The Trifecta Of Investment Priorities

In this episode, I relate a recent experience with a client where we discussed the importance of stability, liquidity, and growth when deciding what to invest in.

 

Investment Advisory Services offered through Demars Financial Group LLC Securities are offered through Crown Capital Securities. Member FINRA/SIPC

Episode Transcript

(00:02):
Welcome to Actual Advisor Value, the behind the scenes look at how fiduciary financial advisors enrich baby boomers lives.
.999I'm Taylor DeMars, a third generation financial advisor and certified financial planner, making a positive impact on hundreds of retirees.
.682892124Join me to hear short, specific stories of how I address the issues baby boomers like you face, and consider, could this help me or someone I know? Today. 4 00:00:35,550.682892124 --> 00:00:42,130.682892124 I had a really interesting conversation with a long time client that I think a lot of retirees can identify with. 5 00:00:43,460.682892124 --> 00:00:44,510.682892124 The client I met with today. 6 00:00:45,230.682892124 --> 00:00:49,750.682892124 He's been a client for over a decade now, and he's in his mid not actually in his late eighties now. 7 00:00:50,620.682892124 --> 00:00:56,476.079717521 And all those refer to him as John, John came in today and was Curious. 8 00:00:56,476.079717521 --> 00:00:59,176.079717521 Take a deeper dive into his investment performance. 9 00:00:59,476.079717521 --> 00:01:01,756.079717521 So he wanted to know, Hey, why have things been. 10 00:01:02,146.079717521 --> 00:01:04,156.079717521 Up some years and down some years. 11 00:01:04,306.079717521 --> 00:01:08,296.079717521 And he was just looking for ways to optimize his portfolio from a growth and income standpoint. 12 00:01:08,656.079717521 --> 00:01:11,176.079717521 Which I'm totally happy to have those types of discussions. 13 00:01:11,593.918226838 --> 00:01:16,392.53623926 He had heard some things about high yield bonds, as well as preferred stocks. 14 00:01:16,792.53623926 --> 00:01:24,862.53623926 I think we had a healthy discussion around that, that when zoom now has some principles that apply to many retirees that are in his type of situation. 15 00:01:25,552.53623926 --> 00:01:32,782.53623926 And with his scenario, we have a mix of stocks and bonds, and the stocks are there to outpace inflation geared for long-term growth. 16 00:01:33,82.53623926 --> 00:01:33,922.53623926 While the. 17 00:01:34,45.210152304 --> 00:01:35,995.210152304 Bonds are there for stability. 18 00:01:36,655.210152304 --> 00:01:50,485.2101523 And providing some interests, but at least a peace of mind of knowing that the income that is being drawn on a monthly or annual basis and, or the RMDs required minimum distributions coming out are not at risk of. 19 00:01:50,875.2101523 --> 00:01:54,565.2101523 The market volatility that stocks or equities experience. 20 00:01:55,375.2101523 --> 00:02:00,385.2101523 So coming back, full circle, he was bringing up the idea of, Hey, Why don't we try some high yield bonds. 21 00:02:00,505.2101523 --> 00:02:01,805.2101523 And I was, emphasizing. 22 00:02:01,805.2101523 --> 00:02:02,855.2101523 Yeah, we can definitely. 23 00:02:02,921.87681897 --> 00:02:05,531.87681897 Explore that option, but there's a trifecta. 24 00:02:05,741.87681897 --> 00:02:07,271.87681897 That many retirees. 25 00:02:07,398.54348564 --> 00:02:08,448.54348564 Are trying to balance. 26 00:02:09,18.54348564 --> 00:02:11,148.54348564 And then in a certain priority, if I might add. 27 00:02:11,508.54348564 --> 00:02:12,378.54348564 In this order. 28 00:02:12,828.54348564 --> 00:02:13,608.54348564 Stability. 29 00:02:14,28.54348564 --> 00:02:14,808.54348564 Liquidity. 30 00:02:15,378.54348564 --> 00:02:16,158.54348564 And growth. 31 00:02:16,705.2101523 --> 00:02:17,515.2101523 I'll say that again. 32 00:02:18,385.2101523 --> 00:02:19,225.2101523 Stability. 