The Pitfalls of Evaluating Rate of Return

Do you have "good" investments? How do you know? What is a good rate of return? How much time do you need to evaluate if you own good investments? In this episode, Host Joe Allaria and Co-Host Jay Waters discuss the pitfalls the many investors fall into when they are evaluating their own investments, and how having the wrong perspective can lead you astray. 


Listener Question
What is a realistic rate of return expectation for a newly retired individual?


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Disclaimer: 
All material discussed on this podcast is for educational purposes only and should not be construed as individual tax, legal, or investment advice. Investing involves risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results. Joe Allaria is an Investment Adviser Representative of , a Registered Investment Advisory firm. Information discussed on this podcast may be derived from third parties that are believed to be reliable, but CarsonAllaria Wealth Management does not control or guarantee the accuracy or timeliness of such information and disclaims all liability for damages resulting from such sources. Any references to third parties are provided as a convenience and do not constitute an endorsement.

Transcript

Joe Allaria: 0:00

Welcome everyone to the Retirement Power Hour. My name is Joe Allaria. This is episode 20. And today I'm going to be joined by Jay Waters, Wealth Advisor at Carson Allaria Wealth Management. Jay and I are going to be talking about the biggest pitfalls in evaluating your investment returns. This is all prompted from a listener question that we'll get into in just a moment. But first, don't forget, go to retirement powerhour podcast.com. Tons of resources there. You can submit a question that we can respond to you on, and we may feature it on a future show. And don't forget, click work with me if you want a free retirement analysis. The first step is setting up a phone call with me. We'll talk about your situation. I'll ask you a few questions. I'll see if you could potentially be a good fit and if we could help you. And if so, we will give you that free retirement analysis and help you answer questions like can I retire? How much can I withdraw once I retire and not run out of money? What accounts should I be withdrawing from? How can I pay less in taxes? How can I get more money to my kids in a tax-efficient manner? All of those types of questions will help you answer those. Medicare, Social Security, the list goes on. So you can click work with me and take that first step. Just schedule a no-obligation phone call and you'll talk with me. We'll have a nice conversation and we'll go from there. With that, I want to go into our listener question for this episode. And the question comes from Mark. And Mark says, I'm a bit unhappy with my returns over the past couple of years. I just retired. I was planning on a higher average return than what I've seen. And I'm unhappy at the moment. Just curious, what should a retiree expect in terms of average investment return? Well, Mark, that's a it's an interesting question. And because that answer can go so deep, I wanted to just make today's entire episode about this question and go more in depth because if you look at things the wrong way, it can really steer you the wrong way. You got to have the right perspective. So what I'd like to do is bring Jay Waters on as my co-host and guest today. And we're going to talk about the biggest pitfalls in evaluating your investment returns. And Jay is a fellow wealth advisor here at Carson Ilaria Wealth Management and is my periodic co-host. So we'll bring him on. Jay, thank you very much for joining me again and helping me out.

Jay Waters: 2:26

Yeah, absolutely, Joe. Looking forward to it today.

Joe Allaria: 2:29

So we're talking about returns, Jay, and the biggest pitfalls and really how to properly evaluate your investments. The reason that we're doing this topic is because I've had many conversations, I know you've had some as well, where you hear people make comments about their investments. And it might be that they've had investments elsewhere with other advisors or in their 401k or somewhere else, and they're just really unhappy. And before I automatically start throwing stones at other advisors, you know, I really try to dig down to the core of what the issue is and see if if they're even being realistic or being fair to their current advisor, their current investment. So I've heard it so many times that I figured, hey, let's just talk about this and let's make this a topic on the show. So what are what are some of the things, Jay, that you've heard people say, some comments that you've heard people say in regards to returns? I have a couple here, but what are some that you've heard and and you know right away when they say it that they're probably not looking at their investments right and they're probably not evaluating them fairly.

