Why Your Personal Rate of Return is More Important

In this episode of the 'Retire Early Retire Now' podcast, host Hunter Kelly of Palm Valley Wealth Management emphasizes that investment and portfolio management, while often perceived as the bulk of a financial advisor's duties, are actually a smaller segment. Key themes include the importance of understanding personal financial goals, cash flow, risk tolerance, tax planning, and asset allocation before constructing a portfolio. Hunter discusses the significance of personal rate of return over arbitrary benchmarks and details how to make investments tax-efficient. He encourages listeners to focus on their unique financial needs rather than market trends or media hype. The episode ends with an invitation for listeners to suggest topics and schedule personalized consultations.

Check out the Palm Valley Wealth Management Website
PalmValleywm.com

Check us out on
Instagram
LinkedIn
Facebook
Listen to the Podcast Here!
Apple
Spotify

Transcript

0:02

And welcome to the retire early return podcast. I'm your host hunter Kelly owner upon valley wealth management. And today we are talking all things, investment and import folate. All things, investment in portfolio management. Uh, but before we get started, Just wanted to say, Hey, we're wrapping up this, uh, probably six or seven week series on, uh, financial planning topics and kind of going through that process. Uh, so if you're kind of just jumping in for the first time, Go back to, uh, our previous episodes back in October, where we started with what the financial planning process looks like, the Palm valley. Pathway process, um, that I've created. Um, to help people and clients get to their financial success and independence. But, uh, If you're not new, go ahead and like, and subscribe. And welcome to the retire early retire now podcast. I'm your host hunter Kelly owner of Palm valley wealth management. And today we're talking all things, investment management and portfolio management. this whole wrap up our financial planning series that we started back in early October. So if this is the first time you're listening. Go back to the introduction of the Palm valley pathway. This will overview the Palm valley pathway process that I have created to help clients. through their financial planning needs. to reaching financial independence and retiring early or retiring now. And if you liked this podcast, go ahead and leave a five star review. On your favorite podcasting platform. and then in the description below, there is a link where you can send me a message. If there's a certain topic that you want to talk about or certain questions you have, we can certainly address that on the podcast as well. Love getting those. Got a handful of those over the last couple of months. So let's jump into it. investments. Why are we talking about investments last? Right. And so most people I meet off the street. Whether that's perspective clients or people just realizing what I do for work, having a conversation, they think. asset management or portfolio management, investment management. Is about 95% of what I do and reality, it is a much smaller portion of what I do for clients and what a much smaller portion that most real financial advisors or financial planners do. now if you're a portfolio manager, if you're managing like a mutual fund or ETF or some sort of hedge fund. certainly your day-to-day is going to be. Picking the best investments that meet, your particular criteria. But if you're working with individuals and business owners and things of that nature that have, financial planning needs, investments are, is going to be. more of the smaller portions that you're going to talk about because, Investments make the will go around, but there's other things that have to be considered before we start talking about how we're going to build these portfolios. Like your goals, what's your cashflow or your income need. what's your risk tolerance? What's the capacity that you have for risk. Tax planning, estate planning, all of the things that we've kind of mentioned, prior to this conversation. is, is what I would consider more important. Um, to get into that portion where we need to talk about, investments. And so, um, once you get through that, Then we can start thinking, okay. What can we do or how can we build this portfolio? Uh, to meet my plan and honestly going through those steps before going through those topics and working through your plan and then building portfolio, it makes it much easier. Um, to go ahead and build that portfolio. The biggest thing that you'll have on your side. Once that plan is built is your personal rate of return. Now you don't have to chase these arbitrary benchmarks that, uh, the media tells you to chase the S and P or the. NASDAQ or this or that, or Dave Ramsey saying, Hey, I can get 10 to 12% every year. Yes, that's probably potentially true. Maybe not. Who knows? Um, but who cares about some arbitrary number? What I want to know is what is my rate of return need to be, to reach retirement or, or be able to buy a house later on down the road or put my kids through college or whatever those personal goals are. You may not need the 10 to 12%, so you may not need to take that risk. Yes. Would it be nice to beat your personal return and have more money? Of course. And by all means, I want to try to do that for my clients. If I can. But also, I don't want to take too much risk we're. Now we're putting the plan, uh, in jeopardy because we're trying to chase some arbitrary. Uh, benchmark that, that the news tells us to chase. Right. So once we've considered. All these portions of financial planning. And we have our personal rate of return. Now, to me, that's telling me, Hey, for my clients, we're putting everything within our control or controlling the things that we can