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Playing a game of football is similar to your investment portfolio. And while you should have ‘star player’ investments, you also need linebackers as a safety net for your assets.

Or as the saying goes, “Don’t put all your eggs in one basket.” Even if you’re seeing mouth-watering returns when you look at your portfolio. Even if they look like the best eggs for your basket.

In this episode, I discuss how to properly diversify your portfolio and defend your investments for a stress-free retirement.

Show Highlights Include:

  • What the Mexican-American War reveals about the ‘winning investments’ in your portfolio and why they don’t always protect you. (1:22)
  • How to immediately avoid the ‘Pete Carroll’ approach to planning your retirement. (3:03)
  • The biggest mistake in managing your investments and how to find the companies that compliment your retirement goals. (8:20)
  • What a properly diversified portfolio needs for protecting your assets and sustaining a successful retirement. (10:40)

To schedule your free retirement tracking meeting, specifically for first responders, head to http://pensionattention.com/ or call us at 805-409-8150.

Read Full Transcript

Welcome to Pension Attention, the best show for first responders who want to take control of their finances.

After advising Los Angeles city firefighters for over 12 years, financial advisor, Brad Barrett now shares how you can grow your wealth, build your legacy and enjoy a life of freedom. And now here's your host, Brad Barrett. [00:19.9]

Brad: Welcome to Pension Attention, the show for you, first responders who want more out of their deferred compensation and pension plan. My goal with this podcast is to reach you where you are at whatever stage in your career you are in, to provide my nearly 15 years of experience working with both active and retired service members on their investment and retirement planning. My team here at ONE Fire and Police of fiduciary advisors are dedicated to ensuring you take control of your finances and build the life you deserve. To find out more about me or my team here at ONE Fire and Police, you can go to our website at PensionAttention.com, or you can give us a call at (805) 409-8150. I want to take a moment here and thank each of you for tuning in here each week to Pension Attention. Please make sure to subscribe, you can go to our website again at PensionAttention.com, you can click on the media tab, you can download it, subscribe and leave us a comment. Let us know, it's always good to get feedback here on the show. [01:21.3]

Today on Pension Attention tension, we are we talking about how defense wins championships and diversification wins returns. We've heard that saying before defense wins championships, some of us subscribe to it, some of us don't depending on your philosophy of sports, but actually want to start this podcast off with the topic of the Mexican American war. Yep. You heard me, right? I'm going to nerd out on you, as you know, I do. Have you ever heard the expression snatch victory from the jaws of defeat? Well, the origin of that statement can be traced all the way back to the Mexican-American war. This war, if we recall from our high school studies, right, took place between 1846 and 1848. And some of you might recall that was a time when America was on their Western expansion. We had just completed the annexation of Texas and through the Mexican American war, we acquired New Mexico and California. So, during the war, a regimen of American troops from Virginia won a hard-fought battle and a politician at this time had described the victory by writing, ‘they snatched victory from the jaws of defeat.’ [02:27.3]

Now, as we all know that expression is now a part of, we'll call it our American lexicon. It means that you win when it appeared that you would lose. But there's an opposite side to the expression that has also made its way into our common vernacular. That is snatched defeat from the jaws of victory. This expression would be used when it appeared that something was going to be won, but it actually was lost and normally lost because of mistakes or let's say bad judgment or poor planning. So, let me give you an example and here comes into the sports analogy with regards to defense wins championships. And one that is probably near and dear to any football fan and actually touches us a little bit here in Southern California, because it actually involves our beloved Pete Carroll and he Trojan fans out there. [03:15.2]

So, in 2015, the new England Patriots played the Seattle Seahawks in the super bowl. And for many of you who watched this game, you probably know where I'm going with this. It was an amazing game and probably once again, proved how lucky and good Tom Brady can be. But it also showed defense in a time when things look like they would have been one because of offense. Now, late in the game, if you recall, it appeared that Seattle would win, right? In fact, it would be really difficult for them at that time to lose. And as CBS sports wrote in the games, post-mortem what transpired will live in the history of this league for as long as football games are played a series of decisions, including the bizarre call by Seattle coach, Pete Carroll, to throw the ball on second down on a receiving route in the crowded middle of the field, that will always be second guessed and quote, coach Carol, by the way, took a huge unnecessary risk here. And he did it late in the game when there was no time to recover, the game clock had run out. [04:15.6]