Jay Waters: 3:34

Yeah. They'll, you know, the couple things you always hear a lot is, you know, my 401k hasn't done well in the last two years. I must not be invested well, or I'm in the wrong funds, or my neighbor is up more than I am for this year. You know, what's the reason? I again I must be invested wrong. Hearing those sayings, and you know, the important thing is to not hear or not spend too much time focusing on what other people are doing or what the news may be saying or what other people might be invested in. It's focusing on how you're invested and what it compares to actually what the rest of the market's doing.

Joe Allaria: 4:07

Yeah, it's a lot of apples to oranges comparisons, is what I see. And it all comes back to setting realistic expectations. That's my true belief. It's not that I'm trying to um you know protect any period of time where we might see poor returns in some of the investments we use, but that's just part of investing. You're gonna have ups, you're gonna have downs. And if you're gonna invest in something, you should set realistic expectations on I think the time frame for when you need to evaluate. And someone said to me one time too that uh, and it was it was during 2022 that, well, my yeah, the the neighbor one, my neighbor or my my relative, their portfolio was actually up one percent, and ours was down. Well, most of you know 2022, the market was down, stocks were down, bonds had their worst year ever. So I said, Well, you know, that doesn't really mean anything to me without knowing what they're invested in. They they could have been in CDs paying 1%. Yeah, you know, so you're just looking back a year. I said, Well, let's look back the last seven years or or 10 years to see how things have done. Because just looking back one year in the stock market, it's not very useful, it's not very reliable. And I just made this point the other day to a client. If you look back two years as of the date we're recording this podcast, it's May of 2023. You look back two years, the SP 500 is negative. Should we just say, well, yeah, the SP 500 is trash?

Jay Waters: 5:36

No, and it's it, you know, it's it's the combination of the two. It's comparing what the investment should do, and then also how long you should give it to do what it's supposed to do, giving it enough time, also, right? Not not saying, okay, I'm gonna compare the SP for one year and another investment based off 10 years, right? So it's the time horizon and the investment class itself.

Joe Allaria: 5:58

We would certainly not say the SP is trash. We're gonna share some data on that. And on the flip side, again, in 2022, where the SP 500 was down approximately 18%, bonds were down approximately 13% in some change, the bond market, and your checking account, let's just say earned zero percent, but it was the best out of those three. Would anyone in the world say that your checking account's the best investment ever? Because you never lose. I mean, maybe some, but you know, when people know when they're investing to make money, you're not gonna say, uh, I know my checking account's the best place to have money to invest it. Well, it was the top performer in 2022 out of those three that I just mentioned. So I need to make this disclaimer as well. We're gonna share some historical returns and some data that we've uh received. We've got our our data from dimensional funds. They put out some material for uh for advisors. So we've compiled some of that, and some we'll share with you on our screen. If you're watching this podcast, if you're listening, we'll just share with you what we're looking at. But um, none of this, you know, past performance is not indicative of future results. We get that, and that disclaimers on about everything that we have now. And I'll say this: I think you can you can look at the past and you can start to gather some evidence. Nothing is guaranteed, nothing's like, it's not like the last 10 years is gonna repeat the next 10 years. That's that's not gonna happen, and we know that. But we can look at the past, and if you have enough data, you've got enough different types of time periods where interest rates were up, down, you know, going up, going down. You had wars, you had you know recessions, you had all sorts of different types of events going on. The more data, I think you can start to at least gather evidence for how markets act. On the topic, Jay, of is the SP 500 trash? I don't think many people would say that. We looked at five-year, 10-year, and 15-year average periods, average returns. So every five-year period, every 10-year period, and every 15-year period, and that went back all the way to 1926. And what we found was the average five-year return. If you looked at five-year periods, the SP was up 10.29% on average, the average 10-year return, 11.03% per year, if you looked at it 10-year blocks of time. Yep, and then 15-year-old the average 15 year was 11.33 percent. So is the SP trash? No, but it was it was negative the last two years. So that should tell you right there. If I'm only looking at a two-year period to evaluate the SP or any investment, evaluate my mutual fund, evaluate this this stock strategy that I have. You know, I I put together a stock strategy or an advisor put together a stock strategy for me. I'm two years in and it's negative. Does that mean it's bad? Well, we just said the SP is down over the last two years, so it's really tough. I mean, our my personal belief, Jay, is two years is not nearly enough time. I use the number, we use the number 10 years, and that's not even a guarantee, but it's a much better metric, I think, based on the historical evidence of what we found.

