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Here’s What’s Wrong with Your Investment Risk Profile – Episode 133

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Do you remember completing a risk assessment the last time you set up an investment account? Did it really set your savings plan on the right trajectory, or did it simply cover your advisor’s butt in case you weren’t happy with the eventual returns? In this episode of Dentist Money™, Reese & Ryan talk about an Element called Equity Rate from our periodic table of financial indicators. They explain why traditional risk assessment tools fall short of measuring your investment needs, and how they miss the mark when it comes to creating the right balance of stocks and bonds in your portfolio.

Show Notes: Tt e-guide: There’s Only One Number You Need to Predict Your Retirement


Reese: Welcome to the Dentist Money™ Show, where we help dentists make smart financial decisions. I’m your host Reese Harper, here with my trusty old co-host, Sir Ryan Isaac.

Ryan: Buenos dias.

Reese: And he speaks– he’s a multi-literate Ryan Isaac?

Ryan: (laughs) multi-literate? That’s a thing?

Reese: Yeah. Two languages!

Ryan: I think you’re looking for bilingual.

Reese: (laughs) kicking this off on the right foot.

Ryan: It’s like a gameshow. “Um, the answer you were looking for there is bilingual.”

Reese: The host is supposed to be elevated; you don’t make the host look dumb on live radio.

Ryan: You’re right. You can’t look dumb on a skinny black tie, white shirt, black pants day though.

Reese: It’s a “Ryan Seacrest” day!

Ryan: I like it, you’re Ryan Seacrest. You look like you came out of a ska band. Like, the horn section of a ska band.

Reese: I play the trombone in a ska band.

Ryan: And you skank when it’s not your time to play? Is that how you skank?

Reese: Yeah. For those of you who don’t know what that means, the skank is a dance that ska bands do while playing ska music.

Ryan: What is ska music?

Reese: Ska music is probably the most popular musical genre ever invented (laughs). It was primarily popular during the late 20th century, the 1990s–

Ryan: Well most people didn’t know that Abraham Lincoln had a ska band on the side.

Reese: He did– the tone was a little different…

Ryan: It was like “The Lincolnator and The Abolitionists” or something.

Reese: Many of you will listen back to this podcast and remember the days that you were introduced to ska music.

Ryan: We’re just grateful for you listening.

Reese: We can point you to places like Less Than Jake, or Reel Big Fish–

Ryan: Mighty Mighty Bosstones!

Reese: We’ll put you on to the Bosstones.

Ryan: Some Goldfinger?

Reese: Yeah, a little Goldfinger. America gave us two things: the constitution, and ska music in the 90s.

Ryan: Okay. With that, we’re going to talk about risks today in your investment portfolios. Perfect segway. But before we get into risk in your portfolios, and– the topic today, and we’ve been talking about this in the office lately, is how do you measure this? How do you measure someone’s risk? How do you give them appropriate guidance? It’s a big topic in our industry, too: there are dozens of companies that build software just to test how risky someone should be in their investments, and what kind of investments they should choose… but recently, we did something that reminded me of choosing risk in portfolios and why it seems a little archaic: we took a company trip, kind of, some of us did, and we rode mountain bikes at Deer Valley Resort in Park City, Utah.

Reese: I wanted it to be more of an all-inclusive trip for the company, but some people don’t have preferences for going down mountains at high speeds and putting their life in jeopardy, and so, it’s difficult to make that one be a company activity, but a third of the business was there.

Ryan: Some people went. I think there were a lot of stories on risk up there, because I went up there, and I have probably a sixty dollar helmet– it says “shred” on the side of it, so it’s pretty serious–

Reese: (laughs) it says “shred” but it clearly does not indicate any– (laughs) there are no feelings of shredding.

Ryan: With my huge weird helmet. It kind of looks like you went to Walmart and got your helmet, but then put a “shred” decal on it.

Reese: We’ll call it a cross-country helmet.

Ryan: I have fingerless gloves, which always makes me think of a dance-off in a back alley, which we also discussed. See I didn’t know– we showed up, and people have full-face helmets–

Reese: You’re getting into the sport though.

Ryan: And they have neck braces? Neck braces! What are you doing on a bicycle that requires full body armor? I mean, I just felt really unprepared for the risk I was apparently taking as we took two lifts up to– what was is, 8,000 feet?

Reese: No, we were closer to ten.

Ryan: Okay, two lifts up to 10,000 feet, and then they’re like, “there you go, kid,” and everyone else is full head-to-toe prepared. I have fingerless gloves, some thin cotton gym shorts, and a Walmart helmet (laughs).

Reese: And on the way up, you looked down below us, and you saw multiple people almost going to the hospital.

Ryan: No, we did! Justin actually heard second hand the story of the guy we saw under the lift that was being carted off. Justin heard about it from a second hand source: the guy was unconscious next to a tree.

Reese: He didn’t realize that a cross-country helmet and no body armor– it’s not the appropriate way to prepare for a tsunami.

Ryan: The risk of a black diamond downhill trail.

Reese: Tsunami is thirty foot tabletops, massive drops, huge gaps, and this person was riding a bike that wasn’t prepared for that, and they did not have any appropriate gear, and they had never rode this kind of trail before.

