The Market Call Show

Winning Strategy for Investors Who Want Rising Income | Ep 97

In this episode of The Market Call Show, I discuss a practical strategy for investors seeking a rising income stream, particularly in the face of inflation and increasing retirement expenses. I outline a dividend growth approach that combines consistent income with long-term capital appreciation, making it a core strategy for retirement portfolios. I explain how to identify and select a "winning universe" of stocks, emphasizing the importance of companies with strong fundamentals, reliable earnings, and a history of steadily increasing dividends. The process includes filtering stocks based on criteria like liquidity, a 10-year track record, and consistent dividend growth. This narrows the focus to high-quality companies that can provide stable and growing returns. Portfolio construction is another key element. I share how to build and manage a diversified portfolio by limiting sector and industry concentrations, maintaining balanced position sizes, and setting guidelines for rebalancing. I also discuss how to evaluate stocks continuously, using both fundamental and quantitative rankings to guide investment decisions. This approach is designed for long-term investors aiming for reliability rather than speculative gains. I highlight the benefits of blending this core strategy with other satellite investments, such as bonds or private real estate, to enhance returns and reduce risks. Whether you're retired or planning for the future, this strategy can serve as a foundation for a resilient and income-generating portfolio. Listen in for actionable insights and tips to build your financial future.   SHOW HIGHLIGHTS * I discuss the need for a rising income strategy in response to inflation and retirement expenses, emphasizing the importance of long-term capital appreciation alongside growing income. * I explain the value of dividend growth investing, focusing on selecting companies with a consistent track record of increasing dividends and strong earnings. * I outline criteria for selecting stocks, such as filtering for liquidity, excluding companies with less than 10 years of performance history, and prioritizing sustainable dividends. * Portfolio construction is discussed, including limiting sector concentration, balancing position sizes, and maintaining diversification to reduce risk. * Stock analysis involves both qualitative and quantitative methods, focusing on profitability, analyst coverage, and adaptability to ensure steady growth. * I highlight the importance of ongoing portfolio management, including regular reconstitution and rebalancing to maintain alignment with investment goals. * Criteria for selling stocks include dividend cuts, declining fundamentals, and insufficient liquidity, ensuring the portfolio remains strong. * Strategies for blending dividend-focused portfolios with other investments, like bonds or real estate, are explored to enhance returns and mitigate risks. * This approach is positioned as suitable for long-term investors, offering stability and income generation, particularly for retirees. * The episode concludes with a discussion on integrating this strategy with faster-growing investments for a well-rounded portfolio.   PLUS: Whenever you're ready... here are three ways I can help you prepare for retirement:  1.  Listen to the Market Call Show Podcast or Watch on Youtube One of my favorite things to do is to talk with smart people about investing, financial planning, and how to live a full life.  I share this on my podcast the Market Call Show.  To watch on Youtube  – Click here [https://youtu.be/7bM-geh0pyE]  2.  Read the Financial Freedom Blueprint:  7 Steps to Accelerate Your Path to Prosperity If you’re ready to accelerate your path to prosperity, the Financial Freedom Blueprint lays out a proven system for planning and investing to secure your financial independence. You can get a personalized signed hardcover copy – Click here [https://www.pathtorealwealth.com/the-book/p/financial-freedom-blueprint] 3.  Work with me one-on-one If you would like to talk with me about planning and investing for your future. – Click here [https://meetings.hubspot.com/louis-llanes?uuid=979d970e-5869-43f5-87f7-0c20ea991e6e]       TRANSCRIPT (AI transcript provided as supporting material and may contain errors) Louis:Okay, today we're going to be talking about a winning strategy for people who are looking for rising income. What spurred me to want to talk about this was that, frankly, there's a lot of people that are needing rising income. They need rising income because inflation continues to go up. And many people are retiring and they need an income stream that's going to keep up with inflation. So I wanted to talk about a strategy that is very effective, really as a core strategy for people who are needing rising income. Because one of the most common challenges that investors face Is that over the long term, especially, you know, when you're trying to fight inflation, your expenses continually rise and you need a combination of long term capital appreciation and a growing income. So a dividend growth approach is one of the best strategies to achieve dividend growth. Now, I want to share today a method to accomplish this goal, and I'm going to be very specific because I find that people really feel more comfortable when they understand what's behind the curtain in generating a portfolio that you can really rely on, especially when you're dealing with your core strategies.So, this method can give you some ideas to form a core strategy, and Within a retirement income plan, and it's designed to be, really the bedrock of the portfolio, but it's also a good idea to have satellite strategies to enhance the returns over time for the portfolio. But let's just start off with the first thing that you need to do in order to have a good, rising income approach with stocks. The first is you need to choose winning a winning group of stocks. You need to choose a winning group of stocks that have a successful dividends track record. So you got to get that universe, right? And that's crucial. So what I like to do is I like to start off with the S&P1500. The S&P1500 includes large companies, mid cap companies, as well as small cap companies, and they're all in the United States. And I like to filter out from that group companies that have excessively high yields because companies that have really high yields, it's generally unsustainable. I want to make sure that the dividends that are there are well supported by earnings as well as the company fundamentals and that they have the ability to provide a competitive advantage. So the numbers are basically showing us that these companies have a strong business and a competitive advantage. So I want to explain a little bit more about, like, establishing the universe, if you will.the other thing I like to look at is, I want to look at the daily dollar volume and eliminate those stocks that are really illiquid. So the dollar, daily dollar volume just says, Okay, what is the average volume of the stock in the market? And multiply that times its price, and that gives you kind of the dollar value that is traded in a given day. So typically, So I rank order those companies and I want to make sure that they have a that they're generally usually in the top 90%. So like the bottom 10 percent of illiquid stocks I generally want to ignore them. And then I also have a cutoff, a dollar cutoff to say it needs to be at least x. And that number does change depending on the purpose. So basically get rid of those stocks that are too illiquid. You don't want to have them in your. In your strategy, because you're really looking for those solid companies. So I also want companies that have a long term track record. So I exclude stocks that have a track record that is less than 10 years. Now, some people say, well, wow, there's a lot of great companies that you're missing out on. Well, that is true, but I like to look at those younger companies for different types of strategies. For this strategy, this is a strategy that's designed for steady growing income stream. And, long term capital appreciation. So we're not really trying to hit the cover off the ball. We're trying to get steady growth of rising income and also getting rising capital appreciation. So we want to get rid of those companies that have a 10 year, less than a 10 year record. And now it's for the best part of the universe selection.I want to exclude stocks that are not raising their dividends. So I'm looking for companies that are raising their dividends every year and they haven't cut their dividend in the most recent four quarters. So in the last year, they haven't cut their dividend. They may have kept them the same, not necessarily raised them. But we're looking for annually, successively, higher dividends. And then we're looking at the quarters and saying, you're not cutting the dividend. This really narrows the universe down. And like, for example, as of right now, that universe is 341 companies. That I just outlined. So you want to start off with those winning stocks. So now we've got this group, this universe of companies that, you know, you've really shut off a lot of dead weight. You're only including those companies that have a long term track record of rising income, and they have the characteristics that can get you headed in the right direction. But you don't want to leave right there. You also want to actually move from there and actually look at these companies fundamentally. So, you know, you want to demand from these companies that they have steady rising dividends and strong earnings. So, a critical aspect of this strategy is to focus on companies that have adequate analyst coverage. So, analyst coverage would be, Is good to have. You want to make sure that you don't want to make it too stringent because there are some smaller companies that you want to have investment in and they may have less analysts following them. So I have found in today's marketplace that the sweet spots right around five analysts. So five analysts are covering it. You still have a big universe of companies that are in a smaller market caps. As well as the mid cap and the large cap. So why do you care about whether or not Wall Street is looking at these companies? Well, the first thing is there's a lot of value in actually assessing and analyzing the change in what's happening with analyst expectations because stock returns have high correlation to these changes. So we're looking at. You know, earning surprise. We're looking at, you know, whether the company is beating expectations or whether, analysts are starting to upgrade a stock because that's really indicative showing that the company is actually improving their results. So part of the equation is looking at expectations and another part is actually looking at what is actually printing and what the company is demonstrating with their fundamentals. So, that's why we want to have at least five analysts covering that. Another thing that we want to do is we want to, you know, like I had mentioned, we want to have rising dividends. So as we narrow that universe down, we're getting to a high quality basket of stocks that can build a reliable income source. Now the next step is to, I like to connect, kind of think of, building a portfolio like cooking. You know, it's like having a good recipe. So I'm really what I'm outlining for you right now is a recipe. So you want to build a tasty recipe to get better results. And that means you got to build and manage the portfolio. And select from this list of companies, you can just buy all of them if you wanted to, but if you want to get better results, I recommend, or I like to limit the sectors and the industry weights of companies. And I like to first look at them fundamentally. So. You know, looking at these companies from many different directions, you know, the first would be quality. How profitable are they? What is the return on capital? We like companies that are capital efficient. are they growing their sales and their earnings? And to what extent are they really printing good numbers there? the other thing I like to look at is, you know, there's just so many different things, but I mentioned the sentiment aspect about what the analysts are viewing, how they're viewing the company, but also we want to actually look at just the profitability, the quality, the valuation. So once that's been, analyzed, there's another, there's a qualitative thing that I like to look at and, I call it ADP, A as in apple, D as in dog, and P as in profits, . I outlined that in my book actually. the financial freedom blueprint. And you know, I'm really thinking about writing another book because I have a lot more that I want to share with people. But if you go to my book and you go to page 22,I outlined the ADP criteria and this is how focusing your capital on companies that have a few different characteristics. Number one, are they adaptable to changes in technology and innovation? And number two are, do they have desirable products and services, that are desirable now and likely to be desirable in the future? So it's not a fickle thing because for this portfolio, we're really looking for long term growth, right? And compounding growth and are they profitable? Is their business model such that they have getting, they're getting good? Returns on capital now and is likely to do so in the future. So it's really an assessment of now actually demonstrating it as well as, you know, when you're looking at the company's business model, is it likely to sustain in the future? So those three things can really help you. to have better returns than sticking your money under the mattress. And, and also, better returns are more likely than you would get in bonds, by a significant margin. Okay, so once we've done that, you know, we've done the fundamental aspects and looked at all the quantitative methods. basically, I like to quantify those into ranks. And that really keeps you disciplined so that you can compare companies to each other. So, I, the next step in this is something that's really important because what a lot of people don't understand, is that stock selection or investment selection is very important, but what is equally important and could be sometimes more important is how you blend And how you put the portfolio together. That's called portfolio construction. So there's some key elements and I'm just going to give you some of the broad strokes here, limiting your sector and your interest, what industry weights is important because you don't want to have too much concentration and you want to make sure that you're not. You know, 70 percent in tech stocks or, you know, 50 percent in energy stocks, anything like that. You want to have some balance there because that generally will improve your risk adjusted return because when you're retired or when you're generating income from pulling from your portfolio consistently, you need to have some more stability in the portfolio. So we also want to have individual position sizes. So the amount of capital allocated to each individual stock should also be,limited. So typically the range between one and 5 percent of, initial capital is a good place to go in terms of getting adequate diversification for a portfolio like this, looking at a lot of different ways you could go, really, 50 stock portfolio is a good starting point for a high net worth investor. You want to own those stocks individually rather than going out and buying some package product. This gives you a lot more ability to home in on exactly what you need. So once you've, you know, invested in these stocks, it's not just set it and forget it, it's an ongoing process. So you want to allow some drift with these stocks. And typically I like to let stock portfolios or individual stock positions drift about 30 percent from the target. So if we have a target weight of 5%, then it could go up, you know, point, 0. 3 times,0. 