The "Retirement Know It All"




​​Advisors and Diversification

Some advisors may discuss diversification, but in reality they will have all your money at risk all the time, or they will tell you that they will put a percentage of your money in bonds for safety. That is basically the same level of risk in many respects, because you can still lose principal in bonds just as you can in stocks. For example, if you have a brokerage account and you have mutual funds and stocks, then your money is at risk at all times. That is not diversification, because your money is at risk in similar risk level investments and both can lose significant principal.

Mutual funds fluctuate, and so do stocks, so they are at risk all the time. Therefore, you have the same risk level. Even though they are different investments types, the level of risk has not changed.

Understanding that the main reason your advisor has made certain investment decisions over others is because that is what they get paid to do. If you are at a bakery, you will most likely be buying baked goods. If you go to a stock broker, you will be buying stocks. Too many people make wrong assumptions about why certain advisors did not offer other types of products. The reason is because they do not sell other products. So just make sure to identify what the advisor can and cannot sell!

You must understand that true diversification means spreading your risk by having different levels of risk and safe investments that cannot lose value when others do.

Having different advisors can further diversify your money, as we have already discussed. This is why you may want different advisors handling different investments for you so you are further diversified, and then you have some investments that do not lose money when others do.

I see many people walk into my office and want me to review their brokerage statements. These clients are in their 70s or 80s, and 100 percent of their money is invested in stocks or mutual funds.

All of their money is at risk all of the time if the market has a significant correction. This is not diversification.

I label it gambling, and as I have said before, some know they are gambling with their retirement and others do not. I want you to know either way. I explain they have no diversification, and they tell me they do. Why? Simply because the advisor told them so.

Investing requires taking some risk, but many people take too much risk. As I have previously mentioned, some know they are risking or gambling with their retirement, and others do not. Just realize that higher returns means higher risk. Some investors believe they are immune from losses and others think they will sell at the right time if they need to. Unfortunately, no one can really time the market so the importance of managing and limiting risk is vital to an investor’s success.

This is specifically why so many people lost billions of dollars during the most recent crash — the housing crisis — because no one explained to them that stocks, bonds, mutual funds, or any other securities products lose value even if you have different types. They are all risky investments. The risk level is the same; it is high risk. Investors can lose money if the market goes down. 

Let me put this in perspective. There is nothing wrong with risk or having mutual funds, stocks and bonds in a portfolio, but what is wrong is that most advisors do not know how to diversify a client’s assets by having less risky investments that cannot lose value. That is the problem. This may be because your advisor only sells risky investments and cannot offer safer alternatives.

Furthermore, what happens if you need your money or die at the wrong time when the market is in a correction? Or what happens if you have retired after 30 years, and on the day you moved his 401(k), the market went down 30 percent or 40 percent or more?

There are alternatives that can be in place to prevent total devastation of this client’s retirement account, but the advisor did not advise the client of this. It is criminal.  

 The reason why you need to spread your money out into many different investment vehicles, with different levels of risk and safety, is so this does not happen to you during the next correction.

Here is a great analogy I heard on a radio program: If you were going to have your bathroom and your roof fixed because they both needed repairs, would you have the same person repair them both?

You call your local plumber to fix your bathroom. He brings in his shiny toolbox, and there is only one tool in it — a big red wrench. He says, “I’m here to fix your bathroom.” Would you let him in? Most likely!

You tell him about your roof, and he says he can fix that also: “No problem.” He says he has the tool to fix that, as well, and it’s the same big red wrench. Would you let him fix your roof and your bathroom? No!

Unfortunately, that is exactly what advisors do every day, and most investors do not know any better or realize it is happening to them. The client needs to ask and be educated about true diversification.

In summary, you need different investment tools to accomplish different goals for your money. In addition, you may need to have different advisors because that way you can spread your risk even further from losses.

You need to know the purpose of your money and then pick the right investment vehicle for that money. Also, determine what risk level you want for that specific money. 

One tool for every job is not a good idea, and it’s not sound financial advice when it comes to your retirement money. Having both safe and risky investments percentages prevents losses and protects your money from devastation when in bad times. This is common-sense investing — or at least it should be.

Many advisors and investors today just do not think about this in real terms. There are people like Suze Orman on CNBC and other so-called financial gurus telling people the only method is to invest all your money in the stock market no matter what the circumstances.

This just is not fair to the people who do not know any better.

An advisor’s age and experience is another criteria you may use when considering an advisor and determining your risk levels for diversification.

For example, if you are 65 years old and your advisor is 35, in most cases you are going to be advised as a 35-year-old would invest. Most advisors do not invest your money as a 65-year-old would but rather they invest money as a 35- year-old would. They generally invest your money in risky or riskier investment choices, because they have the time to recoup losses. You do not! Also, they may not understand why risk diversification is needed at age 60, 70 or 80 more than any other age. Your age should determine your risk tolerance and your diversification levels based on your specific age.

If you are 65 years old, then 65 percent of your money should be invested in safe investments and 35 percent should be invested in riskier investments. Keep in mind; this depends on many factors which I will explain later in this chapter.

Definition of Risk Tolerance:

The degree of variability in investment returns that an individual is willing to withstand. An individual should have a realistic understanding of his or her ability and willingness to stomach large swings in the value of his or her investments. Both your age and your timeframe for meeting your specific goals play a role in determining your risk tolerance.

When you are younger and have a long time to meet your goals, you may have a higher risk tolerance than someone who is nearing retirement and is counting on income for the rest of his or her life. Other factors such as personality, personal experiences with the market and current financial circumstances also come into play with the risk levels you choose. These choices vary from client to client.

Some clients cannot tolerate risk. I have seen so many clients who tell me they want out of the stock market and want something with zero risk because they cannot sleep at night or get physically ill when they think about the thought of being broke and losing all their savings. No matter what your advisor may tell you about how this cannot happen, if you are diversified do not listen to him or her. If your intuition tells you to sell, then sell. 

If you want safer investments, find safer advisors who offer safer investment alternatives.

You may not think this happens, but it does every day. You just do not hear about it. I have been told by many clients how they or another person have lost it all in risky investments simply because of bad advice from good advisors. It is imperative to understand that too much risk is not for every investor.

There are safe alternatives with less risk that your advisor or other advisors can offer you; however, they may not, because they do not make as much commission as some of the other products they sell. Or worse, the advisor may not be able to offer you these safe products because their company will not allow it. Therefore, it is your job to seek out other advisors that do offer safe product types as a percentage of your portfolio.