Jay Waters: 9:05

Yeah, and the whole point of the historical evidence, again, like you said, it's it's not a guarantee of future performance, nor is it could it repeat itself? It just again it helps groom and get you used to uh understanding what can happen, what has happened, and what almost could be expected in certain cases because the market has gone up and down over the years, where people become uncomfortable when they see the market down over two years. Well, if you look back over the last 80, 90 years, it should be expected. It's coming, you know. Here it is. Like, okay, I I knew this was a part of it, right?

Joe Allaria: 9:42

Yeah, it's possible. We have to know that it's possible. I don't like it. And we're not telling, I'm not saying, I know you're not saying that you should like it and just be, you know, like happy and comfortable. There's a difference between being completely caught off guard and panicked and just being mildly annoyed and understanding it's part of it, but not super happy. But again, it's not the fund, it's not a bad fund. The SP 500 is not a bad index. There have been funds that have down, doesn't mean they're bad funds. It just might mean you're not giving it enough time to evaluate. But how much time do you really need? How much time does the SP need? Now I said 10 years. Let me explain why I said that. And we use that, we talk about a bucketing strategy where short-term, mid-term, long-term investments, you have to figure out how much you need to be putting in each bucket. And that long term we define as 10 plus years, and this is why. So if you look at the SP 500, how many times has the SP 500 been negative? If you look at even five-year periods, we looked at 93 different five-year periods. So starting from 1926 to you know five years from there, 1927, five years from there, 1928, five years. And if you evaluate all of those five-year periods, there was 93 of them. 12 out of 93 were negative, 12 out of the 93. So that's about 13% of those periods. You actually saw the SP down after five years. Some people think, geez, five years, that's an eternity. Well, we call that the midterm. We don't even call that long term. If you go to 10 years, we evaluated 88 10-year periods. Only four of the 88 were negative for about 5% of the time. So 95% of those periods, you said the SP was positive. Those are 10-year periods, and this is just the SP. I want to stress that too, because we don't recommend investing just in the SP 500. And we're not making any investment recommendations on this podcast either. So keep that in mind. But we don't recommend that. We're just we're talking about the SP because people talk about the market. So 95% if you give it 10 years. Now you go to 15 years, there's never been a 15-year period where the SP is negative. Now we have to be realistic sometimes and say, well, 15 years, that's a long time. And uh so we use 10 because 10 has a pretty high probability, and especially if you look at a diversified portfolio, which I have here, and our diversified portfolio data only goes back to the 80s because you know you didn't have emerging markets uh prior to that. International data wasn't as easily accessible. But if you look back, the worst 10-year period going back just to the 80s in a diversified portfolio was around three, three and a half percent per year. And that was 1999 to 08. And so the only reason that that was so bad is because you had 2008, it was the last year. So you were doing pretty fine, you were doing fine, and then you had 08, and that took your average 10-year return down to about three and a half. But obviously, that those are that's a black swan type of event that we hopefully don't see very much in the future, but that just gives you some perspective. If you look at all the other 10-year periods, returns were higher, they were positive. So that's good. If we look at five-year periods and diversified strategies, you know, we had one period, one five-year period where the diversified portfolio was negative. This is not our portfolio. This is a this is an index provided by dimensional funds to to kind of imitate a globally diversified portfolio with large cap, mid-cap, small cap, growth value, international, emerging markets, and real estate. So this is we're just kind of using this as a benchmark. We're not this is not our our portfolio of returns. But that's some evidence for using 10 years.