Ryan: So, like me. So, here’s what got me thinking about this when we were talking about risk in portfolios: I was thinking about that ride and the levels of, what do you call it, expertise in the rides are kind of marked like ski resorts. Like, it’s green, then blue, then black, then double black, right? That’s how it goes? So we started of in some greens, the holy roller, and they’re just kind of some rolling, nice things, but you pick up a lot of speed– I was a little scared for holy roller. We did that twice. But then, on the third run, we said, “I think we’re ready for blue,” and I felt like blue, in this– you know, we’ve got green, blue, black, double black– I felt like, “that’s probably a fair indication that I’m ready for a blue,” it probably clearly denotes the risk of what the trail is going to be. The green was flowy; it could go fast if you wanted it to. The blue, you said, had some jumps. That seemed normal to me. What did we find out in the first thirty seconds of that stupid blue though? (laughs)

Reese: Well this is a good point! See, I didn’t realize that this blue was aggressive until I went down it again and was reminded by the people falling behind me off of the edge of the setback–

Ryan: But if this was a portfolio, this would be like, conservative, moderate would be the blue, then you have aggressive and aggressive growth. This would be, like, the moderate portfolio, and I was like, “holy crap! Three out of the five of us here are going to die. Your son turned around and went back down the lift after he broke his bike on the first turn!

Reese: (laughs) yeah, that was the hard thing for me: I had ridden this thing so many times, and I was more tolerant of this risk level of trail that when I got– I stopped a few hundred yards down, and I was just hoping that there was even someone coming back down behind me, and I was scared there for a minute. And it wasn’t, like– it’s not obvious to me, because I had had a lot more experience riding on this trail, and I felt like this was the middle ground run, and it wasn’t quite the same risk level as I assumed it to be.

Ryan: I mean, it was seriously the same as saying it was a moderate portfolio, but you have 50% losses in it, you know? It was pretty crazy. Anyway, that experience reminded me about how hard it actually is to choose how risky of an investment portfolio someone should do, because, I mean, what’s the normal way in our industry that people figure that out, on how much risk to take?

Reese: Well the normal way that it happens is that you fill out a stupid questionnaire that you don’t really understand very well, and you make some guesses at it because your financial advisor is just like, “fill this out, and then I’ll tell you what to do,” because legally that helps protect some financial advisors, because they’re like, “well, you picked it!” (laughs) it would be like me telling Ryan, “I’m not responsible for you dying on this trail, you idiot! You picked it!” And he’d be like, “you took me down this trail, bro!”

Ryan: And it was the lower end of the portfolio! It was the blue; it wasn’t black!

Reese: And so, that’s how it typically happens: you’ll fill out a questionnaire, this questionnaire will give the advisor an estimate of risk that you should be taking, and then they will– actually, not an estimate, but it will map your answers to a portfolio, and then sadly, in many cases, they can just say, “you picked this; this is what you said you wanted, remember?” I’m not saying that everyone is that mean, okay?

Ryan: Well in preparation for this, I was curious because I’ve seen some of the big ones, but I went online, and I did lose count, so I can’t make up a number, but it was over ten quizzes that I took, and I found them from huge, reputable companies–

Reese: Okay, and so you went and filled them out for this podcast; you went and said, “I’m going to invest in an experiment for this show.”

Ryan: Name a large financial institution, or a fast-growing tech-based app that manages your money, I took their risk profile questionnaire.

Reese: Merrill Lynch.

Ryan: Yeah.

Reese: Betterment. Wealthfront. Wealthvest.

Ryan: Yes. Yes. Yes.

Reese: Interesting. Robinhood! (laughs)

Ryan: No, I didn’t take Robinhood. New York Life. Vanguard. All of the big ones!

Reese: Okay, so twenty things you took: what happened? What did you learn?

Ryan: There’s no consensus! That’s what I learned! It reminded me of riding a mountain bike down a blue, and everyone’s like, “the blue is at the lower end of the thing,” and then it’s a wide range of experience down that blue run. For example, the definition of a long time frame ranged anywhere from seven years to twenty plus. So, do you need this money in less than seven years? That was considered long for some questionnaires, others were twenty, and the others were seven, ten, one of them was eleven, one of them was fourteen, then a couple fifteens, and a couple twenties. So, that was weird.

Reese: Very weird! You can imagine if you were an investor, and you’re– see, the reason this is important is because these surveys will spit out the amount of stock that you should have in your portfolio based on what you kind of consider a long time frame to be.

Ryan: Well it got harder than that, too. So, the time frames were kind of weird, but the questions were all over the places. Some of them were, “describe yourself,” and they’d have these real extremes in answers, like, “how do you view the stock market?” This is one of them that stuck out. One of them was like, “it’s a casino,” the other one was, “I like to play it,” and the other answer was, “I don’t know but I’m in it,” and that was supposed to tell me about–

Reese: So, depending on the one that you pick– any one of those three would make you look like an idiot if you picked it. Like, all of those are dumb answers, so no one’s going to be like, “yeah! The stock market is a casino!”

