Help Me Retire Podcast - Episode 35

Volatility is not the same as risk

Show notes:

Up one day and down the next... stocks can be volatile...

But does that make them... risky? THAT depends on how you define risk... and a lot of people are thinking about risk... all wrong...

Today... I’m going to show you how market volatility can actually help you BUILD wealth...

And if you’re retired... and trying to make your money LAST... I’ll show you how to build an investment portfolio that can help you sleep better at night... no matter WHAT the market is doing...

This is the Help Me Retire Podcast… with your host… Mike Brown… Senior Wealth Advisor with Raymond James Financial Services… and head of Brown Family Wealth Advisors…

Mike is the best-selling author of Your Way to True Wealth: How to Make It Happen, Make It Last, and Make It Matter…

He and his team have been helping clients pursue their dreams of financial independence for the past 30 years… and in the Help Me Retire Podcast… he’ll share his best ideas with you…

And now… here’s Mike…

Some people avoid owning stocks because they’re so unpredictable... so volatile... so... risky...

And if that’s your definition of risk... then... I guess you’re right... owning stocks IS risky...

But I think you might be getting it all backward...

Here’s how I define risk: More than losing money... more than market volatility... to me... risk is the possibility that you won’t reach your goals... that you won’t have enough money to put your kids through college, for example... that your nest egg never gets big enough to retire on... or if you are retired... that your lifestyle constantly erodes... year after year for the rest of your life... because your income can’t keep up with inflation...

In the next few minutes... I’m going to help you think about risk in a different way...

I’m going to show you how the volatility of owning stocks can actually help you build wealth faster...

And I’ll explain... once you’re done building wealth and are trying to make it last a lifetime... an approach to investing that can make you less vulnerable to market volatility... all the while creating an income that can keep increasing... even when stock prices aren’t...

Let’s begin by acknowledging something obvious... stock prices ARE volatile day-to-day... there’s no way around that... always have been... probably always will be...

But think about this: Market fluctuations... by themselves... are not the same thing as risk...

They only turn into risk... when you ACT on them...

As a whole... the market is totally unpredictable day-to-day... but over time... stock prices have historically increased... pretty much in line with the profits and dividends all those companies collectively produce over the years...

The real risk of owning stocks, then... is selling them at the wrong time...

And there’s only two ways that can happen... if you get scared and sell stocks when they go down...

Or when you HAVE to sell them... to get the money you need to live on after you retire...

That’s how you turn a temporary market downturn... into a permanent loss...

And that’s how you turn short-term volatility... into the real risk you won’t reach your long-term financial goals...

When our younger clients ask me how to build lifetime wealth... I ask them to think about it this way...

You can have financial security now... today... or you can have it when you stop working sometime in the future...

But almost certainly... you can’t have both... and it’s your call...

You can feel financially secure today by owning things that don’t go up and down in value... CDs... money market funds... Treasury bills... what we call fixed-income investments...

But the more of your savings you invest that way... the LESS likely you’ll be able to build a nest egg large enough to retire on one day... to be financially SECURE in retirement... because you’re not letting your money do enough of the work along the way...

OR... I tell them... you can own stocks for your long-term goals... knowing they probably aren’t going to make you feel very secure today... but will make it MUCH more likely you’ll be able to retire financially secure one day... and then KEEP feeling that way for the rest of your life...

And here’s something else I tell people trying to build wealth...

If you’re investing in stocks for the long run... a big bear market... something most investors fear... can be the BEST thing that can happen to you...

Why is that?

Because let’s say you’re putting 10% of your paycheck into a stock fund inside in your 401-k... you’re investing a fixed amount of money... and you’re buying a certain number of shares of that fund every payday depending on the price...

If the market falls... and the share price of your fund falls with it... you’ll wind up buying MORE shares with your next paycheck...

And as the price goes back up... you’ll be buying fewer shares for the same money...

Over time... you’re going to notice something very interesting taking place...

You’ll discover that you own a greater number of shares at lower prices... and fewer shares at higher prices...

As a result... you shouldn’t be at all surprised one day... to see that your 401-k has actually outperformed the very funds it’s invested in...

That’s called... dollar-cost averaging... a simple, ingenious investment strategy that can help you build wealth over time... without having to think about when to buy or sell... it’s automatic...