Jay Waters: 13:35

Yeah, and another point to that is on when you look at the five-year, 10-year periods on the worst case scenarios, when you look at just the SP 500 when it was down 10 years, so those four times, the worst case of those 10 years, looking back in history, it was only down 1.4%. So again, that uncomfortable doesn't feel great if you look 10 years out and say, okay, I'm down 1.4, again, not great. But if that was the worst case out of 88 different testing periods, right, you know, it's not down, it's not like it's down 10%, 11 or 12. It's it's down one. On the diversified side, when it was down over that five-year period, the worst case starting in 2007, it was down 0.01%. So barely down. I mean, it just barely missed the mark.

Joe Allaria: 14:28

No, we're not happy about that. We don't want to see that. I won't I will I hope every one of my clients you know averages 10% a year for the rest of time, but we just know that's not likely gonna happen, and we have to take the ups and the downs. Now, going back, I've heard people say this my 401k is no good, my IRA is no good, or my advisor, I'm just not happy with returns. And a lot of times they're going back two years, three. I'm like, how long have you been working with them? You know, why do you say your 401k isn't doesn't grow for you? Uh, well, it hasn't grown the last two years. And if someone said that today, I would say, well, you know, the market hasn't gone up, the SP 500 is negative. Not that I'm trying to dissuade people from working with us, but right off the bat, I want to set the the tone up front that we have to be realistic. And I'm not just gonna go along with what you're saying if you're unhappy with your advisor or whatever. I because then you're gonna do the same thing to me two years later, and I'm gonna make sure you understand right up front, that's not a good way to evaluate investments because again, I just keep using the SP 500. It's a negative the last two years. Is it a bad investment? Absolutely not. It's not the only thing you should probably should invest in. You need to diversify, but it's not bad. And the same thing goes for bonds. I've heard this so much about bonds for last year because bonds were down, the bond market was down 13.1%. It was the worst year ever for bonds, Jay. And you you know, you know that too, but the worst year ever. And people are saying bonds are terrible investment. Well, 2022 caused the first four-year period where bonds were negative ever. So before that, we had never seen a four-year period where bonds were negative. Because of last year, we now have one on record. Again, how negative were they over four years? 0.2%. Um, over a five-year period, we had never seen bonds be negative. Because of last year, now we've we've seen one. How negative were they? 0.5%. So that's with last year on record. So, what usually happens when stocks go down and stocks go down and bonds go down so dramatically, then the next year, sometimes you know, they'll rebound. It's all about the right expectations and just setting the right expectations up front. If you're investing in stocks for a day, I'd say, well, just go to the casino.

Jay Waters: 16:50

But it's a coin to the roulette table.

Joe Allaria: 16:53

You know, go to the roulette table because you're just gambling. And I I would say the same thing over you know, using stocks for a period of one year, expecting them to go up every year, or every quarter, or worse, every month, when you get your statement, you expect to never see a negative number. It's just not realistic. And Jay, uh, you know, I'm I'm a mild sports fan. I used to probably be a better sports fan, but we see this in sports and I and people that watch football, basketball, and hear about coaches that get fired. You sometimes this topic has come up just casually with friends, is that when college coaches are hired or professional coaches are hired, football, basketball, the time that they are given to sometimes turn a losing program into a winning program is so unrealistic. And they get, you know, they get fired a year or two in, or maybe they won a championship, even, but the two years later they're they're struggling a little bit, and these people are getting fired. One coach I want to mention, Mike uh Bootenholzer, I think is how you say it. He was the coach for the Milwaukee Bucks. They won a championship two years ago. And it was the first title they had since 1971, and they didn't win the championship this year, and he's fired. I mean, the the again, the expectations are absolutely ridiculous, again, in sports. That's just a that's just an analogy, but we do the same things to our stocks. You're just setting yourself up for failure. These owners, these heads of universities, that they're just setting themselves up for failure. They're just being unrealistic, trying to get a quick fix, trying to get a quick turnaround solution. And unfortunately, all these things take patience.

