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Posted on March 16, 2019

5 Investment Diversification Mistakes That Could Hurt You

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Wealth from Wisdom is a weekly radio show from Carson Wealth.

Paul West: There’s one thing, one thing that could help you avoid losing your shirt in a stock market correction or during a bear market. And do you know what that one thing is?

I’ll tell you right now, you’ve got to have a properly diversified portfolio. You’re going to say, “Paul, that’s so simple.” Well, guess what? It was so simple. Why do so many people fail at it? Actually, most people fail at this, and in today’s show we’re going to talk to you about why. But I’m going to warn you right now, there’s so much more diversification that’s simply spreading your money across stocks, bonds, cash and other investments, real estate, you know, for example, there are other critical issues that nearly everybody misses and these issues can come with these unthinkable financial consequences. And if you’re not careful, it’s going to bite you, too.

You’re listening to Wealth From Wisdom. I’m Paul West and thanks so much for joining us today. Hey, my co-host is our senior investment strategist, Scott Kubie. Scott, welcome to the show. God, I know you were on a couple of weeks ago and we’re going to share our insights on the market and what’s going on.

One of the things my job is, as the lead advisor here at the Carson Group, and it’s the reason why we’re currently ranked in Barron’s and Forbes and all those locations – is it’s not just about the investments, it’s helping people make the right decisions on their risk budget, what they’re doing, but taking the whole picture into place. And that’s why I say people all the time think, oh, I’ve just got 60% stocks, 40% of the bonds. I’m a great diversified investor. Well, the reality of it is that doesn’t mean they are at all. And it’s a good start potentially.

But when you start unpeeling the layers and start to look at it, what we find out all the time is that they’re not, and especially when I look at it, they may not because of they’re not diversified from a tax perspective or they’re not diversified from an income perspective. And I have all of those eggs in one basket per se.

So we’re going to share five common mistakes today, Scott, on the show when it comes to diversification, including the number one mistake people make with their investments. And second, the key to diversification in your retirement. And third, what those critical roles about income diversification. Scott, we’re going to talk today also about, there’s an anniversary that is a looming deadline. Not yours? Okay. Not on the show today nor mine. If it was, I better make sure I’m aware of it before it’s a show that’s diversification. That’s safety, that’s protection.

Ten years ago something happened and we’re going to talk about it on today’s show, but let’s really get into mistake number one. And the biggest mistake we see is investment allocation mistakes. And that is your investment allocations. Don’t match your investment risk tolerance. What the world do you mean by that, Paul? So here’s a simple way, I’m going to explain this. In December the market went down, right, Scott? It was rough.

Scott Kubie: Yeah, I mean it seemed like it was going down almost every day.

Paul: Yeah. So I’m going to ask our listeners today, I’m gonna tell you right now, did you panic? Did you lose any sleep? Did you feel like you needed to make a change? If any of those three things happened to you, guess what? Your investment allocation isn’t matching your tolerance for risk. Plain and simple. So if you felt that way, and by the way, most people probably did because what happens is, and Scott you’re so good at this is, you’ve shared so many stories about people’s risk and, and I use the word boring, that the market in 2017 and 18 was often boring.

Scott: Yeah. I mean, you have hardly had any moves of any of the, you know. And the biggest down client decline in over a week was relatively scant. Frankly. It was just a year, that went up, up, up at a steady pace, even moves up weren’t all that big. It was just a boring beautiful year.

Paul: Yeah, we call it. And so one of the really statistics we monitor is how many up or down days greater than 1% or less, or excuse me, more than 1% on the upside or the downside we watched in the market and again, 2018 you know, came back. But the third quarter, if I recall correctly, there was zero.

Scott: Zero. And that only happened, to my knowledge, one other quarter and it was in 2017 was one of those. So there had been some periods of time where we have experienced some of the least volatile quarters that I think I’ve ever occurred in market history.

Paul: So what happened then? People got, I’m going to call it…I don’t want to say the word lazy here, but they got more comfortable with risk because not much was happening. So people tended to shift more into growth based assets.

Scott: Well, and I think it’s a common mistake if you, if the experience that you have of owning stocks is that you rarely ever experience a downturn, it isn’t, there’s no discomfort from it. Why not allow that allocation to creep up? Why not allow to move a little bit more money into stocks? Because you can certainly handle the volatility. But I think that’s where we always have to remember what the underlying risk components are that can come back and bite you like we saw in the fourth quarter as you were referencing.

