Finance Roundtable Podcast
It is a complicated and tricky world out there. Without a solid understanding of how money works, life can be even more challenging.
We get it, talking about money is uncomfortable but we all can agree that it is an important topic to understand.
The Finance Roundtable Podcast team wants to bring you along as we interview some remarkable professors, professional athletes & financial strategists about money.
If you have ever wondered what is talked about between financial professionals and what goes through our minds when we are off the clock; then you will want to check out the Finance Roundtable Podcast.
Jacob Gold and Michael Cochell are Financial Advisors offering securities and advisory services through Cetera Advisor Networks LLC (doing insurance business in California as CFGAN Insurance Agency LLC), member FINRA/SIPC, a broker dealer and Registered Investment Adviser. Cetera is under separate ownership from any other named entity. Jacob’s California insurance license # 0E55425 Michael’s CA Insurance License # 0K90130. The views depicted in this material are for information purpose only and are not necessarily those of Cetera Advisor Networks. They should not be considered specific advice or recommendations for any individual. Neither Cetera Advisor Networks nor any of its representative may give legal or tax advice. Kelvin Gold is a Marketing Associate. Registered Address is 14850 North Scottsdale Road #255, Scottsdale, Arizona 85254.
Finance Roundtable Podcast
What is Asset Allocation and Why is it so Important?
Unlock the secrets to a financially secure future with our latest episode, where we promise you'll grasp the essentials of asset allocation like never before. Join me, Professor Jacob Gold, along with my insightful co-hosts Michael Cochell and Kelly Gold, as we dissect the art of crafting a resilient investment portfolio amidst today's global uncertainties. Discover how a strategic mix of stocks, bonds, and alternative investments—much like the perfect pico de gallo recipe—can shield your finances from market volatility. Our discussion highlights a pivotal 1991 study that astonishingly attributes 91.5% of pension growth to thoughtful asset allocation, proving its remarkable impact on your financial journey.
Beyond investment strategies, this episode also navigates through the nuances of compliance and regulation. Learn why understanding the regulatory landscape is crucial, as we clarify the distinct operations of G-a-n Insurance Agency LLC from Cetera Advisor Networks, detailing our specific licenses in California. With transparency as our guiding principle, we introduce our marketing associate Kelvin Gold, ensuring you’re informed of the integrity and structure behind our advice. While we share invaluable insights, remember that we’re here to inform, not replace personalized legal or tax advice. Join us to gain a well-rounded perspective on building a financially sound future.
Hello everybody, I'm Professor Jacob Gold and welcome to the Finance Roundtable. My co-hosts today are Michael Koschel and Kelly Gold. We thank you for joining us today. Today, we're going to be talking about asset allocation. What is asset allocation and why is it so important?
Speaker 1:If you haven't noticed, things are a little uncertain these days, whether it's the war in Ukraine, the tensions in the Middle East or the upcoming presidential election.
Speaker 1:There's a lot of noise out there and some people feel like they can time the market. They know when to get in, when to get out, how to appropriately allocate, and this episode is all about coming up with a well-diversified, long-term strategy and how for most, that is the most desired approach to be moving forward financially. I would say that if people don't understand how to manage money, they feel that there is a silver bullet, or they feel that if they have one little nugget of information that other people don't, that could really give them a leg up as an advantage. And in reality, there's so much noise out there that the best thing that an individual should do is to really get to know the different terms and ideologies of investing. And, as I teach personal finance at Arizona State University, one of the themes that I really spend a lot of time on is that of asset allocation and, mike, would you mind sharing with our audience what is asset allocation and why it's important? Certainly.
Speaker 2:It's a term I think a lot of people come across, especially if they're an employee at a company that has access to a 401k. I find when I go and provide some education to some of the corporations I work with, I try and redefine that in a different way so they have an understanding, because you see that word a lot If you sign into, look at your accounts, say it's a 401k, 403b. A lot of times employees will see that term and to try and break it down and I wrote this down just to give some clarity view it as a type of investment strategy that will allow an employee or an investor to be able to split their portfolio into what they would call different asset classes. Now that allows us to identify now what's an asset class at that. So there's different levels and sometimes thinking about it, but to break it down, think about it as a strategy to be able to split their investments with different asset classes.
Speaker 2:The second part of that would be well, what's an asset class? A lot of us are familiar with it but we may not know that terminology and for the most part, it's investing in different stocks, investing in different bonds and, in some cases, alternative type of investments such as real estate. These days we've got different currencies and so forth, so to try and break it down a little simpler, asset allocation is using the strategy to split their investments in different asset classes, so a variation of different stocks, bonds and alternative investments. Hopefully that gives a little bit of clarity. Once you dive in a little bit deeper with it, I think you get more clear of like how you might be able to use it for your own personal investments.