Jay Waters: 18:36

Yeah, there's that almost that expectation or that feeling of that one coach who got them there, you know. I don't know how long he was a coach for, but it'd be interesting to see how long he was a coach for to then when he won the championship. And they probably again, it's easy to set the expectation of, well, you did it that quick. Why didn't you do it again the next year and the next year? So again, it's just as important to look at how you got there, but also what the history was on okay.

Joe Allaria: 19:05

Well I happen to have that information. He was two his record, 271 wins, 120 losses, five division championships, his worst season, he was 46 and 26. His last season, his last season, he was 58 and 24, a 70.7 winning percentage, and it was the best in the NBA. I mean, if I'm if I'm this guy, I am like I don't know what you want from me. You know, what else do they had the best winning percentage in the NBA, not to divert too much, but it's a great analogy because I'm telling you, people do the same thing with their investments. They'll say, I don't understand why I'm not getting 7%. I just don't understand that and I'm unhappy. You're like the owner who fired the the the winningest coach you know last season because he didn't win a championship. It's just not going to happen every year. But if you just sit tight, you know, at least historical evidence has shown that markets rebound. And on that point, you know, if we say the SP 500, if it's averaged 10%, take a guess, Jay. You know the answers to the test here, but how many years out of 97, if the market averaged 10%, how many years do you think we have actually seen a uh a return around 10%, say eight to twelve percent? What do you think the average investor thinks? How many years have it? 97 years, how often do we see that return? If it's averaging 10, from 8 to 12 percent.

Jay Waters: 20:44

I'm gonna say 7 to 10 would be probably what most people think, probably maybe more than that.

Joe Allaria: 20:48

You know, I think the average investor probably thinks it happens the majority of the time. The less, you know, uh historical data they might know. I think they'll probably say, yeah, I think it happens most of the time, but six years we saw a return of eight to twelve percent in the SP. So that that just goes to show, even though that's the average, very rarely are you gonna see that. And what else does that mean, Jay? You're gonna see some years that are way above. Um, and I've got this here, so uh you're gonna see some years that are way above that average, and some years, plenty of years that are below that average.

Jay Waters: 21:25

Yeah, and I know there's a piece letter and we'll touch on it, but it's when talking about really great years, really bad years, to then get that average is making sure that you don't miss out on those great years, because it can bring down that average so much if you are not there for those good years to actually have that average over time.

Joe Allaria: 21:46

And here's that piece that just shows I mean, these are all the years, only six years have we actually seen that eight to twelve percent, even to give you a little bit, give you a little bit of a range. And the other thing I want to mention too is why setting expectations is important because sector returns are very cyclical. So getting in the weeds a little bit, but talking about different sectors of the market, different parts of the market. There's value, there's growth. These are how companies and stocks are sometimes categorized, right? So this is a piece from dimensional fund advisors. And what we're looking at is from 1926 to 2022, value companies have outperformed growth companies by 3%. Values up 12.7 percent over that 96 plus years, growth's up 9.7 percent over that 96 plus years. Okay, that makes sense. But then we see from 2017 to 2020, we saw value was negative 3.1% during that time and growth was up 17.6 percent. That's a huge difference. And I remember some questions about why are we holding these value funds? Because it seems like growth stocks are much better. And the thing is, sector returns are cyclical, and we had to set proper expectations. So anything in the stock category, we put that 10-year label on and say, well, we don't get too excited before we hit 10 years because things can happen inside that 10 years where these cycles can, you know, come and go. What we found after 2020, if you look at July of 2020, excuse me, to December of 2022, value was up 28.7% and growth was up 6.6%. It totally flip-flopped. But if you just based your decision on the three years, July 17 to June of 2020, then you missed out huge. You put all your money in growth and look, look how you did, would have done from 2020, mid-2020 to end of 2022.

