Introduction:

Welcome to Episode 2 of Retire Eyes Wide Open. I’m Scot Landborg - On today’s episode we are going to talk about Volatility and how volatility in your portfolio can hurt a happy retirement.

We’ll review the week’s news in the Money Rundown

We’ll talk about the best thing I saw this week at 2 in the morning

And our Scot Strategy Segment and Listener questions are all about managing the ups and downs of the market and how to get a handle on volatility in your portfolio.

Welcome to Retire Eyes Wide Open. Don’t go into retirement with your eyes closed, go into it with your eyes wide open. If your financial advisor and tax advisor aren’t talking, someone isn’t doing their job. There are two systems in this country. One for the informed and one for the uninformed. You can’t turn back the clock. You can only get better for the future. You’ll look back at this moment 20 years from now, and you want to know that you did everything you could to position your financial life. The world is changing and so is retirement.

Hi, my name is Scot Landborg and I’m here to help you retire with your eyes wide open. That means having the information you need and the clarity you deserve. It means understanding and interpreting the world as it changes. It means knowing about investments, taxes, social security and estate planning and how they’re all connected. And probably most important, it’s about living your best retirement life. The good life. You know, I meet with thousands of retirees. I see people doing it right. I see people doing it wrong. People that are happy. People that are depressed. I see people that are informed and people that are uninformed. And I’m going to show you how to retire with your eyes wide open.

Money Monologue:

Volatility can hurt a happy retirement! Did you know that? The ups and downs of the market can cause people to lose sleep … some people agonize over it. Volatility can be dangerous. More dangerous than you might realize.

When you’re facing down retirement, looking at your investments often becomes a higher priority. People pay closer attention. And they start asking how their investments are going to help supplement their other income sources in retirement.

Basically – where is your money going to come from? We can look at pensions, we can look at social security, and we can look at your investments to provide income.

I meet with people every week – some of you come to me and think of the S&P 500 as a money market account. You’ve got reckless with risk. You’ve opened up your account statements quarter after quarter and what do you find? A higher number than you saw last quarter.

If you’ve owned US stocks this has been especially true. Since 2008 – 9 years of almost uninterrupted bliss. Your account moving higher and higher. Since the low in 2008 – the S&P 500 is up over 300% since the bottom. This economic expansion has been the 2nd longest on record.

The question I have for you – is your portfolio prepared – is your retirement prepared for the next big drop? What we call volatility. Are you ready?

If you have an advisor that’s helping you with your money – you need to ask him or her a very important question. The next time the market drops 20% - what will you do with my money? That’s the question you need to ask. What changes might you make? And if the answer from that advisor is to do nothing, you may need to look for a second opinion.

Managing volatility is much more important when you’re 50 plus than it ever was before. We’ve put together a white paper on the differences between the accumulation phase your financial life and the distribution phase. If you want that report, go to our website. Go to RetireEWO.com to request the report or send us an email and we would be happy to send it to you.

What it clearly demonstrates is that when in you’re in your 30’s or 40’s volatility does not matter. You have the time to recover losses and you don’t need your investments to provide income. When you reach your 50’s or 60’s and start pulling money out of your accounts, managing volatility become of paramount importance. When you’re 35, growth is what matters. What investments are going to give you the most upside potential?

When you start pulling money from your accounts, volatility becomes your top concern. If you face market carnage like we saw in 2008-09 when the market dropped 57%. Or like 01-02 when the market dropped 49%. If you face that market carnage in the first few years of your retirement, you can completely run out of money in as little as 10 years.

Imagine retiring at 65, and at 75 you have nothing in your retirement accounts? Nothing. It’s possible. It’s happened to people. We are going to have another recession. It might not be this year, or next or 5 years from now. But it’s out there. Your average recession happens every 7 years. We’re 8 years in. What comes next?

The most important thing of all is not predicting when. It’s to start discussing now. What do we do if this—what do we do if that? What if our stock drops by 20%? What will we do? What if my accounts drop by 10%? What will I do? Ask your advisor. Talk to your friends. What is your strategy? What is your advisor’s strategy?

The most important thing is to get your head out of the sand and realize you’ve had a little luck on your side over the past 9 years.

It’s been okay to put your head in the sand and not pay attention over the past 9 years. But in the years ahead, you can’t afford that. The stakes are so high.

