The following is the transcript from Episode 15 of Retire Happy with Roger Gainer, a financial and business audio podcast.
Clark: Risk is present all the time and the difference in my experience between people who are successful and people who are not is how they approach and manage those risks. You\’re listening to Retire Happy with Roger Gainer, President of Gainer Financial and Insurance Services Inc. Risk is everywhere. So how do you respond to risk? How will you protect your investments? In this episode, Roger walks us through the different types of risk, and a few tools on how you can better navigate all the things we\’re taught in the marketplace of what we should and shouldn\’t do. He also offers some of his best practices on how to establish a logical approach to maneuver through risky and uncertain times. Thanks for joining us. I\’m your host, Clark Buckner. Let\’s jump in.
Roger, great to have you back on the call. I can\’t wait to talk about today\’s topic. It\’s all about risk. So first, how are you doing?
Roger: I\’m doing great. We\’re getting a little rain around here. Thank goodness. So maybe we\’ll have good crops and otherwise, we\’ve had some new additions to the Gainer Financial family, and we\’re very excited about having those folks on board and watching them develop. So yeah, positive stuff.
Clark: Excellent. Well, today\’s topic is all about risk. And I\’ve heard you talk about risk before, but I\’m really eager to hear really zooming in what it is, what it isn\’t, why some people, some of your clients, people you interact with, why some people just have a hard time with it and how it can really paralyze them and control them, but in the other breath, how some people can conquer that and not let it, you know, keep them from finding success and being able to retire happy. So how about we just start off with talking about generally what is risk in your words? How do you describe that?
Roger: Well, risk, as defined by most folks today, is the risk of loss. Now this can be a loss in an investment, this can be a loss, your house burns down, those poor folks up in Sonoma and Napa counties with all the fires and then down in Southern California, you know, that was a risk that hopefully most of them, I know not all of them, plan for and had a strategy in place. Anything that can upset the applecart of your life, is those are the risks to things working out the way you planned or the way you hoped or the way you, you know, would have preferred. So it\’s those things that get in the way. I like to say that life is messy and we can\’t predict where it\’s coming from.
And when we go through risk management discussions with clients, the first thing we\’re trying to determine is what risks can you accept and manage on your own, and what risks do we want to hedge, if you will. So that\’s usually the first line of risk management of that nature is insurance, your homeowners insurance, your car insurance, your health insurance, disability insurance, long-term care insurance. Those are risk management tools. But when we start going through the list of different kinds of insurance products and insurance policies, people start rolling their eyes and they say, \”I\’m insurance poor. I write so much premium checks, so many premium checks. It just drives me crazy how much money I give to insurance companies.\” You ever feel that way, Clark?
Clark: Yeah, yeah, I can relate to what you\’re saying.
Roger: I have an insurance license and I feel that way. So I can\’t imagine somebody else not feeling that way. So what I mean by the previous statement is we want to change the relationship with insurance companies. That\’s a starting point in almost every engagement. And we determine where insurance fits, because I used to carry a book around that had a picture of a castle, and back in the Middle Ages when they build castles, they didn\’t start with the castle. The first thing they built was the moat, and then the second thing they built was the wall, and then inside of that is where they built their castle. That\’s where the valuable stuff, you know, was brought in because they could protect it.
That picture used to remind me that if we\’re gonna build wealth, if we\’re gonna build a future, if we\’re gonna build a lifestyle, we better protected, otherwise someone\’s going to come and take it from us. That\’s the nature of the world today. Now, it isn\’t like the Middle Ages where, you know, guys on horses with spears and bows and arrows come McAllen and swords. Today that can be, you know, another driver fire. It can be a market manipulation, it can be, you know, any one of a number of things. And so we have to evaluate those things, because I don\’t wanna make a plan for somebody that\’s so delicate if one thing goes wrong, the whole plan falls apart. Yeah, that\’s the way most people\’s plans are when I first sit down with them. Any one thing, a market correction, a lawsuit, losing a job, can destroy their entire financial security.
Clark: So you\’re talking about where it fits. When do you think about what doesn\’t fit? Is that part of the thought organizer? How does that all fit together?
Roger: It\’s part of the thought organizer in that, you know, we want to understand what you\’re feeling is about certain kinds of risk. Because like I started with risk is everywhere, but how we deal with it can either end up with us being a victim of that risk or benefiting from it. Another synonym for me in a lot of risks is opportunity, especially when we\’re talking about markets, investments, and those kinds of things. You know, when the appearance of risk is ratcheted up, usually that\’s when there\’s money to be made. Think back to 2008 and…by 2009 nobody wanted to be in the stock market. I mean, I talked to people, said, you know, \”Hey, look at how far down it is. You know, we may not be at the bottom, but we sure got to be a lot closer than we were in a year and a half ago.\” Most people could not accept an investment in stocks at that point, yet in retrospect that was one of the safest times to buy stocks really in the last 25 years.