Ryan: Or, “if you got an unexpected inheritance, would you put it in a CD, a hot tech IPO, or a single blue chip stock?”

Reese: All stupid things that no one would pick! Like, I don’t know! I don’t even know what blue chip means half of the time.

Ryan: So my results came out in balanced to moderate, that was my range, and every website and every quiz has a different answer on what you are. So you’re either this work they make up, could be balanced, could be moderate– I was anywhere from 60% stocks to 80% stocks allocations– let’s see, some gave ranged of expected returns, like, “you’re balanced to moderate, so you should expect anywhere from a 6%-14% return in your portfolios! (laughs) it was really hard. So, then another really confusing thing that you were saying, some of them gave specific, like, “here’s how much stock allocation you should have,” and then some of them said, “click on the advanced tab,” and the advanced tab would then break down how much should be domestic, how much should be international– in the most aggressive, advanced results, the highest allocation to international equities was like 12% (laughs) even though–

Reese: So it’s like a third of the market cap. A third of what the world actually is.

Ryan: Half of the world’s market cap is outside of the United States.

Reese: And you’re just like, “no, we’re not putting our money in that.”

Ryan: My most aggressive recommendations, if the website got that much detail, was 12%, which it rarely did. I found two quotes– one of them was from Betterment, actually, and this was really good information: and they said, “these questionnaires measure what kind of risk taker you think you are, not what kind you need to be in order to achieve your goals.” I thought that was really interesting. We’re kind of doing this self-assessment on, like, “I think I’m a–” and most people think they are riskier than they really are, and it’s not usually in relation to their goals. And then another website said that the rational Dr. Jekyll fills out the questionnaire, but the emotional Mr. Hyde controls the investing. So, my first thought that I was to talk about today is how people define risk in their investment portfolios, you know? I think it’s a huge misconception. So, that is the first thing I would ask you: how do you think investors define risk? When you say “risk in your portfolio,” what do you think is going through people’s heads?

Reese: The only thing they are probably thinking about is losses, like, downside: how much my account is going to go down, or possibly could.

Ryan: Like volatility.

Reese: That’s what they are thinking; they wouldn’t know what volatility means, but we do. If you explain it, people would know, but they would just think, “tell me how much money this could go down.”

Ryan: Yeah, “whether I sell it or not, how much could it go down?”

Reese: When they say “risk,” they just want to know number one, will this goes down– there is some expectation that there might be something they could invest in that wouldn’t go down. They’re like, “so yeah, it would be nice to get 7% a year, I don’t want it to go down though.” And there is this idea that that is a thing, that there is a thing that you could invest money in that wouldn’t go down.

Ryan: And you should know what it is.

Reese: Yeah, well I mean, if you don’t, then what value do you provide to me? You’re a worthless financial advisor! You don’t know how to give me something that doesn’t go down? But if you think about any business in the world, any company, any dental practice, do you really think that there is a likelihood that your business never could go down, and that there is no scenario in which it could go down that companies wouldn’t change price? They just go up all the time? Because if they just go up all the time, then what they turn into is CDs; they turn into things that have no value; they don’t pay a return. A CD doesn’t ever go down, so it doesn’t pay you a lot.

Ryan: That’s a really good point. You think about the amount of time dentists can spend thinking about if their investment portfolios, or the stock market specifically, can go down, but think about the biggest risk they ever take, you know, they’ve got ten years of their time in school, hundreds of thousands of dollars in student loans, maybe a million dollars later in practice, and equipment, and building loans, and so one of the biggest things that they’ll ever undertake, and how common is it that, over the life of that asset, it actually ends up just being worth a lot less money than it was at its peak?

Reese: Yeah, totally. One of the riskiest and biggest thing a dentist will ever own, their own practice– it’s really common to see a steady decline before they eventually exit. You took all of these risk profiles, and the average thing that came out online was that you’re moderate to balanced, or you’re balanced to moderate, and what I found in my own experience is that most people never want to be at one end of the extreme of a spectrum; they’re kind of searching for middle ground, and the only way they will go at the end of a spectrum is if they’re hyper-educated about the ends of those spectrums, and if they really know why they fit at the end of those spectrums, because if they don’t know why they fit, they just end up opting for the middle option in a lot of things in life, you know? You don’t want to come across as an extreme person; you want to come across as a moderate, or an independent. It’s really popular right now to, like, not take a position that’s extreme, and, you know, not have a strong opinion that offends anyone, right?

Ryan: I feel like that’s all that’s online is extreme opinions that offend everyone (laughs).