Promise me this--don’t make any rash moves but start educating yourself on the dangers of volatility in your retirement plans.

Start opening your eyes and ears to find ideas to combat it. Start stress testing your own portfolio to see how much volatility risk you might be exposed to. There are some great tools to help you do that online. And we’d be happy to help you as well. If you want to get together and talk about the risk in your own holdings, go to our website – retireewo.com and click on schedule a consult. We’d be happy to meet with you.

Money Rundown:

Our money rundown segment is where we cover the week’s news.

There are a lot of media sources out there that are going to give you updated information about the economy and the markets. My job is to help summarize and synthesize – help pick out a few stories that are most important for you, as a retiree or investor.

Story #1 – Facebook.

Facebook stock plunged on earning last week. The stock dropped over 20% in a day after the company said it expects revenue growth to slow as it "puts privacy first" and rethinks its product experiences.

1. Facebook stock plunges on earnings https://money.cnn.com/2018/07/25/technology/facebook-q2-earnings/index.h...
Overall revenue is up from the same quarter last year, but less than Wall Street estimates.

And investors are concerned about less engagement from users and upcoming changes to their advertising platform.

So, what does that mean for you?

If you own Facebook stock, it was a tough week to watch. If you’ve been waiting to buy Facebook, maybe you were happy about the pull back. Facebook is still the dominant social media player and challengers like snap chat have struggled to gain ground as Facebook keeps adapting.

I think the most relevant story here is about if you should own individual stocks at all. I think it reminds us how important it is. If you are going to own individual stock, you’ve got to understand that there’s a significant risk. You could be down 20% in a day. Are you okay with that much volatility? There’s much more volatility in individual stocks. Lots can change even in a day. You need to make sure, if you’re going to have individual stocks, you need to have what’s called a “sell discipline”. When you buy a stock, know how long you plan to hold it and what conditions need to be met for you to exit the position. When are you going to acknowledge that you’re wrong? If you’re going to buy a stock, you need to have a set rules in place that says hey, if the stock drops to this price, I’m going to sell. Or if these conditions change, I’m going to reevaluate. Where people make the biggest mistake, is when they fall in love with the stock and even as they watch it go down, keep making excuses as to why they want to continue to hold it. Also, don’t have too much in any one company. And finally know their place in a portfolio. Individual stocks are riskier. Maybe they should be in the ROTH portion of your portfolio, where they can grow tax free. You can pull out tax free in retirement. Maybe they belong in the cash portion. Or the non-qualified portion of your portfolio. Kind of a longer term buy and hold where when one of you pass away, you or your spouse, you’ll get a step up in basis. You can sell that stock and pay no tax. So understand where they fit in an overall portfolio. Don’t have too much in any one company. And make sure you understand their overall place in your portfolio.

Story #2

The labor market is strong. Did you know that “Only 6 months in the last 40 years have produced an unemployment rate of 3.9% or less? Including the April 2018 jobless rate of 3.9%. 6 months out of 40

years represents just 1.25% of the months over the last 4 decades or equal to 1 out of every 80 months.” That according to a recent Department of Labor report.

How does that impact you? We have to understand the strength of this economy. Jobs numbers are not leading indicators on where the market is headed. There are other stats more reliable for that. But the economy is currently strong and helps justify some of these strong equity valuations in this rising stock market.

And the recent tax bill--profitability of S&P 500 companies. This economy can go event higher. Make sure your portfolio is not just positioned to manage risk, but also to capture upside and continue grow if the market goes higher.

Story #3

Robots are going to take your job, according to a recent McKinsey & Company report.

By 2030, i.e. just 12 years from now, 23% of the “on-the-job” hours of Americans workers could be automated and completed by artificial intelligence and robotics.” McKinsey & Company, BTN, 5/7/18

What does that mean for you?

Thank God retirement is in the cross hairs! More seriously though, some of you may have faced layoffs over the past 30 years as more and more work moved overseas. Now the story will be robotics and automation taking over more and more work.

If your plan is to keep working 5 more years, what would you do if you were laid off in 2 years? Or laid off tomorrow? Can you adapt your plan? When would you take your social security or tap your investment? How would you get your healthcare? Topics we talk about with clients all the time when discussing different scenarios and income planning projections. Make sure you have an adaptable plan.