05, you know, so 30 percent of your target position could go up or down. Thank you. So you want to give some drift because you don't want to have,you want to give these companies some room and you don't want to rebalance too frequently because this will minimize, this needs to minimize your turnover. So we want to place those constraints on sectors and industries to ensure Good diversification and their businesses should have non correlated,factors of returns that, that, that generate revenue and expenses for the company. They should be relatively non correlated. Okay. So let's talk about like how much capital that you put in stocks over time. So my approach is to dynamically adjust the, target weights based on fundamental rankings, basically. And the fundamental ranking is all those factors that I mentioned to you, the quality of the valuation. And there's multiple dimensions, you know, and how you look at those companies, but how are they, are they improving? Are they not improving relative to the whole basket? And typically, if you look at the whole universe, we're typically focusing capital in the top quartile. of companies in there,in the universe. And if the companies fall out, maybe falling into the bottom quartile, typically they're going to be, removed from the portfolio. There's let's talk a little bit about selling and how important that is. So this strategy generally, it's a moderate,turnover strategy. So it's not a high turnover strategy, because you're really looking to You're really looking to hold on to those great stocks as long as possible and learn to earn the compounding dividends. But you also want to make sure these companies are doing well, fundamentally. So, one reason that a company can get pulled out of the portfolio would be if they cut their dividends, because they're no longer in the universe at that time. So if their dividends are getting cut, they'll, they're going to be eliminated from this strategy. if they are no longer as liquid as they need to be, they'll be eliminated. eliminated. That rarely happens. the other thing is if their fundamental fundamentals deteriorate enough, then we're going to need to pull that stock out of the portfolio because they no longer meet the criteria of strong fundamentals, which is a high,correlation to expected returns in the company. So, so those are the main reasons why you pull stocks out.this, you know, and you want to just do this continually. So there's really basically two processes. There's what's called reconstitution, which is basically when we say, okay, what does the universe look like? And then what are the rankings right now? And who's in and who's out. Right. And then there's rebalancing and that's the process of saying, okay, here's our target weights, based on the fundamentals now and the market cap, et cetera. and based on that. how far are we off from that? If it's within range, no problem. If it's out of range, then we need to pull that back. So let's talk a little bit about that. So we're talking about recognizing when you need to cash out, right? So just to recap, selling criteria is really straightforward. Stocks are removed if they cut their dividend. If they drop in their fundamental ranks, right, typically below the 25th percentile. And again, this approach helps you maintain our portfolio of top performing liquid stocks with a strong track record of dividend growth. It's a really simple concept that is very effective. So by adhering to these rules, the portfolio remains robust and avoids over concentration in one sector or industry, right? Because we have those constraints and is providing steady, reliable, Income and returns over time relative to more speculative investment strategies. So we're talking a little bit about the mindset of this strategy of some, you know, having this as a core part of a portfolio for somebody looking for rising income, you really should have a mentality of hold and prosper. I like to think of it that way. You want to hold and prosper because these, you really reap the rewards over time with these stocks as they're building their profits, they're growing, the dividends moving up and it just keeps going up and we're focusing our capital and our attention in those companies. So it's designed for longterm investors who are seeking that steady growth and income. It's not meant for market timing. It's again, it's meant for that reliable income, and the volatility of this strategy has been lower than the overall market. So one of the things we like to look at a standard deviation. You probably have heard of that before, but if you look at a simulated result of this It's a standard deviation is 13. 19 percent since February of 2004 and the beta is 0. 72 compared to the S& P 500. So it makes it suitable for a retirement portfolio where stability is important. Right? And historically, this strategy has performed well, too. It's annualized at 12. 2%. But whenever you're looking on at simulated strategies, it's important to understand as with any investment strategy, past performance doesn't always be an indication of future results, right? It's important to understand that and returns, you know, that I'm talking about here have a provision for transaction costs, but it doesn't include advisory fees. Okay. So that's just, you know, something to understand. So, The performance has shown to be very competitive and it's generating what we're looking for, a rising stream of income. So you want to choose the best stocks and let go of the rest. That's really the key on this. So historically this, again, this portfolio shows moderate turnover. It's been around 0. 57 percent annually, 57 percent I should say. And the average holding period over is over years. Typically winners are held on average 646 days. So that's well over a year while losers are held for roughly on average 300 days. So you want to have, you know, we're not trying to generate a lot of short term gains here, right? We're trying to build longterm capital appreciation. But one of the key aspects is you will, you'll notice is that the days held for losers is a lot lower than the days held for winners. And sometimes you can hold winners for years and years. Like for example, Costco or Microsoft, you know, Apple. You know, Nvidia has been in there is in there now, so you want to understand that there's going to be some outlier stocks that you hold for a very long period of time and you're, and, but this, these are just average statistics to understand, but this discipline longterm approach helps you balance this risk and return target that you're looking for and gives you that steadier, return. So just overall, this is a big. bedrock. I consider it a bedrock strategy for people who are retired. it adds for stability. and one of the things you can do with this is you can blend in other portfolios around it as satellite positions. For example, you can have high quality municipal bonds to save on taxes and that could give you a different return stream and more conservative. same with corporate bonds if that makes sense for you and your tax bracket or the type of account that you have. private real estate can be very good. in this, and, you know, that is something to really consider, depending on, which areas look the most attractive there, but that can enhance your income and mitigate risk during market downturns.Because again, this is a stock portfolio, so it's going to fluctuate. It generally has historically fluctuated less than the overall market. Most people the S& P 500 type companies, and those stocks have fluctuated more, which makes sense because these are lower duration stocks that are paying you dividends now,And then, you know, owning around 50 stocks offers diversification across those industries and it can help you counter that inflation and the tax problem that people have over time, over retirees lifetime, which could be 20, 30 years. So, that's pretty much it, that I had for you today. I hope you've gotten some ideas, insights, maybe on how to incorporate a dividend investing strategy. Thank you. for yourself, even for people who aren't retired. A portion of your portfolio in this type of strategy is a great compliment to more aggressive, fast growing type company strategies. there's another strategy that I managed called the fundamental trend strategy that is more geared towards fast growing companies. They could be younger companies, more dynamic. Companies like that. it's a great compliment to that type of strategy. When you put those two strategies together, you get a really nice blend. So, thank you for listening. And, you know, hopefully you get some ideas about, dividend strategies. And if you found this helpful, share it with your colleagues, any friends or family. And, you know, follow me for more and, like and subscribe. Hope you're doing well. And we'll talk to you next time.

AI Driven Investment Breakthroughs | EP 96

In this episode of the Market Call Show, I dive into the transformative role of artificial intelligence in wealth management. Together, we’ll explore how AI is reshaping portfolio management, moving beyond a mere tool to become a revolutionary force in investment strategies. Drawing on groundbreaking insights from Brooklyn Investment Group’s latest white paper, we’ll uncover how AI enables wealth managers to scale their operations, cut time commitments, and reduce costs, all while enhancing the quality of client service. AI's ability to automate complex tasks like portfolio rebalancing allows managers to oversee hundreds of accounts more accurately and efficiently. AI can cut a portfolio manager’s time spent on routine tasks by up to 82% and reduce computational costs by as much as 85%. Join me as we discuss why adopting AI-driven strategies isn’t just beneficial—it’s essential for staying competitive in today’s fast-paced investment world. Whether you're a wealth manager or someone interested in the future of investing, this episode offers practical insights into how AI is setting new standards in wealth management, making it possible to serve clients with precision and speed.   SHOW HIGHLIGHTS * I explore how artificial intelligence is revolutionizing wealth management, offering significant improvements in efficiency and personalization. * The episode discusses insights from the Brooklyn Investment Group's research, highlighting AI's potential to scale operations and reduce time and computational costs. * AI technology allows wealth managers to oversee numerous unique accounts with precision and speed, enhancing client service without increasing workload. * According to research, integrating AI into portfolio monitoring can reduce a portfolio manager's time commitment by up to 82% and computational costs by up to 85%. * AI-driven strategies are becoming essential in delivering exceptional client service, making personalized investment management more accessible to a wider range of clients. * AI models predict when accounts need attention, optimizing tasks such as cash management, risk assessment, and tax loss harvesting. * Advanced AI techniques, like zero-shot and multi-shot learning, enhance the adaptability and accuracy of investment strategies. * The importance of human judgment in AI-supported systems is emphasized, ensuring decisions are reviewed and validated for consistency and accuracy. * Challenges in AI implementation, such as handling complex conditions, are addressed by simplifying calculations and ensuring human oversight. * Continuous improvement and evaluation of AI models are crucial, as AI is set to become an integral part of the finance world, enhancing efficiency and decision-making.   PLUS: Whenever you're ready... here are three ways I can help you prepare for retirement:  1.  Listen to the Market Call Show Podcast or Watch on Youtube One of my favorite things to do is to talk with smart people about investing, financial planning, and how to live a full life.  I share this on my podcast the Market Call Show.  To watch on Youtube  – Click here [https://youtu.be/7bM-geh0pyE]  2.  Read the Financial Freedom Blueprint:  7 Steps to Accelerate Your Path to Prosperity If you’re ready to accelerate your path to prosperity, the Financial Freedom Blueprint lays out a proven system for planning and investing to secure your financial independence. You can get a personalized signed hardcover copy – Click here [https://www.pathtorealwealth.com/the-book/p/financial-freedom-blueprint] 3.  Work with me one-on-one If you would like to talk with me about planning and investing for your future. – Click here [https://meetings.hubspot.com/louis-llanes?uuid=979d970e-5869-43f5-87f7-0c20ea991e6e]       TRANSCRIPT (AI transcript provided as supporting material and may contain errors) Louis: Hi, I'm Louis Llanes, and this is the Market Call Show. Today, I'm going to be diving into a topic that's really reshaping the way wealth managers work. I'm going to be talking about how artificial intelligence can not only help wealth managers manage large numbers of investment portfolios more effectively, but also improve the results for investors, which is very, very important. Our discussion really was inspired by a white paper that I read. It was put out by Brooklyn Investment Group and it's titled AI and Portfolio Management Portfolio Monitoring. It was put out the third quarter of 2024. This research provides what I consider eye-opening data on how generative artificial intelligence is really able to help wealth managers scale operations, save time and reduce costs and also produce better results for clients. So I wanted to kind of break this down, because this is not an area that is optional anymore. This is something that is actually mandatory now in order to do a very good job for clients. So the first part I want to talk about is just the concept of offering personalized investments, very personalized investment management, more so than could have been done in the past, and being able to do it at scale, doing a lot of it. So one of the biggest takeaways that I've been reading in a lot of different research is that making personalized investments more accessible is really important. Making personalized investments more accessible is really important. So, people you know, historically, separate account management or direct indexing with tax loss harvesting, it was really only reserved for high net worth clients because it was so resource intensive. It took a lot of resources to get the job done, both with technology and with people. But now with AI, wealth managers can really scale personalization to a wider range of clients without there being like a proportional increase in the workload. This is really good news for a lot of investors. So imagine if you're a wealth manager that you can handle hundreds of separate accounts, each with a unique profile. The artificial intelligence can step into that automation and make many of those operational tasks a lot easier to do and much more accurate, freeing up a lot of time for portfolio managers. And this means that, instead of being restricted to a smaller group of clients, wealth managers can actually have more time and they can broaden their significant reach to more people and give you more individual attention. That's a big important takeaway here. The other thing I took away from my research recently is that the time and the cost efficiency is really going to be improved. So I want to talk a little bit about numbers. According to that research report that Brooklyn Investment Group put out, integrating artificial intelligence into portfolio monitoring and specifically can cut down on the portfolio manager's time by up to 82%. That's not just a little gain in efficiency, it's literally a game changer. And it's not just the time saving, it's also that there's potentially 63 to 85% reduction in the computational costs. You know, I've been in this business for a long time close to 30 years and actually over 30 years now and you know when we first started rebalancing portfolios, it was very intense and it's just gotten better and better. But now we've really had some breakthroughs on reducing the computational costs, so we're able to get much more precision and speed. So this is achieved by using that artificial intelligence and looking at accounts that need to be rebalancing. So a big part of our job is to make sure that all of our clients have their portfolios rebalanced and we need to know if something needs to be changed. So we're spending our time more on what we should be investing in and why we should be investing in a certain way, but the actual execution of making sure that we're aligned with that strategy is really a portfolio monitoring task, so we can allocate more resources truly on what's more important, which is understanding what we want to be investing and why we want to be investing in certain investments, and more time discussing with clients issues and customizing portfolios, and less time computating. So the other thing that I have taken away is that we've got a smarter portfolio monitoring, really