Now, by the way, if any of you watch the Rose bowl from 2006, when coach Carroll was the coach of the USC Trojans and they were playing the Texas Longhorns, it was come later to known as the greatest college game ever played. He again on fourth and one late in the game, took Reggie Bush out and decided to put LenDale white in another late in the game, bizarre call. And referencing the super bowl back to that one here in 2015, the coaches play call coach Carroll's play call there was an NFL that actually tweeted, it was the dumbest play call in the history of NFL football. The outcome of this game was much different than what could have been for Seattle all because of bad judgment. Seattle snatched defeat from the jaws of victory, of course, coach Carroll being a standup guy admitting his mistake. He was quoted as saying, I made the decision to throw there's nobody to blame, but me. Unfortunately, and ultimately the final analysis, it was a bad decision that led to a disaster for Seattle. The 2015 super bowl is just one example of snatching defeat from the jaws of victory. In other words, it's also an example of how defense can win championships. When you're on offense, when you're in that accumulation phase of your retirement of your investing life, offense can be somewhat easy. You're running the ball down the field, right? You're deferring into your deferred comp plan. You're contributing consistently every other ones that you're making your paychecks, right? You're putting your allocation to work. And if you choose to hire a professional manager, you're even adding more team members to your team to win this game of ultimately having a happy and healthy retirement, meaning you have enough assets between deferred comp plan, other savings drop eventually to go into retirement with, to be able to support your overall retirement life. [06:04.3]

And in fact, referencing more sports here for a second, we just saw this in February again, another Tom Brady win call what you will, but his defense, the Tampa Bay, Buccaneer’s defense, not Tom Brady's side of the ball. The defense side of the ball allow the Kansas City chiefs led by Mahone's of all people to put up nine points. Nine. Yes, Tom Braden, his offense put up 31, but they held them to nine points. So again, you've probably heard this statement before defense wins championships. And whether you prescribe to that notion or not, as it relates to your portfolio, especially as you get closer to retirement, defending your allocation, defending your wins is really paramount. And we've talked about that a lot on this show. And I talk about a heavily here at ONE Fire and Police and our advisors talk about this with our clients constantly, because when we talk about diversification, which we're going to talk about next, we talk about rebalancing. What is rebalancing for a second? We'll talk about diversification, but you probably heard me say this before. Rebalancing is essentially the process of realigning, the weightings of a portfolio of assets. Rebalancing, essentially it involves periodically buying or selling assets in a portfolio to maintain the original or desired allocation that we set out for each of our clients. [07:26.1]

For example, if we meet with a client and we go through their wealth forecast, we put together their incomes where they're making on base and sod, what their outflows are, their mortgages, their lifestyle with their kids' education planning, we put all that together, okay. And we align that towards this person, for example, maybe 15 years on the job. He's got 10 years left before 25, and he's also 50 years old at that time. So, we're looking at drop entrance potentially, so we're matching up his pension benefits as well. So, we're aligning an allocation towards that next 10 years. And then the next 30 years after that in retirement. [08:00.4]

Do you know how much you should be contributing to your deferred compensation plan? Are you getting the most out of your current investment options? Looking at entering or about to exit the drop program? Go to www.pensionattention.com to find out how we can help. [08:16.2]

So, an allocation that we said, let's say it's a balance. Let's say we do a 60% equities, 40% fixed income balanced portfolio. When we rebalanced consistently again, we're realigning the weightings of the portfolio based on the market fluctuation. So, if we have a run-up, which we've seen the past couple of years in the equities, if we do nothing as your portfolio manager, meaning we are a non-active manager for you, you go January 1st, you start out with a hundred thousand dollars and you have 60% of that is in equities. By December 31st, if you have a 20% year as a hypothetical, that 20% is on the equity portion that 60%. So, from January 1st being at 60, 40, 60% equity, 40% fixed income to December 31st, if you do not rebalance, you're going to be at a much higher weighting than you wanted before. You're going to be more aggressive than you wanted before. [09:11.0]

So, in other words, instead of saying realigning, we're trimming constantly within the portfolio to keep to our allocation. That rebalancing strategy, a part of active management fits into what a diversified portfolio should look like. And another thing I want to be mentioned here real quickly is when you talk about active management, a lot of our clients, and a lot of people out there in the investing world want to put quantity with quality. And I want to really strongly say, this is quantity does not equal quality when it comes to trading. It's also doesn't mean that word is going to do the set it and forget it mentality either. We're just going to buy a holding and say, okay, we're going to look at it in 30 years. We're just going to ride the dividends and we won't touch it, right. I consider more of an active waiting. [09:54.1]

And what I mean by that is we're actively rebalancing. We're actively diversifying. We're taking a look at your accounts and every other Wednesday, when the paychecks come in, we have the contributions. We're always working behind the scenes. But at the same time, when we're investing in the holdings that we have inside of your allocation, we're making sure that we're finding good companies. We're not just going to move off of them every other week because of some new news cycle we're aware of what's going on, but we want to be prudent investment managers for our clients to make sure that we find the good quality, fundamentally strong companies that fit into a diversified portfolio, so that we can then rebalance that diversified portfolio to manage the overall wealth that we're trying to grow for your clients relative to your own goals and objectives. [10:40.3]