Clark: Interesting. At so one glance something may seem really risky, but in fact, it can actually be safe. So what does that say about how we look at opportunities that may be \”risky\”? And how do you start to think about changing your lens, so what you do see is closer to reality versus something that is skewed out of fear?
Roger: Well, you know, we\’ve talked a lot about…you even brought it up just a few minutes ago, the thought organizer. When you understand what your objectives are then you can determine and ask yourself, \”Does this risk serve my purpose? Is this going to move me ahead if I take this activity?\” So sometimes risk management is defensive and sometimes it\’s offensive. It was offensive for people to buy houses, foreclosed properties back in in 2008 and 2009, but it was a hard thing to do. See, we have to understand our personal emotions and how that determines what risk really is. I would put it to you that in 2005, there was zero risk in residential real estate. Didn\’t matter where you bought it, didn\’t matter what part of the country, and pretty much didn\’t matter what you paid for.
Houses just were going up in value and that was that. So people just bought indiscriminately. They didn\’t really think about what they were buying, and they didn\’t really concern themselves with price because they had to get in. That\’s FoMO, the fear of missing out. And that can make us take risks that we didn\’t really thoroughly appreciate. But, you know, even though we were all cocky and confident in the future of those prices for residential real estate, we know what happened in 2007 and it was pretty ugly, because there is no risk until there is. There was no risk in 1998. You could have bought anything with a dot com, anything that said tech company on it. There was a company that basically their only product was a sock puppet and their stock went insane. They were delivering dog food, for God\’s sakes.
They were spending more on UPS shipping than they were on the dog food itself, and they had free delivery. Needless to say, it didn\’t last very long. But if you bought that company in in 1997, it went up because there was no risk. Everybody said, \”This time it\’s different.\” Anytime you hear those words, your little radar should go and start flashing. This time it\’s different. We\’ve been hearing that now with all kinds of markets. You know, this time it\’s different. Gold\’s gonna go to $3,000. This time it\’s different. The stock market\’s gonna end up at 30,000. You know, we do need corrections. Well, the more things change, the more they seem to stay the same. And if you don\’t learn from history, you\’re gonna be swallowed by it, frankly.
Clark: This time it\’s different. And you find people that\’s what they\’re telling you, and that\’s what… Like when people come to you, what kind of…I shouldn\’t use word \”baggage,\” but when you meet with potential new clients, and what are the kinds of things that they bring that maybe they need to get over first? You talk about the emotional fear people have, all of that.
Roger: Well, there\’s a belief system. You know. Wall Street particularly is one of the greatest marketing organizations ever put together. They have people believing that the only place to be, the only place you can make money today, in the long run, is in the stock market. Yet most wealthy folks in this country, most folks that are on the Forbes 500 list or the Inc. 1000 list or whatever list of incredibly rich people that you wanna look at, they made their money in one of two ways. They started a business or they invested in real estate. There\’s not a whole lot of folks, unless they started a brokerage firm like Charles Schwab or something like that, that made their fortunes in the stock market.
Usually, then there are few, but it\’s like how many people make their fortunes in casinos playing poker? There\’s a few, but most people can\’t cut that mustard, right? They\’re gonna get swallowed up in the world of professional poker, because of all the same reasons they get swallowed up in the stock market. Emotions, taking chances that they don\’t understand. That\’s a great segue actually. The great poker players, they understand how to manage risk. They either manage it through good money management when they\’re betting and know when to hold them, know when to fold them kind of a thing. They don\’t stay in every pot. They decide when it makes sense to, you know, call and raise and when it makes sense to just stay on the sideline and live for another day.
And I would put it to you that people of wealth, they get this. They understand that you got to take risk but take it on your terms, take it when you fully understand that risk and, you know, and then take bold action with discipline and objectives and stick to your discipline. Now that\’s very hard for most people because we are encouraged not to live that way. We\’re hit with over 100,000 marketing messages every day, whether it\’s eating a better bowl of ice cream or driving a nicer car. You know, these are all roadblocks to clear thinking. So we\’ve been taught strategies by Wall Street to just accept the risk, because heck it\’s time in the market instead of timing the market. You ever hear that one?
Clark: No. That\’s a new one for me.