algorithm. So the human brain can do a lot of things and we can really capture exceptions, but we can only do a certain number of things at a time, whereas in the technology world, we can give it guidelines and guardrails and rules to help us make sure that we are being consistent, which is really important in delivering consistent results. So how does artificial intelligent monitoring work? Well, basically, we have models that can predict when an account needs attention, whether it's deploying access to cash, if it needs more cash or less cash, or if the management of risk is an important element, what's happening with risk and is there some change in the risk relative to how we want it to be to be, whether or not there's an ability and an opportunity to harvest tax losses, to lower the tax bills. The system achieves nearly a perfect recall, meaning that there's almost no important rebalancing opportunity that is missed because these screens are looking at everything. So this predictive accuracy it really ensures that we, as wealth managers, investment managers we can trust our systems and identify the right moments for action without having to sift through every portfolio one by one. That's crucial when you're managing a large number of accounts. So I want to talk about another takeaway that's really important. Advanced AI techniques now are allowing us to do even more, so the technology is really fascinating. If you use large language models, these abilities really give you a performance that is much more extensive when we train the data, and so we can train the data based on how we trade and what certain things that we really want to be prioritized, and this can help identify even more effectively things that need to be done. And there's different, I guess, methodologies. One is zero-shot or multi-shot learning approaches and, in simple terms, zero shot learning allows artificial intelligence to make decisions with little or no context, which is not always what we want, whereas multi-shot learning allows us to use past examples to further enhance performance, and these techniques ensure that your predictions are more accurate and adaptable to what's happening in the portfolio and in the markets. So, and always, we have decision support. It's always ultimately human-based, but it's just a tool to help us to identify things and then make the ultimate decision as to what needs to happen. As we all know, even AI, you know it's wise, but you have to trust, but verify every approach. So you want to have the human in the loop, which we do, and we want to ensure that these guardrails are in place to oversee every aspect and to make sure that things are flagged for trading only and when there's certain breaches or certain limits that we are looking at and it's automatically marked for human review. So each one must be reviewed, and that's a really important part of this. So the combination of AI's computational power and human judgment makes for a robust system that's efficient and reliable. That, by the way, is also a big part of how we manage money itself. So there's a lot of human judgment about, for example, the valuation of a stock or what may be happening with interest rates, and that can be overlaid on top of quantitative analysis. That helps to make sure that you're on track and you can use it as guardrails. It gives you much more consistency in your decision making Another, I guess, takeaway that I've gotten from research is that there's challenges and solutions, so let me explain a little bit. Like any innovation that you have when you use AI and portfolio management, it isn't without challenges. When you use AI and portfolio management, it isn't without challenges. One issue that this paper mentioned, that kind of brings us to light, is that sometimes you can struggle with complex conditions, such as comparing small percentage values, but there are solutions to this. To simplify, you can convert these values into basis points, you can make calculations more straightforward, and simplifying is always a good idea. So I forget who actually said it. It might have been Einstein, but you always want to have the simplest solution that is the most effective. You don't want to have something overly complex, because the more something that is complex, the harder it is, the less reliable it is, the less robust it is complex. The harder it is, the less reliable it is, the less robust it is. So the research that I've been looking at really is a balance between precision and recall, so you want to note that it's better to have false positives than to risk missing a necessary trade, something that you need to do. So that's why you need human review. So you want to be more stringent and it's better to have something tagged that is a false positive, meaning that it looks like it might be something you need to do, but you don't need to do it, so you can say, no, we don't want to have that, because that makes sure you don't want to miss something that's really important. You don't want to miss training opportunities that could impact the portfolio's performance. So, as I've been looking at this, you know this continuing improvement is really kind of the future and the future steps. So what's next? I mean, I think there's evaluation of new models, there's new AI type algorithms that are coming out and they're always going to be part of the finance world from here on out. We just have to get used to that because truly, it makes you smarter. Actually, it just makes you more efficient, and the human ingenuity and having that overlay with human touch is so important. But we want to have these algorithms and we want to make sure these algorithms are better and better. That's really all I have. I want to just to wrap it up AI really isn't just a buzzword. It's a really a practical, powerful tool for wealth managers. It allows us to scale our operations, save a lot of time, cut costs, provide better service for you, the client. And, like I said, the future of portfolio management is going to have AI in it, whether you like it or not, but it's always best to be smarter and faster and more efficient with human judgment, because truly nothing will replace human beings in the end, and our clients are not a number, and we want to have that ability to be as customizable and to offer the best solutions that we can at the lowest price and have the best experience we possibly can, and technology and AI really is helping us in that realm. Okay, so that's it for now. That's the Market Call Show for this round. If you've enjoyed today's episode, don't forget to subscribe. Leave us a review. I'm Louis Llanes. I'll catch up with you next time, where I'll dive into more insights to stay ahead of the investment management world. I hope you have a great day. Talk to you later.

Fishing in Less Crowded Technology Stocks | Ep 95

Today, on the Market Call Show, we dive into smarter tech investing, I paint a vivid picture of the current tech sector, likening it to overfished rivers where investors crowd around large-cap stocks, inflating prices and squeezing out value. We come up with a fresh approach: focusing on smaller tech companies and early-stage private equity to achieve better diversification and risk reduction. We explore the valuation landscape as of October 22, 2024, shedding light on the significance of return on invested capital for predicting returns. We reveal that only a small fraction of U.S. tech companies achieve over 10% in return on invested capital, while high cash flow ratios make even profitable companies seem overvalued. Tune in to hear why I believe looking beyond the usual tech giants can open doors to sustainable growth in this crowded market.   SHOW HIGHLIGHTS * I explore hidden investment opportunities in the tech sector with Luis Llanes, emphasizing the value of looking beyond large-cap stocks. * Louis uses the metaphor of overfished rivers to describe the crowded and overvalued large-cap tech market, suggesting a shift towards small tech companies and early-stage private equity. * We discuss the current valuation landscape of the U.S. tech sector, highlighting that only a small percentage of companies achieve a return on invested capital above 10%. * Louis notes the median price to cash flow ratio for profitable tech companies is 25, indicating high valuations even among successful firms. * We analyze the tech sector's high median price to book ratio of 5.11 and its implications for investors. * The conversation touches on the challenges of navigating the crowded index world and the benefits of a bottom-up investment approach. * Louis discusses the impact of artificial intelligence on the tech sector, drawing parallels to the dot-com bubble and the need for risk management. * We consider the advantages of targeting small tech companies with strong fundamentals, profitability, and growth potential. * The episode emphasizes the importance of a diversified investment strategy, combining both indexing and active equity management. * Throughout the discussion, we encourage listeners to assess investments based on fundamentals and to be prepared for potential market volatility.   PLUS: Whenever you're ready... here are three ways I can help you prepare for retirement:  1.  Listen to the Market Call Show Podcast or Watch on Youtube One of my favorite things to do is to talk with smart people about investing, financial planning, and how to live a full life.  I share this on my podcast the Market Call Show.  To watch on Youtube  – Click here [https://youtu.be/7bM-geh0pyE]  2.  Read the Financial Freedom Blueprint:  7 Steps to Accelerate Your Path to Prosperity If you’re ready to accelerate your path to prosperity, the Financial Freedom Blueprint lays out a proven system for planning and investing to secure your financial independence. You can get a personalized signed hardcover copy – Click here [https://www.pathtorealwealth.com/the-book/p/financial-freedom-blueprint] 3.  Work with me one-on-one If you would like to talk with me about planning and investing for your future. – Click here [https://meetings.hubspot.com/louis-llanes?uuid=979d970e-5869-43f5-87f7-0c20ea991e6e]       TRANSCRIPT (AI transcript provided as supporting material and may contain errors) Louis:Hi, this is Louis Llanes for the Market Call Show. Today I'm going to be talking about fishing for less crowded technology stocks and it's really a suggestion to help you reduce risk and diversify your portfolio. So I live in the beautiful state of Colorado, which offers excellent fly fishing for trout, and when I first moved here I learned that the fish on the Blue River in Silverthorne. You had to be a really good fisherman. The fish was. There was a lot of fish there. The rivers were full of trout, but it was located behind a popular outlet mall and it drew a lot of tourists to that mall. So there was a lot of men out there who would leave their wives to go shopping and they'd head down to the river and it to that mall. So there was a lot of men out there who would leave their wives to go shopping and they'd head down to the river and it made the river really crowded and you could see the trout everywhere. They were all over the place. The water was very clear and you could perfectly present your fly because we were fly fishing, you could perfectly present that fly and you could even be bumping them on the nose with the perfect fly and they would still not bite. They would just leave it alone, and that's what happens when an area is overfished. That's what I'm feeling the tech sector feels like. The tech sector feels real similar, because there's tons of money that has been chasing these tech stocks and in the market where the large cap tech stocks dominate and the IPO market has dried up, it makes more sense to seek opportunities in less obvious places, in my opinion, like select small tech companies and early stage private equity. Instead of putting all your money into well known names that dominate the large portion of the S&P 500 that everybody's talking about, it's more logical to look for less crowded areas. In my opinion, there's way too much money chasing the same indexes and that's also pushing up those tech stocks, because the tech stocks represent almost a third or, depending on how you categorize tech stocks, it represents over a third even of the S&P 500. So here's the valuation picture today, and today is October 22nd 2024. To put things in perspective, I ran some numbers on the US technology sector using the GIX standards. The GIX is a it's basically it's a standard for categorizing tech stocks, or really all the stocks. Now there's 638 companies that are in the technology sector in the United States, but only 21.2% have a return on invested capital above 10%. So I like to buy companies that are profitable, that have good returns on capital, because that is a big determinant of expected returns. So most companies in the tech sector right now have a negative return on invested capital. For those with a reasonably good return on invested capital, the median price to cash flow ratio is 25.26 and the median return on invested capital is 19 in just in the tech sector. So these companies trade at a median price to book ratio of 5.11. So, based on using a multi-stage fair value calculation, which a lot of analysts would do for companies that are growing fast and then they start slowing their growth and then go into more of a steady state, if you just use reasonable expectations for companies in the tech sector, you find out that you generally rarely would be in a situation where your price to cash flow ratio is above 20. Yet the median right now is 25. So for even the most profitable tech companies they're very expensive. So, if you know, take a look at them in terms of percentile. You'll see that. You know the vast majority of the tech companies are really below the line and a lot of them are significantly below the line, like at the 10th percentile in return on invested capital. The average return on capital invested capital is like negative 27% negative 27% and even when you go to the most profitable, if you look at the decile, the top 10% of return on invested capital in the tech sector, the average return on capital is 21%. So you know, I mean we're in a situation. My main point, I guess, is that we're expensive right now. So finding opportunity and better rivers is really what we want to do. We want to look at areas where there's a bigger return potential and maybe smaller companies are a better place to look, companies that have higher returns on capital and strong business models with smaller allocations to maybe early stage private equity, things like that, because in the index world today it's overcrowded, like we talked about. And, to make matters worse, a lot of the brokerage firms and a lot of advisors are indexing right now and a lot of people are offering a lot of like. Investment advisors are offering direct indexing, where you're able to buy the stocks directly in an index, and many RIAs or registered investment advisors they're adopting this. Registered investment advisors, they're adopting this. I see a lot of advisors who are, you know, maybe not quite as experienced, out there looking at how well indexing has done recently and kind of extrapolating that's how indexes are gonna do in the future and they're making that assumption. So they're choosing to go this way and this is really in their minds makes them feel like, hey, indexing is a no brainer and I'm not anti-indexing and I think a proportion of portfolios could be indexed. In fact, we have strategies that are a core plus, where there's some indexing and then some active. But if I look at things kind of more the investment landscape, more from a rational standpoint in terms of expected return based on fundamentals, I think you have to kind of be prepared for either a melt-up or a melt-down situation, and you hear this a lot. There's certain research firms that will talk about this melt-up concept where you have stocks running up really rapidly because we're printing money and there's money is trying to find a place to go and that's probably gonna go into stocks, and then other people say, hey, this is just the opposite. Inflation's going to get high, interest rates are going to go up and then we can have like a meltdown. So the truth of the matter is we don't know exactly which direction this is going to go, and that the best way to invest really is to have more of a bottom-up approach, where you're looking at individual