Now, dollar-cost averaging doesn’t mean the market can’t go down... it can’t guarantee profits over any time period... and it won’t make you rich overnight...

But dollar-cost averaging CAN give you the discipline you need to build wealth over time... and here’s today’s lesson... it can turn market volatility... something you might have thought of as risk... into a huge advantage...

Yes... with discipline and time... market volatility can actually help you build wealth even faster...

Is that how you’re investing your 401-k? Then you’re a genius and might not even know it...

And if you’re not using this time-honored strategy to systematically build wealth... then why not?

Well, that’s BUILDING wealth, you say... but I’m already retired... and this crazy... volatile market is keeping me up at night...

Owning stocks might have made retirement possible, you say... but now it’s simply too... risky...

And depending on how you’re drawing money from your portfolio... it might very well be...

If you’re following the so-called... four-percent rule, for example... slowly liquidating your portfolio throughout retirement... market volatility can indeed create risk... for one simple reason...

When you sell stocks to pay your bills... the more the market goes down... you have to sell MORE shares... at LOWER prices each time... just to get the same amount of money...

How’s that going to work?

So, I’m going to let you in on a little secret: dollar-cost averaging does not work in reverse...

When you’re BUILDING wealth... dollar-cost averaging turns market volatility into a huge advantage...

But dollar-cost averaging in reverse once you retire does just the OPPOSITE... market volatility now becomes your biggest enemy...

Following any strategy that requires you to sell MORE shares when prices are LOW... can turn dollar-cost averaging... into dollar-cost RAVAGING...

Remember... one of the two quickest ways to turn temporary downturns into permanent losses... is having to sell stocks at the wrong time...

So stop doing that... and here’s how...

Figure out how much money you’ll need to pull from your investments over the next five to 10 years of retirement... and invest that money into something more predictable than stocks over shorter time periods...

Are you going to get lower returns on that money over time? Count on it... but that’s a lot better than having to sell stocks in the next bear market...

You’re not trying to build wealth with this money...

This is something we call your “Reserve”... the part of your portfolio we don’t want exposed to market volatility...

And THIS is where your withdrawals should come from... especially in a down market...

That’s why we like to say... stocks are no place for the rent money...

Now, the Equity portion of your portfolio... the part you’re typically NOT using for spending money... should have ample time to recover from even the worst markets... ideally you’re not having to sell shares when prices are down...

Most of the stocks we look at not only have appreciation potential... they also pay cash dividends...

And on top of THAT... we’re also looking for companies with a consistent track record of INCREASING those dividends over time... faster than inflation...

While we wait for stock prices to recover... we anticipate those dividends just keep rolling in... and we use that money to replenish what you’re withdrawing from the Reserve to pay your bills...

So now... I hope you’ll agree with me that the volatility we’re seeing in stock prices... is not the same thing as risk...

Risk is the possibility you won’t reach your goals... and once you understand it... volatility can actually work to your advantage...

So, what you might have thought of as risk... is actually opportunity...

And if you’re retired... trying to make your money last... volatility can’t hurt you once you set up your portfolio to keep your short-term spending needs... out of stocks altogether...

Because again... stocks are no place for the rent money...

Here’s one simple thing you can do right now... to manage volatility and feel more financially confident…

If you’re working... saving... building wealth... put your investment plan on auto-pilot... dollar-cost average into your 401-k plan at work... and don’t stop doing it until you’re retired... no matter what the markets do...

And if you’re retired... take a look at your portfolio and ask yourself... “Do I have enough in the Reserve... to cover the next five to ten years of withdrawals... so that I’m not forced to sell stocks at the wrong time?

Do that for me... and you’ll be glad you did...

Thanks for your time today... we’ll talk again soon...

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Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC.

Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.  Brown Family Wealth Advisors is not a registered broker/dealer and is independent of Raymond James Financial Services.

Any opinions are those of Mike Brown and Brown Family Wealth Advisors and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a recommendation. There is no guarantee that these statements or opinions will prove to be correct. Investing involves risk, and you may incur a profit or a loss regardless of the strategy selected. Past performance is not indicative of future results. Prior to making an investment decision, please consult with your financial advisor about your individual situation.