Reese: Well, online is very different; in social media and online, there is no identity, you just ramble on and don’t have any consequences for what you’re saying. If you’re standing in front of me and talking to me about your life, you’re not going to be like, “I’m like the worst person ever; I never exercise, and I’m going to die.” You’re never going to say that, but you’re also not going to be like, “I have the best exercise habits of anyone, and I’m doing amazing, and I’m killing it.” You’re going to say, “well, you know, I’m trying,” and explain what you’re doing, because you don’t want to be the worst person, but you don’t want to be the best, and I think any time you have a spectrum that’s presented to you, you’re trying to be tempered on one side– you’re just trying to temper who you are a little bit so that you don’t come across as extreme. And that’s why I don’t like the investing risk profile spectrum; I don’t think that’s a healthy way to think about it, because no one’s got one risk profile that says, “you’re this kind of risk taker!” It’s really just about education yourself about what bucket of money should do what thing, and if that thing is what I should do with that money, then I will do that! And so if I say that you’ve got an account that you’re going to put money in and that you’re going to a tax deduction for, but we don’t want to touch that money until you’re age 70.5, because that’s when, ideally, it would make the most sense to take it out, and let’s try to build up your financial plan to allow us to let this account be left until that age, then what if I told you that the highest return we could possibly get is by owning only stocks in that account and having it be invested in a really diversified way, and trusting that over that twenty year period, that account is going to grow a ton, and that by any amount of bonds that we mix into that, or that by any amount of safe investments that we mix into that, all it’s going to do is make your return lower. Do you want your return to be lower, or do you want your return to be as high as it possibly can be? Because you don’t need this money for twenty plus years, and if I give it to you in that context, you might say, “well I want my return to be as high as we possibly can, as long as I have an emergency fund, some fallback money, and I as long as I know that I have other investments.

Ryan: Despite the fact that even a really advanced questionnaire might have told this person that they shouldn’t hold only stocks.

Reese: Yeah, despite that a questionnaire would have said, “you need to have a 60/40 mix,” and then the person talks to their advisor, they end up picking a balanced portfolio, and throughout your career, it costs you a million dollars in lost returns because you didn’t expose your money to the asset class that could have given you the optimal return! Now, does it have the most volatility? Does it move up and down the most? Of course it does! Just like a dental practice or any other private business ownership, it’s the most volatile thing you could own, but if we’re going to sit around all day and keep our money in kind of like, happy medium land, and not make a choice about what we really want to do with it, then we end up just having lower returns over our lifetime, and that costs us net worth! Now, I want to say, generally speaking, the experience you had online and filling out ten questionnaires and getting an answer of like, “you’re a balanced investor”– if you look at almost all investor portfolios across the country, and you say, “what does the risk mix look like?” It’s like right in the middle, right? It’s that way because a lot of us are picking portfolios that are right in the middle, but it’s not that way because some of us are one one side of the spectrum, and the other side are not; it’s not because some are only owning bonds, and some are only owning stocks, because a lot of us are picking these middle of the ground portfolios, but I just don’t think we really know the difference between when I should use a stock and when I should use a bond. Like, I’m going to get a lump sum of money in the next few days that I have to sit on for awhile, and I have to decide, “do I spend this on an upcoming purchase? Do I spent it on the company? Do I invest it for my own retirement?” I’ve got a lump sum coming up, and I have to make a decision on that, so if I have that choice to make, I can be confused about it, and I can be like, “well, I don’t really know, so I’m going to pick a middle of the ground portfolio,” or I’m going to say, “well no, it’s for this purpose.” For those of you who own a business, you’re thinking, “am I going to need this for the company? Am I going to open a second location? Am I going to hire someone? Am I going to expand and grow? Am I going to add more equipment? Am I going to buy real estate?” If the answer is yes to any of those questions, then you have to carve out the specific amount of money that you need for those tangible goals and put it aside and don’t invest it. But if the answer is, “well there is this chunk that I don’t currently know if I’m ever going to need it until way down the road,” then invest it as aggressively as you can, because if you know that you have at least a ten to twelve year plus time horizon before you’ll need that money, then don’t sit around with it in a conservative account. And I find that too many people– when we ran this report this month it was really eye opening to me: I’ve got some clients who are hyper-efficient with how their portfolios are structured in terms of, if they’ve got a goal that’s short-term, I mean, they’ve got it in fixed income, and it’s really targeted, but the rest of their money… they are all equity, and they are growing great. But they’re very volatile portfolios, and I’ve had to work through for years with these clients on struggling with these emotions and how they feel when their account goes down, and I know that in the next couple years I’m due for another one of these moments, but man, the clients who are really precise about their investment goals, and allocate them to the highest risk they can tolerate for the goal that they have, not making your portfolio just one cluster of a risk profile but really identifying the portfolio timeframes for each bucket of money, and then aggressively investing that… I mean, it makes a big difference, Ryan; it’s millions of dollars in net worth growth. And it’s the same money, and it’s just like, one person was willing to do the hard work of saying, “I’m going to have to expose this to more volatility.”

Ryan: Yeah, I often talk with clients about the real actual cost of participating in the stock market or public markets: it’s not the cost of the funds nowadays; it’s not the cost of outsourcing to an advisor. The real cost in it is that emotional and mental rollercoaster, and it’s a real price. It’s not easy. It’s not the price people think they’re paying, though. But that’s the real cost of getting– if you go, “oh, the S&P 500 over twenty years gives me 10-12%,” well if you want that, then the cost isn’t the price of the ETF to capture it, or the cost to outsource to someone to just do everything for you so you can just keep doing dentistry, the real price is the fact that that S&P 500, if that’s what you’re getting, will fluctuate wildly.