businesses based on fundamentals and, like I, always talk about the quality, et cetera, et cetera. So I want to be prepared for either scenario and that means just going bottom up. Now this type of environment is kind of more ripe for volatility spikes. In fact, I've heard some analysts are expecting volatility to increase after the election. So, but volatility spikes can catch investors off guard. In my view, it's prudent to incorporate active equity management with indexes like the core plus year bound that invests in both indexing as well as active strategies that concentrate their holdings in the active strategies. Concentrate their holdings on those stocks that have the best fundamentals and I think if investors do that, it puts you in a better position. If the market heats up, then you'll have a sensible allocation to the indexes and then you also have a fundamental approach and that blend. I would expect to have better risk-adjusted returns over time. This approach is really often what I tend to take with high net worth investors. In the active equity portion of the portfolio, I like to target companies with strong fundamentals, like I mentioned, and a real chance to outperform the index, and you don't want to have too many stocks in there because you want to have some level of concentration in that portion, and it's a great example of diversification. You could go all into one strategy, but why limit yourself? You're better off having a blend, in my opinion. Now, all the buzz right now in tech has to do with artificial intelligence, and to me that kind of echoes the dot-com bubble, and I know that history rhymes and it's not always exactly the same, but there are some corollaries. Artificial intelligence is heavily and it's clearly going to change the world. That we know. That's an easy conclusion to come to. But what's harder to know is which companies are going to be the ones who are going to be the winners, which will thrive and which will literally disappear. We have to make some educated guesses and apply risk management when dealing with artificial intelligence. So if you kind of look at the dot-com bubble, that's exactly what we saw. We knew the internet was going to be transforming everything, and here we are looking back and we say, yeah, that's exactly what happened. Yet most of those companies that had the huge valuations ended up collapsing over time and a few did very well, but overall the business became more efficient across the economy. So that increase in efficiency using the Internet boosted the entire economy in a lot of different ways and it led to a lot of new industries. And I think that's likely what's going to happen with artificial intelligence. I think AI will follow a similar path. I have charted what it looks like with the market cap as a percentage of the S&P 500. And if you look at the kind of the graph of that percentage, so basically how much concentration does tech represent in the S&P 500,? And we're near the peaks that we saw at the dot-com era. So we're not quite up there as we were. We pulled back a little bit from there, but we're pretty close. So in history you could make an argument that we're, you know, we have to be somewhat careful, you would think. So small tech companies on the positive side that meet my criteria, I think is a good way to go. I like to invest in these smaller companies that exhibit certain characteristics and I modify them somewhat for the smaller companies. But I really am looking at three categories and the first category is sentiment, which involves the shift in the brokerage firm's recommendations, the shift in the earnings. You know how well we want to see you know the estimates moving up. The company is doing better. The revenue is moving higher. There's growth in the smaller companies. We're looking for them to be moving up the market cap rank, moving from a smaller company to a larger company. The second category I like to focus in, obviously, is quality, which includes how profitable they are. What are the returns? What are the return on invested capital and the strength of their balance sheet? And, lastly, I like to look at the valuation assessing the company's metrics compared to free cash flow, asset sales and earnings per share. You know how much are you paying for those metrics of cash flow and assets. So there's a few companies out there right now that we own. Now, in investing in these strategies, it's definitely more dynamic, and so companies can fall in and out depending on how they rank on these issues, because we're trying to focus our capital in those companies that are doing well. So there are a few companies. I don't want to necessarily mention tickers, because these are smaller companies and I don't really want to have that out there right now, but that is, and so I like to have some money there and another way to fish in kind of less crowded streams is to you know you don't want to, instead of focusing where everybody knows I'm looking for under a great like mid caps and private equity. So I'm underweighted large cap tech names right now, and these are the names that mostly everybody knows about. They're kind of priced to perfection. So I'd like to think I'd like to hear more about what your thoughts are about this. I am bullish on technology, I'm bullish on a, I'm bullish on the United States and I'm bullish on our overall future. I think it's just a matter of saying what price, or I should say asking ourselves what price are we paying for these investments and does it make sense? So that's all for now. I hope you got some value out of this. Feel free to contact us if you have any questions about any type of investment strategies. I'm Luis Llanos, market Call Show signing out. Have a great day. Outro Sequence For the latest episode of the Market Call Show. Make sure to like, subscribe and follow us on X, formerly known as Twitter, and YouTube. Go to wwwmarketcallshowcom for all our past episodes and sign up to get alerts. If you enjoy the content of this episode, please share it and comment. The information in this podcast is general in nature and does not take into consideration the listener's personal circumstances. Therefore, it is not intended to be a substitute for specific, individualized financial, legal or tax advice. To determine which strategies or investments may be suitable for you, consult the appropriately qualified professional prior to making a final decision.

Are You Leaving Money On the Table? | Ep 94

Today, on the Market Call Show, we're uncovering three powerful yet underutilized strategies that could revolutionize your retirement savings approach. We dive deep into the world of the mega backdoor Roth IRA, revealing how high-income earners can bypass traditional contribution limits and potentially save thousands in taxes over time. Next, we explore the often-overlooked realm of self-directed investment options within 401(k) plans. Using examples from industry giants like Fidelity and Charles Schwab, we illustrate how these tools can dramatically expand your investment choices and potentially boost returns. Drawing from years of experience in wealth management, I share insights on the critical importance of asset location. We discuss how strategic placement of investments across various account types can significantly reduce your tax burden and enhance overall portfolio performance. As we navigate through these complex strategies, we emphasize the value of holistic financial planning. Whether you're a seasoned investor or just starting to take control of your retirement savings, these techniques offer a roadmap that focuses on wealth accumulation.   SHOW HIGHLIGHTS * I discussed the concept of a "mega backdoor Roth IRA," which allows for substantial after-tax contributions to a Roth IRA, even for high-income earners. * Explained the different types of 401k contributions: pre-tax or traditional, Roth, and after-tax, emphasizing the importance of checking if your plan supports after-tax contributions. * Detailed the steps required to maximize contributions using the mega backdoor Roth IRA strategy, including the need to max out regular 401k contributions and then contribute additional after-tax dollars. * Highlighted the overall 401k contribution limits for 2024, which are $66,000 for those under 50 and $73,500 for those over 50, including all sources of contributions. * Outlined the advantages of the mega backdoor Roth IRA strategy, such as high Roth contributions, tax-free growth, bypassing income restrictions, and avoiding required minimum distributions (RMDs). * Discussed the potential disadvantages of the mega backdoor Roth IRA strategy, including plan limitations, tax complexity, contribution limits, and immediate taxes on gains if not converted promptly. * Introduced the concept of a self-directed 401k investment strategy, which allows for greater investment flexibility and the potential for higher returns through options like Fidelity Brokerage Link or Charles Schwab PCRA. * Emphasized the importance of checking plan eligibility for self-directed investment options and the benefits of utilizing investment advisors for managing these accounts. * Explained the concept of asset location, stressing the importance of placing tax-inefficient investments in tax-deferred or tax-free accounts to optimize tax management and overall returns. * Highlighted the use of technology and advisory expertise to integrate retirement accounts into a comprehensive financial plan, improve tax efficiency, and optimize rebalancing strategies.   PLUS: Whenever you're ready... here are three ways I can help you prepare for retirement:  1.  Listen to the Market Call Show Podcast or Watch on Youtube One of my favorite things to do is to talk with smart people about investing, financial planning, and how to live a full life.  I share this on my podcast the Market Call Show.  To watch on Youtube  – Click here [https://youtu.be/7bM-geh0pyE]  2.  Read the Financial Freedom Blueprint:  7 Steps to Accelerate Your Path to Prosperity If you’re ready to accelerate your path to prosperity, the Financial Freedom Blueprint lays out a proven system for planning and investing to secure your financial independence. You can get a personalized signed hardcover copy – Click here [https://www.pathtorealwealth.com/the-book/p/financial-freedom-blueprint] 3.  Work with me one-on-one If you would like to talk with me about planning and investing for your future. – Click here [https://meetings.hubspot.com/louis-llanes?uuid=979d970e-5869-43f5-87f7-0c20ea991e6e]       TRANSCRIPT (AI transcript provided as supporting material and may contain errors) Louis: Welcome to the Market Call Show, where we discuss investing wisely and living well. Tune in every Thursday to Apple Podcasts, Spotify, Google Play or subscribe on YouTube. Hi there and welcome to the Market Call Show. This is Louis Llanes. Today, I'm going to ask you a question: Are you leaving money on the table? Are you leaving money on the table when it comes to your retirement accounts? This is one of the things that I've found to be very common. A lot of people don't understand some of the strategies they could be doing that could increase their wealth, lower their tax bill and, overall, make their financial plans much better, in particular, for those people who have high income and are really in a situation where they're trying to maximize their retirement accounts. So let me just kind of set the stage about what I'm talking about here. There's really three less known strategies with your retirement accounts that can significantly help you build more wealth, create more income for longer and save on taxes. And basically what's happening is most people who have built capital in their 401k and now it's grown to a significant amount of their net worth, they really become to rely and will need to rely on these funds for future income. So typically these people are high income earners and they have high income taxes, and one of the things that's concerning now is many people are concerned that taxes could increase, especially since the sunset rules may be ending, you know, so that we may see that the tax rates will be bumped up automatically. And also inflation has been raising income brackets for a lot of people. So this is not talked a lot about, but it's really happening and I see it every day when we're working with clients where their incomes are going higher because of inflation. Just to stay even, incomes have to go up, but the tax rate brackets stay the same, so the cutoffs, the amount of income that you need for each tax bracket, doesn't really change. So in essence, everybody's tax rates go up because as you make more income, the tax rates go up, so that that creep in an income tax rate increase is also affecting many people. We have a lot of uncertainty in capital gains tax and income taxes. Next year there's a lot of election uncertainty and that's also leading me to want to get this out there and hopefully this can help you. You know, when you have money in your retirement account, one of the basic things that I'm sure you understand. Most people do understand that all of the money that you take out from your retirement accounts when you retire is taxable as income. It's taxed to your income tax bracket. That bracket may be higher than the capital gains tax rate, depending on how things turn out. So I want to talk about these three strategies. You may have heard of them, you may not have, but I want to make sure that we cover them because they can mean a lot of money in your pocket. The first one some people call it the mega backdoor Roth IRA. This is an advanced retirement strategy. It allows you, as an income earner, to contribute substantial amount of after-tax dollars into a Roth IRA, even if you exceed the typical income limits for a Roth contribution. So here's a breakdown of how this concept works and its pros and cons. The first thing is a 401k contribution has different types. You can contribute into a 401k into three different ways. First is pre-tax or traditional contributions. The second is going to be a Roth or after-tax contribution. And then there's after-tax. It's different from Roth. It's not common in all plans, so you have to check to see if in your plan you can do an after-tax contribution as well. Most big plans that we see, or sizable plans, do allow for this, so you'll have to check to see if that is available to you. So the second thing is the mega backdoor. Roth has a few steps that you have to take in order to maximize your contributions and get the most tax benefit. The first step is you max out your regular 401k contributions. So, for example, in 2024, this is $23,000 per year if you're under 50. If you're over 50, it's $30,000. And your employee contributions, whether pre-tax or Roth, that is your maximum contribution you can put in. But the second step is really important. You can contribute additional after-tax dollars in your plan. So some employers allow for after-tax contributions above that standard $23,000 or $30,000 limit. The overall 401k contribution limit in 2024 is $66,000. That's if you sum them up and that's if you're under 50. If you're over 50, it's $73,500 in 2024. So this includes all sources your employee contribution, your employer match and any after-tax contributions. So a lot of people think that limit is only $23,000 to $30,000. For many plans, if you add it up to the total contribution limit, including after-tax contributions, you could get that number to be significantly more. In fact it's over double the amount. So that's important to understand and over time you can significantly increase your tax savings. So now here's the other thing. The third step here that I want to talk about really is the kicker. If you perform an in-plan Roth conversion or roll the after-tax contributions into your Roth IRA, this allows these contributions and their earnings to grow tax-free. So let's just use an example: Assume in 2024, you contributed the maximum $23,000 in pre-tax contributions to your 401k and then your employer contributed another, let's say, $10,000 in a match. That leaves you with room to contribute another $33,000 in after-tax dollars and that would give you that total of $66,000. You can then convert these after-tax contribution to a Roth or a Roth 401k and if you do that immediately, you will not have a gain problem. It's very important to understand that. So let's talk about who can do this. First of all, the employer plan must be compatible. Not all 401k plans allow after-tax