control. And then we're letting the market kind of take care of itself. Right. Um, and so I'm a big believer of, uh, doing what you can do with inside your control and everything else. Like, don't worry about it, right? Don't worry about what Johnny and Susie are doing down there with Bitcoin or whatever XYZ investment. Don't try to chase the Joneses. You know, you have your values, your goals. That you're trying to accomplish. And let's worry about focusing on those. And build a portfolio that will put you in the best position to do that. Right. So once we have that in place, so we have our personal rate return. Now there's some things that we want to consider to actually getting to building that portfolio. Um, the first one would be your risk tolerance. Right? And so we've talked about this in a number of podcasts, but your tolerance is you personally. If the market is swinging up. 20% or swinging down 20%. How are you going to react? Are you going to want to buy more on that swing up and buy in late? Are you going to want to sell at the bottom? Because you've seen a 20% dip or 30% dip. Um, what is that emotion like? Right. And so for me, when I think about this and for my clients, What I want to do is put them in the best position to stay invested because the biggest, uh, determiner of success in, uh, investing in these types of portfolios. His time in the market. So what is going to keep you invested in the longest. Um, and if that means taking a little bit of all activity or risk off the table, So that you don't wake up at night and, and have night terrors because the market went down two or 3% in a day. Um, then let's do that to where we can take that risk off the table. And allow you to stay invested right. The next piece to that would be risk capacity. And so a risk capacity is what are the numbers say? Can we realistically. Go into all equities portfolio or, um, do we need to take some risk off the table or some volatility off the table? And potentially have more cash on hand or more fixed income. What does that look like? Or is, are you in a position where you can take. More risks from a mathematical standpoint, a plan standpoint, a capacity standpoint. Um, and really turn the dial up. And potentially put yourself in position. To earn more over time. Right? So these are all things that you want to consider. Once we have that considered. But we say, Hey, oh, well, uh, An 80 20, so 80% equity or stocks and a 20% fixed income. And more bonds. Would be a good mix or whatever that makes is now we want to start thinking about asset location, right? So we know we want some fixed income. We know we want some equities, well, what are we put those investments? So where we want to put them right. Is, or how we want to think about that is called a fancy way in financial planning, it's called asset location. So all that really means is. How much do we want an after-tax dollars? How much do we want? And pre-tax dollars. And how much do we want in Roth money? Right. Um, and having a good mix is, is, uh, ideal for, uh, tax planning, strategies, things of that nature. And so, um, one thing you want to consider your more growth, heavy type investments you would want in your tax deferral type of counts, like for your Roth accounts. Um, and then also potentially your after tax dollars. Uh, in those more growth, heavy type investments, because, uh, in those AF after tax, the way it's tax, right. If there's no dividends, if you're just getting an appreciation of the stock and it's growing. Um, the only time that you would receive a tax bill at that point is if you were to sell for a gain, right. And so having those more growth oriented stocks in those Roth accounts or those after tax accounts, brokerage accounts. Generally makes more sense. Now everybody's going to be a little bit different. Where you may need some fix 10 common, those accounts for whatever number of reasons. Um, but generally speaking. We would want. Um, to do that as much as possible. And then all of your fixed income or income producing assets we would want in those pre-tax accounts. Um, because we're going to have to pay taxes on it anyways. Um, and that that could alleviate over a long period of time, some RMD issues or some required minimum distribution issues later on down the road. So. Um, consider tax location. Uh, how much mix do I need in either of these three buckets after tax pretax or Roth money? Um, the next thing is actually building out the portfolio. So, um, So if you are diving in deep and you're going okay, well, here's my Roth now. I need to put this much money into my Roth, or this is how much money I have in mine, Roth, whatever the case may be. Um, we want to think about asset allocation. So now we're getting into, well, How much large companies we want. Uh, how much, uh, smaller companies do we want international. Um, do we want to be tech heavy and we want to be financial heavy. Uh, water, all those things that we want to do. And a lot of that could be based off of what we think will do best. Long-term. Or maybe playing the economy and more of a short term type deal. And I'm not talking about day trading, I'm just saying, Hey, based off economic indicators, Uh, interest rates or, um, how, uh, Job reports and things of that are coming out. We may Teeter heavier toward one allocation versus the other. Um, to potentially put yourself in a situation to either mitigate loss or. Capture some potential gains later on down the road. And so that doesn't mean. Uh, putting all your eggs in one basket. I just may be mean going over. Wait. Um, for a period of time until some sort of economic indicator. We'll tell you, Hey, maybe we should go back to those growth companies versus dividend companies, things of that nature. So. Um, thinking about asset allocation. And then, um, when you're thinking about taxes, right? So