Episode 97 – The Rules of Investing


Learn the rules for safe investing

Hi everyone, welcome to another wise money tools video. You know, I had a really interesting situation this past week that maybe many of you fall into a similar situation, it had to do without a traditional financial advisor set up accounts for this couple. And the fees that they were paying unnecessarily and maybe unknowingly, this couple own their own business. And to help prepare for retirement, they set up what’s called a SEP. This is a simplified employee pension. It’s essentially a 401k. For self employed business owners, like a 401k, you defer taxes until you take the money out of retirement. The SEP administrator, typically the business owner, can set up a brokerage account or some sort of investment account where they can put the money into the investments.

So this couple used what I call a traditional financial planner to set up the SEP. Too often, investors simply turn their money over to advisors in hopes that the advisor knows what he’s doing. And that the fees and costs won’t be too outrageous. What I’m trying to teach people is to be the captain of their own financial ship, and to take greater control and interest in their money. After all, this is supposed to be their nest egg, they’re creating their future. So this is really important money. Did you know The average American is going to earn about 2 million dollars in their lifetime, at age 65. So many of them end up with approximately $60,000 in assets, and that includes their house. Well, that’s not the American dream. What this means is the average person saves only about 3% of the $2 million, or $60,000.

A large majority of this to mains gonna go to interest and debt and taxes much more than they saved. And that’s really kind of a tragedy. We’re just yesterday, I was reading an article about the shortfall retirees are up against. It was a Bloomberg article. And it’s dated June 12. If you want to read it, the crux of the article stated that retirees are going to be short about 10 years of money. In other words, they’re going to run out of money about 10 years before they run out of life. And to quote the article it said, in the US the forum calculates that 65 year olds have enough savings to cover just about 9.7 years of their retirement income. That leaves the average American man a gap of 8.3 years, and women who live longer face 10.9 years in that gap.

Now this is assuming you only live to be around 85 or so there are lots of people who are pushing into their 90s these days. So to come up short by 10 years, is more than just a horrible thought. There are essentially four ways to offset this shortfall. You can save more, you can spend less and get a greater return. Or you can avoid massive losses that take years to recover. So here’s what this couple was doing. Again, they were saving a pretty good chunk of money. I mean, that part was in their favor for sure. However, their cost to invest and keep the money with the mutual fund company was significantly eating into their returns. I’m not going to name the funds they were invested in because I don’t need this company breathing down my neck.

Let’s just say they’re a very large mutual fund company. And in their name, there’s part of our country’s name. All right that’s about all I’m gonna tell you anyway, this couples face with a huge dilemma, hand their money over to a financial advisor that’s supposed to know better and do better than they could on their own, or learn how to manage their money themselves for a better outcome. Here’s the irony though. There is no guarantee whatsoever that a financial advisor has any more insight on the future of the financial markets than they do. Seriously. No financial advisor has a crystal ball. They typically simply write out the ups and downs and tell you to hang on. Now, how do I know this? I know it’s true. This is how I was taught. This is how most advisors are taught. Advisors are not supposed to be reading the market. And they just want you to invest and then let it ride.

If you work with a financial advisor, have you ever been told to get out of the market and sit on the sidelines? I doubt it because this is not what the firm’s teach them to do. They’re taught to sell on their service, choose three to five mutual funds and then hang on for the next 20 years. Well, that might work out okay. The problem is they typically choose managed funds that are much more expensive have returns. When I say lower returns, I’m typically comparing the returns to the S&P 500 index. This index is typically the barometer that most funds are compared against. But here’s the rub are managed funds better than just buying the index? Well, in March of this year, CNBC reported for the ninth consecutive year the majority 65% of large cap funds lag the S&P 500 last year, after 10 years 85% of the large cap funds, underperform the S&P 500.

And after 15 years, nearly 92% or trailing index, they went on to say that active fund managers are gonna have to come up with another argument as to why you should use them. Because they’re not outperforming the index seemed if you’re in it for the long haul, please tell me why wouldn’t you just buy the index, it’s cheaper, has a better long term return. And you don’t have to have an advisor to buy it. As far as annual expenses go. This couple were was paying 5.75% for every dollar they invested in up front charges. This is a cost simply for the privilege of having the investment advisor by the fund for them, there’s no benefit or extra return for paying this cost, it’s just gone. That means the fund has to grow by over 6%, just to get back to where they were on the amount of investment they put into the account.

Even in a good year that might take six or eight months or even a year just to recoup the upfront cost. And if the market goes down the year they invest by say 10 or 15%, it could take two to five years or more just to break even a 50% drop like 2008 could take significantly more time. And it took some people over a decade to recover from 2008. Now look back in the 70s and 80s, when there was essentially no access for the consumer to the markets, no internet, you had to use a broker of some sort. This was the only way you could invest, you had to accept the fact that is going to cost you substantially to invest and you had to use some sort of broker financial planner. But now with all the online brokerages and ETFs ETFs or exchange traded funds, you don’t have to pay exorbitant fees, and you can buy the index pretty cheap yourself.