Reese: Yeah, and that’s why I’m such a strong proponent of getting and advisor, because I do think that people are able to achieve a higher return when they are working with someone who encourages them to take the appropriate level of risk, and in most cases more risk than you’d be willing to take without them.

Ryan: Yeah. Well, and we know that that’s the case with dentists just because of how many people we meet that are sitting on multiple six figures in cash in a business account for a long time.

Reese: Yeah, it’s like, you’ve been sitting on this money for eight years?

Ryan: What’s weird though is then you’ll see the 401k that was set up by someone random years ago, and it’s just concentrated, terrible portfolio in two sectors of the economy, like, hyper-aggressive–

Reese: Energy and gold.

Ryan: (laughs) energy and gold, and then nothing else, you know, like, this hyper-concentrated, really overly-aggressive, overly-risky portfolio–

Reese: And that’s just a bad– if a dentist did that, then shame on you. But if a financial advisor did that to you, then shame on him for doing that. But in most cases, it’s an advisor doing that, or just saying, “yeah, that’ll work! That’s a good idea.” But it’s something that I feel like no one listening to this podcast should ever be in one sector, or one stock inside your 401k. If you do that, you’re not being smart with your money. It’s not a preference, or like, “I think I’m just going to take a little more risk.” When you do that kind of thing, you’re not just taking a little more risk, you’re just gambling at that point. You don’t speculate on a stock; you don’t speculate on a sector. We’re talking about exposure to the market. We’re saying, there’s 13,000 stocks in the world, and if you owned them all in some set of indices that were proportionate to the size that they were in the world, that’s the right way to build an index portfolio.

Ryan: And if you want more risk, then just hold less fixed income in cash.

Reese: Yes. And I think there’s a place for fixed income in cash; there’s a huge place for it, and that stability of that just bedrock portfolio… it will give you the mental bandwidth to take more risk. For example, let’s say we start out with someone and they’re a 50/50 mix, they’ve got 250 grand, and they’re going to invest that money. You’ve got $125,000 in stocks, and $125,000 in bonds. Well, that person basically has– in $125,000 in bonds, they have a one-year emergency fund sitting there to offset their living expenses for a year. It feels pretty good at that point! I mean, you feel pretty conservative. When you get to $400,000 or $500,000, you don’t need to continue to have two years of living expenses in bonds! One year is still enough; you could have more stock. And as you gain a larger and larger portfolio, you can afford to have more and more and more equity exposure because you’re more liquid. Even if the market goes down a ton, you could still go get money from your equities, but once you get to the point where you’re what we’ve talked about in previous podcasts, we call it a 30 TT score, a multiple of 30, the larger you are in terms of your net worth relative to your spending. A TT score is something we calculate by just adding up all of your stuff and dividing it by your annual spending. If it’s 30 or more, you could continue to still take that kind of risk or that kind of volatility, because man, you’ve got a long runway of liquidity that you could pull from, and even if the market goes down 40-50% over a two year period of time, you can ride through that, and you’ll be fine! But you don’t have to do that; you can have that same amount of money in a more conservative account, and a lot of people will find that that’s just a more comfortable place for them. But your advisor, just like a good physical trainer or a nutrition coach, should be pushing you to stretch yourself, and stretching yourself with investing is taking more risk with more volatility. That’s stretching yourself, not going more conservative and saying, “you know what, I just don’t want–” like that’s the opposite direction of what will make you more money. And so, I think a good advisor is constantly trying to help you push that risk profile just a little bit further than you’d be naturally able to do on your own.

Ryan: Yeah, I think that’s one of the good points to make is, “okay, so if I took a dozen questionnaires and none of them gave me good direction, because it’s all really vague, and it’s one size fits all, and they all kind of spit out different answers–” what is the better way to help someone measure risk, though? You started talking about this. If it’s not you, which it’s not likely going to be, you need someone who has an incredible detailed, organized picture of what your life is like.

Reese: Yeah, how would you do that with people? You do it every day!

Ryan: We do it every single day! Hundreds of times. So, everyone listening, if you go to our website, you can see what we are talking about, this framework on how we view someone’s entire picture. Go to, hover over the services tab, and then click on Elements®, and about halfway through the page, you’ll see this table, it looks like ye old chemistry table of doom, and there are twelve bricks there: there are three on top, four in the middle, and five on the bottom, and they are broken up into the three sections of risks you take in your life, in investments, in practice, and in insurance. The four in the middle are the four categories of where your money goes: savings, spend, debt, taxes. And the five on the bottom are your net worth: liquid, retirement plans, practice assets, real estate, and then all of them added together is your total term that you’re talking about. So, when we’re talking about getting someone organized, that’s the framework we view, and that’s the lense we’re looking through. I can tell someone what their portfolio should be if I know what those twelve bricks are telling me. How much of their net worth is sitting in real estate that is not liquid? Yeah, so when would you tell me how much risk I could take? How do you make that decision with me given that context? You know my wealth, you know my net worth, you know where I’m spending my money. How do you coach me to know how much risk I should take?

