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  • Doug Oosterhart, CFP®

What Are Your Thoughts? - Season 2 Episode 1

After a few friends asked me to start season two of WAYT, I decided to commit to doing a few episodes.

The topic for episode 1 is a classic. Prospects, clients, friends, everyone always seems to ask: "What are your average client returns?" In this episode, I put a framework around the best answer to that question - especially when dealing with clients at all different stages in life.

Links to Apple and Spotify

Transcript below done using AI - please excuse typos and grammatical errors.

All right. So this first topic that I'm going to cover here at the first episode of season two, I figured we started off with a classic question. I get from prospects and clients alike, and it's in terms of return. And the question is how much return can I get? What's your average return? You know, if I were to work with you, what can I expect? And things like that. So it's really interesting, right? Because what kind of question, like, what path are we going down? Right. Like what's even the right answer that would make a prospect or a client feel good. If someone said, you know, Oh, you can earn 15% per year. Well, wouldn't that seem too good to be true. You know, what about 3% people might say, Oh, that's not enough. Well, how much is enough? You know what return makes the most sense for you?

You know, if you're 80 years old and you have enough income to live, what return do you absolutely need? You know, a lot of this is personal preference and we'll tell clients, Oh, well, the right portfolio for you is the one that you can sleep okay. At night with, you know, owning. So it's really interesting and it's all gonna start with goals. And the first thing is to establish what return do you absolutely need inside of your portfolio to give yourself a high chance of success, to make sure that you have enough money to meet all those goals and to live a fulfilling life, because that's what we're trying to do. You know, if you earn, right, like I know people that have made hundreds of thousands of dollars over the past year and the market by using super high risk options or different leveraged strategies.

And now they're thinking like, I literally have a friend who said, yeah, my buddy is up hundreds of thousands of dollars. And he might just quit his job because he thinks he can just earn 30% a year and be totally fine. 33, zero. I'm like, Oh, okay. You know, we, first of all, we need to have a talk with this friend and make sure that he knows that that's not really possible to do right. Even right. Jim Simons, who was, or still is the best investor of all time, right. Has average returns or something outrageous, you know, 40 plus percent net of fees over years and years and years. And he runs that Renaissance hedge fund. So I mean, to think that you can just get 30% per year is definitely, definitely a pipe dream, but going back to goals, right. I mean, I've only had one client in nine years where one of the goals that we wrote down in our first meeting was he said, yeah, I want to earn 10%.

Long-Term on average. And he's 60 years old, still a client. And what does he do? Right. How does he invest? Well, he owns individual stocks and that's it. He only owns, you know, probably 30 ish individual stocks and his portfolio can move up or down in any given day by hundreds of thousands of dollars. So I don't know how many people can handle that. So part of it is now he now let me go back. So he is funded, fully funded for retirement and he will be okay, however, he calls it intestinal fortitude, but how much will your stomach turn if your portfolio goes down by $400,000 at any given day, you know, that is that I know for most clients that's definitely will make them uneasy. And again, going back to goals, a lot of times I'll tell prospects, you know, I have clients with portfolio returns that are all over the board, right?

Let's contrast the, the client that said he wants 10% per year to a client that truly does not want home runs. And we're just thinking, no, actually these two clients are relatively close in age, but we're thinking, Hey, we do not need home runs. Yeah, we'll take them if we get home runs, but we don't need them. So why not just make sure that we're doing things smart and, and doing things that we can control and the sense that we don't need home runs. So let's just not lose money and let's make sure that we're at least beating inflation. We're earning like return still important. Don't get me wrong. But there's degrees of return that makes sense for clients. So first of all, we need to start out with looking at what do you need from the portfolio as income to make sure that your plan is successful and that you don't run out of money.

And then after that, first of all, are we even in the ballpark of making sure that you will put yourself in a position to earn that return? And then if the returns too high where it will like example, right? Let's say that someone needs just, just by math, right? If we just use the classic 4% rule, which says every million dollars that you have generates about $40,000 in income through retirement. And now's not the time to debate that rule, but just thinking about, you know, using that as a baseline, if we said, okay, you know, each million spins off 40,000 and, and you need $80,000 a year out of the portfolio, you know, and you only have 1 million, right? That's an 8% withdrawal rate. So you at, at a minimum need an 8% return. Well, is that possible one? I don't know. That's not what we're going to talk about today, but first, you know, the, the second part of that is can you even handle the volatility and risk associated with getting that eight, nine, 10% return in the portfolio?

I would argue that most investors actually can not. And I see that right. And today, you know, at the time of recordings, March 23rd and a year ago was the bottom of the Corona virus downturn and the market. And I remember client calls last year, a year ago, and these people are on the cusp of retirement. And we had rebalanced basically on the way down and buying more stock, more equities on the way down. And, but they're still seeing losses in their account, right. When they open and log into their account, they're like, Oh geez, how much am I down? And you know, I'm telling them, Hey, this is okay. We have years of income for you, either in cash or in bonds that this short-term downturn in the market, it won't affect your long-term success of the portfolio. And I mean, yeah, it's not easy, right.