Also, make sure your investment accounts account for this changing world too. Toys R US – gone. GE – tanked. Make sure you really look at what you own, how you invest and are you ready for this new world? Is your portfolio ready for this new world? Or Amazon gobbles everything up. Is your portfolio ready for this new world ahead?

And that’s our money rundown for the week.

Best Thing I Saw This Week:

http://www.espn.com/video/clip?id=24220355
In case you didn’t know, I have a 2.5 year old son. And I woke up to him last Sunday at 2AM - screaming his little head off. Something no parent wants to wake up to. Likely just a bad dream. I went in to comfort him and we ended up on the living room couch watching SportsCenter. Not bad right?

It was there, watching SportsCenter that I saw the best thing I saw this week. SportsCenter did a profile on the Olympic High jumper, Jamie Nieto. Jamie is a top ten US high jumpers. And after his Olympic career ended he married his Olympian girlfriend. He began a college coaching career at Azuza Pacific University.

Then tragedy struck.

Jamie, who had been a professional high jumper for years, and years and years had done back flips thousands of times. This time, while on camera he slipped, and he broke his neck doing a back flip. Jumping. Doing the thing he’s a pro at.

He had such an inspirational story of recovery. They said he’d never walk again, but he defied the odds. It’s a great story and we’ll put a link to it on our Facebook page. It made me think of retirement life. We’ve all heard of someone who works their entire life, only to have something happen shortly into retirement to derail their plans.

It happens a lot. It a reminds me of a few things – a couple pieces of advice:

1. Don't put off what you want to do - do it -do it now! Don't wait. In retirement you have the go-go and slow go years and what we call the no go years. Make sure you have a plan and do what you want to do early. Don’t wait.

2. Make sure you financially plan for worse case scenarios and be prepared for the what-ifs. Crazy things can happen. And make sure your financial plan is ready to handle it. Things are going to happen and your advisor that’s working with you really need to look at those what-ifs. Talk through different scenarios and how you can adapt your plan so whatever comes your way—whatever curve balls get thrown your way, you’re ready. At least as ready as you can be.

3. Face challenges with as much optimism as you can muster. Know you’re going to face them. You’re going to face challenges and do it with is much grace as you can. Don’t be surprised. We get older. It’s going to happen. You’re going to get sick. Your spouse is going to get sick. A kid. Something may happen to your parents. Your parents are going to go through a very challenging part of their life. Be ready for it. Know that it’s going to happen. Don’t be surprised by it. So make sure you’re doing those things in your life, that you’re doing them now, that you’re enjoying life every day. And don’t be surprised when those challenges come.

4. Know there will be challenges - enjoy where you are. Enjoy where you are right now.

You know who I meet with every single day? A lot of people that are not prepared for a sick parent - even less for a sick spouse. It actually surprises them. And it's human nature, right? As much as we want to prepare, going through it is so much more intense than even if we plan for it.

That being said, the biggest mistake is having your eyes closed. Simply thinking it through. And putting protective measures in place in your financial life can be very helpful when you need it. Think emergency procedures. I heard of advisor that did a fire drill for his clients. He showed up on their doorstep one day unannounced– knock, knock, knock- if this tragedy struck, what are you going to do now? Think about that. If something happened to you, if your financial picture in order? Are things the way you want it? And make sure you’re positioning your financial life to take advantage of today.

And that’s the best thing I saw this week.

Scot Strategy Segment:

Earlier in the show, we highlighted why volatility is a concern but what are some ways to deal with volatility? How do you get ahead of it? How do you start making changes to prepare for the future? I have a few strategies and tips to help you as you navigate the financial world and as you try to deal with managing volatility.

1.) Stress test each holding you have—every investment you have. Whether it’s an ETF, whether it’s a mutual fund, whether it’s an individual stock. Look at the ‘08 and the ‘01 numbers for each position you hold. This becomes even more important than the long-term performance track record of those positions. If you’re concerned about volatility, you need to stress test those positions. Understand how risky the things that you own are. You’ve got to have your eyes wide open about what you have. It’s been easy to keep your eyes closed because you’ve been making money for the past 8, 9 years, but let’s take a real look at where you are now. If we have another ’08 or another ’01 type of environment, how risky is each one of your positions?