contributions but I must say many, many do. So it's important to check. Some don't offer in-plan Roth conversions, so you'll need to check with your plan to make sure they have these features. But if they do, that could be a goldmine for you. Second is the income limit income limits. The backdoor strategy bypasses those income limits that normally restrict Roth IRA contributions. Anyone can use this strategy, regardless of your income level, as long as your 401k plan permits it. So that's a big boon because there's many high income earners who can't put money in a Roth IRA. This will allow you to get more money in a Roth IRA which is tax-free, and tax-free is a big deal, especially if tax rates go up. So let's talk about what the advantages are. Obviously, high Roth contributions. It allows contributions far above that regular Roth IRA limit, which is only $6,500 in 2024 and $7,500 if you're over 50. So that's the first advantage. Second is it's tax-free growth. So once you convert that money to your Roth IRA, both of the contributions and future earnings growth are tax-free, and that can compound significantly over time. Number three you bypass income restrictions, so high income earners who normally can't contribute to a Roth IRA due to income limits can use this mega backdoor Roth strategy to fund Roth accounts. Fourth, your Roth IRA advantages. Roth IRAs do not have required minimum distributions, also known as RMDs. This gives you flexibility for retirement withdrawals. Many people are stuck and they have to take those withdrawals. I look at our clients that are retired and you know, when we pull that plan up, we just know we're going to be paying taxes on those RMDs no matter what, and this gives you some flexibility so that you don't have to take those RMDs out. So there are, however, disadvantages: First, plan limitations. Not all 401ks allow for you to have that tax contribution. You know you may not be able to use this strategy if it doesn't offer it. And second is there's tax complexity on after-tax contributions before conversion which may be subject to tax. So it's important that you do these conversions at the right time, the right amounts, so that you can avoid paying extra taxes. Also, you have the contribution limits. You still may be limited to your overall amounts and you have to make sure that that includes your employer match. So the strategy only works for those who can afford to contribute significant amounts of after-tax dollars. So this is for high-income earners typically. So fourth, immediate taxes on gains. Any gains on that after-tax contribution before you convert may be taxable when you roll those funds into that Roth IRA. So it's important to roll it quickly so that you don't have those gains. If you wait a long time and you have a big move up in your value, then that could be taxed. That's not good, so you want to avoid that. So now we talked about the 2024 limits on the employer-employee. We've also talked about that. You can get a lot more money in, so this is a significant strategy. This is the first strategy I wanted to mention. If you're not doing this and you qualify for it, your plan qualifies. I'd check it out and see if that's something you want to do. So in summary, that's great for high earners and to get more money tax free. Now I want to talk about the second strategy. This is one that we bump into a lot, so a lot of the larger plans. They allow you to do what's called a self-directed investment strategy in your 401k money. So typically, when you put money into your 401k or your retirement account, they give you a list of funds that you could choose from and they're many times rather limited and they generally are invested in just your core type of investments like large cap, mid cap, small cap, all United States stock. There might be like a Barclays global bond or maybe just a domestic Barclays bond index, and typically there's money funds or other types of secure, guaranteed return type investments that pay lower yields but have no ability and have stability in the value. In fact, a lot of times they're called stable value funds. You might have some international developed and a lot of times you're seeing them being indexed. You might have emerging markets in there and if you're lucky you might have some real estate and gold and things like that, but that's typically not in many plans, so you have some limitations with most 401K plans. So you have some limitations with most 401k plans, but if you check in the fine print, you might have the ability to do a self-directed IRA. Now I'm just going to mention two of the major brokerage firms that you typically see with these. Typically, if your retirement plan is at Fidelity, they have what's called a brokerage link and with a brokerage link account you basically are opening up a regular brokerage account that you can invest in a broad range of mutual funds stocks, bonds, ETFs you know, really like a brokerage account, because it is a brokerage account but it's still linked to your 401k. So it is a 401k account but you have self-control to be able to, or self-direction to be able to invest those funds in a much better way. Now you can also use investment advisors, like we managed PCRA accounts or brokerage link accounts as well. So Charles Schwab's version of this is called a PCRA. They have some differences in how they're put together, but they're basically the same thing. So let me tell you a little bit about how this works. In a self-directed account, when you opt into that brokerage link, for example, a portion or all of your retirement assets are moved into a self-directed brokerage account within Fidelity or Schwab, if it's a PCRA, and then you get expanded investment choices so you can now invest in, like I said, stocks, bonds, ETFs across the board. You can get much more diversification and, on the account management side, you can manage this account yourself or you can have an investment advisor or a money manager help you manage that and that you know that would really take a load off of you for the buying and selling decisions, decisions, rebalancing, and you can get your account more suitable for your particular situation. Because, depending on what your assets are outside of the 401k you might it might be better for you to have a different allocation than is available to you. If you just did a normal 401k, if you didn't have self-directed, you wouldn't have the ability to customize and make that allocation excuse me, make that allocation right for you. So that's the big advantage. You have greater investment flexibility. You have potentially higher returns, especially if you have expertise or if you have advisors who have the expertise to help you construct a better portfolio for you. And you get better diversification because your asset classes that you can invest in the sectors the security selection is much wider. So what's the downside to this? Well, there's more complexity. You know self-directed investments add complexity. You have to monitor and manage these investments. That's why using an investment advisor or money manager to help you can be very helpful. If you like to do it yourself, then it could be good for you as well, but it could be time consuming and require a strong understanding of the financial markets. So if you don't have the time or inclination to do that, obviously you could use an advisor to help you with that, but it also can increase your risk. If you do it on your own and maybe you're not up to speed about what the risks are of all these investments, there's the danger that you don't do well with it because your portfolio is not managed in a way that's sound. So it's important that when you invest in individual stocks or sectors or other funds, that you know how to construct a good portfolio and it's cohesive with your financial plan. There could be some additional fees. Some investments may have trading fees or they may have management fees that are associated with them. So you have to see what those fees are. Now when you look at the brokerage for the two I mentioned, Fidelity and Schwab, they tend to have very reasonable fees and if you do security selection correctly, you know typically there's not a commission per se on the like an explicit commission on buying stocks and bonds, and many of the exchange traded funds don't have commissions and they have very low fees. So you can really get around a lot of the fee issues. So who should use a brokerage link? I would say it's either experienced investors who are more suitable for it. If it represents a big part of your portfolio, like if you've been putting a lot of money there away, there that becomes an important part of your plan. That could also really give you a strong case to use a brokerage link because you want to take better care of those assets. And it's also good if you have advisors that can help you seek customization so you can build a tailored portfolio that your standard employer plan just can't give you and the benefits and features are much more broad. So how would you access a brokerage link? The first thing you'd need to do is you need to or PCRA, by the way. First thing you need to do is you need to check your plan eligibility right. Not all employers offer it. Then you would open up a brokerage link account and then you would fund, you would transfer those money and you would fund it over and then you could invest it. So that's a good way to go. Look at, look for the see if your plan has those self-directed plans, particularly with Fidelity Brokerage Link or Personal Choice Retirement Account, PCRA for Charles Schwab. Those are, those are a good thing and not underutilized benefit that you may benefit significantly from. Okay, so now let's move on to the last strategy that I wanted to mention to you and that actually has to do with wait for it Asset location, all right. So one of the most important things to understand is that and you probably already understand this, I'm beating a dead horse, but I have to say it taxes are so important to your returns. There's lots of studies out there trying to estimate how much of your return is dragged down, pulled down by taxes, and on average, you see the number estimated to be anywhere from one to 3% of your returns. So it could be a lot and some people go well, that's not that big of a deal. Well, over time, that adds up to a lot of money. So managing taxes is really important and in doing that, it's important to be able to have strategies. There's many different ways for managing taxes and this is not a tax strategy only podcast, so I want to talk about it in particular, with the 401k, and we've already talked about conversions, right, converting to the Roth. Now I want to talk more about asset location. So there are certain investments that are better suited to be in a tax deferred account or tax free account, and that has to do with how much taxation those investments spin up. So if you have. You know when you look at your total portfolio, if you have a balanced portfolio that is invested properly, with good diversification, you're going to have some investments that spin off more taxes than others. For example, high dividend yield paying stocks tend to spin off more taxes because those dividends are taxed. Taxable bonds that generate interest, that will be more taxable, that will cause more taxes. Or if you have investments like, say, private credit, which is a good asset class to consider, where you can get higher yields than traditional bonds, and then you can access those in the private markets, have them in your investments and then you could put those tax free so that you're not paying taxes on all that interest. So those are just a few examples of the types of investments that you would want to or consider having located in your retirement accounts. So when you look at your total picture and it's really related to how much you have outside of your, how much investments you have outside of your qualified plans, your retirement accounts, and you know what your balance is. Do you have rental real estate? So it requires a holistic view of your situation. Now one of the most powerful things that you can do is there is technology now where you can analyze your total picture, including your investments inside your retirement accounts and outside, and make some asset allocation decisions to optimize your taxes and optimize your returns. So typically, if you combined this type of technology which allows you to look inside. For example, we as investment managers, we have access to these tools we can look inside any of these plans and see what are the options that are available. You have a list of options. Okay, what are those options? And we can look at the holdings-based analysis down to the holdings level. What does that portfolio look like if we structured it in different ways? And if you look at that, you can really tailor your investment portfolio of your retirement accounts to your whole picture. So instead of just isolating each investment, it's better and more sound to look at the whole picture. So it gives you better tax management, gives you better integration into your total financial plan and gives you a comprehensive look. So this is probably the biggest advantage of using technology to look at that. And also, with this technology, you can also get the advisory expertise. You can also get fund selection that's more detailed and you get portfolio rebalancing. So one of the biggest advantages to having a well-run strategy is having a system on how you're going to rebalance your investments. There are different ways to rebalance. You have time-based, where you just do it based on the calendar. You know every quarter, for example, or every year, you you know if stocks went up versus bonds and you sell off some stocks and buy some bonds or vice versa. You can do it based on time or the calendar, or you can do it based on volatility. So if you have a target allocation and it moves a certain percentage above or below what your target is, then that would be a triggering event that would cause a rebalance. There's some studies that show that that can be advantageous relative to calendar based, because it's based more on, you know, changes in the risk return profile of the overall portfolio. So having that rebalancing capability is really important. So this is really more about a technology, strategic way of thinking about and managing your retirement account in the context of your overall portfolio and also you can optimize that to your specific goals and risk tolerance. Risk tolerance is a big part of it and your retirement timeline. So with the retirement timeline, what you're you know, everybody's situation is different. So you may it may be optimal for you to first start taking income from your taxable accounts or from it may make more sense to take some from Social Security first or from an annuity first or from a pension first. There's a lot of different variables for different people. Maybe you should take it from your tax-deferred account first as a default that's not the best way to go usually. Or it may be better for you to take a ratio income that's prorated over certain accounts and that requires full financial planning to understand what's optimal for you because everybody's different. But getting that tax and investment efficiency, getting the ongoing monitoring and rebalancing, improving your risk management that is the biggest benefit of using these types of technologies. So I want to summarize here. These are three of the what I would consider least utilized, most important things that a lot of people can do where you're leaving money on the table with your retirement accounts. First is the contribution and conversion strategies that I mentioned. That allows you to put more money away. Perhaps that makes sense for you. The other would be self-directed either a PCRA, a brokerage link or anything like that, and utilizing expertise to get that done correctly. And then also tax location, using a holistic investment allocation that can lower your tax bill and give you longer term investment results. So that is pretty much it for this podcast today. I guess my suggestion to you is to check these things out and see if they can work for you and if you want any assistance on that. As always, you can always reach out to us and we'd be happy to answer any questions for you as to how you can best get this done for your situation. That's all for now. Thanks for tuning in and we'll talk to you later.