Going through periods of loss in your accounts, but in order to have a successful plan, you have to take some volatility and you have to be able to handle some risks inside of the portfolio or else you don't earn anything. And that's what I hear a lot of times from people is, well, I just hold cash because it's a it's safe. Or I hold bonds because they're safe. Well, there's risks to everything, right? Cash earned zero, and does not keep pace with inflation. So actually even if your balance and the account stays the same or goes up, you're still are losing money in terms of inflation and then bonds, right? A lot of times people think bonds are safe. Well, just a little bit of history. I'm that we're coming out of a 40 year bull market and bonds. And with rates being so low, which is awesome if you're borrowing money, but it's not great if you are trying to retire, or if you're, if you're needing income from those bonds, because the rates are so low and you can lose money in bonds, right.

That's a total misconception that bonds are super, super safe. Yeah. I was just looking yesterday that the a T L T, which is the 20 year bond ETF and it was down a good percentage just this year here. I'll pull it up right now. And if we look at TLT, you know, year to date down 12.8%, right? So, I mean, obviously that's a 20 year bond ETF, but even if we look at like I E F, which is a seven to 10 year, year to date, that's down 5% versus the market, right. If we look at SPY or VOO , which is up about 5%, so a 50 /50 portfolios even, and that's not gonna work. So the it's just, you know, you ha there's risks to everything, right. In all asset classes, right. Stocks, cash, bonds, they can all go up. They can all go down, even if on paper, again, the example with cash, even if that stays the same, it's just, you know, really developing a mindset of first of all, what does it take to earn the return that I need to be successful in retirement?

And then can you even handle that return? Right. I have clients that are on the cusp of retirement that totally care more about not losing money rather than growth in their accounts. And that's a, it's just a really interesting mindset. That's a tough mindset. And it contrasts a lot of people that are younger, right. If I contrast this to I I know a guy that is young and he hates ETFs, hates index funds. Hey, and that's fine. But he also uses put options and he uses leverage to generate higher returns. And he's okay with that because his thought is that he is young enough to bear any risk. So it's just a balance. So that question of, you know, how much return can you earn if I work with you or what can I expect in terms of return? Should we elect to work together?

It totally varies. And that's the right answer. Whether or not, you know, prospects like it is, you know, it should be followed up with a question of, I don't know, how much risk are you willing to take because there's a trade off. There's no such thing as an investment that has zero risk and high returns or zero volatility and higher returns and high returns, because it just can't work like that. Or the markets wouldn't exist. Everyone. I mean, the markets wouldn't be a thing if there was investment that earned 10% a year and had zero risk. So it's really, it's really interesting. And that's why you have to just breathe, be prepared with a plan to know. Okay. Based on your thoughts, based on your goals, what do you need to earn inside of the portfolio to get in the ballpark of where you want to be as far as income pulling out of the portfolio later on in life.

And if you're not willing to accept the risk to invest that way, what are the options you have to save more? You have to work longer, things like that. So really if we follow up with a question of, I don't know, how much risk are you able to handle and letting the client think about that for a second? It's not that we're dodging the question again. Return is definitely important. You just have to think about putting it in perspective about what makes the most sense for your portfolio. So again, it's pretty tough. Another, another question just on top of that, I hear from people that may be, don't have a ton of experience in the market is, well, am I going to lose it all? You know, what's, what's safer. Like, I, I actually, yeah, just the other week, what's safer saving or investing.

You know, if I invest, can I lose it all? That was the question that was posed to me. And that question to me is, is just because someone may not have the experience of investing to know how it works. They just hear different things on Facebook or social media or the news, and talking them through an educating on how investing works. And, you know, generally speaking, like, let's say you open an account in a robo platform, like like what wealth front, or betterment or something like that. They're not going to be investing in individual stocks that have high volatility. Like I talked about, you know, my client earlier in the show. And, and so putting it into perspective of what even is investing and how do we make the distinction between investing and gambling, because they're two totally different things. They're literally the exact opposites.

So just speaking to that, you know, am I going to lose it all if I invest, right? It's the chances are so, so small, especially if you're owning hundreds or thousands of companies inside of an ETF. Like yeah. If, if you put all of your money into a call option that expires next Friday. Yeah. Every dollar that you put into that, you know, the option could expire worthless and you lose everything. So yeah, there definitely are ways to lose all your money by using stock market tools. But generally speaking for the average ETF investor, it's, you're not going to lose at all, especially if you're long, if your time horizon is long-term enough. And then it dives into portfolio construction, right? Where you have a mix of stocks or stock ETFs bonds, or bond ETFs and cash, you want to mix that so that there may be different time horizons assigned to different dollars inside of a portfolio.

So my final point on that is just adding on and I'll tell clients, look, your portfolio might have different sleeves of return metrics because we might have, like, I have clients that, you know, are in retirement, that we have segmented out part of their portfolio to be a legacy bucket where they're going to pass that on to their kids or grandkids. And that time horizon outlives them as an investor. So it's not just, Oh, your 80 year time horizon short, let's be super safe. We're assigning different goals to different dollars inside of a portfolio. And that's so key, especially with portfolio construction, to make sure that the client's goals are taken care of first and looking at return is looking at okay, what do you need to make sure that your plan is successful? And what can you handle, right. What's your capacity for risk and then diving in from there.

That is how we can construct a portfolio for them. It really starts with our goals and our plan first, and then circles back to how that portfolio gets invested. And then it's ongoing coaching. So my final point, final, final point as ongoing coaching, you have to make sure that whatever advisor you're working with, or if you're a DIY or really managing how you behave and think about your investments going forward and knowing that you did construct your portfolio the correct way. So that's, those are basically my thoughts there on the, how much return can I get questioned. And it really boils down to your goals. And what makes the most sense to give your plan, the highest level of success moving forward?

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