2.) Have a sell discipline. Whenever you make an investment – think about what would have to change for you to sell or get out. People fall in love with stocks all the time. And those are people that run into problems. I don’t care what stock you own, I don’t care how many years you’ve worked there, you don’t know what the potential risks are around the corner. And sometimes the risk isn’t that it’s going to lose money, but maybe the risk is that you don’t make a lot of money over the next decade. Certain stocks just don’t grow over a period of time and people fall in love with what they think they know. Just because you work at a Fortune 500 company doesn’t mean you know everything about that business. Doesn’t mean you know everything about the competitors in that business. So you really need to think carefully about a sell discipline. And this becomes even more important when you have a lot of your portfolio wealth concentrated in one position. I meet with people all the time—50% of their money in one stock, company stock, and they fall in love with it. So you need to have a sell discipline.

3.) Ask your investment manager about their investment philosophy. Do you believe it bodes well for the future? So when you’re thinking about your portfolio, the returns, the risk--you really want to get to the bottom of what is your investment manager’s philosophy. What’s their fundamental approach to how they make investment decisions every day, because it’s going to give you confidence about how they’re going to make decisions going forward. It’s important to look at past performance numbers, but it’s not the only indicator when you think about the future. Did they get good performance numbers because they’re lucky or did they get good performance numbers because they have a good outlook to how they manage investments and how they make decisions? Are they an active manager? Are they a passive manager? Is it about mean reversion? Is it about momentum? What is their philosophy and try to understand as much as you can.

4.) Understand that the next 5 years are not going to be like the past 5 years. The past 5 years are very different than how the next 5 years are going to be. Make sure you really understand and embrace that. The past 5 years, it’s been a rocket ship to the moon. Every time you open your account statement, you’re making more money. The next 5 years, there’s a very high probability of a recession—a pull back. Make sure your portfolio and your positions are prepared for that new world.

5.) De-risk your retirement income picture. Look at adding more guarantees to meet your basic needs so you can sleep at night. Then take more risk with the rest. What am I trying to say? When I get together with people one-on-one, one of the first questions that we’re asking is, “How much income do you need in retirement?” Then we look at where the income is going to come from. Is it going to come from social security? Is it going to come from a pension? Is it going to come from investments? We look at where the money is going to come from. And I encourage you to de-risk the retirement income portion. Whatever you need for income from retirement, take the risk out of it. That’s social security. That’s pension. That’s other guaranteed income sources. The rest of it can be gravy. The rest of it is the frosting on top of the cake. That’s where you can take some more of a risk in your portfolio. You’re going to sleep better at night knowing that paycheck that you need is going to cover the basic stuff you have in retirement. And the basic stuff that you need in retirement.

Listener Questions:

If you want your questions answered during the show, go to our website and click on our button to have your question answered on the air. We’d love to get your question addressed so if that’s something you want to do, visit our website.

Joining us is our producer, Angela.

Angela, thanks so much for joining us and what kinds of questions do we have from some of our listeners this week.

[Angela] Thanks, Scot. So the first question is Sloane in Laguna Niguel, CA.

My wife and I have been making over 9% per year in our investments since the last big crash. We’ve been doing great and I’m hesitant to make any changes. We have about 90% in US stocks – very low fees. How do we lower our risk? Bond have been just awful.