And so, these words of diversification and rebalancing, those are defensive words in a way, if you think about it, which is why I'm bringing up the notion of defense wins championships and diversification wins returns. And diversification, it's, it's simple understanding, is the practice of spreading around your investments so that your exposure to any one type of asset is limited. So, this practice is designed to help reduce the volatility as I mentioned earlier of your portfolio over time. And one of the keys to successful investing is learning how to balance your comfort level with risk against your time horizon. So, investing in your retirement nest egg, this deferred comp plan, your overall retirement plan too conservatively at a young age and you're in the risk, maybe that the growth rate of your investments won't keep pace with inflation. And conversely, if you invest too aggressively, when you're older or getting closer to drop entrance or exit, you could leave your savings exposed to market fluctuations in volatility, which really could erode the value of your assets at an age when you may not have as many opportunities to recoup your losses. [11:47.1]

And one way to balance risk and reward in your investment portfolio is again to diversify your assets. So as much as it may be, this was boring word, or a lot of times overused word it's vitally important to the success of long-term investing. This strategy, okay, has many, it's got complex iterations, but at its root, the simple idea of spreading your portfolio across several different asset classes, the diversification itself can help mitigate again, the risk and volatility and portfolio. Again, potentially reducing the number and severity of, you know, stomach churning, ups, and downs. And as you get closer to retirement, that becomes more paramount. So, there's a saying as many of my, my police department listening here now protect your six, right? We want to make sure we're protecting your six in the investment portfolio, deferred comp plan has a protection vehicle inside there with regards to active management, which we do with regards to diversifying your portfolio, rebalancing all the strategies that make sense in terms of not being too concentrated in one area, but also making sure we're finding good fundamentally sound positions that build for growth. And again, tailoring that to your specific growth needs. [12:55.1]

And if you don't know what your growth needs are, everyone knows they have a rate of return they'd like to do. They love to earn 8% every year, 10% every year. And that's all great, but the reality is that doesn't matter as much as understanding your distribution rate. If you don't know what that is, we need to go through that. You can sit with one of my advisors here, myself included here at ONE Fire and Police. You can set some time if you haven't done that and hadn't sat with an advisor yet before. You can go to PensionAttention.com and set some time with myself or give us a call at (805) 409-8150 and we'll set that time again to take a look at your deferred comp plan, where you're at, and define your distribution rate, because that'll back us into the needs based analysis around what your rate of return needs to be both now and as you get closer to retirement and then through retirement. [13:39.6]

So yes, we're going to have offensive investments in your portfolio. We're going to have that star quarterback, that star running back, those star receivers, running that ball down the field with regards to your equities. We're also going to have your safeties, your linebackers, you guys protecting your downside, if you will regard to the strategies of diversification, of rebalancing, of actively managing your portfolio. Something that's not happening right now with most of the core funds, it's just fund related stuff. It goes in every one, every other Wednesday, and you know what happens happens, right? So, we're going to get a little bit more tailored, a little more structured to build out your portfolio so that, you know, number one, you know what you're investing in, how you're investing and the purpose full investing, which is really that dollar cost averaging. I spoke about many times on these, on these podcasts and what I talk about in our practice with consistently and on a discipline basis, funding your deferred comp plan, because you could pay 26 times a year. That's a lot of times you multiply. If you've got 10 years left, let's say that's 260 times you're going to be contributing new dollars. [14:41.0]

Wouldn't you want to make sure you know that each of those dollars, I don't care if it's a hundred dollars every other Wednesday. It's purposeful, if you know what you're doing and you design a portfolio that builds for it. So, a lot of this Pension Attention podcast and a lot of what we do as advisors here, especially for our first responders, is making aware that you have the option to better manage your deferred comp plan than just putting into mutual funds. So again, whether you prescribed the notion of defense wins championships, and it's not really the most fun way to talk about investing, because everyone loves talking about the Teslas of the world or the Netflix or whatever's new and hot lately. And that's all good and well, we're going to have a lot of those holdings in your portfolio, but putting those in as an overall game plan is what makes those successful. And as much as it's not fun talking about that, it is prudent and it's definitely been proven to be able to sustain retirement. And what I mean by retirement is not just while you're in retirement, but while you're building your assets now leading up to retirement. [15:40.9]

I want to thank you for listening today. Before acting on anything discussed today, remember to speak with a financial advisor near you about your specific situation, or if you'd like our help, you can visit us at PensionAttention.com or you can give us a call (805) 409-8150. Next week on tension and tension. We're going to be talking about the five questions to answer before you retire. I'm looking forward to it until then stay safe. [16:07.1]

The information in this podcast is educational and general in nature and does not take into consideration the listeners personal circumstances. Therefore, it is not intended to be a substitute for specific individualized, financial, legal, or tax advice.

To determine which strategies or investments may be suitable for you consult the appropriate qualified professional prior to making a final decision. [16:30.3]

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