Paul: Yeah, for sure. And then, so then you get the fourth quarter and we have a downward moving quarter, and then now they’re taking on more risk and now they’re losing more money than they wanted to, and they created an environment. So this, I call it this risk creep or the scope creep, that comes in because they turned the dial. The heat got too high for them. But they didn’t realize they had turned up the heat so high because they couldn’t feel it yet. It was like the water was starting to boil, but they didn’t put their hand in there until it was boiling and then it was too late because they burnt themselves.

Scott: Well, and you know, just to use that same analogy of like a Thermostat, you know, you get your house, I love to get a little cooler, a little cooler and cooler. All of a sudden I’m really cold. And what do you do? You go over there and you just crank that thing way up, where you crank it way down if you’re too warm when it actually gets warm enough to run the air conditioning. I think that’s a good example is people don’t make slight adjustments. They allowed to creep up and then they make a big one. That’s not so bad. If it’s your thermostat, it’s terrible.

Paul: Yeah, because you’re going to take the risk. And so then for the listeners today, and I know there’s some of you that are out there, so then you dial down your risk at the end of December because you got scared or concerned. Then you probably didn’t dial it back up. And then we had a great January, pretty good February and now you’re sitting here in March saying, crap, I missed out on that.

Scott: Well, I mean we had a terrible Christmas Eve, but that was the day the market bottomed. And as soon as Christmas got over, markets reopened. It was a strong upward trend that we saw for a number of weeks. It was hard to get adjusted fast enough. You had to have your portfolio in place in order to catch the full benefit of that rally, I think.

Paul: Yeah. So let’s talk about something here, Scott. And this is something that I think is so important. This is, I’m going to call it peeling that next layer of the details in your portfolio. So how many of our listeners are invested in ETFs or exchange traded funds? The numbers keep showing there’s a massive inflow into ETFs. Scott, I mean, you certainly can attest to that. You manage a lot of ETF portfolios for us.

So here’s what I see all the time. I run a software, it’s called a digital allocation tool. So if a person wants to talk to us at Carson, what we have them do is we get their existing statement where they are today, either self managed or somewhere else, and we plug it into the tool and we tell them how much upside risks they’re taking and how much downside they’re taking. Purely math. I’m not trying to sell them anything, I’m just giving them the numbers.

I think that’s the beauty of us being a fiduciary is we have a legal and ethical obligation to give people the numbers and they appreciate that. But here’s what happens all the time, Scott, and I want to share this with the listeners because I think, again, most listeners there are falling into this diversification trap and not to call it this.

So they say, Paul, I own five ETFs. I’m great. I’m diversified because I own five ETFs. So what we do and what I love to show people is, so here’s an example. Vanguard is a very common ETF family for people to use. iShares, another very common family to use. So they may say to me, Oh Paul, I’ve got Vanguard and iShares, I’m good. So then what I’m able to show them, and again, this is the pure math, this isn’t Paul trying to sell them anything or anything like this is, but yes, you do have two ETFs. However, the individual holdings inside of those ETFs are often what we call 99% correlated. Meaning they basically own the same exact thing. So you’re really owning the same thing. So you think you own two, but you really own one.

Scott: You know, I own the total stock market and then I own the S&P 500. But the overlap on those is huge compared to, and they’re going to move pretty much just right in line with each other all the time.

Paul: Yeah. So if it’s up 1% the other one’s going to be up 0.99 or 1.01 I mean, yeah, they move exactly. Essentially the same. So don’t fall into “Hey, I’m going to buy multiple ETFs that are similar. And yet that’s diversification”, because that’s not. You might as well just buy the index and that’s it.

Scott: And you know what, one of the things I love about that tool that you talked about, that analyzes the risk, is it always has a realistic assumption of how markets could go down. So even when we get that calm period like we saw in 2017 we always model on the idea that markets can go down by a decent amount or large amounts at any time. The corrections are a normal part of the process and therefore you always want to take that into account as opposed to using all of the last year’s results and say, wow, how did that feel? It’s always got to be a  realistic assumptions of what’s going on.

Paul: Yeah. So here’s what’s so funny, Scott. And if you’re listening, I know you’re going to realize this is true when I make this statement. So let’s just say this for example, your account goes up. Do you say it goes up in terms of a percentage? So let’s just say I have $1 million. And my account is up 10%, or $100,000 when it goes up. Do you say you’re up 100,000 or you say you’re up 10%?

Scott: People talk about the upside in percents all the time.

Paul: Yeah. Why? Ego! We want to brag about it and say how good we did or what happened. But if we go down, so I’m gonna use the same exact numbers here. So, but I’ve got $1 million, but I go down 10% or $100,000, what do I say?