33 00:02:19,555.2101523 --> 00:02:21,445.2101523 Liquidity and growth. 34 00:02:22,218.5208099 --> 00:02:24,347.40969879 And this doesn't applied to all people, of course. 35 00:02:24,357.40969879 --> 00:02:26,157.40969879 There's no perfect answer for everyone. 36 00:02:26,577.40969879 --> 00:02:32,217.40969879 But especially in his scenario, I said, John, You've got a decent amount of funds here. 37 00:02:32,337.40969879 --> 00:02:37,847.40969879 It doesn't mean that you can go to the casino, you don't have to worry about what's going to happen, you do have to be tactful about preserving these assets. 38 00:02:38,757.40969879 --> 00:02:43,167.40969879 So I was trying to say, look, first of all, our priority is to preserve the assets. 39 00:02:43,947.40969879 --> 00:02:53,377.40969879 It seems that you're bringing up another element, which is, Hey, how do I squeeze more drops out of this line? How do I give him more money out of this portfolio? By the way of high yield bonds? Insured. 40 00:02:53,407.40969879 --> 00:02:53,857.40969879 There's all. 41 00:02:54,457.40969879 --> 00:03:00,787.40969879 Wide variety or flavors as I like to call them of bonds, just like stocks or thousands of different stocks. 42 00:03:01,17.40969879 --> 00:03:02,997.40969879 some of them, many of us know off the top of our head. 43 00:03:03,537.40969879 --> 00:03:06,747.40969879 Most of them are more obscure companies that were not familiar with. 44 00:03:07,287.40969879 --> 00:03:11,517.40969879 Or other forms of equities and the same thing with bonds, lots of different types of bonds. 45 00:03:11,697.40969879 --> 00:03:13,867.40969879 One of them being high yield bonds. 46 00:03:13,897.40969879 --> 00:03:23,347.40969879 And if I were to draw on a spectrum here of where those fall within the more risky and less risky side of bonds, they definitely fit on the more risky side. 47 00:03:23,767.40969879 --> 00:03:25,957.40969879 Why Ohio bonds are. 48 00:03:26,467.40969879 --> 00:03:28,657.40969879 Named as such because they pay a higher interest rate. 49 00:03:28,987.40969879 --> 00:03:30,877.40969879 Then most other bonds. 50 00:03:31,387.40969879 --> 00:03:37,777.40969879 You have to ask why though? The reason is that they're being issued by companies or entities that are considered more risky. 51 00:03:37,807.40969879 --> 00:03:43,927.40969879 I think of it as your second cousin, twice removed, who's always begging for money and says, Hey, I'll pay you back. 52 00:03:43,927.40969879 --> 00:03:44,527.40969879 I'll pay you back. 53 00:03:44,577.40969879 --> 00:03:47,727.40969879 I'll pay you double whatever the bank We'll offer for an interest, why. 54 00:03:48,537.40969879 --> 00:03:51,957.40969879 They're desperate, right? They're not known to be very credit worthy. 55 00:03:52,237.40969879 --> 00:03:53,767.40969879 Maybe their credit score is low. 56 00:03:54,407.40969879 --> 00:04:04,127.40969879 And as such, in order to be able to borrow other people's money in order to convince you to lend them your money, your hard earned dollars, they have to offer it by higher interest rate. 57 00:04:04,787.40969879 --> 00:04:09,627.40969879 Now that goes contrary to the first principle is stability. 58 00:04:10,287.40969879 --> 00:04:14,37.40969879 I would hate to venture down John's point and say, yeah, let's put money in those high yield bonds. 59 00:04:14,367.40969879 --> 00:04:18,307.40969879 And then the issuer goes bankrupt could put is no longer. 60 00:04:18,737.40969879 --> 00:04:20,207.40969879 Answerable for those funds. 61 00:04:20,537.40969879 --> 00:04:26,717.40969879 And now trying to squeeze a few more drops out of the line, resulted in, you know what, I'm sorry, your money has gone. 62 00:04:27,527.40969879 --> 00:04:27,917.40969879 Ouch. 63 00:04:29,87.40969879 --> 00:04:32,415.95845162 Second priority for retirement assets is liquidity. 