[Scot] Well Sloane, congrats on making money in this market. Making changes is difficult. Especially when you’ve been winning. You’ve been winning year after year. But I’d say, first of all, if you go to the casino and you put money on red and win 9 spins in a row, maybe take a little bit off the table. Maybe manage risk a little bit better. My first piece of advice would be to interview multiple advisors. If you want to set up an appointment with myself, go to our website RetireEWO.com or SterlingWPartners.com. Click to set up an appointment. I’d be happy to meet with you one-on-one and talk about how our investment strategies could help improve what you’re doing. Still get good performance potential but better managed risk. And we do that through some of our actively managed strategies. But don’t just meet with me. Meet with multiple advisors. Really have an understanding of how they manage money and how they can help you. As you’ve been accumulating wealth, having an advisor by your side hasn’t been as important. It hasn’t been as important the past 9 year as you’ve been winning year after year. But now the stakes are higher. If you run into a volatile market—if you run into a whip-saw market, you can run out of money. So it might make sense to bring in an advisor to manage part of your portfolio. They don’t have to manage all of it. Maybe they manage half of it. Maybe they manage a quarter of it. But what the advantage is to you having a professional help you, is they can kind of be your canary in a coal mine. They can help give you some indications on how they’re managing money and where they think the market is going. If you’re managing it simply by yourself and you see trouble down the road, how are you going to feel comfortable making decisions about when to pull out our when to make adjustments? You need to have the right professionals in your life so that when trouble hits, you’re ready and you feel comfortable about making those decisions moving forward. A couple of other things. You said you’ve got 90% of US stocks. That’s a lot of risk. That’s a lot of risk for your retirement picture and I know bonds have been terrible and we’re not very optimistic about them moving forward but there are some other alternatives that you could look at for the conservative piece of your money and if you want to talk more about it, I encourage you to set up a one-on-one.

[Angela]. And our next question comes from Janice in Mission Viejo, CA.

Hi, Scot, I’m an index investor… been so for years. Is there an index that can help me lower my volatility? And what do you think is a good amount of risk for someone to take?

[Scot] Well Janice, thank you so much for the question. Is there an index that can help lower your volatility? There are a whole bunch of new emerging indexes out there and they’re worth looking at very closely. But they can be complicated and you really need to understand the mechanisms for how they’re doing the calculations and what they’re doing to reduce volatility. I think, again, this is an area where you want to look at hiring a professional. Talk to a few different professionals to find out what they’re doing to manage risk. What is their philosophy? What is their fundamental approach? How do they make decisions to help manage risk? Because sometimes it’s not about finding an index to help manage volatility, but it’s about finding an advisor that uses indexes to better optimize volatility. Maybe you’re more in the SMP 500 index this quarter, but next quarter maybe you’re in more of a conservative index. About how much risk you should take—this is really a personal question. We really need to address a number of different issues, including where is your income going to come in retirement. How much of your assets are you going to need to produce income in your retirement? If you don’t need your investments to provide income, you can afford to take a lot more risk. I met with someone recently and they made over $15,000 per month from pension income from the state of California. Pretty crazy. What’s interesting about this person is that, despite having a significant income from the state of California, they’re a very conservative investor and don’t want to take any risk which is kind of very different from what I normally see. If you don’t need your investments to provide income, you can afford more risk. Now you may not take more risk because maybe you don’t like taking risk but you can afford to take more risk because you don’t need your investments to perform to provide income. As soon as you say, I’m going to pull income from my investments, it changes the risk factor significantly.

[Angela] And the last question comes from Lois in Yorba Linda, CA.

I have a portfolio of mostly dividend paying stocks. Shouldn’t that offer enough protection against a falling market?

[Scot] Lois, thank you so much for the email. Dividend stocks do provide you with something. They provide you an income stream as you may wait for that stock to recover. But they are not immune from

volatility. They’re absolutely not immune from volatility. Look at those stocks. Look at each one of those holdings. I challenge you to put them all in a spreadsheet and then look at their performance in 2008. I would challenge you that dividend paying stocks were nearly as volatile as any position that you would own. Just because they have a high dividend didn’t mean they weren’t going to go down in 2008. And I don’t care how high your dividend is, if you’re pulling income from those investments—if you’re liquidating stock to pay for your income…pay for your lifestyle, volatility matters. And dividend paying stocks are absolutely not a defense against a falling market. The other thing you have to keep in mind is dividends can change. Just because they’re paying a dividend today, doesn’t mean they’ll pay the same dividend tomorrow. And those dividends may get adjusted, especially if the market goes down. Make no mistake, dividend stocks are not the best defense against a volatile market and you need to stress test each one of those holdings.

Thanks for joining us today on the show. Angela, thank you so much for joining us. If you’ve got a question, again, hopefully this was helpful to our listeners. If you‘ve got a question, send us an email at RetireEWO.com. You can also follow us on Facebook, subscribe to our podcast on iTunes. I want to thank all of you so much for listening. Stay tuned next week as I continue to discuss how to retire with your eyes wide open. Don’t go into retirement with your eyes closed. Retire with your eyes wide open! I’m your host Scot Landborg and we’ll see you next week.