Roger: Okay. Well, Wall Street would have you believe that it is important for you to stay in and never sell your investments, because if you sell your investments you might miss one of the 10 best performing days and that\’s when most of the market gains are made, is on those days. Now, mathematically, there is some truth to that. I have a little chart here that says, if you go on December 31, 1927 and put $1 in the S&P 500 that in 2015 that $1 would have grown to $11,000 and change, so 11,000% return. That\’s very impressive. And if you\’d missed the 10 best days, you would have had only a gain of about 380%. So that is a significant downside.
However, this particular study went on to look at the other side of that coin. This is the part that Wall Street doesn\’t have you look again. What if you miss the 10 worst days? If you missed the 10 worst days in that time frame, your rate of return would increase to 37,000%, not 11,000%, 33 times better performance by just missing the 10 worst days in market history. And interestingly enough, if you missed the 10 best and the 10 worst, your returns would still increase overstaying invested. So it just shows you the weight of losses yet people… I hear it all the time, \”I have to stay invested. I have to stay invested. I have to accept risk.\”
I just got an email from a client yesterday, who said she went in to talk to her people at Charles Schwab, and they insist she has to be in bond funds. And I explained to her the risks of bond funds today, they\’re much riskier than what the reward is. So, you know, to me it\’s just not a good deal right now. And she was told by Schwab, \”We have no other way to de-risk a portfolio than to use bond mutual funds.\” And it\’s bond mutual funds that have a lot of risk at this point in the interest rate cycle, at this point in the bond issuance cycle. And this isn\’t a call a podcast about the bond market, but there\’s a tremendous amount of risk in the bond market. Many people think that that\’s gonna be the trigger for the next 50% correction.
Clark: Very interesting. Man, so to zoom out and…
Roger: I didn\’t mean to catch you speechless there.
Clark: I\’m trying to keep up. I\’m taking lots of notes here. So as we\’re thinking about really taking a different look at what risk is. We\’ve talked about some of the ways that you\’ve seen people try to overcome those roadblocks to clear thinking, the other like we\’re seeing just unbelievably high amounts of marketing and advertising every day telling us, \”You should do this. You should do that.\” And you gave this phrase, \”Stick to your discipline.\” So one of the final questions I wanna be talking with you about is I know earlier we talked about the thought organizer, and for anyone who\’s not familiar with that please explain it. But then how can you start to stick to the right kind of discipline? How do you go through those practices, I suppose, to find a better discipline and then be able to stick to that and be confident that you are in the right discipline?
Roger: Okay. Well, the first and I would say most important advisor that you have is your gut. Okay. If something doesn\’t feel right, ask more questions, ask lots more questions. And if you don\’t like the answers, get up and walk out, move on. There\’s a lot of options. There\’s way more options in… I like to say I have a bigger toolbox than Fidelity or Charles Schwab, just because we work with all kinds of tools and not just stocks and bonds. And it\’s really selecting those tools that are gonna serve whether it\’s your discipline or your vision, it\’s that vision that really creates the discipline. And if I can\’t be comfortable with what my money is in if it\’s keeping me up at night, I\’m not gonna be clear thinking, I\’m gonna be nervous.
I talked to a lot of people who jumped out of the market. I talked to one just last week. Said, \”On the eve of the election, I was so nervous. I pulled everything out of the stock market. I just was so worried about what was gonna happen and I\’m frozen. I can\’t get back in. I don\’t know how to get back into the market. I feel like I\’ve lost missed everything.\” And for him, I said, \”You probably shouldn\’t be in the market. We should probably look at other things because you\’re frozen by this fear.\” Let me explain how most people are accepting these risks without knowing, Clark. A lot of our listeners participate in something called a 401 (k). And how do we fund a 401 (k)? It\’s funded by a payroll deduction. Every time you get paid, usually that\’s twice a month for most people, they deduct some percentage or specific dollar amount and they put it into a mix of investments. Those investments for almost every participant is a mutual fund or a series of mutual funds that they select from and create a portfolio. Now that sounds like a pretty good idea. In fact, they call it $1 cost averaging.
So the point is, you\’re being forced to buy when you don\’t wanna buy, which is, you know, for some people, that\’s a good thing, right? Because they wouldn\’t be buying if the market was low and because you\’re not thinking, \”Okay, so I don\’t have the discipline. I don\’t trust myself. You know, this is the only way I\’ll ever buy when the markets are down.\” The problem with that is that you\’re buying when the markets are up too. And really, let\’s think about it right now, given that we\’ve been nine years, not nine months, nine years without a greater than 20% correction, and that\’s the longest continuous time without that kind of correction in the post-World War II era.
