The Myth Of Diversification | 7 Figure Annuity Sales Podcast | Ep. 165

Today we're going to talk about the myth of diversification.

Hey, everyone. Welcome to this week's podcast. I am Chad Owen, the annuity sales coach. And you all know who he is. You love him or love to hate him. It is Boy Wonder. Depends if you're the good guy or the vill who loves you or hates you, I guess. But. Yep.

Who? Which one? Which one's which?

How's. How's the little fuzzy doing?

Oh, yeah, this is. This is Craig the caterpillar.

Yeah, Craig. That's even a creeper name for a caterpillar. What are you doing? Oh, gosh.

This is a revolting development.

It is. Very much so. So you need to shave it. That's it. Nair to the rescue. It's just, you're going to wake up and you're going to have that on you and your lips going to be so burnt because it's sat there for five hours while you're sleeping.

You know how you told me one time I joked with you about your gray hair and you told me that the gray hair has really, well, wisdom. But then, I mean, the. The effect of gray hair with people who are entering retirement.

Do you really want to go down the effect of a creeper mustache? No. Okay. Do you really want to do that? Is there a reason why kids run when you go to the playground? Okay, well, first of all, I'm not.

Going to the playground.

Moms were looking at you weird in the groc story.

Yes.

Okay.

Yeah.

Specifically, your first warning.

Well, to me, that just says that I actually do look like Tom Selleck.

They're running from you.

Not running. No, definitely not running.

You look like Tom Selleck running from you.

They're not running. I can assure you that the looks are weird.

They are weird.

I don't. I don't like that part of it.

Okay, so what do we get to talk about?

Golly, the myth of diversification. You know, Merriam Webster has an interesting definition, quite frankly, that I really do not like.

Miriam.

Miriam. Yeah. I don't know. Some. Some. I'm sure he had a mustache.

You know what? Interesting, though, this side note. If you haven't seen the. The professor of a Madman or the Dire Diary of a Madman, it has Mel Gibson in it. And there's another solid. I can't remember his name. He's a really well known actor and it talks about how they formed the first dictionary into English. And it's fascinating, really. I don't know how much of it's like actual historical truth.

Sure.

But it's based on. And it's pretty amazing.

Well, so there you go.

Okay, look it up. Let's get back to our regularly scheduled program.

So Mr. Webster says the act. Well, this is what diversification is to him. The act or process of diversifying something or of becoming diversified. An increase in the variety or diversity of something. That is.

So they use the word diversity. Explain diversification.

They use. They use the word in the definition.

It sounds like a broker's way of explaining justifying diversification. So we need to move your money into stocks, bonds, mutual funds, commodities, so we can be diversified, when in reality, true diversification keeps you flat. Because if stocks and mutual funds are going out, bonds and commodities are going down, then does that kind of. Isn't that how it's supposed to work? That.

I mean, the essence of diversification is to reduce risk.

But the thing, when you think about it, it actually increases risk because even now, stocks, bonds, mutual funds, commodities, there's no balancing between them. I mean, you can see commodities and stocks and mutual funds and bonds all fall in the same day. And I'm trying to remember the exact statistic on this, but I think. I think. Don't quote this as fact. Double check it. But I think 2018 was a first year that cash beat stocks, bonds, mutual funds, and commodities. I think that was the first year. So I'm. And I'm pretty confident that. But like I said, don't make it the gospel. Yeah, it's. I'm pretty sure it was. Stocks, bonds, mutual funds, and commodities got beat by cash. So if diversity diversification was supposed to work, that never would have happened.

Well, based on what you've said about my mustache, I can't imagine that what you're saying they're gonna assume to be gospel because very clearly you've got some opinions about.

I'm starting a petition, and the first person to sign it will be my daughter. Yeah, your wife.

I had permission.

I did.

Was it a dare? Was it the same reason you had to eat cilantro that you hate?

A whole bushel of cilantro on a dare. I do.

Yeah. But diversification is such a myth because here's, here's, here's my thought process. I lived in Las Vegas for four years. I could go into every casino, I could play every slot machine, every table that's in that entire place and call myself diversified.

Right.

Everything in there is designed to take my money. Right. If it wasn't. No, it's designed to make you winners. Really? So is that why those casinos back in Those days, I don't know what is now, but they would consider themselves debt free in the first month they were open. That's diversified. They want you to win. So I go on and play every slot machine in every table. And I could call myself diversified. Stocks, bonds and mutual funds are designed for one thing, to make brokers rich. That's really what it comes down to. And I know that's a harsh statement, but if it wasn't, then why wouldn't a broker make a deal with you? I only get paid when the market goes up. When the market goes down, I go down with you. Now, technically they do because if they get 1% of the amount under management, they lose money. They would lose money. But the reality comes into the brokers never suffer the extreme consequences. The client does. You know, if they're paid 1% management fee, they'll lose. And it goes from 100 million under management to 50 million under management. They're still doing pretty well. But if they're going from 100 million to 50 million under management, that means their clients lost 50% of their money.

Right.

That's catastrophic. It is a lot of people's retirement. And once again, I'm going to throw out the balancing statement. I do not have a problem with brokers that do it honestly and ethically.