An exchange-traded fund has some of the lowest cost ever, I’ve seen ETFs as low as 0.20%, that’s $20 for every 10,000 invested. For some front-end loaded funds, you could be pain as much as $850, for every 10,000 invested. On $100,000 that could mean the difference between paying eighty five hundred for loaded funds, or 200 for an ETF. Now if you feel sorry, the advisor because he’s a nice guy, he’s not gonna to make money, if you do it yourself, it’d be much better for you to give him a gift card for dinner, and then go invest that money on your own elsewhere. I can’t think of a good reason to pay a front-load on mutual funds ever. If there were some facts that somehow proved that by paying a front load, you had a better money management and ended up with much better return it might be worth considering.

What’s interesting, and this is for you, Dave Ramsey fans of front loaded mutual funds are the only thing his preferred advisor sell. Yeah. So if you use an advisor that’s hooked in with Dave, expect to pay loads for your funds. I don’t get this because Dave seems to be the guy who wants to save you money. However, the facts bear out the opposite, you’ll have a better chance at a higher return by not paying front loads than and simply buying the index. Look, most funds are so diversified anymore, that they aren’t going to beat the index consistent anyway. And historical facts prove that out as well, the index is cheaper, easier to buy than ever before, and outperforms the vast majority of actively managed funds. And who can pick the 4 or 5% of the thousands and thousands of funds out there that may beat the index by a small margin.

The problem is, unless you learn this on your own, or you have a guy like me telling you this stuff, you’d never know, there’s no way your financial advisor is ever going to tell you this stuff. Because he’d essentially be out of a job. They aren’t in the business of helping you by the index, the only way they earn their money is to sell you managed funds, with the promise that their asset allocation model will do better. Or they may sell you the index, but then stack on an advisory fee that puts you right back in the same position you were in with the expensive loaded funds. A fee based advisor can be just as devastating to your finances, if all they do is buy mutual funds for you that you could buy yourself and then add on their fee. Now, how does all this play into the banking system?

Well, first off, we don’t just speculate and throw money at the market and cross our fingers. Since financial advisors don’t have a crystal ball, and can’t tell us when you should be sitting on the sidelines. And since they wouldn’t tell us anyway, even if they had a crystal ball, it’s up to us to make some 30,000 foot view calls on where things are and what we should do about it. In addition, we have some great investors, we can mimic and follow if we can’t figure it out ourselves. While we’re waiting for opportunities in the market, or in businesses or real estate or lending whatever you’re most comfortable with. Keep your money safe and accessible. It can sometimes take a few years to finally find a good opportunity. Then if you’ve done your homework educated yourself and understand the premise of investing.

The warm Buffett way, as I call it, you get involved. Using this couple as an example, there’s little chance with the fees associated with the funds that they’re in that they’re really going to make any headway. What’s worse is they will likely be sending these funds during the next crash or recession, because their advisors not going to tell them to get out. As a result, they may lose years of growth and be waiting several years just to get back where they were. Meanwhile, the clock’s ticking, and they’re nearing retirement every year that goes by. This is why so many people are gonna fall quite short during retirement. You know, the day you run out of money isn’t the only day you worry during retirement. It’s the years and years running up to the day, you’re gonna run out of money, you know scrimping and pinching pennies, hoping to make your money last just a little longer. Basically, you’re worrying and stressing out about money your entire retirement years.

Now, that’s not very good golden is if one way to combat all this is to take greater control of your money. Using the banking system as a safe storage facility until the opportunities arise is a sound strategy that’s worked for nearly two centuries now. It’s the last place you can go for tax free growth, tax free income and a tax free death benefit. If you have liquidity and access to capital, then you can be like other great investors and take advantage of markets when they go on sell. When everyone else is losing money, you’re safely protected from losses than when markets have shifted and you can invest it’s on sale prices, you can build your wealth much faster and safer. It’s what the wealthiest people in the world have done. But it’s not taught by wall street or financial advisors because it’s not in their best interest. Best of all, it’s not that hard.

The most critical thing is to build your capital, have it ready and available when events triggered. And markets are businesses and other opportunities are available at great prices. It happens it will happen we just don’t know exactly when it will happen. Which is why we want to build up our capital while we can. The contrast is Stark between what is being pushed by wall street, manage money and fees versus taking more control and buying markets on sale. So here’s a question for you. If traditional financial planning and investing in 401K’s and steps and all that was working, why are more people not retire new with enough wealth to last their lifetime? Why are there articles after articles that indicate people simply don’t have enough money for retirement to last their lifetime? I mean, traditional financial planning has been in full swing for 40 to 50 years now. Yet things aren’t changing much.

People are still coming up short during retirement or scaling back their lifestyles dramatically. It’s because I believe you have to be in greater control. You have to understand investing, how and when to invest. the wealthiest people didn’t simply invest in mutual funds. And 401ks, they did something different. They invested at the right time they built the business they could sell they lent money to businesses, they bought property and many many other ways. But they jumped in when the markets were on sale when everyone else was losing. Okay, I know this was a lot to take in the fact that we could do so many more of these videos and going further depth on each of these concepts. But and we will but this is a good start.

So as always if you have any questions shoot him to Dan wise money tools.com I’ll answer him just as quick as I can. Don’t forget to subscribe. And if you want to take advantage of a strategy session with me, click the link below reserve your time we’ll have a quick conversation about your situation. Well, good to have you with me. Until next time, take care.

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