Jay Waters: 23:57

Going back to your neighbor or another advisor, whatever it may be, if they were all growth and that, right? I mean, your neighbor, whoever it could be, could maybe maybe been all growth from 2017 to 2020. In the short run, they may look like a genius. And most people like to talk about returns when they're up. No one ever brags when they're down, right? You never hear your neighbor next door saying, if they were all value, saying, Hey, we were down three percent last year, isn't that great? You know, next door neighbor's gonna say, Well, I was up 17. Well, that next year, you give it the next two and a half years, that same person is not gonna walk out their garage and and then brag anymore, right? So it's it's making sure you are comparing apples to apples, not apples to oranges. And it's also so important on having a diversified portfolio. The worst case is you go look at 2017 to 2020 and you look how well growth did, and then you say on the tail end of it, you go, man, look how great growth's done. I should just put all my chips there. Yep, and then then you miss out, then you miss out on all that value for those next two and a half years. And sadly enough, you see people do that sometimes.

Joe Allaria: 25:10

And with rates being high now, Jay, similarly, it's like, why wouldn't I just go put all my money in a CD? I can get five percent, five percent, you know, four percent, five percent in a CD. I'm okay with five percent. Why not just go do that? Well, I think it depends what your goal is. If your long-term average average return goal is five percent, Jay, that means again, some years you'll have to get more than five percent. Because some years you're gonna get less than five percent. We just play through those scenarios, all right? Well, let's say you get that CD right now and you hold that CD for the next 12 months and it's paying you 5%. But let's say the market goes up 20% during that same time, then you didn't get that 20 because you you only got five. And then at the end of the 12 months, CD rates have come down. Now they're back to 2%. Now you're looking at, well, where should I put my money? I guess I'll put it back in the market. You know, things are better now, and I'll put my money back in stocks and bonds. Well, you you just missed four years of returns at five, you know, if you want 5% a year, the market went up 20%. You got you got one, you got five percent. So you missed out on three additional years sort of of returns. And you need those. This chart shows that. And we're looking at it if you're on YouTube. If you're listening, what what we're looking at is a chart that talks about how much your rate of return will drop if you miss the top days in the market. Jay, I'll let you talk through this.

Jay Waters: 26:37

Yeah, it was kind of what I was touching on earlier on giving the time that it should be, staying invested, following through on the philosophy that was set in place to give it 10 years or or whatever time frame should be set on what you're investing in. And you know, on this on this here, so again, for those on YouTube or looking at it, is if you stay fully invested on an investment of ten thousand dollars from the years of December of 2007 all the way to December of 2020, 22, you'd have $35,000 if you invested ten thousand dollars. If you missed the 10 best days in the market, you'd have almost half of that. So 16,000 about 16,000.

Joe Allaria: 27:21

And and and talking rates of return too.

Jay Waters: 27:24

Yep, because that's from yeah, from a rate of return on the average, so for over those 15 years, if you are fully in fully in the market, never miss any of the days, you're gonna average on based off this data 8.81%. Yeah, that's what historically if you miss the 10 best days, you'd be all the way down to 3.29%. You miss the 20 best days, and the return goes negative.

Joe Allaria: 27:52

That's that was just pause there for a second, because that that is incredible. That's an incredible stat. You're in there the entire time in this 15-year period. If you were just invested the whole time, you got 8.8 percent. You missed just the best 10 days, it drops five and a half percent. You know, it drops down to what do we say, 3.29%. But if you miss the best 20 days, that's not even a month, but the best 20 days, you your return went negative. That that's incredible to me, Jay.

Jay Waters: 28:25

And I was trying to do some quick math without accounting for holidays and federal holidays and when market may be closed, is over those 15 years, there's probably approximately between 3,700 and 4,000 trading days. So if you just missed 20 of almost 3,700 trading days, which is a very small percentage of days, it makes that big of a swing in percentage percentages returns.