Preparing Your Portfolio for Retirement | Ep93

Today, on the Market Call Show, we're discussing the importance of authenticity in financial planning. Using a great Rush analogy, we look at how sequencing returns impacts the longevity of your portfolio , and we talk about strategies to navigate varied markets. Most of us are concerned with peace of mind in retirement, and having enough to do everything we want to do, so taking a personalized approach to planning that considers both flexibility and fixed income is key to achieving the retirement we want.   SHOW HIGHLIGHTS * In this episode, we explore how to craft a lasting retirement plan, with insights from Louis Llanes, Senior Vice President at Farther Wealth Management. * We discuss the impact of the sequence of returns on the longevity of retirement funds and share strategies to manage varying market conditions effectively. * Understanding one's financial personality is emphasized, with references to Carl Jung and Tom Basso, to help make more informed and personalized investment decisions. * We examine the trade-offs between probability-based investing and a safety-first approach, as well as the balance between flexibility and a fixed income. * Essential retirement strategies, including optimizing withdrawal rates, portfolio diversification, and long-term care planning, are covered in detail. * The episode introduces the concept of bucketing strategies, alternative investments, and the importance of tax management in securing one's financial future. * We delve into the importance of asset allocation and how different asset classes perform under various economic conditions, emphasizing the need for diversification. * Strategies for managing healthcare costs and avoiding common financial surprises are discussed to help ensure peace of mind in retirement. * Listeners are encouraged to join upcoming monthly webinars for more in-depth discussions on retirement planning topics. * The episode concludes with gratitude to Tom Basso for his valuable insights and mentorship, and an invitation to tune in to future episodes for expert advice on retirement planning.   PLUS: Whenever you're ready... here are three ways I can help you prepare for retirement:  1.  Listen to the Market Call Show Podcast or Watch on Youtube One of my favorite things to do is to talk with smart people about investing, financial planning, and how to live a full life.  I share this on my podcast the Market Call Show.  To watch on Youtube  – Click here [https://youtu.be/7bM-geh0pyE]  2.  Read the Financial Freedom Blueprint:  7 Steps to Accelerate Your Path to Prosperity If you’re ready to accelerate your path to prosperity, the Financial Freedom Blueprint lays out a proven system for planning and investing to secure your financial independence. You can get a personalized signed hardcover copy – Click here [https://www.pathtorealwealth.com/the-book/p/financial-freedom-blueprint] 3.  Work with me one-on-one If you would like to talk with me about planning and investing for your future. – Click here [https://meetings.hubspot.com/louis-llanes?uuid=979d970e-5869-43f5-87f7-0c20ea991e6e]       TRANSCRIPT (AI transcript provided as supporting material and may contain errors) Louis: So good, I'm glad we're here. Thank you for coming. Really, the webinar thing was really brought to my attention by really request, because I get a lot of questions about preparing your portfolio for retirement and I wanted to make available what the most common problems that I've been running across with individual investors and some of the pitfalls that they've run into and, some ways, provide some resources for you for ways for you to kind of overcome some of those challenges and not have those roadblocks initially at all as you're preparing for retirement. So that's really the purpose of this webinar. For those of you who may not know much about me, I'm Luis Llanos. I'm a Senior Vice President, wealth Management for Farther Wealth Management, so my company, wealth and Investments, recently merged with Farther, and so I'm now a shareholder of Farther and I'm the investment management committee. We managed just under $3 billion right now, and we have a wide variety of different types of clients. I'm a charter financial analyst charter smart market condition been managing money for over 25 years Gosh, it's actually close to 30 years now and so that's really a little bit about me. So I really want to dive in. Since we're running late on time, so let me share my screen and we can go from there. Sure, let's see. All right, you should be able to see my presentation. Can you see my presentation? Anybody Not hearing from anybody? Yes, you can see my presentation. Okay, perfect, all right. So let me just start off with a little bit of a kind of a question for you or a little story. So I was thinking about what is the biggest thing that I guess determines people's success when they are preparing for retirement and they actually do retire and they start living off their portfolio. And it got me thinking about just a common success factor that most people have, and I thought about some people that I have followed. On the right there that's a band called Rush, one of my favorite bands. They started out, you know, trying to do what all the producers told them they should do. They, you know, the producers said they should try to sound like Led Zeppelin or they should do certain things and be make your song short. And they just decided that you know, that wasn't us. And they did their own thing and they had a. They had an initial flop, trying to do what everybody else told them to do, and then they just said look, we're just going to be who we are. They made an album called 2112 and they exploded because they knew who they were and they, they were authentic as to who they are, and, of course, you know some of these other people and since we don't have a lot of time. I won't go into all the stories, but each one of these famous people. One of the things that they determined was I'm going to be myself, I'm going to understand myself and I'm going to. I know I'm going to be making trade offs, like there's no perfect answer, but if I'm true to myself, I can live with the trade-offs and I can have a successful outcome, and that's really the you know what I wanted to talk about, because that is about the same situation that people have with retirement planning or investing in general. There's always a trade-off, trade-off between one ideal objective that you may have off, between one ideal objective that you may have and then something else may, you know, be affected because of that. You know, carl Jung said that he who looks outside dreams, but he who looks inside awakens, and that's very, very true. So I know Tom Basso is on this call and I've learned from him as a successful investor that he talks a lot about. Hey, I need to be understanding what my situation is and I need to do what's right for me. What is right for me may not necessarily be what's right for somebody else, and every time you do that, there's going to be a trade-off, and the biggest trade-off when it comes to preparing your portfolio for retirement tends to be this desire for certainty. In other words, I want to know exactly what my income is going to be, what my return is going to be versus what my lifetime total retirement income could be and my terminating estate wealth. So the more certainty you have you know what you're going to get the less return you're going to make and therefore you're probably going to have less lifetime income and you'll probably pass on less wealth to your heirs. So that's just one example of the types of trade-offs that you have. So I want to talk first about understanding yourself, because everything goes from goes from there. It starts with that, and I'm going to just talk about some a series of trade-offs that everybody faces when they're doing their portfolio for retirement. And then I'm going to stop for questions, and you can, you can answer. You know I can hopefully answer some of your questions, and then we'll move on to the next topic. Okay, the first one is probability-based versus safety first. So probability-based means that I'm investing in a way and taking my income from a portfolio that's diversified across a lot of different investments stocks, bonds, real estate, alternatives knowing that I'm going to have some ups and downs in that portfolio, but I'm okay doing that and my I know my return is more variable, but I'm likely to have a higher rate of return over the long run. On the other end of the spectrum is the safety first, which is I want to know contractually what I'm going to have as an income level. That would be like pensions, annuities, lifetime income protection, holding government bonds to maturity. Basically, you are not affected by capital gains fluctuations. So those are the extremes. Most people fall somewhere in between there. So that would be your first trade off. And then the next trade off has to do with your desire for optionality or having the ability to be flexible. Like, if you really value being flexible, you want to have the ability to make changes for favorable economic conditions or any change in your situation. Then that would be one type of mindset and I tend to be more of an optionality mindset person. Other people are not that way. They like more of a commitment, a desire for some dedicated source of income. There you're really looking for some kind of a specified long-term solution and a lot of people feel more satisfaction with that because there's less decision-making, there's more you know, maybe their family members would have less burden as well, and you tend to kind of set it and forget it. Those are two extremes. So those two trade-offs that I mentioned, those tend to be the biggest, most important trade-offs. Now I'm going to talk about a couple more trade-offs that I want you to think about that may affect you. One would have to do with accumulation versus distribution, and I'm not talking about, I'm talking about during retirement. So some people they would opt out to have more stable of an income stream, knowing that they're going to have a lower rate of return and they're probably going to distribute less money to their heirs, so they're willing to change their standard of living for that predictability. The other would be somebody who says you know, I want potential variability, I'm okay with variability, and then I'm okay giving more to my heirs. So, as you can see, these are all related. Like, how important is it for you for that money to be for your benefit versus your heirs? And people are different. So this next trade-off has to do with with time. So some people they want to have some earmarked assets that are designed for perpetuity, meaning the rest of your life, and other people feel more comfortable having some kind of reserve, whether it be cash reserve or dedicated bond funding for a specific amount of time Some people prefer to have. Some form of their mind is just designed that I want to have things in buckets. There are some mental problems with that way of thinking, but some people are just naturally wired Now with each one of these ways of thinking. There are some potential pitfalls to them, but it's important for you to know as a human being where you fit naturally in these types of way of thinking. So the other is front-loading versus back-loading. So if you're worried about longevity risk which is basically saying I'm a little bit afraid that I might outlive my money that's a big concern for many people Then you're probably going to have a different way of spending than somebody who's not so much worried about that. So if you have a low concern for longevity risk, then you're more inclined to front load spend in the early years. So you're early in retirement you're going to spend more and then maybe later you'll spend less. That's usually what people think, but we tend to spend more throughout retirement because of inflation. But that's another issue. The other is high concern over longevity risk. That means that you're going to spend less, you're probably going to want to conserve more so that you have more in later years. So now what I want to do is bring this to something that's practical, that you can actually use and at the end, stick around, because at the end I'm going to give you a way that you could actually make an assessment for yourself to understand where you fit. Okay, so this what I did is I took those first two trade-offs and put them in a little matrix here and so if you're that investor who is a safety first investor, that you want that knowable income and you're okay with commitment, then that's kind of like an income protection type strategy. And on the other side, if you're kind of a probability investor and you want that high optionality, then you're more of a total return type of investor. If you look at this matrix here, I come about right here Mostly a total return investor and mostly optional. But I'm not super aggressive on it like some people are. But you have your own place that you will naturally set, and sometimes you have to get out of your comfort zone to do what's right for you, to be a little bit out of your natural state, which which can be difficult at times, but it's important to do so. The other two are a little bit less intuitive. If you are high optionality, meaning you want a lot of flexibility, but you also are a safety first person, then you're more of a time segmented investor, which would mean I'm going to put some buckets together, I'm going to maybe cash match a percentage of my portfolio bond laddering, or I might put an annuity for something. I'm going to bucket things out for my early years, et cetera, et cetera, and that's one way of going about it. That can be suboptimal as well, you know so that, but but it can fit your psychological needs and it's important to do that so that you don't like bail at the wrong time, which is worse than not getting your your, your own psychological profile down. So the last category is one that is actually less common, a little bit harder to understand, but basically you want to have a lot of you're into the probability base. In other words, you believe that maybe the markets are going to go up over the longterm, so you want exposure to that, but you also want some. You know you're able to make a commitment. You're okay making a longterm commitment. So there, you'll probably want to make some kind of a contractual agreement where you are, or some type of a strategy where you're managing your risk on the downside, but in a contractual way, not like with stop losses and things like that, but in a contractual way, knowing that you're not going to have as much upside. So this is a smaller representation of the population, at least that I have run into but there is a certain percentage of the population that really values that. So the question is is what's your preferred strategy? Well, there's a, there's a test that you could take. It's called a RISA R-I-S-A is it is the name of it and I can help you guys and I'll show you how I can help you guys actually take one for free and that you can kind of know who you are right there, all right, so I'm going to dive into the investment management side more, who you are right there, all right. So I'm going to dive into the