And the fact that about every five to nine years we get a correction like this, it says to me that we\’re a lot closer to a correction, a significant correction, than we are to, \”Why seen the market double from here.\” Okay? You have people that are piling in because of that FoMO, F-o-M-O, fear of missing out and that, you know, gosh, we just gotta be there because look at it go and it\’s going without me. So I just have to get in, whatever that takes. And yet, logically, now would be the time to de-risk your portfolio. I mean, logically, we\’ve had a huge run-up last year. And if I think dispassionately and I look at history, the only time we see 25% and 30%… I shouldn\’t say the only time, but for the most part, when we see 25% or 30%, 35% jumps in the stock market, it\’s coming out of a big market correction.
So we saw that back in 2010 and 2011, we saw big rebounds off the bottom. But it\’s easier because your percentages are great because the numbers are smaller. If you understand that math, you know, you\’re gonna have, it\’s easier to have a 25% up year when the market is at, you know, 8,000 on the Dow Jones instead of 25,000 on the Dow Jones. So the other time we see those is towards the end of a bull market. When that fear of missing out, people jump in, valuations get a little crazy, optimism runs rampant. We think, \”Oh my goodness, you know, it\’s gonna go up forever.\” Just like real estate was gonna go up forever in 2006, the stock market\’s gonna go up forever. Just like gold five, six years ago was gonna go up forever.
You know, it was headed at $2,000 and then $3,000, and $4,000. And we always read those articles. And it\’s because of immediacy bias, and whatever\’s happening right now to us is gonna happen forever. And we know that things work in cycles. So if you\’re buying all the way down, well think logically why that people who are the market makers would want you to be doing that. Yes, it\’s dollar cost averaging, but it\’s also providing liquidity to the market insiders who wanna get out. They need to know that there\’s money coming in the market on a regular, regular basis. And most 401 (k\’s) don\’t allow you to de risk anymore. They\’ve taken a lot of the more conservative options out of their offerings through encouragement by Wall Street because frankly a CD does not make anybody a commission.
So those kinds of assets used to be 25, 30 years ago used to have guaranteed options in most 401 [k\’s], those are gone. In fact, the only one I\’m totally aware of right now, well, it\’s true, one is from an old employer of mine that I\’ve still got money, they\’re earning 5% guaranteed with no risk to principal. And I just can\’t move it because I can\’t do that anywhere else. And the other place is in the government\’s 410 (k) plan for federal workers called the Thrift Savings Plan, the TSP and they have something called the G Fund and the G Fund has a guarantee of principal. Doesn\’t\’ pay much interest. It\’s paying around 2% right now. But if the market crashes, you\’re gonna feel pretty good if you\’re not losing all that money.
So the question that I want our listeners to ask asked themselves right now is, \”Do I have a plan in place to protect myself from another 50% correction?\” You know, we got a shot across the bow two weeks ago. We saw volatility come back in a way that, you know, everybody\’s kind of forgotten that markets go in two directions. So we got that little bounce back. It\’s going on as we speak. We we\’ve come most of the way back from that sell-off of late January and early February, but, you know, how much higher is it gonna go? I don\’t know. But is there more risk to the downside? I would put it to you that it is. Logic tells you that every day, the market goes up, bring as sense closer to a day the market will go down and vice versa.
But people forget this. So it\’s so much easier to take profits than to take losses. It\’s so much easier to reposition when the markets are functioning well like they are now and there\’s liquidity and there\’s high volume and good participation, and you wanna ideally sell into strength, into an up market as opposed to into a down market. So for all those reasons right now is a great time. It\’s probably the best time you\’re gonna have before a major correction occurs to put strategies in place to protect yourself from a potential 50% correction. Now, do I know when it\’s gonna happen? No. Do I know that it\’s gonna be 50%? Absolutely not. In fact, last time it was over 60%. It might only be 30%, but do you wanna go through all of that?
Clark: A lot of ways.
Roger: So what\’s the strategy? How are you going to protect yours? Because nobody\’s gonna care as much about yours as you do. Okay? No matter…
Clark: I think that…
Roger: Yeah, go ahead.
Clark: Yeah. I also start wrapping it up because I know you\’re you\’ve got a packed out calendar, and I think we\’re at close to the end here. And I think I think you are about to bring us to the final invitation that we like to talk about, and that\’s the thought of organizer. And so when you\’re talking about follow your gut, like listen to your gut, pay attention to how you\’re feeling, and if you have questions to keep asking them. So the next step in all of us this, I know we\’ve been talking a lot about risk and none of this is designed to scare anybody, but it\’s hopefully what I\’m hearing from you is this is an encouragement to really think through why are you doing the things you\’re doing. And a great tool that you\’ve created, a good first step to take is the thought organizer. Just really quick, how can someone access the tool the free tool, the thought organizer? And how is it a good first step for someone? And then we\’ll wrap up after that.