Scott: I lost $100,000.

Paul: Yes. So listeners, does that happen to you? Are you falling into that trap? So here’s why: we’re human, right? We hate losing the impact. There’s so many studies out there that cite the emotional parts of losing money and the pain it brings. And that’s why what I hope when you’re looking at your risk portfolio and you’re doing your diversification, this is why I don’t want you to fall in this trap.

Let’s look at both sides in terms of real dollars, or let’s look at both sides in terms of percentages so that way you’re comfortable. And if you’re a million dollar portfolio and you go to $900,000 and you can’t sleep, or you want to make major changes or if you want to sell and go to cash, that we probably have a mismatch. Now. If it doesn’t bother you as much or you’re okay or it fits into your entire game plan, then you most likely are.

None of us want to lose money, but at the end of the day, I’ve talked about this on the show before, is you can’t have both. You can’t not lose money and also make the maximum return. I mean, it’s impossible to do that. There’s, there’s no way. You guess right a couple of times, but you certainly can’t guess right all the time.

I will tell you most people fall into this trap, but to avoid falling in that trap, if you want to give us your statement and have us run that digital allocation analysis for you, give us a call. (888) 419-8513 or you can email info@carsonwealth.com it’s a secure site. (888) 419-8513 you’re listening to Wealth From Wisdom

Paul: Choosing investments isn’t a one-time event. There are ongoing things that could always trigger a need to update, rebalance, change, and  just put in your favorite word there, to your portfolio. But if you don’t consistently review it, monitor it, rebalance it, then you can be taking on far more risk than you know, we call the scope creep, or drift is probably a better technical term, Scott. And you are listening to Wealth From Wisdom. I’m Paul West. Your co-host today, Scott Kubie, senior investment strategist here at the Carson Group. And we’re talking about five mistakes people make with their portfolios.

Scott monitors the markets all the time. Scott helps us do our quarterly outlooks, help us see things from a macro perspective. So let’s get macro with people here. So there’s an anniversary, we hinted at it in the first segment. Scott, let’s just get into and talk about it. So people tend to look at periods of time and when you hit pivotal years you start to think things. So yeah, when people get married, right? Your one year anniversary, your five, your 10 your 25 and on and on from there. So we’re at a 10 year anniversary of a financial time of something that happened. So 10 years ago, essentially, March 9th, 2009 we hit, I’m going to call it rock bottom

Scott: It was rock bottom. It was a rough period in the mark.

Paul: Yeah, so 10 years ago, for many of you maybe it feels like yesterday, for others of you it feels like a lifetime ago. But we wanted to bring that up in this segment because 10 years ago, a lot of people, if you think about where you were in life, where were you? Are you in the same home. Are you in the same job or are you retired? Were you not retired yet? Kids, grandkids, life, death, divorce, all of those things could have happened over this 10 year time period. But do you remember how you feel?

I’m closing my eyes right now and I’m picturing myself where I was and what I was doing. And by the way, I wasn’t with Carson Group at the time. It was a tough time for the economy, the United States, thinking about people with houses and the housing spikes. But then the market, I mean remember how much people’s 401K assets went down?

Scott: Oh Man. Yeah. I mean it really is the most formative experience for a lot of investors of their entire investing lifetimes.

Paul: Yeah. When I think about if I’m like, our producer Jamie here, she’s young and like for a lot of people that’s their first investing experience in life is they maybe started working in the early 2000s and they had to deal with the 2001 crisis and then they deal with the 08-09 crisis. Those are their first investing experiences. Boy that’s going to jade me of wanting to be a conservative investor cause I’m like crap, this stuff is, it’s nasty.

Scott: Or you saw your parents go through it. Even if you were a little bit younger and the experience, the uncertainty, were they going to be able to retire? All of those sorts of things and the concerns that were passed on. I think it’s really affected a lot more people than we think.

Paul: Yeah. So let’s talk about some of the numbers here. So, I mean in March, you know, I’m going to go way back to 2009 here. Like we said 10 years ago. I mean, we’d go to March 29. So since then to the present. So yeah, I’m going over the last week here. If I’m off a day or two, be okay with me, Scott. Don’t beat me up.

Essentially over this 120 months, the S&P 500 has gained 312%. Yeah, 312%, there’s not very many periods of time that it’s done better, but there have been. Let me give you an example. October of 1992 March 24th of 2000 it was actually up 417% yeah, that was, that’s the a great market run followed by the tech bubble that shoots it up that high. Yes. It didn’t do very well right after that. It did really bad. That’s why, right? Based on those days, but actually, so it went up that fast.