investment management side more. So the biggest question a lot of people ask is how long will my money last? I think, and it doesn't matter how rich you are. I mean, I had a conversation with a client of ours that has $40 million in asset center management and he's wondering about how long his money is going to last. So it's a very interesting problem, but it's a very serious problem and I think one of the things that people forget and this is one of the things that I've noticed just with individual investors you might have a portfolio, say, you have a couple million dollars put away. You're like I don't know if that's enough. I don't know, should I retire now? Should I retire later? One of the first things that you need to think about is the fact that the order of your returns matter when you have good years, bad years, et cetera, matters If you have bad years earlier in your retirement career. If you will, then your money won't last as long than if you have, you know, bad years later. So it's important to know that you could have the exact same return stream and simply shuffle the timing around of that return stream, and how long your money lasts will be affected by it. So there's ways that you can mitigate this problem and I'm going to talk a little bit about that, but I just want to do a quick illustration to show this. So let's say investor A and investor B both have the same return year by year in terms of not in the order of the sequence, but the actual returns that they have every year is the same. It's just different orders. So investor one he has a big decline early down 15% in the portfolio in those first two years and then the rest of the years. You can see he runs out of money a lot faster than investor B, who had that same 15% return loss. But it was later on and that makes a big difference into how long your money lasts, I should say so. The next point on this has to do with your withdrawal rate. Let me just define what the withdrawal rate is. The withdrawal rate is the percentage of your portfolio that you're going to be spending from each year on average. So let's say, if you have a million dollars and you spend $50,000 of it, that's a 5% withdrawal rate from your portfolio, 50,000 divided by a million dollars. So the point on that is that if you have a lower withdrawal rate, naturally you have more resilience in your portfolio, because one of the problems with the sequence of return risk once you start taking money out of your portfolio. You have what's called reverse dollar cost averaging. The math is reversed. So volatility in the portfolio the more volatility you have in your portfolio, the less long your portfolio will last, even if you have the same average return. So you can have the same average return with less volatility and your money will last longer. So the key is lower your volatility overall or have some other strategy that you're dealing with so that you're not having to pull money out of your portfolio your total return portfolio, when your returns are not as strong as they, when you're going through a lower return period, which everybody has. So what are the strategies to deal with this? Well, there's a bunch of different strategies that you can deal with. This is a little table you can't read. I did that on purpose just to make the point that there's a lot of ways that you could deal with it, and it really requires a detailed analysis of your specific situation, of what the appropriate strategy is, and it starts off with knowing yourself. So, but one strategy could be you could just simply have higher cash reserves and you rely on those higher cash reserves. Maybe you have two or three years worth of your expenses set aside in T-bills or short-term bond ladder for three years short-term bond ladder, something like that and then you just let your you try to maximize your return per unit of risk. That's how I like to invest. I like to have, you know, some, a cushion, a buffer, if you will, and then really try to maximize my return per unit of risk. But not everybody feels comfortable with that. Some people want to just have some kind of a, some kind of annuity payment or set up something like that that they can deal with those earlier years. Or they may want to bucket, you know, set up a strategy where they have the knowable rate of return in the first five years of their retirement and then the rest of that portfolio is earmarked for total return. There's different ways that you could deal with that, but it's important to have a strategy and have a mechanism that you're going to use to deal with this risk. The simplest one is bigger cash buffer, dedicated funding in your earlier years. And then the second part of the strategy has all to do with how you construct your total return portfolio, which is your portfolio that you're trying to maximize your return per unit of risk. So hopefully that makes sense and I'm going to move in. I'm going to go through this next section here and then I'll stop for questions again. So let's talk about how you put together your total return portfolio. It's really important that you have different environments really accounted for in your portfolio. In order to do that, there's really two main things that affect the capital markets. One would be the inflation rate and the other would be the growth pattern in the market. So this is a table that I got from Ray Dalio, who is a brilliant hedge fund manager. It's a variation of some stuff that he's put together, but when you look at scenarios and asset class returns, the best way to kind of overcome and have an all-weather portfolio which is a term that Tom Basso uses, that Ray Dalio uses it is a way of having different return streams that are non-correlated, and that's the best solution for that. You may have 10 to 15 different return streams that may not be asset classes, it could be just different return streams or strategies. So in order to do that, you have to understand why you're doing that and then also look at what types of assets do well in different environments. So now, before I get into this table, I also want to make a caveat or point here that some people don't believe in prediction. They say let's just follow what the markets are saying. Whatever the markets are saying, they're right, we're going to follow that and that's a great heuristic on average, because predicting is very difficult. Other people say I'm going to be running non-diversified strategies and I'm going to be running them all the time, but I'm going to construct them in a way where they can deal with the environment, all these different types of environments, and there's less decision-making on the timing part of it. I'm just going to do as best as possible in each type of strategy, if that makes sense. So just to break this down, just give you some examples If you have low growth in the economy GDP growth is not doing very well but you have a lot of inflation, that's not a great scenario. But if you're in that scenario low growth, high inflation then gold, commodities tips, real assets tend to do well and a lot of people avoid commodities. A lot of people avoid those types of assets, but they actually do really well during these periods of time or they can do well. So if you have high growth, for example, and low inflation, that's what we've experienced for a pretty good amount of time and people have gotten used to that. But the truth of the matter is we don't get that all the time and we need to prepare for any of these environments. But if you have high growth, low inflation, stocks are going to do well, real estate's going to do well, corporate bonds do well, private equity does well. There's, you know, lots of things. Do well your traditional asset classes. Now, during these periods of time, this is when people get lulled into believing that that's the way it always is and that's when people get hurt. So twice in my career I can remember, and I think we're kind of in a period right now where everybody, when you start hearing everybody say it's better to just index, just buy the S&P 500 and you're going to be fine, that's usually a sign of some really rough times coming ahead. The last time I remember, during the dot-com bubble, we had the same environment. Everybody's like, hey, I'm just going to call Vanguard or whoever I'm going to call up and buy the index fund S&P 500. And then we had a massive decline in the market and people truthfully, people don't stick with that, and so it's important to understand that. But when we're thinking about diversification, I like to think of it in terms of a hierarchy. You have asset classes that you need to be sure that they're non-correlated, and then you also have strategy or your approach that you're dealing with. You know what is it. Is it a value approach? Is it a momentum approach? Is it a breakout approach? Is it what is it? Is it a counter trend approach? The reason why that's important is because they tend to perform it. You can have the exact same asset class, but if you have a different approach, it will have a different return pattern. The other has to do with security selection. Is it bottom up, is it top down? What is the method that you're using and how you're constructing your securities within the asset classes? So you know you want to diversify all of those and you know we can get into we don't have time since we're running a little bit late but there's a lot of different asset classes you could be looking at. One thing I would point out that is really a lot of people are not participating in which they might should be, would be all of the private asset classes, like private debt, private equity. Those strategies have a lower correlation and a lot of people are ignoring them and if you are an accredited investor, a qualified purchaser, they could be a good addition to your portfolio. So now getting into this diversification, there's like remember we talked about trade-offs. We've been talking about trade-offs this whole time. Here you have to come up with the trade-offs that you could live with. But one of the things with about a diversified portfolio that really I've noticed over the years it's interesting is that people will always have a little bit of angst with a diversified portfolio. So, for example, in 2000, 2002, dot-com bubble blows up. Like I told you we were just talking about how everybody was feeling good just before this period and said you should buy the S&P 500. Those investors went down 40% in the following you know, following period. Right that, those two years, a diversified portfolio. If you were not you know, I'm just using a relatively passive diversified portfolio for illustration here they were down 15% and pretty much everybody says I lost money. The people who were indexing really lost a lot of money. Or if you were buying those growth stocks that everybody was in love with and you just held on to them and didn't have a risk management protocol, you really got hurt. And then that's you know. But you were a winner in the diversified portfolio there. The next period I wanted to highlight was 2003 to 2007. S&p was up, strong up 82%. Diversification worked very well during that period of time. Diversified stock bond portfolio was up 87% during that time and it actually outperformed, and partially because bonds did very well and everything was just lockstep working well. And then we had the financial crisis and the stock market went down and everything went down. Diversification type strategies you know these are not hedged and they're not, you know, long short. This is just a long, lonely, diversified portfolio to show you, for example, and you know. Then you feel like, for example, and then you feel like, oh well, I lost money. Then we had a big, rip-roaring bull market. I'd like to point out that in 2009, when most people should have been buying equities, nobody wanted to buy equities. That's typical of how things work and that's why having some part of your portfolio in a value-oriented strategy is really important, in my view, because that really does help in periods of time when there's a lot of excessive fear or when people are getting too overly optimistic about the market. Value keeps you more level-headed and will help you not get killed when those growth stocks, or whatever those stocks that are doing well, do collapse. Growth stocks, or whatever those stocks that are doing well, do collapse. So, but to make a point, there is you make, you made money, but this is the thing. This is probably the like the, the biggest devil of diversification. That hurts people, I think, when you make money but you don't make as much money. So during this period of time, 09 to 2019, the S&P 500 was up 351%. Diversified portfolio was up only 220%. Right, and you're like I didn't make as much money. And then you're thinking, well, maybe I should be just putting more money in the S&P 500. Maybe I should be getting more aggressive with my strategy, and people get outsider their comfort zone and their risk profile and they don't recognize that and then they get hurt and that's exactly what happened in 2020. Then it's I don't, then I lost money. So you have to be careful with your emotions and I'm going to bring up Tom Basso again. I'm glad he's on this call, because one of the things that Tom really has mentioned is like staying level-headed is really important and have you know. If you're feeling over exuberant, bring yourself down. If you're feeling like like you know, really in the down in the gutter, you need to bring yourself up and have discipline in your strategy, knowing that your strategy over the longterm works and being adaptive to what, what you need to be doing, being aware, but you know, just to bottom line this, during all of this period of time, if you had put all your money in the S&P 500, you made just about the same amount of money as a diversified portfolio, but you had a smoother ride and you could even smooth this out even more. I'm using this just with a traditional. I'm making this illustration just with a traditional stock bond diversified portfolio long only. So I guess my point here is that when you're thinking about preparing your retirement portfolio, remind yourself you have to have a way to remind yourself that diversification always has a little bit of angst to it, but it's important because you need to keep your volatility down so that you could have a good outcome over the long run. All right, I'm going to talk a little bit about alternatives. I really touched on this already, but you know private equity. You know I would consider some of the stuff that Tom Basso does to be alternative type strategies trend following long short stocks, bonds, commodities, currencies that would be one type of alternative, asset class private debt and there's other types of hedge funds, those non correlated assets. When you put them together in a portfolio, really can help your, your diversification and your give you. You're not really sacrificing return, but you're definitely lowering your risk. So that's, that's where that's that sits and there's. You know a lot of people will tell you like 90% of your variation in your portfolio is due to your overall asset allocation and your strategy. That's generally two. It doesn't tell you what your direction is going to be, whether it's up or down, but your asset allocation