Ryan: Yeah, and part of that too is in knowing– so are you the dentist who is one doc one location, and you’re three days a week, and you’re just trying to get the most profitable, the biggest you can get, and that’s where you’re ending? Are you the guy who is pushing for ten, and you need to constantly pump more capital in your business? Do you hold real estate? Do you hold buildings for your practices? So getting to know the person too on top of all that organization, like, what you even want out of your life and your career will tell me a lot about how we need to prepare. Maybe the cash balance plan and the 401k is extremely aggressive, because it’s not money that we can get out anyway, and you’re 40, we’re not going to touch that for 30 years, but you’re after tax portfolios… they might need to hold some bonds! Because I know that you’re an entrepreneur, and a third location is going to come up at some time on your radar, and unexpectedly, you’re going to want to jump on it, or the building is, or maybe you hold a whole separate account that is very liquid, very conservative, very short term, just for that purpose, and we try to estimate, alright, what could be the price of the building in your area? What would the down payment look like? And your wife wants to move to the new home that you’re going to build, and you’re going to need a big down payment for that, and just knowing someone’s goals on top of all of that information, like, know who they are and what they’re driving towards will help us create a lot of that too, and that might end up being very different than what the questionnaire tells you.

Reese: I think that’s some great insight, just the fact that you’re working with your clients, and you’re not saying, “what did they spit out on the risk profile? That’s what account I’m going to put them in,” you’re saying, “I need more context; I need more information,” because clearly, a ten-question questionnaire from a risk profile is not enough information for me to make a recommendation.

Ryan: Well it’s not even specific to a dentist, which is very different from the corporate executive sales guy with the salary and the 401k plan!

Reese: Well yeah, it’s like, if you’re answering this about my 401k, you’re answering this about my entire risk profile, and that’s the point I was trying to make earlier: with a dentist, risk is not– we’re not talking about one dimension of risk, here. You give me a risk profile, and I’m filling it out, don’t expect that that tells the comprehensive picture of who I am.
Ryan: Well this makes me wonder, should we fill out– a dentist might have six buckets of money, so are we supposed to fill out six questionnaires and then repeat it every year when something changes?

Reese: Well that’s what I’ve told– see, in our business, what we have consciously done is that instead of having the client fill out one risk profile and have that be the story of their whole life, which honestly, you need to know that that is what a lot of your advisors may be doing right now: their assumption about the way they invest your money is driven by a profile that you filled out and probably did not know how much that was going to affect your future, and how much your returns would be affected by that.

Ryan: Are you surprised when you see portfolios that are 100% equities and you’re like, “that guy’s personality is not going to deal with that well,” or the reverse of that?

Reese: Yeah, I’m always surprised that portfolios do not usually match up with what I think people want their portfolios to do; what they’re hoping to get out of their money is not the way that their money is invested, and I think that the best way to go about doing this for me, though, is that there needs to be a fundamental belief that the advisor is really trying to discover what will work for someone over a long period of time, and what is going to work for you as an individual. What will you not walk away from? What will you not stop? What will you not quit? What will be the most sustainable plan for you? And each person is going to need a size of an emergency fund, we’ll call it. Now, these emergency funds that we’re talking about are invested; they’re invested and growing; we’re talking about a more stable baseline return. It’s not invested in the stock market; it’s going to be fixed income corporate debt, municipal bonds, you know, it’s not sitting in checking, but everyone needs a certain size of that to be able to take the appropriate risk that they want in the other areas. For some of you, it’s going to be taking risks with hiring associates, expanding your practice with multiple locations, a DSO kind of goal. Some of you, it’s just like, “I want to get my practice to where I’m producing myself, no associates, to where I’m doing $1,000,000 in collections, or $2,000,000 in collections. In order for you to take that kind of risk in your business, you’re going to need a certain size of liquidity, a certain emergency fund, a certain amount of fallback cash that’s invested that you know you can count on, that allows you mentally to take risk in that practice, to take risk in that business. And the bigger your goals get within your business, the bigger that fund needs to be, and because I have a fair amount of confidence in my business plan, and maybe the experience I’ve got with investing, maybe my personal liquidity bucket could be smaller than someone else’s to have me feel okay, and feel like I can do this.

Ryan: You’re saying based on your experience, and your level of knowledge?

Reese: Yeah, level of knowledge, and maybe my level of confidence in the plan I’m going to do in my business.

Ryan: So maybe you could have a slightly less gear in going down the blue run because you know what’s ahead of you, and you know when to slow it down a little bit, and when to speed up, you know how to take jumps– I have no idea, so I should be head-to-toe geared up.

Reese: Yeah, totally. Until you’ve had fifty runs down that run, and you kind of know– you’re not going to be negligent, and you’re not going to not wear any helmet, but maybe you can take off the bulletproof gloves, and the bulletproof chest plate, and pants, and steel-toed boots. Like, at some point, you can dial it back.

Ryan: (laughs) seriously though, because I know what a switchback that’s point straight down feels like… which I have no idea how to navigate.