Actually, here’s a, here’s a stat for everyone in a shorter period of time than this 10 year run. So just something to watch there for so many people. Now let’s look at things like this. So if the S&P was up 312% over this 10 year time period, how much do you think gold was up over this 10 year time period at all? Like not, not nearly, not even close. 40%. So let’s talk about homes. People love to talk about real estate. Let’s talk about one of the most volatile markets. Let’s go into Southern California. So what do you think the median house price change from March of 2009 to March of 2019?

Scott: I don’t know this. I’m going to guess 150%?

Paul: You’ve got the first number right. Okay, 102%. So here, this would also surprise you. So the median house price in March of 2009, and this is from the L.A. Times. This article I’m citing here says in March of 2009 the median house price was $250,000 now, you wouldn’t think that today, right? You’re like, what? Southern California, Sunshine State, Sunshine Tax, all those things. But today the average is, or the median is 505,000.

Here’s another stat I want to share with all of you. So many of us, especially, we’re here in the Midwest. Here in Omaha, Nebraska, what are we dealing with? We work with a lot of people who are farmers, and I know a lot of farmers listen to our show, and a lot of real estate and people that own land and land for hunting and for fun, and all of those things that go with it.

So I look at commodities. So we look at commodity prices all the time. Of course we think of agricultural commodities, but there’s other commodities you can think of. Coins, all of those types of things. So here’s a trick question for you. So I just gave you the answer, Scott. Are you alright? So what do you think commodities did between March of 2009 to March of 2019?

Scott: So I would say it depends on the major, cause I’ve actually looked at this one. It depends on how you mix the commodities together.

Paul: So, the S&P GSCI.

Scott: That’s a little more energy intensive. I’m going to guess 20% higher?

Paul: 27% lower. So you’re almost right on that. But here’s why I want all of our listeners to pay attention to what we’re saying here, and this is why I’m going to call it the significance of the 10 year anniversary.

A lot transpired and happened, and we get this question frequently. Well, if the market’s gone up so much, why haven’t I gone up so much? Why? Because you didn’t want to take market risk, you didn’t need to take market risk because you didn’t want to suffer. None of us could have ever said, we knew that March 9th of 2009 was going to be the bottom of the market. Nope. Nor would we have said December 24th of 2018 would have been the bottom of the quarter for 2018 plummet. Right? And we don’t know where the high point is going to be here in 2019.

Scott: Yeah, the only indication I had that those were the bottoms is the phones were ringing really heavily during both of those periods. That is almost the best indicator in some ways

Paul: Interesting you say that. So actually here’s what I call it. So our listeners know what I’ve been doing this Wealth From Wisdom show for awhile. I love to talk about behavioral biases people have. And one of the biggest biases people have is what we call the herd bias. So again, what happens in herds? People follow.

You know, for herd bias, again I’m gonna use farmer analogies. What do you do? You have herds of your animals, they all follow each other. Well, what happens if a predator comes? Who gets caught in the herd? The slowest one, right? So many of you are herd investors, and you wait to hear what everybody else is doing and then you make a decision at the end. And guess what happens? You get caught. You get caught, you perform worse than other people, and that’s why there’s this psychology that’s out there.

Paul: If you actually do the right thing and don’t let the emotions get the best of you, then you’re not the one calling on December 24th, 2018 wanting to get out of the market because that would have been the worst thing you could do, right? Or vice versa, if you got out on March 31st March 31st or March 9th of 2009 again, the worst thing you can do.

You can’t let your emotions get the best of you. And we’re very clear, Scott, we can’t predict the market. What we can do, is we can take all the information we have at every period of time we’re at and help give you our best recommendation. But we will never ever be 100% sure. Let’s be crystal clear on that.

Scott: And, and it’s impossible to be. The other thing about it is we take only not the idea of, oh gosh, what was it like to ride through those? But also, remember how quickly the market rebounded from that March high. I had a call I’ll never forget, it was in September of that year. Guy calls in and it’s an investor and they had had a question. They were saying, hey, it looks like things have calmed down in the market. I had to put the phone on mute so I could kind of relieve the emotion.

The market was up 30-some percent, I think at the point that he had called in, from the lows. It had rallied a ton from that period of time, but emotionally because they’d been out, because of the experience that he had, he was not willing to admit that he’d left a ton of money on the table. He called it stabilization and that just speaks to the fact that when markets bottom and, just like we’ve seen this time off of December 24th, if they can recover really really quickly when the fundamentals change, the fundamentals improve. Some of those risk factors get taken away.

