are, you know, the AI companies. So these are the large, large companies. And you can see here the baby blue color was at the top, and then, you know, it stayed at the top for a while. So of course, you must have that. But then it went all the way down to the bottom here, and then it went back up the top. So pretty much you can pick your color, yeah. And it did it right. Okay, so what this shows, it shows two things. One is that you cannot predict next year, correct. Okay. It is just very unpredictable. It could be at the top. And, you know, people tend to chase returns, but when you do that, you end up taking more risk, because if you’re chasing returns, you’re chasing the thing that everybody’s buying, right? And to quote Warren Buffett, if everybody’s brave, I’m a coward, and if everybody’s a coward, I’m brave. So what happens, though, is all the headlines are, you know, emerging markets are doing fantastically well, or large cap or technology, or whatever the soup du jour is, yes. And of course, everybody’s loading up on that, but when you do that, you’re taking more and more risk. Yeah, because the thing this high flyer, you can see it history tells us is most likely to be the one that goes down next. And but you can’t predict it, right? And you can’t predict that the ones on the you know which ones are on the bottom and when they’re going to go up next? Yes, but you can say that over time, what’s at the top will go to the bottom and what’s at the bottom will rise to the top, right. Okay, so diversification, if nothing else, this shows you the importance of having a diversified portfolio. Yes. Now you may notice the purple box across the middle. Whenever I show this chart, everybody fixates on the purple box. I want that one. Yeah, steady. Okay, because it’s like steady Eddy over here. It does have a little down period, but even then, you know, what is that a 13% return. That’s not shabby. But if you look at all this period of time. I’m, you know, it did have some some, some bad years. But overall, you know, diversification you can see here in the purple box is a steady Eddie and so, you know, when we talk with clients, we have two kinds of people that we work with, clients and skippers. Yes, right? Clients are people that want to become squippers, absolutely skippers. Are the people that are looking at the clients and saying, hahaha, yeah. So when, when we’re looking at diversification, you know, we have different levels for a square versus a client, yes, but the importance of the importance of diversification is, I think, very well illustrated by that purple box there. And that’s the 60 stock, 40 bond portfolio. Is what that is. Now, one thing that I think is very important Jeromy, and that is, you know, we’ve talked in the past about the three worst enemies, do you have to to your financial well being, right? Right? One is taxes, the other is inflation. And what was the

Jeremy Thornton  

third one? Again, it was some kind of animal. It was it a wombat? No. Could have been a bear, a

Ken Moraif  

bear. That’s it. It’s a bear. Yes, kind of like Jeromy, yeah, which is no one in this room, right, correct? Yes. So yeah, bear markets. And so, you know, even though diversification is wonderful and everybody loves it, what you’ll notice is that you can still, in 2008 over here, you can still lose 28% of your money. And there are other periods of time when you could lose a significant portion, of course, and so diversification is very, very important. And in another episode, we’re going to talk about how to use the information on this chart to our advantage. There’s a strategy called rebalancing, where you know, you don’t know exactly when the one on the top is going to go to the bottom and the bottom is going to go up to the top, but you can use that information, right? That knowledge to your advantage. So there is a different video podcast we’ll be talking about with regard to that. But the important thing about diversification is that it’s not enough, yes, in our view, right? Okay, because it does not address the third worst enemy to your financial well being, right, which we actually, I should say, is the first, yeah, and that is bear markets, right? And the big bad bear markets are not frequent, right? But they do happen and frequent enough if you’re going to be retired, hopefully, you know, 30 years, the likelihood of you experiencing one is significant. Yes, okay, we had y, 2k where the SP, the stock market went down 49% from peak to trough. We had 2008 where it went down 57% so we do have, and they happen, of course, and if you don’t plan for them. I think you’re it’s unwise, right? You’re not being, I don’t think you’re being very smart if you don’t plan for those kind of things. So having a strategy to address those is very important. So diversification is good, yes, but making sure you have a strategy to protect against bear markets, right? I think is even more. Is even more, is even more important than diversification. And you know, I remember back I was talking to he’s now a skipper, but he was a client at the time. And you know, he was saying that in 2008 when the stock market crashed right. And I actually met him in 2009 he had had enough of buy and hold, and you know it’s gonna come back. He had lost so much money. And you know, he said he went and talked to his financial advisor about he says, I’m losing so much money. How do we? We got to stop the bleeding. And the financial advisor said, What do you we’re diversified. Yeah, right. And he goes, he goes, diversified. He goes, Yeah, look, the stock market went down 57% you only went down 35%

Jeremy Thornton  

right, right.