64 00:04:32,905.95845162 --> 00:04:36,625.95845162 So ensure I didn't feel competent at saying let's chase down the high yield bonds. 65 00:04:37,45.95845162 --> 00:04:39,245.95845162 We're invested as of this recording in. 66 00:04:39,875.95845162 --> 00:04:41,345.95845162 ETF bond fund. 67 00:04:41,715.95845162 --> 00:04:46,485.95845162 The healthy balance between the short term interest rate environment we are in gaining the highest interest rates. 68 00:04:46,965.95845162 --> 00:04:49,995.95845162 Available from the most credit worthy of companies and entities. 69 00:04:50,775.95845162 --> 00:04:57,175.95845162 As well as the access to our funds, that's the liquidity so that we can buy and sell at any given day or time. 70 00:04:57,175.95845162 --> 00:04:59,455.95845162 Within market trading hours and third. 71 00:04:59,755.95845162 --> 00:05:00,775.95845162 We're getting some growth. 72 00:05:01,465.95845162 --> 00:05:03,565.95845162 Now in priority, the first is stability. 73 00:05:03,835.95845162 --> 00:05:06,475.95845162 We're only picking the most credit with it worthy of borrowers. 74 00:05:06,505.95845162 --> 00:05:10,15.95845162 We're not risking it on Anything less than an a plus record. 75 00:05:10,645.95845162 --> 00:05:11,155.95845162 Second. 76 00:05:11,605.95845162 --> 00:05:12,805.95845162 We're looking for liquidity. 77 00:05:13,255.95845162 --> 00:05:15,685.95845162 We're at an ETF, an exchange traded fund. 78 00:05:16,15.95845162 --> 00:05:18,715.95845162 That allows us to buy and sell those funds. 79 00:05:18,985.95845162 --> 00:05:21,115.95845162 At any given time during market trading hours. 80 00:05:21,715.95845162 --> 00:05:28,285.95845162 We're not restricted by any sort of bond period that could be 3, 6, 9, 12 months, or even years at a time. 81 00:05:28,855.95845162 --> 00:05:32,335.95845162 Or only available to take out on a quarterly basis, for example, Nope. 82 00:05:32,545.95845162 --> 00:05:38,965.95845162 We want to be able to know that we can take the money out if there's an emergency car replacement, medical emergency roof replacement. 83 00:05:39,475.95845162 --> 00:05:46,615.95845162 What have you life happens? And I just, there've been too many times that clients have needed money out of unexpected basis. 84 00:05:46,615.95845162 --> 00:05:48,805.95845162 I want to be able to know that we have that backup. 85 00:05:49,445.95845162 --> 00:05:52,835.95845162 And in fact, our goal is to have clients assets, at least. 86 00:05:53,285.95845162 --> 00:05:56,345.95845162 Be able to hold four to six years worth of fixed income. 87 00:05:56,895.95845162 --> 00:05:59,295.95845162 So access to money is important. 88 00:05:59,635.95845162 --> 00:06:00,955.95845162 Third is growth. 89 00:06:01,555.95845162 --> 00:06:06,595.95845162 And so with the bonds that we have, we're in an abnormally high interest rate environment. 90 00:06:07,15.95845162 --> 00:06:12,835.95845162 We're taking advantage of that by the short term corporate bonds that our clients are lending money to. 91 00:06:13,255.95845162 --> 00:06:14,785.95845162 So they get the highest interest rates. 92 00:06:15,245.95845162 --> 00:06:17,285.95845162 Given those other criteria can offer. 93 00:06:17,615.95845162 --> 00:06:22,915.95845162 Can they get even more interest off of their bonds, to pick a different issue or a different type of bond? Of course. 94 00:06:23,365.95845162 --> 00:06:27,125.95845162 But it's a matter of how far are we willing to push that? Before we risk. 95 00:06:27,389.29178496 --> 00:06:33,569.29178496 Sacrificing the other two factors, again, stability, liquidity, and growth in that order. 96 00:06:34,559.29178496 --> 00:06:38,309.29178496 Then the other element that John brought up today was, Hey, what about those preferred shared. 97 00:06:38,519.29178496 --> 00:06:39,209.29178496 Of stock. 98 00:06:39,929.29178496 --> 00:06:45,959.29178496 Now in short for those that aren't familiar preferred shares of stock are a different type of well stock offering. 