Paul: Yeah. I always say this: trying to time the market is a fool’s errand, because it is. It’s just, empirical evidence proves it. We’re professionals. There’s a reason why we give advice. There’s a reason why people who work with us are more successful because they have a plan in place and they don’t let emotions come to chat. I get asked all the time, Oh Paul, what are you investing in now? What’s hot? And I say nothing because there’s no guidance I can give there.

I’d rather say, you know what’s hot? Hopefully the craps table, maybe you go there because you’re going to have just as good of luck or opportunity. And by the way, you’re taking just as much risk. I would say you’re now doing a little bit like I think…isn’t blackjack the most probable game you have the chance of winning at? The casino, if I understand casino aisles correctly, you might as well go play that if you want to, guess what’s hot. Because you know what, 50% of the time you might be right, but 50% of the time you’re going to be wrong.

Scott: And I think he gets into specifics too. There was an investor who had a big chunk in a Kraft Heinz, which is a stock that, you know. And so they just had a huge chunk in it, and an advisor talked about him about getting out the day before it had that very large decline in recent weeks. And it’s just an example of people getting attached to something. They get belief in it, they get focused on it. They don’t rebalance their portfolios, they don’t diversify. And what do they do? There’s a large downturn and they take it, they take a big hit both from a financial standpoint, but also emotionally because now they’re not willing to. It’s not just that specific risk of the mistake they made, but it’s all risks that they run into that they shy away from.

Paul: Yeah, and it just, I mean 10 years have gone by, Scott, and I would say right now today you really have three options. So one, you can keep everything and just do absolutely nothing. Two, you can log in and look at your account and say, okay, it looks fine, just keep it as it is. Or three, and most people are doing this right now, is getting a second opinion to make sure they’re on the right pathway.

If you want to be like most people and make sure you’re on the right pathway, give us a call. (888) 419-8513 that’s (888) 419-8513. Hey, if you’re like everyone else, you just want to make sure you make the most. We all worked hard in our life, Scott, we want to make sure we get to save our money. But most importantly we don’t lose our money. Especially, 10 years, we’ve been running in this bull market like we’ve been talking about. Give us a call. (888) 419-8513.

There are two overlooked areas of diversification that could and will cost you a small fortune of retirement if you don’t watch out for them. So what are those two things? One, income. And two, I’m going to call it tax diversification. You can’t put all of your tax eggs in one basket or you’re going to create mistakes.

Hey, I’m Paul West. Co-host today, Scott Kubie. Scott, I’m enjoying talking with you. A lot of people ignore these two things. One, making sure they’ve got the right income plan in place and to making sure they’ve got the right tax scenario set up. And ignoring things is one of the biggest mistakes people make.

I know we were talking to last segment, we’re now 10 years since the bottom of the financial crisis. You know, it’s been a great run up in the market if you were willing to take all risk, and not everyone was. But it’s been interesting behaviourally to watch what people have done over this time period and I think we should talk about something that’s in the headlines.

So we’re based here in Omaha, Nebraska. Even though we’re a national firm, we love Omaha. But Omaha has had some challenges and there’s been some great articles out recently. We going to cite the Omaha World Herald here. They’ve been reviewing, well unfortunately, Omaha and their public school system pension plan, Scott.

I mean it’s sad to me, first of all, what’s going on. But for listeners that aren’t aware, it’s significantly underfunded. There’s some great concerns over its ability to get back there, but there’s been a great series of articles written about what’s happened, and ultimately why it happened and who is at fault. And so since we’re financial professionals, of course I have a lot of interest in this story. I think it’s not only interesting, but it’s important for people to learn from. So I’d like to talk about it if we could, Scott, for a few minutes. I know you’ve been paying a lot of attention to it.

Scott: Yeah, and my compliments to the people that wrote the story. It was a great example of investigative journalism. I just, hats off to the World Herald and the people who spent the time and effort to dig into the details. It was just a fantastic set of stories that they put together.

Paul: Yeah. So, here’s what I mean for those of you, we’ll educate you. This is the beauty of Wealth From Wisdom. Our job is to be great communicators, and we’re going to tell you the truth and what things are happening. That’s what you’ve heard, so many stories and articles and why we’ve in the past shared why those Big New York firms and wirehouses, how they make money and why they’re looking out for their own interests and not their clients.

What’s happened here is, so I mean the pension plan did the right thing. They set up trustees. You know, people that have vested interest, and by the way, fiduciary interests, right? To do what’s right and have the pension plan. But if people don’t have enough expertise, or they listened to the wrong people, they can make, unfortunately in this situation, potentially catastrophic mistakes that affect not just their lives, but thousands and thousands of people.

