Douglas Goldstein: Kimberly Foss is the president and founder of Empyrion Wealth Management
and the author of New York Times bestselling book Wealthy by Design.
We are dealing with very difficult markets these days but I know that you sometimes talk
about the good side of bad markets.
Show me some light here.
Kimberly Foss: It’s really difficult and I know a lot of advisors are struggling with
this as are investors now, they kind of have an awakening toward this volatility but you
know the reality is there is volatility in the markets and we just have not had it in
a while so people aren’t quite use to it again and it’s not fun but wouldn’t it
be nice to get like say a study with greater return of 4% rather than all of these ups
and downs every year.
So I tell my clients and they go “Oh yeah” and I said “Yeah, well be careful for what
you wish for because the idea there of the volatility is we get to basically buy on discounts.
So I have three reasons when I go over with my clients to say “Hey, you know what, it’s
important that the markets are volatile and actually there’s a good side too, the bad
side of volatile markets.
Really the facts that the downturn of markets scare people is a reason why that stocks deliver
higher rates return of the bonds, I mean that’s called the risk premium and people aren’t
willing to pay as much for an investment that the [frighten to] debt off then that money
that investments could go down and the other side of that is us being buyers, we get to
buy that on discounts.
Sometimes I refer to it to my female clients as market 70% off sale, you’re getting still
the Louis Vuitton bag but you’ll get it for 70% off, I mean how great is that right?
Douglas Goldstein: Certainly from the buying side, it sounds good but people who let’s
say bought a year ago who are now saying “Oh my gosh!
I must have made a big mistake.”
Do you think they did make a mistake?
Kimberly Foss: Yes but the thing is perspective, everything is in perspective.
Over history, stocks have been fairly consistent even at buying a relatively bargain levels,
basically delivering higher rates of return than long term bonds and cash itself.
Just look at that S&P [short] that you have.
Small cap stocks outperform large cap stocks, value of stocks outperform small and large
and bonds and cash.
And so, yes maybe last year when you bought at a higher [than] today, you’re just going
to buy today and then you know what, in 5, 10, 15 years it’s not going to matter because
you’re going to look back at these times and go “Wow!
I got that for Google for cheap.”
Douglas Goldstein: It’s true what you’re saying that on paper when we look back we
always tell people that past performance is no guarantee of future returns, on paper things
look pretty good and it’s good to buy when the market is down, but let’s say someone
is in retiring years or about to retire or just retired, you think it’s still appropriate
to have a lot of exposure to the stock market?
Kimberly Foss: The first and foremost question is what’s your allocation and that really
drives and determines the variance in your portfolio or your volatility and volatility
really affects your return long-term.
So if we quiet that noise through the allocation.
So if you were say 5 years out to retirement or you’re just about to go and retire, you
don’t want to be 60/40 in that portfolio.
You probably want to be more like 40/60 and as to in this retirement time as well, maybe
you’re 2 or 3 years out or you’re just into retirement which I have a lot of clients
just starting retirement “Hey, let’s keep five to 1-2 years cash on the sidelines to
basically fund your retirement and tell if you can get through these volatile times and
invest the rest for the long term.
So when we’re buying these on a regular basis putting money on a monthly, quarterly,
annual basis on all these downturn, you’re basically buying hopefully near the bottom
but in the long-term you’re certainly doing a better job of buying into the market than
putting just a lump sum in there all at one time and trying to time that and overtime,
this actually yields you more return on your investment again because your stocks have
actually returned more than bonds in a long term.
Douglas Goldstein: I want to touch on something you said a minute ago which is the idea of
keeping a big cash reserve and you actually said 1-2 years.
I often tell people that the traditional wisdom of 3-6 months of spending in cash is not enough.
You’re saying 1-2 years.
You think that’s the right amount these days?
Kimberly Foss: I was saying 1-2 years in the event that someone is just about to retire.
If you are 42 years old then you’ve got 20 years out to retirement, no not keeping
you 1-2 years in cash.