99 00:06:46,319.29178496 --> 00:06:49,79.29178496 Most doctor we were referenced today is common stock. 100 00:06:49,559.29178496 --> 00:06:51,449.29178496 Common stock has voting rights. 101 00:06:51,809.29178496 --> 00:06:53,99.29178496 And offers dividends. 102 00:06:53,279.29178496 --> 00:06:56,789.29178496 It's more of a traditional vanilla type of stock. 103 00:06:57,389.29178496 --> 00:07:02,169.29178496 Whereas preferred stock is a little more unique and short because if a company were to liquidate. 104 00:07:02,829.29178496 --> 00:07:03,429.29178496 Go bankrupt. 105 00:07:03,429.29178496 --> 00:07:04,239.29178496 For example. 106 00:07:04,509.29178496 --> 00:07:09,989.29178496 They get their money back after those who have loaned money to the company. 107 00:07:10,19.29178496 --> 00:07:10,739.29178496 So it would go. 108 00:07:11,259.29178496 --> 00:07:14,259.29178496 Lenders then preferred stock and then common stock. 109 00:07:14,899.29178496 --> 00:07:15,679.29178496 in that order. 110 00:07:15,989.29178496 --> 00:07:20,619.29178496 there are some other benefits, but there are also some cons some cons or you can't vote. 111 00:07:20,859.29178496 --> 00:07:31,149.29178496 Most of us don't really care about that in a very large company, but in John's case, I had a highlight look, these preferred shares stock, while they do offer sometimes a higher dividend rate. 112 00:07:31,689.29178496 --> 00:07:32,679.29178496 Let a common stock. 113 00:07:33,269.29178496 --> 00:07:39,479.29178496 They sometimes they have a fixed dividend payout rather than the variable dividend that is usually paid out by a common stock. 114 00:07:39,742.62511829 --> 00:07:41,542.62511829 But they also have liquidity restrictions. 115 00:07:42,112.62511829 --> 00:07:49,942.62511829 And not everyone is exactly alike, but as a whole, many of them have liquidity restrictions either a, because they won't let you sell for a number of months. 116 00:07:50,392.62511829 --> 00:07:58,842.62511829 Because they want you to give a little so you can get other benefits, but there are less traders and there are less buyers of those shares of stock. 117 00:07:59,322.62511829 --> 00:08:03,162.62511829 So if you think about it in terms of, Hey, if I wanted to. 118 00:08:03,662.62511829 --> 00:08:04,532.62511829 Sell a banana. 119 00:08:04,532.62511829 --> 00:08:06,752.62511829 There's lots of people out there who want to buy a banana. 120 00:08:07,172.62511829 --> 00:08:09,212.62511829 It's the most imported fruit in our country. 121 00:08:09,932.62511829 --> 00:08:11,672.62511829 Whereas, if you wanted to. 122 00:08:12,122.62511829 --> 00:08:13,52.62511829 By a pomelo. 123 00:08:13,622.62511829 --> 00:08:17,162.62511829 It's a more unique fruit now found very common in your local grocery store. 124 00:08:17,192.62511829 --> 00:08:18,932.62511829 There are less buyers, less sellers of them. 125 00:08:19,322.62511829 --> 00:08:21,752.62511829 So it's harder to get rid of the one. 126 00:08:21,872.62511829 --> 00:08:25,262.62511829 If you wanted to find one regarded to sell one, if you wanted to. 127 00:08:25,682.62511829 --> 00:08:27,602.62511829 And it's the same thing with preferred shares of stock. 128 00:08:27,932.62511829 --> 00:08:29,792.62511829 You don't have that ability to say, Hey. 129 00:08:30,62.62511829 --> 00:08:31,742.62511829 This company isn't going in the direction I want. 130 00:08:31,742.62511829 --> 00:08:33,122.62511829 The stock price is going down. 131 00:08:33,332.62511829 --> 00:08:34,82.62511829 I want to get rid of it. 132 00:08:34,672.62511829 --> 00:08:38,332.62511829 Guess what if that is the case? You're in a boatload of everybody else. 133 00:08:38,332.62511829 --> 00:08:42,172.62511829 That's in that same situation and you're going to have a hard time finding buyers. 