Scott: Yeah, I think, I think their board was weak on their overall financial strength. I think, you know, we can certainly delve into the depths of managing a pension plan, but I think there’s some really good lessons that individual investors can take from this as well, such as do you have the right advisor? Do you have someone who’s giving you good advice, who also is very knowledgeable and spending time following the markets? Because that board wasn’t to the degree that they should have. They weren’t as capable as they should’ve been and it really caused them to make some very bad decisions and get swayed very easily by a couple of people’s opinions that came in and gave them advice.

Paul: Yeah, I love this. This was in the article, so I’m in the World Herald series and I’m just quoting directly from the article here, and I think this is so spot on and great job by them. They said “Hey, there’s three ways that they thought, here’s how to wreck a portfolio in three easy steps. One, make a major change in asset allocation. Two, invest heavily in things you don’t understand. And three, use a faulty process to choose investments. So what would they think? And we would certainly agree with all, well most, I’m not going to say all in the article here. But a lot of this was preventable. But also what do they do? Here they are, 2009 and later and they’re working and towards the bottom of the stock correction and they start getting out of stocks.

Scott: Which we just talked about in the previous couple of segments, is people overreacted to declines and then they get themselves stuck in a situation where they’re not able to keep up on the upside.

Paul: Yeah. So now you’re going to have stocks who’ve been fantastic performing since then. And then you go into other asset classes and a lot of pensions. And by the way, we do believe in this and when we give guidance here to pensions and endowments and foundations, which we do here at Carson, there’s always some form of allocation.

One, helping protect people for income because you have current income needs. Call that the first category. Second category is how you refill that first one. And the third is what are you really doing from a growth perspective?

So the growth could be stocks, but a lot of times it’s alternative asset classes that you’re taking additional risk, but you’re hoping or certainly thinking that you’re gonna make above market based returns because of the additional risk you’re taking. But you can’t move all of this money or a high percentage of money into these riskier asset classes, especially when, and Scott this was the part of the article. Again, congrats on the journalism done here. When they made investments in real estate in Mumbai, distressed housing in the U.S. and agriculture in the Ukraine. I mean, does that sound something like the OPS pension people want it?

Scott: Yeah, I know. And I think that’s the example of being way outside their overall comfort zone and their knowledge base.

Paul: Yeah. So by the way, we too invested in distressed housing here in the U.S. so I mean, I’m not faulting that as an asset class. Ours has turned out very well. I’m not doing that for promotional because you’ve got to be careful. Like we hired a manager to run that and their only thing is running that strategy. That’s all they do all day long. So you’ve got to hire experts in those specific fields. You can’t use a sprinkle approach.

Scott: You know, and in addition to the expertise, I think one of the things that the OPS kind of lost track of is what were the liabilities they were managing against? Because they have a certain obligation to their pensioners.

Now, how does that apply to an individual? Well, you’ve got goals that you want to achieve. And so if you’re in a situation where you have a lot of major goals and deep ambitions that you wanted to pursue, and then you turn around and make your portfolio really, really conservative during the downturn, you’re not going to achieve those goals with that allocation. And I think that’s part of what we see when you talk about the faulty process, is they lost track of what they were really trying to manage against and towards. Really, they lost sight of what the most important thing is in an effort to try to add a little value and protection in case the market kept going down.

Paul: Yeah, so I mean, one of our top five mistakes we’re talking about today is people don’t consistently update their plan. So we talk about families a lot on the show, making sure you’re a married couple, you live in Omaha, Nebraska, or let’s say you live in Beatrice or you live in North Platte or wherever you are. You live on a farm, and you spent your life working so hard and you want to retire. You want to live your life and you want to love your life. Basically, you just want to make sure you’ve got enough money that you don’t run out of money in your lifetime, hands down.

That’s what so many people are concerned about. That’s why we say you have to have a plan, but you’ve got to update your plan. Life happens and changes happen. And what the article again cites, is that OSERS had really a one-page investment policy that didn’t build a plan. It didn’t build a long-term game plan or a long-term vision. So what happened? They then just kept making a series of independent erratic decisions that then didn’t work because they didn’t stay true to what a real long-term plan was.

Scott: And just to clarify, OSERS is the name for those that manage the overall pension for the Omaha Public Schools. I thought that put that in perspective. For even the smallest client that comes in, we produce a longer investment policy statement than the Omaha Public Schools’ pension plan had. That’s ridiculous. I mean, and I don’t think that and in events, the one page they had, it wasn’t a very good investment policy statement either. They really did not have a plan as far as what they were going to do and it allowed them to get off track in a big way.