Speaker 1:That's a great explanation, mike. How I tend to explain it at ASU to my students is creating an asset allocation for your investments is a lot like someone making salsa. I'm an Arizona kid, I love a good pico de gallo. I'm an Arizona kid, I love a good pico de gallo. And if you think about it, you've got the tomato, you've got the onion, you've got the cilantro and you've got the jalapeno pepper. Now you don't want to put too much pepper in it because it can really burn your mouth and really make the experience not very enjoyable. The proper amount of ingredients, of that mix between tomato, onion, cilantro, a little lime and jalapeno, it takes on a whole new flavor and can be very tasty for individuals.
Speaker 1:And so in asset allocation there are certain economic stages where stocks do really well. And when stocks do really well maybe your other assets, like bonds, aren't performing as well. But as the economy slows maybe those stocks take a turn and they come down. But maybe those bonds really create some stability within the portfolio. So asset allocation is a way to spread out your risk in different types of securities. So you're not all in with one thing. You've maybe ever heard the analogy don't put all of your eggs in one basket. You don't want to have just all of your money in XYZ company stock, you want a little bit of everything and you hope that there's a little yin to your yang and when something goes up, another thing goes down and it's evaluating the whole.
Speaker 1:Now one study that I think is really pertinent to this conversation is back in 1991, three gentlemen Gary Brinson, randolph Hood and Gilbert Beebower came up with the BHB study and what they did is they studied the performance and the asset allocation of 91 pensions from 1974 to 1983. And they really broke down where these pensions made their money and what the analysis and the study concluded was that of all of the growth within those pensions, of those 91 pensions, over a 10-year time period, they could equate 91.5% of all of the returns of those pensions to the asset allocation of that pension, which means that very little of their overall performance was attributed to their stock selection or or timing the markets. So 91.5% of all of the growth of that pension was attributed to the mix of how they diversified their portfolio. And I think that that's really powerful for people to understand, because so much time and energy is put into selecting certain stocks or knowing when to jump into the markets or when to jump out, and those areas can be very tricky and there can be momentum that plays against you. You might have biases that hurt you in trying to time the market or trying to front load your investment.
Speaker 1:And in reality we want you to set up your portfolios in a way that we recognize there's going to be ups and downs based on what's going on economically, but you don't want to. That asset allocation that you're using represents where you want to go long term. Then when times get tough, you don't have to think, oh, should I get completely out of the markets? Because if you get out of the markets, you've got to time it right twice. You've got to know when to get out and when to get back in. It's more appropriate to be fully invested and have time in the market than trying to actually time the market, and that's really important. And asset allocation allows us to focus our energy on other areas of our life. We can focus in on our work, we can focus in on our family, we can focus in on our joys on the daily. And as long as we do that work ahead of time and we know what we can tolerate, then we can allow our portfolios to grow long term. I think that that's quite important for people to understand.
Speaker 3:Kelly does that make sense to you.
Speaker 1:Yeah, it makes a lot of sense. I know we talked about this in your class and I've heard about it several times, but where can someone figure out their risk tolerance?
Speaker 1:Great question, kelly. Absolutely Well. A good place to start is you can always go to our company website, which is wwwjacobgoldcom, and right there on the homepage you will see the opportunity to take a risk tolerance questionnaire. It's usually it only takes you maybe 10, 15 minutes, and it's a really neat process of really trying to hone in on what your risk number is, and the higher the risk number, the more risk you can take on, which many times not all the time, but many times means more of a concentration in equities. And so knowing your risk number is a really great way to understand how you should be diversified. And once you have an idea of what your risk number is, you can really backtest it and you can see okay, based on my risk number, how would my portfolio perform if we relive a 2008 scenario or if we were to relive a 2020 type of scenario again? And so Mark Twain once said that history doesn't repeat itself, but it often rhymes, and so if you have the time to go through and be very analytical when it comes to your risk tolerance questionnaire, not only will you know that your asset allocation represents where you are and where you want to go. But then you can also take that and look at how that asset allocation did in prior time periods both good and bad. And so before someone makes a knee-jerk reaction and gets out of the markets because they're worried about whether it's the economic environment is changing or our political environment is escalated with concerns, before someone pulls the trigger and really makes a drastic change, we encourage them to perhaps discuss, take a pause, reach out to your financial advisor, talk with him or her about what's going on around us and whether or not these events really should change the way that we allocate our investments.