Reese: Yeah, and what I do like about the way the industry– what the industry has done right is we’ve created two financial products, a stock and a bond, that basically accomplish what I’m talking about: you can have something safe and predictable that gives you yield, and that still makes you a great living in a bond, or you can have a stock that gives you a lot of long term growth. And you can mix those things together to get different outcomes, and it’s really an awesome financial system! It’s amazing that companies can raise capital this way, and that investors can invest this way. But if every investor has a different mix of these two extremes, some people are not aggressive enough and need to be pushed, and some people are ignorantly too aggressive, and they need to be pulled back, and they need to be given more liquidity, because they’re going to explode. And you hear that story all the time: “I hit retirement, I was 65, but my 401k crashed.” Well what were you doing in stocks the year before that market crashed with all of your money? You didn’t have any fallback cash or no emergency fund? If you knew that you were going to retire then, that’s just bad planning! That’s not the stock market’s fault; I hate hearing that, because it’s like, “oh the stock market! You know, Reese.” It kills me! What were you doing with all your money in stocks that far away from needing it? You know? That person did not have this fallback reserve we’re talking about. If you have all your money in stocks, you better have a three to four year bucket of safe money, because the market could be imploding for that long, and you should not be all exposed to equity. Throughout your career, all I’m saying is that most people don’t have quite enough equity exposure during their accumulation years. They’re too conservative; they don’t grow their capital well enough; they leave a lot in cash, and they leave a lot of returns on the table, and their net worth hurts because of it! And then later on in life, people who didn’t accumulate enough, and they didn’t save enough, they’re too aggressive because they’re trying to make up for lost time. And so, a lot of times in their later years, people are taking more risk than they should, and those are the things that a financial advisor is trying to get to: helping you take more risk when you should be taking in, and less risk when you should not be.

Ryan: So, I kind of want to go back then to one of the first things we started talking about: what should the definition of risk in a portfolio– well, I looked this up in the dictionary, and the actual definition of risk is “a situation involving exposure to danger.” So my question then is, what is the real danger in a portfolio? Is it that it goes down?

Reese: This is a little sophisticated, so pay attention; it’s going to be one minute of this. Take the amount of the percentage that you need to withdraw from your balance: the percentage, that’s the danger. If the percentage that you need gets too big, you’re in a dangerous location. For example, let’s say you have a million dollars, and you’re going to withdraw $120,000 a year out of that account: that’s a dangerous place to be, because it’s 12% of your balance. If you’re drawing 3% of your balance, or $30,000 a year, it’s not a dangerous place to be. That’s the real danger. What percentage of your balance do you need to withdraw? Because if your balance– if the percentage you need is high, then you’re in a dangerous situation, and you probably should not be aggressively invested, because that money is going to get spent really fast, and you shouldn’t have it exposed to capital markets. If you’re at a 7 or 8% of your balance that you’re going to need, then you definitely don’t want to have it all in stocks. I mean, there could be some periods of time where we have a bad stock market, a four to five year period, and because you needed that much money out– imagine if you start out retirement at a million bucks, and your account drops 40% because you’re all in stocks; it goes to 600. When you started, you only needed 70 grand a year; that was 7% of the million. You still need 70 grand when it goes down to 600, but that’s over 10% now. You’re 12% plus; because the market is down, now you’re withdrawing 12%, and you’re like, “holy cow, I’m withdrawing 12!” So when we say you can be withdrawing 3 or 4%, we’re saying, “well that’s because if the market goes down, you’ll be withdrawing like 5, and 5 is still sustainable. 5.5 is still sustainable.” So, the real risk in my mind is, if you’re not planning on withdrawing money for more than a ten to twelve year period of time, you should be growing that capital as aggressively as you possibly can, because it’s enough time to let things go. If you know you’re going to be withdrawing money from that account, the moment you know what the dollar amount is, the moment you could start seeing it, and a financial advisor, that’s what his job is: planning that all the time. Knowing what you spend, how you spend it, the way you like to travel… it’s his job to just observe your spending through a good spending tracker and kind of say, “this is the way this person likes to live, and I’m going to calculate and build their portfolio to match up with that spending, and we’ll take the right amount of risk for that withdrawal that we know is coming.” That’s a good financial advisor who’s doing that much work, but it’s not a good financial advisor who is spitting you a survey, taking your answers, and then putting your money in it and hoping that when you get to retirement and you complain about it, and he just looks and you and says, “well you filled it out this way!” You’re like, “well thanks a lot, bud!”

Ryan: Or when you said, “I want to take more risk,” and they just doubled down in oil stocks.

Reese: Yeah! Or “take some more risk? Well let’s go into energy then.” Just get crushed for seven years!

Ryan: So I think that’s a really good explanation of what the real danger is. Now, we measure that, it’s something called total term. Justin, where can people get the total term guide book?

Justin: Yeah, so if you go to that elements page that you were talking about, in that periodic table, you’ll see “Tt” as one of the bricks that you can click on. If you click on there, you’ll see how to download the “Tt” guidebook for free.