Paul: Yeah. Well, and I think, Scott, the story why—and again, it makes me sad that things like this happen—because it actually, you know, getting to reading the articles, is that it was one of the best performing plans in the country. Then in a period of 10 years, it’s fallen on the exact opposite side and now one of the worst performing in the country. It impacts a lot of people. If people just follow a process and build a long-term plan, I know it sounds so simple in theory. It doesn’t happen and we see it all day long, whether it’s individual families.

I work personally with a lot of business owners. And what happens, Hey, we joke, we all have those squirrel moments, right? You want to go chase a squirrel chasing new idea, chase an opportunity. But when it comes to your financial game plan, I’m okay with having a squirrel moment, but you can never do that with money that becomes dangerous for you. You should always delegate the dangerous to professionals. And then if you want to manage some things on your own, make sure it’s something that you’re comfortable if it wasn’t here today, it’s not going to change your life.

Scott: Yeah. Cause I think this has really changed the lives of a lot of people. You know, they’re having a much tougher a discussion with their teachers right now in the next contract, because they just don’t have as much money as they need to. And that’s a, it’s a really big challenge and it affects education all the way down. And so I think for individual investors you get the same thing. It’s real life impacts to that.

Paul: We’ve all heard the saying,  “Past performance is no guarantee of future results.”  I think people actually ignore it now a little bit. Like when you get on an airline, if you hear them just give you the safety briefing. How many people are really listen?

Scott: I have actually haven’t heard the safety briefing in the last 55 so I mean, I’m fully ignoring that briefing at this point.

Paul: Yeah, but let me say it again. Past performance is no guarantee of future results. I wish people actually listened to that, Scott, because I can’t tell you how many times an investor, that all they want to do is investigate past performance and they make all of their decisions based on that.

Let’s do this. Let’s do a fun game here for everybody, Scott. I like games. So, so you have a company, you’re the highest performing company for the last five years. You rent videos and DVDs to people and people have to come into your store and to get them and you rent them and you bring them back. And if you don’t bring them back, you get charged late fees. But those late fees add to profitability, and the bottom line of the company, and you’re the top performing company.

Or, you get to choose this new company that’s not profitable, but they’ll send the DVD directly to your house with a package. You mail it back, no charge. Or you know what? I can go online on my computer, my TV, and watch the video from my home without having go to the store. I’m not profitable yet. So my past performance doesn’t look great. Which one would you choose?

Scott: Yeah, and I used to cover this when I taught at UNL, that’s Blockbuster versus Netflix. And that’s, yeah, you think you’d look at the Blockbuster, but in fact it’s one of those companies is bankrupt and the other is huge.

Paul: Yeah, I actually read an article the other day, there’s actually still one physical store open in Oregon. So I bring that up because I hope that analogy helps all of you. Stop it. Stop it. Now you may say to me, Hey Paul, I got no other way to judge the success of a manager. And I see your point of view. And I think it can be relative, but what if the manager changes? What if their dynamics change? What if they’re approaches change? Like you have all of those things, the world changes and you have to use it as a, like a piece of your rational but not the piece of your ration.

Scott: I’ll tell you where I see this the most, it’s with 401k investors. Somebody gets to make some choices, I’ve got to figure out where to allocate it, and what do I do? I go down and I look at the three year number and I start picking based on that. But that manager may have been in the one sector that was their specialty that they way over-weighted. And so you get these idiosyncratic surges of performance that you base on that are not going to repeat themselves and you end up at a badly diversified allocation. Something we’ve talked about on this show, in earlier segments  you just really hurt yourself because you’re constantly chasing a target that’s, that’s past.

Paul: Yes. I mean I say this all the time. Your biggest mistake many measures make, and especially when you do it on their own, where they go do they look at research, they look at past performance. Stop it. This is huge mistake. Stop choosing investments based on past performance. Your investment should be based on the future, where you’re going, what you’re doing. And again, back to like we were talking about in a prior segment, having a long-term game plan in place.

If they’re not performing over the short-term, the short-term for me is three-to-five years, then you can make adjustments to specific managers. Don’t alter your entire game plan based on that. So I look at this, Scott, I mean for me the past performance has never going to be a guarantee of future results. So I stopped looking at that and, you know, I was thinking the other day, switched topics on us here.