we talked a little, a little about that, a little bit about that with asset location, but when you're thinking about taxes, You're going to want to think about, um, what type of investments inside. Of your. Um, after tax accounts. Uh, as well. And so what I mean by that is. Do we want to use mutual funds? Do we want to use ETFs or exchange traded funds? Or do we want to have, uh, individual holdings, right? So from a tax efficiency, going from least tax advantageous to most tax advantageous. Um, your mutual funds are going to be your least advantageous from a tax standpoint. Your ETFs are going to be a little bit more tax efficient and then your individual holdings would be most tax efficient. Right. And so. What a mutual fund and ETF do is they allow you to buy basically a package of stocks and fixed income or stocks and bonds. Uh, for basically one share price, right? So if you have$10,000 and you buy shares of maybe a SNP type ETF where you're getting all 500 of those stocks, Uh, without having to buy a single share for each one of those stocks. Right. And so. The beauty of that is now you get a little bit more diversification. For a less cost, if you will. Um, but the downside there would be that. You can not sell those individual holdings. So let's say you own. Uh, an SMP. ETF. Uh, you also own the stocks that comprise the S and P well, if one stock like Google is down in a given year. And you have a loss or if you own it in the ETF. You can't just sell Google right in the heat. The S and P could be up. But if you own the S and P the individual stocks of the S and P and Google list, Alan, you could sell Google. Capture that loss and then eventually get back in. Obviously to avoid. You would want to avoid wash sale rules, but you could get back in. Capture that loss and then use it later on. Now the road to offset gains that you may have once you sell for a, whatever, a number of reasons, right. And so these are the things that you want to consider. When, uh, investing after tax as well. And so again, When thinking about investing, we want to consider the overall plan. First set is going to drive how we're going to allocate our investments. Okay. Um, and what we want to look at there. Is our cashflow need or income needs. Um, What sort of risk we're able to take? What sort of risk we want to take? Uh, thinking about our tax situation. What type of investments we should have and where, what type of accounts should be Our 401k. Should we got a Roth IRA? Should I have a brokerage account. Um, I would say yes to all three of those in most situations, but what is the ratio? Right. And that's going to vary. Individual to individual. Um, And so once you consider all of those, then you can get into the nitty-gritty of what should I be investing in mutual funds in a more active type, uh, fun. Right? Should I be more passive and like an ETF following some sort of index? Um, or should I be. Um, more, the most tax efficient and investing in individual. Holdings. Such as Google, apple, Amazon, and those are just examples. Um, not necessarily a recommendation, but should I have those. Uh, individual holdings. So that can be a little bit more tax efficient. And potentially capture losses, especially in those after tax accounts. Right. And so once you have all that in place, You can determine your personal rate of return. Um, and not have to worry about potentially. Uh, not beating the S and P benchmark or whatever benchmark you want to put out there. The only benchmark that matters is that personal rate of return. Um, and as long as you're beating that, then your financial plan is good. And that's what I say to clients. A lot of times, Uh, we could. We could beat the S and P by 5% over a year. But if it's not enough to meet your goals, And what does it really matter? Right. And so you have to determine what that personal rate of return is. And then from there. That will allow you to determine how do I need to build this portfolio? So hopefully that is helpful. Um, investing can be confusing. But what I want it to get across here is that it is not the only thing in financial planning. It should be just a small piece of what you're doing. Um, especially if you're still in the accumulation phase, you should be worried about saving. And increasing your income. Um, and the investments will come later. Obviously picking great, uh, investments. Uh, we'll make the wheel turn faster. Um, and so that's what we do at Palm valley wealth management. And so hopefully you have learned, uh, at least the process of what the Palm valley pathway looks like over the last few weeks. And so I'm excited for the next couple weeks. I have Danny white coming back on and we're going to talk about group benefits from a business owner standpoint. Uh, so that'll be our Thanksgiving edition. Um, podcasts and then. We'll get into December. So if there's any topics you would like to hear, go ahead and leave a review or get into the description and send me a message and I'd be happy to. To talk about those questions. Uh, and things that maybe aren't on your mind, but if you would like personal, uh, Question DAS and things of that nature. You can always go to my website and schedule a call. It's no-cost. We can just talk if you think you're a good fit for me. And I think you're a good fit for, uh, Palm valley wealth management. Then we can talk further over there, but. Um, Thanks for listening. Go ahead and share this with a friend and, uh, we'll talk soon. We'll see in the next one. This podcast is for educational purposes only. It is not meant to be investment or financial planning advice. Do not make decisions solely based off this podcast, please seek an investment. Insurance tax or legal professional when considering your own situation, please see Palm valley wealth management in mind when making those considerations.