Ryan: Oh okay. Yeah, so, hover over services, click on Elements®, halfway down the page there’s the bricks, you can hover over “Tt”, it’s green, bottom right-hand corner, it will pop up a little modal dialogue box, for all you coders out there, and then you can click the little download. So the “Tt” guide, what Reese is talking about, is how to measure where you’re at in terms of what the danger is you’re going to have of running out of money. Here’s the other thing I thought about when I was reading that definition of risk, which, again, is “a situation involving exposure to danger,” I kind of just recalled things like what Vanguard publishes, or you know, a dozen other studies… I read one from Morningstar last night where they were saying investors’ self-defeating behavior, such as selling at the wrong time, costs them anywhere from 1-2.5% every year; Vanguard measures it’s about 1.5% in behavioral problems. So, I hear that. I like the way you explain it with withdrawal rates, and how long your money is going to last, and that danger, but then I think about the real danger is people reacting emotionally to a down market.

Reese: Yeah, I’m assuming in my example that everyone is going to be similarly rational, but that is not how it usually is.

Ryan: That’s very academic of you.

Reese: Like, I could argue from my perspective why a risk profile is completely fine given this math that I’m telling you, but there’s a side of many people that will just not trust math in that moment, and just be like, “I do not care, it’s different this time, Reese!”

Ryan: Because x y and z, the news, my friend, my brother-in-law, my dad–

Reese: “x y z, it’s different this time, and I’m just not willing to do that.” And if you end up doing that to yourself in the middle of a bare market cycle, and you self-capitulate, and you walk away from your strategy, you kill your long-term financial returns; you’re just flushing your net worth down the drain in a predictable way. So do not do that to yourself.

Ryan: So I think that’s fascinating, because you spent some time talking about getting to know someone so well that you can mathematically tell them, “look. You’re not touching this money for a long period of time: you can afford to do this.” But you also know– if you work with someone who really knows you, who you communicate with frequently, okay, not one meeting per year, but you’re talking frequently– as an advisor, it’s fun to me, because you can see the difference between someone who could technically have that more aggressive portfolio, but they’re also the person who, every few weeks, are going, “should we get out now? I hear the CAPE ratio is too high,” or, “I think the market is oversold, or overbought,” or, “it’s too valuable, we should–” you know, they’re asking the questions that make you go, “we need more education here.” Like, the personality is really jumpy, and there are just some concepts that are taking longer to understand, and live through, and experience, so an advisor should be able to see that and go, “even though you technically could have this portfolio, you’re asking questions and we’re having conversations so frequently that would indicate that there is just a lower level of understanding about how this works that a bad market is really going to be too traumatic. It’s going to be really trying for you.”

Reese: Yeah, and I think it can also– that’s one side of a profile: someone who doesn’t quite have the understanding about how to get through a market, and you know they’re going to just implode as it goes down because of fear, or greed, or lack of knowledge or information. But there’s also the other side that is also very common, which is someone who just trusts you and doesn’t really ask questions, and so they’re just like, “whatever you say, Ryan. I’m just going to go with that.”

Ryan: Which is how I like my kids to behave. They don’t, by the way.

Reese: (laughs) yeah, they don’t. But there are a lot of people who would just say, “I will go with what your recommendation is,” and they will be fine! There are a lot of people that just really trust your recommendation, and I think that, for the most part, if you’re working with a good financial advisor and the are calculating your risk profile accurately on an account by account basis, and they know you really well, and they know your situation, and they know your cashflow, your debt, your goals, your practice exit timeframe, how much you’re going to sell it for, your real estate goals… they can be trusted as a good resource for telling you what they think risk profiling should probably be for someone in your situation, and many times people won’t ever pick up the phone, they’ll just be okay. I have a lot of clients for bare markets who are just like, “you know, I know this, I’m fine,” and their lack of interest, or their lack of involvement, or their lack of– they’ll still get scared and worried, but not to the point where they’re going to do anything about it. They’re just like, “you know, I know why I’m doing this, I know it’s a cycle, I’ve been through one of these already…” that can be good if you have a good financial advisor… it could be really bad if you have a bad financial advisor, because you don’t really know if this thing is okay until the end. So just check your “Tt” score, check the guidebook, make sure that your risk profile– that you’re not drawing too much money out of your account, that your withdraw rate is low, under 5% at a minimum, ideally more like 3.5-4%, and I think that way, you can kind of protect yourself, even if you don’t know whether or not your advisor is doing a great job; you can self-diagnose with that.

Ryan: Okay. I think that’s a great recap. I would just say, if you have questions, and if you’d like to just ask us some of these questions, you want to check your “Tt” score, you want to maybe just get another pair of eyes on–

Reese: Check your investment tilt, and figure out whether you should be more in stocks, more in bonds, what it looks like for your account–

Ryan: Absolutely. Get in touch with us! You can go to our website,, click the button that says “Book Free Consultation,” and set up an appointment on our calendar. You can call us or text us at 833-DDSPLAN. Can they send like a picture text through that? Have we tested that?

Reese: Uh huh. Yeah, you can.

Ryan: Take a picture of your portfolio and be like, “let’s talk about this!” That would be fine. So 833-DDSPLAN, you can call us or text us, or you can go on our website and book a free consultation at… I think that’s a great place to end. Thanks Reese!

Reese: Thanks Ryan. Carry on!


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