Joe Allaria: 28:52

And this and this is this is probably tough because this is I'm I think this is showing the literal best 10 days. So I don't think they're showing the best that the 10 best successive days, if that makes sense. I don't I don't think these 10 days were 10 days in a row, correct? But I think these are the best 10 days. But still, Jay, I mean, five, five and a half percent is astronomical in our world. I mean, one percent difference, a one percent difference makes a huge difference when you're talking about hundreds of thousands or millions of dollars, one percent uh in return. That's why you know our job is is we just help people. We want to we want to get what the market provides and avoid these major, major mistakes and missteps. But and we're talking eight percent difference on the best 20 days. And I've unfortunately seen and talked with people that they were out of the market, and you know, they not only missed maybe the best 10 days, I mean that they just they've been out for years. And so they didn't maybe have all the bet the the bad days, but they they just they missed such a run up in stocks and Because they're scared to get back in and they know it. And they they know that you know maybe the amount of money they had, they should have double, triple what they have. But they've been out for so long, they've been waiting for the market to to revisit its 2008 levels, and it never has. And some people now are waiting for the market to revisit its 2020 levels, and as of right now, it just hasn't done that. But I a few more comments on on this um topic things that we hear. If the market goes down 20%, someone will say it has to come back 25% just to get back to where it was. And a lot of times this is a sales tactic that certain people in the industry use to drive fear um and maybe sell maybe sell insurance products. We just did a podcast last episode on annuities, but it's very easy to spread fear, and so that's a great way to do it. Well, if the market's down 20%, it doesn't have to come up 20%, it has to go up 25% to get back to where it is, and that's just percentages. Well, that's exactly what the market's done. You know, you look at this data, it's exactly what the market's done. Um, and then some because the market has continued it can its uptrend over the last hundred so or so years that we've tracked it. Um you also hear this time is different. I've heard that a lot lately, Jay.

Jay Waters: 31:16

And in comparison with the this time, it's different. It's usually in comparison to some, whether them being older, getting ready to retire, maybe in their mid or late 70s, you know, this time it's different. And with that, it's also it's different, and I don't have enough time for it to rebound, or I don't have, you know, I can't let the market go down. I'm too close to this. So what do you say when someone says I don't have enough time for the market to recover? I'm getting ready to retire. I I have to go to cash, I'm getting ready to retire. Or I'd say I'm in my 80s, I I I don't have I don't have 10 years, right, for the market to come back. So what do you say to to clients when when they say something like that?

Joe Allaria: 31:58

Yeah, I do. I say, do you think you'll there's a chance that you could live 10 years? And it is way different. If you're 60 years old or 65, I think we have to assume you're gonna live at least 10 years unless you have a terminal illness. So let's talk about that person first. We're gonna assume you're gonna live 10 years, and not only that, you're gonna need some of your money at 75, at 76, at 78, at 80. If you're still alive, you're gonna maybe be taking withdrawals. So if we want to invest that in the most prudent way for that time horizon, we feel stocks or stock funds are the best way to do that. So uh I we'll just you know, we'll talk about these numbers. So the worst, if you look at in a diversified portfolio, the worst five-year returns, because people say I might not have 10 years. Well, um, if you look at the worst five-year returns where we talked earlier, 2007 to and five years later, so it'd be 2007 through 2011, so 7, 8, 9, 10, 11, that period was 0.1%, negative 0.1 percent in a return, a diversified type of portfolio. If you just waited five more years, the return goes from negative 0.1% per year to 5.8% per year. And the next worst five-year period started in 2004. Over that five years, the average was 0.8%. If you just waited five years later, so you got to 10 years, the average jumped from 0.8% over five years to 9.3% over 10 years. So we just encourage people like just keep keep the proper uh perspective on these things, keep the proper perspective because the numbers you you can't say these things are guaranteed, but it is a lot of historical evidence, it's a lot of context, a lot of different time periods. And I think it's helpful for that for those people that are 60, 65. Now, if you're 85 years old and we and we've had conversations with folks that are 85, and they say, I really may not be here in 10 years, I would say that that's fair. So we may not want to use stock funds because if our rule is 10 years, then maybe we go to a more midterm investment or shorter term investment. Midterm investments like bonds or shorter term investments, even like CDs. It just depends on the situation. And then where's the money gonna go? If you don't, if if they're not even gonna use it, it's gonna go to their kids, and their kids won't need it for the next five or 10 years. Now you kind of are looking at the time horizon of the kids or whoever will inherit that.