If you want to keep enough on the sideline on the [pattern drive] on the sideline so
that you can, when the markets do come down say 10-15%, you’ve got extra money put in
but if you were a year out of retirement or just to end your retirement, keeping that
on 1-2 years on the sideline is a good idea but ideally what that’s doing is just funding
your monthly drip.
So if you wanted to take 2000, 3000, 4000, 5000 dollars a month out of the portfolio,
this is in cash so you’re not having to tip in to the actual investments that are
somewhat volatile at this particular times.
Douglas Goldstein: I think that’s important.
That was a good distinction between having an emergency fund which everyone should have
and having a cash retirement basket just to cover your expenses when you are in retiring
mode.
Kimberly Foss: I do agree with you with the emergency fund so those are two different
things.
The emergency fund though I really think that is really important for people to keep at
least a year on the sidelines because you’ll never know if you’re going to lose your
job and especially if you’re in your 50s and you lose your job, you may get a severance
package that last 6 months but you’re still not going to be employed and that would really
start even into your retirement and that’s a critical times from 50-65, that’s very
critical for adjustments.
So you want to keep that on the side.
I see the millenials because they watch their parents go through 2008 and they’re scared
and they don’t trust advisors out there.
They are actually looking at more robot advising than actual human beings which I think is
in early days it’s fine but not as you accumulate wealth.
Statistically speaking, they are really playing about a third of the savings that they are
putting away in the stock market.
So I remember when I first started, I was 100% in the stock market and up until started
maybe my late 20’s or early 30’s, I started putting a little bit of bonds into the portfolio
but the only way to capture that wealth is to be into the stock market and you need to
absolutely.
My daughter just started a job in Austin, Texas and we just did her allocation for her
401(k) which for her [campaign] is matching her 3%.
I’m so proud of her, first job, 22 years old and we did the whole allocation basically,
she’s 22 so a little bit about 20% in fixed income and 80% into the stock market.
Douglas Goldstein: A lot of people who don’t have parents who are financial advisors don’t
really get good advice when they’re trying to develop good habits, they just can’t.
If you’re meeting with a couple or a family whose just on bad financial habits they’re
trying to change, what guidance do you give them?
Kimberly Foss: One of the things that I do try is if they can acknowledge where they
are spending money so we just start out with the basics, let’s see where you’re spending
money, let’s just take a pencil or a pen and a yellow piece of paper and just write
down over the last six months, that really is an eye opener.
Once you get the parents on board and said “Hey, wow!
I really do need to take a look at this and how can I help change my habits” that is
the first step.
If the parents are on board God help the children.
It’s really hard but if you have the parents on board then what I do is I listen to them
and said “Hey that’s boring your children in and now and let’s start coaching them
early and often.
And using apps like Acorns.com, great app, it rounds up purchases.
So if you have trouble saving even for an emergency fund, here’s a way that if you
go and buy Starbucks coffee for three bucks, you control so you can round it up to $5,
that buck 50 goes into an investment account that you choose the allocation, again my daughter
did this and just 18 bucks a week, it doesn’t even feel like you’re saving yields a $1000
a year.
So you could easily scrawl away quite a bit of money without really feeling it.
Douglas Goldstein: Could you just tell people how to get a free copy of Wealthy by Design
and how they can follow you and your work?
Kimberly Foss: You can go on our site www.kimberlyfoss.com and sign up there.
Send me an email, you can go Kimberly@kimberlyfoss.com directly, just request that you were listening
to the show and I’d be happy to send you an autographed book in your physical address
and we’ll go ahead and send you one out from here.
You can buy the book at Barnes & Noble.com and Amazon.com as well.
Douglas Goldstein: Are there any other websites that people should follow you?
Kimberly Foss: My private wealth management site which gives you a little bit more niches
what we serve which is www.empyrionwealth.com.
You can also follow me on Twitter @KimberlyFossCFP and then I’m on Facebook and LinkedIn as
well.