Ken Moraif  

Like, what are you kidding me? You call that good, yeah. And he goes, Yeah, you should be thanking me. You should you should be buying me lunch.

Jeremy Thornton  

I’m minimizing your losses. I made you lose less than you would have, you’re beating the market.

Ken Moraif  

So for us, there’s a difference between relative returns and absolute returns, yeah, okay. So for us, it’s not about doing better than the market in a down period. We want to mitigate those losses in a down period. Okay, so for a for an investment manager who runs, let’s say, a stock mutual fund, what they want to be able to say is that compared to their peers, they did better in the good times and and and the bad times, right? But that’s relative returns, yeah. So if the market went down 57 and you went down 40 right, then that’s a win. You were. Right? But we don’t think that going down 40 is a win, right? Okay, so relative returns for us are not good, because our skippers cannot handle right? You know, a 40% drop, maybe

Jeremy Thornton  

a 20 year old, maybe a 20 year old that doesn’t have that much, but he has a lot of working years ahead of them. But if you’re a skipper, or soon to be one, yeah, you you don’t have all those years to recover, correct?

Ken Moraif  

Yeah, exactly. Especially, I would say that once you get within five years of becoming, of retiring and becoming a square, I think that’s when you really not need to start thinking about, how do you protect it? Yeah, okay, because that five years before you retire is crucial, and then the five years after you retire is also crucial. So that decade, we call it the single most important decade of your entire financial life. Yes. So we today, we’ve talked about, you know, the risk versus return, right? We’ve talked about the our philosophy of take only as much risk as is necessary to accomplish your goals, and we always try to push our clients and skippers down to the lowest risk possible. Of course, we’ve talked about how to construct a portfolio so as to get whatever that return is. We’ve talked about diversification and how different asset classes behave. But then once you’ve done all that, as I said, our view is it’s not enough, yeah, because if you are in that decade and you take a big loss, it could cause you to not be able to retire like you wanted to. You know, unfortunately, I met a lot of people in y, 2k and in 2008 who had such devastating losses, yeah, that they could not retire, right when they wanted to. A lot of them, you know, basically had to wait another five or six or seven years, you know, because they had lost so much, they had to wait for it to come back. And that’s terrible. We don’t want that. And then for people who are retired, if you lose that kind of money, yeah, it changes everything, right? You know. So I guess what I’m trying to say is that everything we talked about in this podcast is super important, and we do all of that, but it’s not enough. Yes, you need to have an overlay strategy, in our view, if you’re in that decade,

Jeremy Thornton  

right? Yeah, no, I totally agree. It’s kind of like making a game plan for we’ll use football as an easy analogy. Megan a game plan for a football game and not taking the weather into account. You’re not playing in an arena. Mother Nature is going to come by, and it’s going to decide things for you.

Ken Moraif  

Man, you’re making me remember a game back when in thanksgiving, game with the Cowboys, yeah. Oh my Leon, let, I’ll just say that name, and you know, he was a great player, but on that day, that’s a day that will live in infamy for those of you who are Cowboys fans and who are old enough to remember that. But anyway, so that’s our conversation for you today. So the important things, as we said, is, yes, you should have a you should determine what portfolio is appropriate for you, given the risk that is appropriate for you, and then diversify accordingly. And hopefully this podcast and the charts we showed you are beneficial. And I hope this video find finds you healthy, wealthy and wise. Make sure you like and subscribe. Okay, don’t just watch this video all the time. Subscribe to it like it. Help us out. And then also make sure that you subscribe to our market alert video. So we send this out on a weekly basis. We talk about our view of where the markets are going, what’s happening with the economy, and, more importantly, what you should do about it with your investments. I think you’ll like it and find it very valuable. So once again, thanks for watching, and we’ll talk soon.