is going to determine to a high degree as to how much variability you're going to have in your portfolio. So it's important to get that metric right for you so that you're comfortable with your overall volatility of your portfolio. Okay, so one of the biggest things that is an issue in the real world is taxes. I would say and I've kind of put this presentation in the order of importance in my mind First you want to make sure you understand yourself and what type of strategy you tend towards. Then you want to go into and you want to make sure that you have the right diversification for your total return portfolio, whatever type of portfolio you are going to fall into, and then you're going to want to make sure that you're doing this in a way with taxes right. You want to make sure your taxes are not going to be killing you alive and it's it's such a big part of it. In the real world, what we see is people get eaten alive by taxes, especially if they followed what certified financial planners had been telling them to do for years and years. You know, I remember when I first got in this business, you know the last 30 years or so, that the kind of the common thought was max out your 401k plan, max out all your tax deferred money. You know, do certain things and then you get this big bucket of qualified money which is you know that every dollar you pull out of that is going to be taxed when you take that income. And they don't have enough money in other types of things, and a lot of people wind up retiring in that scenario. And then there's a big problem with taxes after that. And then you find out that that money does not last as long, so your withdrawal rate has to increase if your taxes are going to be higher. So it's important and there's a lot of different things you could do for taxes, but it's important to have a tax management strategy. So when you're preparing for retirement so I'm talking about getting ready to do it you know it's good to say, okay, what steps do I need to make right now so that I'm going to be in an ideal situation, or as ideal as possible, so that taxes are not going to hurt so bad? But if you look at third party research, it looks like about 2% of people's return is taken out by taxes. Well, a lot of people think, well, 2% is not that big of a deal. But when you compound that over 30 years it is a big deal. And especially if you have your withdrawal rate increases because of taxes, then you have that sequence of returns problem which actually exacerbates that. So, because you don't invest in a straight line unless you buy CDs or T-bills. So that's important to know. So Maybe you need to do some Roth conversions. Maybe you need to put more money away, not in your 401ks and IRAs before you retire. Maybe you should be putting money away in other tax managed strategies where there's replacement strategies, tax lost, harvard sting and things like that that you're doing. So there's a trade-off a lot of times between maximizing your total return on a nominal basis, not considering taxes, versus after-tax. So, like, for example, some of the stuff that Tom is talking about sometimes could be, you might actually have a suboptimal after-tax rate of return. If it's in a taxable account, you might have to adjust that. But if you're taking losses judiciously, sometimes it can work itself out, because you're letting your winners run, you hold them longer and then you're taking more shorter-term losses and then they kind of work themselves out. But that's not always the case. So maximizing after-tax rate of return is an art, and the more money you have, the more moving parts there are. If you have, for example, stock that you got from your company, that could be a big determinant of what you should do. There's a lot of different types of stock you could get. You can get incentive options. You could get an NSO, non-qualified stock or restricted stock units. All of these have different tax rules and there's different. You know there's alternative minimum tax. So there's these types of things need to be looked at the more complex your situation is, because the goal is to maximize your after-tax return per unit of risk and to also to have you in a situation where your investment style is right for you. So right now I'm kind of focusing just on the total return portion of your portfolio. So it's a little bit complicated, but I wanted to bring this up because it is such an important part of your situation. Now I'm going to go into an area that nobody really likes to talk about, but I really want to talk about. That's healthcare costs. Because I wrote an article, because I was talking to a friend of mine and he was saying you know, he's an author, a very successful author, and he said you know, I want you to just think about all the common things that your clients have been experiencing that were surprises or things that they could have avoided, and what are the most common. And so I wrote a white paper called the 10 Most Common Avoidable Surprises that Derail Executives Planning for Retirement. They could have fixed this, but they didn't. They were surprised by it and I would say the number one thing would be the healthcare Healthcare. People are surprised with how much they're going to need for healthcare. So I'm just going to kind of get away from the investments for a minute and talk a little bit about healthcare, because that's going to determine how much money you're really going to need and what kind of withdrawal rate you can take. So most people know you have Medicare and you have Medicaid. So Medicare covers people who are 65 years or older. Generally, if you've worked for 10 years you're covered. And what does it cover? It covers hospital insurance, medical insurance. You could buy supplemental insurance that will cover prescriptions, et cetera. So that cost is going to be there. So it should be explicit in your planning, knowing that it's going to be there, and I'm going to talk about what some of the average costs have been. Then you have Medicaid. Medicaid is really an income-based strategy Basically, if you are doing really well, if you're considered quote-unquote wealthy, generally, medicaid is not going to be available to you. So it's really for people in financial need for the most part, and it's also related to the state-by-state criteria. So depending on what state you're in, you're going to have different rules. So we don't have time to go into all the intricacies of this, but part of your planning should be what is my health care situation going to be and what does that mean for my withdrawal rate? So when you're establishing your strategy, having that in place. So let's just talk about what are the costs these days? So Fidelity has a study they do every year where they go and they call it the retiree health care cost estimate study. They just did one, august 8th of this year, and what they do is they try to estimate what the average person is likely to spend when they retire at age 65 in today's dollars. And right now, per person, a 65-year-old will spend $165,000 just on ancillary healthcare costs in today's dollars. So it goes up with inflation. And it's important to note that that's for one person. So if you're a married couple, that usually equates to about $330,000 for a married couple, for a married couple. So that should be explicit into your plan and you should understand that. You know what. What is it, by the way, these costs are covering? It's like your out-of-pocket prescription drug costs, medicare part B premiums, if you have them, or part D, and then all of your like co-payments, co-insurance. So even if you have insurance, obviously you have these costs. So that's not even you know considering. You know other things that could be come down the pike and, and actually the biggest thing that people forget that they could avoid is they don't think about long-term care is also not in this. So a lot of people do need long-term care and long-term care, you know, is there's a few different types of long-term care, but basically there's. You know, there's assisted living. Let me see if I can grab that slide here. We don't have time to go to that other slide, yeah, you have assisted living, you have home healthcare, you have nursing home and you know I've watched clients go through various stages of life and what their costs have been, and it can put burdens on your family, things like that. So you really need to kind of think that through. If you, if you have adequate resources, if you have, if you're doing really well, you know, with your net worth and you could just self fund all of this and it's not an issue. But if you don't, then it's something that you should consider. You know how? How am I going to deal with that? So the average length of time a man needs long-term care is 2.7 years. So the average length of time a woman needs it is 3.7 years. So women live longer. They tend to need long-term care for a longer period of time. Their healthcare costs are generally more expensive for long-term care. So what are the daily costs? So I looked at like where our clients are mostly and what the daily costs are and just made an average of it. So most of our clients are in Colorado, texas, california, wyoming, new Jersey, florida and their average assisted living daily cost is $170 per day for assisted living. So that's someone helping you For home healthcare, it's $168. Somebody helping you in your home and if you have a nursing home, it's $334 a day. So if you multiply that out times, you know two or three years, whatever that number you want to assume. If you could take the average 2.7 years and 3.7, then that should be a contingent that you have in there and there's different ways that you could deal with it. We don't sell insurance or anything like that, but it's something that should be a contingent that you have in there and there's different ways that you could deal with it. We don't sell insurance or anything like that, but it's something that should be taken care of if insurance is appropriate. If you're self-funding, you don't need insurance. Insurance could be an option. You don't need insurance, but the other people might need insurance. If you need insurance, there's like four or five different main types. They could be traditional insurance and you know, basically you pay a premium. If you don't use it, you lose your premiums, so that would be the negative. But you get more care, you get more comprehensive coverage If you do use it. There's hybrid types. There's different types of hybrid where you have a life insurance policy where, if you don't use. If you don't need long-term care, that life insurance policy will pay the entire death benefit to your heirs tax-free. If you do need it, they give you an accelerated death benefit while you're alive and you can use that money for long-term care. And that works really well for people who have resources and they want to pass money to their heirs, but they also want to have something set aside for long-term care. Just in case there's other different things that you could look at, those are the two main ones that are used. Main point here is to make sure you have that in your plan. Don't get derailed by that. And in order to do all this, you really need a retirement needs analysis. Really, basically, what you need is to go through the details of each one of those. So how much do you need to retire to become financially independent? Basically, a 3% withdrawal rate is appropriate as a starting point. Some people say it's overly conservative, but for the average person who has a 30-year retirement, then a 3% withdrawal rate will generally be safe for your portfolio and then, going up with inflation, it'll take care of inflation for you. It gives you some room for volatility and things like that. That's a good place to start. So if you wanted to just use a rule of thumb, you could take the income amount that you think you're going to need today, total spending including paying for taxes and everything else, and then you divide that by 0.03. And that should be the amount of money that you have. That's really a rough figure because it doesn't have all the taxes and other things put in place, whatever's particular to you. But in order to get a real analysis of it, there's a lot of considerations that you need to go through, like, for example, your asset, your tax planning, your estate planning, all that stuff. To get it right for you, do a retirement needs analysis and do a forecast, and we have certified financial planners that do that work for us. I'm in the investment side and the wealth management side of the business, but this is something I highly recommend doing so that you can get the right picture for you, get an idea about what type of investor you are, you know, and go through a process where you know you, you know what we do is, we meet one-on-one with you and then we'll talk about your situation, your goals. I'd help you identify and prioritize those goals, get systematic about it and do an inside analysis so that we can look at the details of what it is that you are in a situation now, what your situation is now, what your strengths are, what your gaps are, and evaluate different scenarios for you to see which scenario is better for you. And a design advantage to say, okay, now you've got a design that's right for you. And then the ongoing management of your assets in the plan and then to do regular reviews to make sure that you're on track. So that is a general service that my firm does. So if you have any need for that, you just let us know. But I wanted to give you tools so that you can start thinking about what it is that you should do to prepare your portfolio. We could literally each section, we could dive so deep into it, but I wanted to just give you an overview of everything. So now I want to give you some resources as we start wrapping up. I want to give you guys each and one of you an opportunity to get a copy a free copy of my Financial Freedom Blueprint book and, along with a white paper, the 10 Avoidable Surprises that Derail Executives Planning for Retirement. And then also I'll send you an email right where you can give us your address and we can mail that book out to you a signed copy, and then also we'll give you a link on how you could take that risk assessment to figure out what type of investor you are, if that's something you want to do. And then we'll also give you a scheduling link. If you want to have a retirement needs analysis, you could schedule a Zoom call with us and do that. And I also want to invite you to listen to my podcast, the Market Call Show. You could go to pathtorealwealthcom and get information about that. So that's basically all I have today. I apologize for the delay that we had earlier and hopefully we'll get it right. I'm going to be doing these various types of topics every month, once a month, mainly so that I can answer as many questions as I can to people the most common questions that we've been getting. So thank you very much for joining and hopefully, if you would like to come to some of the other webinars I'm doing, you could do that and we will send you out an email. And, tom Basso, I want to thank you for all of your input too. I appreciate the. You know your perspective on things and you've been a great mentor and learner for me as well.