Speaker 1:More times than not, when we get a call from a client that is concerned or overwhelmed, the first response isn't okay, let's just go all to cash. It's like okay, well, have things changed in your life? Do you foresee yourself working longer or shorter? Do you need money here in the next year or two because you're buying a car or buying a second home or a child is going to college? And if there hasn't been major changes in your long-term perspective and you were methodical in coming up with that original asset allocation, chances are we just need to buckle the seatbelt a little bit and just endure the ride.
Speaker 1:But if you never went through that process and you feel overwhelmed, now is a good time to figure out what your risk number is, and Michael and I can help with that. If an individual doesn't know what their risk tolerance is, let us know. We'll walk you through the process so you have a very good understanding of what is appropriate for you, because your situation is very different from your colleagues or your neighbors or your friend or a sibling. It's very unique to your own situation and that's one of the advantages of working with a financial advisor is that we get to know your situation and we can see long term on what would be the most appropriate glide path for you. Mike, anything else to add to that?
Speaker 2:Yeah, you know, I almost posed the question. It's probably most important to figure out a proper mix or asset allocation for that individual, maybe for each account. Someone may have different purposes for each account. As another thought or idea, I brought up the example of doing education for employees and that makes a difference. If it's a retirement account, maybe a non-retirement account may have a different purpose or goal which might shift the difference of allocation. So it sounds like, with some of what you've shared and what we believe is, it's really good to figure out that proper mix for the purpose goal which can make a huge difference on the amount of risk we might take or be more conservative. The other side, I thought, is when we think of behavioral finance, emotions come into play. Thought is when we think of behavioral finance, emotions come into play. So in some ways it could be a defense for us to allow to stay invested longer term and I use behavioral finances.
Speaker 2:the emotions come into play, but knowing if we have a proper mix of investments might allow us to endure some of the challenging quarters or years.
Speaker 1:would you say, oh yeah absolutely, and I love the fact that you talk about. You know different accounts might have different risk tolerances because, if we think about it, maybe there's an individual that has a brokerage account or money that's after tax in a trust account and they're planning to use some of that money to buy a new car or to buy a second home, and that time horizon is maybe three to five years from now, but then they have their 401k and they're not planning to retire for 15 years.
Speaker 1:And then they maybe are fortunate enough to have a Roth IRA and we know that maybe that Roth IRA we're going to leave alone for a long time because we want that money to continue to grow tax-deferred and then to come out tax-free.
Speaker 1:So if we take a look at the time horizon of each of those accounts, we might and every situation is different but we might be more conservative with those after-tax dollars, knowing that we're going to need those dollars sooner than the Roth IRA. So maybe we take on more risk in the Roth IRA. We're going to have more ups and downs, but the hope would be hopefully you could grow your investment by more by being more aggressive and having a longer time horizon. But you can't take that same amount of risk with that money that you're going to need within the next three to five years, and then that 401k is maybe somewhere in the middle. So great, great point in recognizing that it's not just one risk number for everything. Maybe you need to do a risk number for your after-tax dollars, your pre-tax dollars and your tax-free dollars, and that's all part of that conversation that people have with us, their financial advisors, on the daily. Exactly, Great, great point. Yeah, I really appreciate it.
Speaker 1:Well, that is our quick episode on asset allocation. As time goes on, we're going to have more episodes about a financial concept. We're going to break it down, we'll explain it to you, we'll share with you how we utilize that concept in our daily practice. We hope you found this episode of the Finance Roundtable podcast enjoyable and we hope you have a wonderful day and you stay tuned for future episodes. Thank you, thank you, thank you.
Speaker 3:Thank you for listening to Finance Roundtable. Make sure to check out our episodes at wwwfinanceroundtablepodcastcom. We also encourage you to explore wwwjacobgoldcom to find articles, research videos and more from Jacob Gold and Associates Inc.
Speaker 1:If you have a question for the show, please email Jacob at jacob at jacobgoldcom. Please email Jacob at jacob at jacobgoldcom. G-a-n Insurance Agency LLC. Member FINRA, sipc, a broker-dealer and registered investment advisor, cetera is under separate ownership from any other named entity. Jacobs California Insurance License 0E55425. Michaels California Insurance License 0K90130. The views depicted in this material are for information purpose only and are not necessarily those of Cetera Advisor Network. They should not be considered specific advice or recommendations for any individual. Neither Cetera Advisor Networks nor any of its representatives may give legal or tax advice. Kelvin Gold is a marketing associate. Registered address is 14850 North Scottsdale Road, suite 255, scottsdale, arizona, 85254. Arizona 85254. Asset allocation is an investment strategy that will not guarantee a profit or protect you from loss.