I know, I like hate to do that idea of the fortune. Spring break just happened. So I took my family, we went out to Southern California and had a great time out in the San Diego area. We’re flying back and I had one of those life experiences happen. Scott, that is my wonderful wife, Courtney. So we’re sitting there at the airport, there’s this gentleman sitting, we’re waiting at our gate in Minneapolis to come back Omaha. We’re connecting back, and this gentlemen was older and he couldn’t open his bag of Twizzlers. So Courtney springs into action, goes over, helps the individual open it, and we start having a conversation. It turns out he is legendary hall of fame announcer and broadcaster Jack Payne.

Scott: Oh, wow. I remember when he was on the radio

Paul: For sure, KFAB right here as well for those of us in Omaha. And it’s funny, I actually told them about our show. He’s like, oh, say hi to Gary and all these guys. I mean he was so excited to hear that, but he was on WWOT sports, he told me, for almost 40 years. And 69 years married. So it was so fun to get to talk to him. So I asked him two questions. Number one, what’s his favorite sports memory? So his favorite sports memory was, now he’s an Oklahoma guy initially, so know that even though he’s worked in Nebraska. So of course his favorite memory was the game of the century for Nebraska Football.

Scott: Oh, that’s a good choice. You can’t argue.

Paul: You certainly can’t. It was just, it was funny to hear his stories. I mean, I’m sitting in for it. I’m waiting, you’re listening. It was great to hear what he said. His other one though, this was more offered up from him. I hope you’re listening, too, Jack, I told him to listen to the show this week, so I hope he is his. I said, “What was your secret to success of 69 years of marriage?” He said two words. Paul, here’s how you answer everything. Yes ma’am. Yes ma’am.

So that was Jack Payne’s secret of success. Jack, shout out to you just for what you’ve done, what you’ve done for media, what you’ve done for radio, what you’ve done for television. Thank you. And just congratulations to you. I mean 96 years old on his own in the airport, coming back from Arizona with his family, coming back, living here in Omaha.

Just a lot of fun to get to hear about him, his life. I’m glad I got to share that. It was fun. I mean, so Scott, we’ve been sharing a lot of cool stuff here on the show. One area we probably haven’t talked about enough is taxes, and taxes is one of the most frequently asked questions.

For those of you listening, I love to be on Twitter. So my Twitter handle is @paulwestcoach. So actually I go live on Twitter. And earlier this week, Scott, I went live on Twitter talking about tax tips and talking about deductions. Reminding people about salt, state and local taxes, talking about the new mortgage interest rules.

So everyone’s filling out their taxes right now or they have or they’re going to be, and they need to be paying attention. And I know  you’re looking at investments. Taxes is such an important part and people think to avoid taxes. Oh we should just go and municipal bonds. But I think you’ve got some good opinions on why that is or is not a good decision.

Scott: Because as the rates have gone down, so, you know, the tax rates with the tax cut that we had in 2018 it may not make sense for you to continue to own municipal bonds where it might have before. Also there’s been a surge in demand for municipal bonds because of the salt deduction going away. That combination has pushed the yields of municipals down recently. So from a risk reward standpoint, you may be better off in a taxable bond or a treasury of some sort rather than sitting in municipals for the reward. It just depends on your situation and that’s why they would get back to that previous statement. You gotta make sure you update your plan and understand what the situation is in your particular case as taxes change.

Paul: Yeah. Well I think a lot of people say, oh, municipal bonds, tax free, I’m going to do it. And they have no idea. They don’t do the math. What do they do? They just, they Google an article or they hear something. Oh they’re tax free. That’s not always the case. And especially right now where we’re at on the yield curve and what that looks like, that we have to have people think past, I’m going to call it the initial thought.

Scott: Right? And that math changes, you’ve got to keep updating that idea over time as interest rates move and taxes change as well.

Paul: Yeah. Well, and especially as you get into retirement, Scott. Like how, and when you withdraw your money from these accounts, which tax accounts you should take from your taxable or your tax free. And also how does that help you pay fewer taxes? And then how do you get the best possible return when taking taxes into account with the amount of risk on it? How can you set up your allocation prior to retirement in order to make that process of taking it out easier? That’s what you need to plan for.

So if you want help just thinking through your taxes, and most people do, so most people give us a call, (888) 419-8513 that’s (888) 419-8513. Hey Scott, I’ve enjoyed the show today. We’ve been talking about the OPS pension plan. I talked about my story about meeting legendary Jack Payne, a hall of fame announcer broadcaster. I hope you’ve got a lot of great content today. Today’s Wealth From Wisdom. If you want help, give us a call. (888) 419-8513 we’ll talk to you soon.

 

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