Jay Waters: 34:45

Just exactly what you said. I'm glad you touched on it. Was uh don't base your diversification or how you're invested just so solely based off age. Look at it as what the distribution distributions are gonna be, what's the purpose of the money? Again, because for an 85-year-old, like you said, again, you hit it spot on is uh do you need it? Uh what are the distributions needed, or do we look at the kids and say when do they need it? Because that is gonna determine okay, you may not have 10 more years to live. You know, sadly say you may not have 10 more years, but your kids are in their 50s, you know, they'll probably live another 20 or 30 years, hopefully. So look at it from that way too.

Joe Allaria: 35:24

Well, I wish we had more time. We've covered a lot of ground, and uh unfortunately we're gonna have to wrap this episode up. But I think the theme here is don't compare apples to oranges. Just don't compare apples to oranges, have the right perspective, understand and the proper expectations on the type of investments that you're using before you try and start evaluating them. Because if you have the wrong perspective, you could start labeling good investments as bad investments, good advice as bad advice, because you're just not looking at it in the right amount of time and you have the wrong expectations.

Jay Waters: 36:04

Let the uh let the apple ripen, right? Don't do it to the orange and let the apple ripen.

Joe Allaria: 36:10

I always use the example of baking a cake for some reason. I don't bake cakes, but you know, if the cake needs 30 minutes to bake, don't go in that in the kitchen after five minutes because you're smelling it and you're hungry and just take it out of the oven and take a bite. No one in their right mind would do that and expect that cake to taste right. I I use that analogy and everyone just kind of laughs as oh yeah, you know, no one would ever do that. That's exactly what people do with their stock funds.

Jay Waters: 36:35

Yep, absolutely good point, Joe.

Joe Allaria: 36:37

So if you have questions, you want a free retirement analysis? You're getting close to retirement, you don't know, can I retire? How much money can I withdraw from my portfolio without running out? How can I save money on paying taxes, pay less in taxes, I should say? You don't know the answers to those questions. Should I be doing Roth conversions? How can I give money to my kids? All of these things. If you have those questions, go to retirementpowerhour podcast.com, click work with me, tell us about your situation, set up a introductory call, an introductory call. You'll talk with me, and I'll just ask you a few questions, see if you're a good fit and or would potentially be a good fit. If so, we're happy to give you a free retirement analysis where we will help you answer those questions, tell you where you're at, tell you where you stand, and hopefully provide some clarity for you. So go to retirementpowerhour podcast.com. Also, if you just have a general question, you can click submit your question on that website, our website, type your question in, we'll respond to you. We may address it on a future episode. Last but not least, don't forget to leave us a review. If you're still listening, you must really like this podcast because we're uh we're deep into it. So if you're still listening, please go to Apple, go to Spotify, leave us a review, tell us what you think. Hopefully you'll like it, and that would be greatly appreciated. That helps us get our word out to uh more people. With that, I want to thank you again, Jay, for joining us. I'm sure we'll have you back soon. Enjoyed the conversation. And for everyone else that's listening, thanks for tuning in. Don't forget to join us next time on the Retirement Power Hour, where we help listeners invest wiser and retire better. Take care.

Speaker: 38:20

Thank you for listening to the Retirement Power Hour Podcast. All material discussed on this podcast is for educational purposes only and should not be construed as individual tax, legal, or investment advice. Investing involves risk of loss, and investors should be prepared to bear potential losses. Past performance may not be indicative of future results. Joe Allaria is an investment advisor representative of Carson Allaria Wealth Management, a registered investment advisory firm. Information discussed on this podcast may be derived from third parties that are believed to be reliable, but Carson Allaria Wealth Management does not control or guarantee the accuracy or timeliness of such information and disclaims all liability for damages resulting from such sources. Any references to third parties are provided as a convenience and do not constitute an endorsement.