134 00:08:42,472.62511829 --> 00:08:44,272.62511829 To take your preferred shares of stock. 135 00:08:44,272.62511829 --> 00:08:46,222.62511829 If there aren't that many people out there. 136 00:08:46,802.62511829 --> 00:08:47,912.62511829 Whereas common shares of stock. 137 00:08:47,912.62511829 --> 00:08:54,932.62511829 Like I said, it's more of the traditional and they're potentially thousands, hundreds of thousands or millions of shares of stock just like yours. 138 00:08:54,932.62511829 --> 00:09:00,452.62511829 So the chances are of you getting rid of that sock, if you need to, either because of a personal issue or because the. 139 00:09:00,722.62511829 --> 00:09:03,62.62511829 The economy is going down, the company is going down. 140 00:09:03,242.62511829 --> 00:09:06,902.62511829 You're going to have more options to get rid of that and thus have more liquidity. 141 00:09:08,702.62511829 --> 00:09:09,842.62511829 So coming full circle. 142 00:09:10,582.62511829 --> 00:09:13,612.62511829 I love entertaining options and ideas that clients bring up. 143 00:09:13,612.62511829 --> 00:09:15,112.62511829 And many times we act on them too. 144 00:09:15,772.62511829 --> 00:09:20,992.62511829 I presented these options in this feedback to John today, and he felt comfortable with our strategy. 145 00:09:21,412.62511829 --> 00:09:25,762.62511829 He feel comfortable with the type of stocks that we're owning and the types of bonds that we were owning. 146 00:09:26,362.62511829 --> 00:09:28,342.62511829 Which are subject to change from time to time. 147 00:09:28,342.62511829 --> 00:09:36,292.62511829 But as far as the classes of equities and the classes of bonds, those are the trade-offs that I think many retirees have to take into account is. 148 00:09:36,712.62511829 --> 00:09:41,542.62511829 Where do you feel your priorities are by way of stability? Liquidity and growth. 149 00:09:42,142.62511829 --> 00:09:50,392.62511829 Now you may have ample, Sources of income and different types of accounts in retirement that you may be able to take different priorities and different accounts. 150 00:09:50,692.62511829 --> 00:09:53,692.62511829 For example, a Roth IRA, maybe a more aggressive account. 151 00:09:54,52.62511829 --> 00:10:04,582.62511829 And you may be willing to have less bonds or no bonds inside of a Roth IRA while you have a more traditional 60% stocks and 40% bonds split inside of your IRA. 152 00:10:05,152.62511829 --> 00:10:10,502.62511829 Why would you do that? The IRA tends to be the first account that one draws their retirement income from. 153 00:10:11,612.62511829 --> 00:10:14,432.62511829 Filling up that income tax bracket to a certain extent. 154 00:10:15,182.62511829 --> 00:10:28,162.62511829 And then if they need more income or surprise income, they always have the Roth IRA as a backup, which given that it's used less frequently, it lends itself to take more risk given it will have a better chance of growth over the longterm. 155 00:10:28,882.62511829 --> 00:10:33,982.62511829 Now, every client situation is different and I can't make any promises as far as what works best for you. 156 00:10:34,582.62511829 --> 00:10:41,932.62511829 But that is generally an example of how you might shuffle those priorities of stability, liquidity, and growth. 157 00:10:42,249.72656757 --> 00:10:43,209.72656757 Thanks so much for listening. 158 00:10:43,519.72656757 --> 00:10:44,689.72656757 Have a great rest of your day. 159 00:10:44,984.74608578 --> 00:10:53,834.74608578 Past performances, no guarantee of future results, and the experiences shared in this podcast may not be representative of all clients as each individual's situation is unique. 160 00:10:54,104.74608578 --> 00:10:57,434.74608578 This podcast is for informational and entertainment purposes only. 161 00:10:57,524.74608578 --> 00:11:02,34.74608578 And should not be relied upon for making financial, legal, tax, or investment decisions.