This Investing Strategy Is Dumb

Brought to you by the EveryDollar app. Start budgeting for free today. You teach your listeners not to panic during a stock market downturn, and to just hold on for the ride. Is there ever a scenario where one would consider changing their investment portfolio? For instance, if someone is getting close to retirement? That's an interesting question. Dave, I'll let you take that. What do you think? I mean, Well, the people say when you get close to retirement to move it. That is a theory in financial planning called asset allocation. The theory says when you're young, take more risk, and as you get old, move the assets away from risk because you need to be able to count on them. I disagree with the theory, and I certainly disagree with the implementation of the theory. Let me walk you through why. The typical financial planner that follows that theory will tell you, okay, I'm 65. At 65, you should move your money towards bonds and growth and income mutual funds, which is largely bonds and dividend-paying stock companies, and get away from aggressive growth mutual funds, get away from growth stock mutual funds, get away from something that's an S&P, and move even into high-yield savings. Okay, so when you do that, you lower your returns from 10% to 12% down to 6% to, or even 5% to 8% would be your portfolio change, but you take less risk. The reason that is dumb is that when you retire, if you have saved substantial money, like we teach, and you get there and you've got two million dollars, you've got a million dollars, which people call here all the time that have or have the potential to. We talk to them all the time. We show people how to do that. So if you have two million dollars when you retire, you don't need the whole two million dollars right then. So if it goes down a little bit the next year after you retire, it's not a big deal because all you're going to be doing is living off of a portion of the returns. You're not even going to be taking off all the returns. So if you've got two million dollars and it's invested, it's making 10%, that's $200,000 a year. You probably don't need $200,000 a year. You're probably taking off $150,000. So you leave $50,000 in there. It's growing and you never are touching the nest egg. So the nest egg can go up and down without really affecting your life. You don't need the safety. When you would need safety is if you have no money. Now, if you've got a hundred thousand dollars, maybe, but if you've got a million, it changes the whole scenario or 500 to a million or 2 million or 5 million or whatever it is. Okay. And so I'm, you know, I've got substantial assets, millions and millions. So I've moved zero to safety. And here's the other reason that's dumb. Okay. I'm 65. I'm in good health. All right. I'm not overweight. I don't smoke all that kind of stuff. Right? So all the statistics say, once you make it to 65, average death age of a male now is 74 females is 76, but that includes infant mortality. Okay. So when you make it to 65, the average death age is more like 90. You got a long ways to go is what you're saying. Yeah. So I got 25 freaking years for that to make 6% or make 12%. And I'm not doing that. So that's just dumb. Uh, so I, that's why I think the asset allocation theory is just bogus because it assumes everybody's going to need all the money right now, which you don't, and that you're going to die right now, which you're not. I think you're right. I think this question is probably someone who doesn't have a lot there. And when it downturns, it probably makes them feel the significance of whatever they're pulling off of it. Now, what I would do to his question, and it's a good question. Is there ever a scenario consider changing the investment portfolio? Yes. I would change my investment portfolio when I have a mutual fund that is not keeping up with other mutual funds of its category. Yeah, I agree with that. And so if I've got a, you know, the S and P 500 is the baseline of the stock market. And so if my growth stock mutual fund is not outperforming that regularly on average over a long period of time, not on, not in one day, not in one month, not even in one year. But if I look at mine about once a year and I go, okay, is this thing trendlining? It should be competing with the S and P and beating it above it. Yeah. If it's coming in less than the S and P, I should just be in the S and P and be dumber. Okay. Be easier. I could just dumb it down. Um, and so, and I've got aggressive growth stock mutual funds. I don't compare those to the S and P. I compare those, uh, to the other indexes that are measuring that market. Right. So I want to know other S, other aggressive growth stock are, is mine underperforming them? Then I would change my portfolio. But you're not just changing your strategy. You're just changing your funds at that point. I would change the funds. I would even change the strategy, but only over a long viewpoint. The, when you ask this kind of question, when you change your investment portfolio, it's often people that are looking at it every day and that'll drive you nuts. So you need to think on this thinking blocks of time of a year and five years and 10 years. And when you think of blocks of time like that, then is there something indicating you need to change your mix? Yeah, that'd be okay. That'd be fine. And, um, uh, or if something has happened and you know, your, your, your view of the world is different. Okay. That's fine. So I'll give you an example. Um, if I died and Sharon looked at what we were doing and said, okay, I understood it when Dave and I were doing it, but I don't like it. I don't like that. I I'm going to go all safe just because I want to sleep better. Well, she could do that. That would be okay. And so if I talk to someone that's 78 on the air here and I'm talking to them, they just, they, any amount of variance is going to cause them to stay awake at night. I'll just put them in high yield savings. That's fine. Just, I'd rather you sleep at night than, than, you know, do this, but there's all kinds of evidence that says you'd be fine doing it the other way. But if your emotions can't handle it, then that's a, that's your risk tolerance. Then we wouldn't do that. We wouldn't tell you to do that. But, um, no, I, uh, the, the funny thing about the financial world, and it seems like today's been the day on this last two days, but is that, uh, the stuff we're taught in that world in Georgia, studying the CFP materials right now, certified financial planning materials. And he and I are having this great discussions over some of the crap they're shoveling out. And, um, he's learning some good stuff academically, but it's also is that they present this stuff like it came from the Bible or something like it's absolute truth because it came from this group of nerds and this asset allocation model that you have to move to safety as you get towards 65 years old is taught with such fervor that it's as if, if you don't believe it, you don't believe in the law of gravity or something. And so me being on the air for 30 years saying, I don't believe it. I think it's a bad plan. Uh, all those guys, they go bananas on Dave Ramsey. They, they Ramsey doesn't know what he's going to, all he's going to cause all these people to lose everything they own. They're all going to be poor because of Dave Ramsey. No, they're not. They're going to have a lot more money. So, um, but, um, do you have the same philosophy, uh, for things like five 29s as the child gets closer to, uh, same one, keep the same because here's the thing. You're not taking the risk the day they go to college. Some of that money's not going to be touched for four years. That's right. It still has time. And so if the if Trump bombs Iran and the market drops, don't panic and take it all out and lock your losses in, you know, in 2008, when the market went in half, people talked to Warren Buffett and said, Mr. Buffett, you lost a trillion dollars today, or you lost a billion dollars today. He goes, I didn't lose anything. I hadn't sold it. You don't, you lock your losses in when you sell it. As long as you're holding it, you're riding the rollercoaster and no one gets hurt on a rollercoaster except those that jump off in the middle of the ride. And so the same thing's true there. Now, what you could do if you're coming into college and let's say you got $200,000, um, I might pull the first year out and put it in high yield savings, put 50 over there and then that other 150. And then maybe the next year, you know, I'll start talking about that. Uh, but the chances of that statistically being down over four years, almost zero, create your free, every dollar budget today, the simplest way to budget for your life.