Roger: Okay. Well, the thought organizer is available on our website www.gainer.financial.com. And just scroll down to the bottom of the first page and there\’s a little form right there that you can ask to have it downloaded. And we put in a little bit of information, and there it is. You can download it, print it out, or you can fill it out. It\’s a fillable form. If you have a partner, a spouse, then I recommend that you each fill that out separately and come and compare them to each other to find consensus. It\’s a great way to head off a divorce or a nasty breakup, because you didn\’t know something about your partner. And it\’s a great way to get on the same page and clarify your thinking. So you have context. You know, that the person that\’s got 30 years to go before retirement has a completely different perspective than the person that\’s got 30 days until retirement.
So being able to clarify where you are and what you\’re doing all this for, your why, like we\’ve talked about before, and that\’s where the thought organizer comes in. Once you fill that out, I would encourage you then to go to your advisors, whether it\’s an investment advisor, financial advisor. And now that you have that context, ask them, \”What\’s the plan to protect me from the next 50% correction?\” And hopefully, they come up with something more than, \”Well, we\’re just gonna increase your exposure to bond funds.\” I could probably devote an entire day to bond funds. I\’ve written some blog posts about bond funds. They\’re not a tool that\’s horrible all the time, but I believe that people just do not understand the risk that they are exposed to right now from most bond funds. Not all, but most bond funds have way more risk than people understand. This goes back to accepting risks on your own terms.
Clark: I think it\’s a great cap right there is it\’s all about accepting risk on your terms. And I know you were saying…and you\’ve got a lot of different tools, and each set of work are doing your and your team is doing. It\’s all customized and it all based on their risk tolerance, right?
Roger: It\’s not just their risk tolerance. Really, that term brings up some nasty visuals, yeah, you know. on…
Clark: A lot of red flags. So let me let me rephrase…
Roger: How many times can I punch you before you say, \”Auw?\” That\’s a pain tolerance. It\’s really what they\’re asking with most risks tolerant questionnaires.
Clark: That\’s a good correction. Right. Okay, I guess what I was trying to say is you\’re really making it customized based on their needs. Is that more accurate?
Roger: Well, based on their attitudes, their objectives, you know, picking the tools. Frankly, if you wanted to play golf, would you run right out and, you know, buy Tiger Woods\’ golf clubs, or would you rather have Tiger Woods swing and then go out and get some golf clubs? I know Tiger has had some down years but most people know who he is, and one of the great golfers of all time. Me personally, I\’d take a swing. Once I know how to swing, I\’m gonna play pretty good golf with anybody\’s clubs. But having clubs and not having the swing to go with them, I\’m not gonna score any better. It\’s the same thing with picking investments. You know, people come to me. \”Oh, my uncle told me to buy that stock.\” \”Well, would you buy it today? \”I don\’t know even know what the company does. I know it went up a little and went down a little and I\’m not sure what to do with it. I inherited this portfolio.\”
Boy, I\’ve seen a lot of that today. \”My folks passed on and I have these portfolios at Fidelity.\” \”Well, have you laid any changes?\” \”No.\” \”Well, why not?\” \”Well, I\’m honoring dad\’s legacy.\” \”You\’re not honoring dad\’s legacy by losing money to the market, that\’s for sure.\” But most people say, \”I don\’t know what to do.\” And they the advisors, they\’re not asking the right questions and they\’re not getting feedback. They\’re just like hoping. So they\’re running through life with their fingers crossed. Ask your advisor, \”What\’s the plan? How are you gonna protect me? How is this portfolio gonna work when things go bad? Do you have a strategy?\” And if the answer is, \”I don\’t know\” Then you might wanna get a second opinion. And if you wanna use me for a second opinion, I\’m happy to offer a complimentary consultation. If I can be of assistance, then we can talk about setting up an advisory relationship.
Clark: Excellent. Rodger, thank you so much. As always, I\’m looking forward to our next conversation.
Roger: All right. You take care.
Clark: Thanks so much for listening to this episode of \”Retire Happy.\” Be sure to head on over to gainerfinancial.com to download your thought organizer to get started. Roger L. Gainer, ChFC, California insurance license number, 0754849, is licensed to sell insurance and annuity products in California, Illinois, Arizona, Pennsylvania, and New York. Roger L. Gaynor is an investment advisor representative providing advisory services through HFIS Inc., a registered investment advisor. Gainer Financial and Insurance Services, Inc. is not owned or affiliated with HFIS Inc. and operates independently. Thanks again so much, and we\’ll see you next time.