They have their segment of safe money that they've already protected their clients, money they know they can retire comfortably and then they have other money they put at risk. Yeah, I love it when a broker does that.

Absolutely.

And you'll never hear me ever say anything negative about someone that performs that way. I have a lot of agents that are registered and it's simple. I don't, I do not have a problem with that. But when you try and make safe money and you try and make safe statements, but you use all risk products, that's when I have the problem.

Yeah, yeah.

I see a 77 year old that 99.5% of the money is at risk.

Right.

And they have a half a percent in a money market account.

Right.

That is not okay.

Yeah, yeah.

No, that's just my opinion. Once again, I'm not telling you if you sell stocks, bonds, mutual funds. No, I'm just telling you my opinion is you cannot risk people's money in that way when they're older. Yeah. It's just wrong.

Yeah, that's good. I will balance this out for, for Mr. Webster as well.

So you're going to diversify?

Well, I'm going to give them the second definition that he did put in the, in the dictionary, the act or practice of spreading investments among a variety of securities or classes of securities. That's a better description for what we are discussing today. But nonetheless, you have to consider what is the point of diversification, aside from the definition, what is the why behind the practice of spreading investments a variety of securities? The why is risk reduction. Yeah, nobody diversifies that, isn't trying to reduce the risk exposure that they have.

It's just the truth. And I hear people say, well, look how much I made over the past year. Well, why did you make that much over the past year? This was a big comment I had in April and June of this year. Like, well, look how much I made over the past. Right, yeah, look where you were in February. Look where you were in April. You're making up a lot of the losses you had.

Right.

But the brokers love Satan. How we did have a phenomenal, Ended up having a phenomenal 2020. And so far, 2021, I mean, we can't predict anything, but up until the summer, you know, it looked like 2021 has been doing well. But one thing we're not addressing is the diversification. So once again, we talk about diversification. You know, we have the large institutions doing well in the stock market, but the small institutions are getting hammered, the ones that aren't publicly traded. So I've said this before, and you know what, people can debate this, but here's the reality. When you have mom and Pop plumber, mom and Pop electrician, go out of business and their little shops gone, where do the people have to go? Home Depot and Lowe's. Publicly traded.

There you go.

So it makes that big company look really good. But you have an entire family and a group of people that are now out of a job.

Right.

So that's a concern. And we got to address that. We got to realize diversification is a way that you say there's balancing, and it used to work that way. Stocks, bonds go. Excuse me. Stocks and mutual funds go up. Bonds, commodities go down. But now I've seen so many times where everything is rising and falling at the same time.

Sure, sure. Well, and it brings up a good point that you can be, and most people are partially diversified, but to get to pure 100% diversification, whatever you want to call it, to basically explain that your risk exposure here is directly inverted with your risk exposure here and the risk way that things are allocated, if this one goes up, this one goes down an equal amount, you end up net flat. That's the essence of Getting to a true and pure place of diversification, which isn't the goal, that's not the goal of investments.

So I mean, I would explain this to my clients in this way you can diversify where you have your ups and downs and you're trying to balance them up. You going to get a portion of the ups but none of the losses you set up, which is a better way to diversify. This is why I don't personally like any variable annuities. I don't personally like any of these ones that have a buffer of 5, 10, 15, 20%. You know, if you have a 10% buffer in the stock market, loses more than 10%, you're in trouble, you know, and so, or you don't get some of the gains above what the first 10%, you don't get gains. That's still a form of risk. And so, you know, me personally, I love being the safe money specialist.

Absolutely.

We don't have to worry about diversification. And somebody can tell me, well, indexes don't make anything that's a complete lie. I personally own annuities. I just got a statement on one where I earned 10.76% over the past year. Well, you didn't earn your 30%. Yeah, but if this market falls 20, 30, 40, 50% over the next 10 years, excuse me, next two years, it falls out, we're in deep trouble. Because Great Depression, I do tell people that as well. I'm not a doom and gloomer. I don't think the market's gonna fall for five, 10 years. I mean, the only time that we can really see that in modern history is during the Great Depression. I think it fell over about nine years, approximately. And so the Feds just, I don't think they would ever let that, let that happen. I think.

Well, they've learned how to, I mean.

Since they control the market so much. You know what, when we talk about back end things, things behind the scenes, man, there are things going on, there's, there's no reason the market should do what it does at times. There's no logic behind it. And how do I know this? I'm not one of those super brilliant economists that just study numbers and that's all they do. But I follow a lot of them. That's what they say. You know, they say things like, hey, we're not quite sure why the markets. I mean, I follow one right now that said the market would be down 30% by the end of August. That's not really looking like it yet.

Right.

You know, but they're pretty convinced on it. Then there's another one. There's these. And they're not economists, they're more, I would say, product pushers because they're saying, well, the market's going to fall 80%, you need to be in gold and you need to be in crypto. Well, what's the motivation behind that? You know, but there are people that have said, you know what, it's gonna go up a little bit and it's gonna go down. Well, that's a revelation.

That's really deep. The market's gonna go up and then it's gonna go down.

You have a five year old look at a chart and ask them what it's gonna look like in the future.

And they're gonna say, I wish I could find this. You know, I haven't googled this in a long time, but there was a stockbroker that did something with a monkey and they threw darts at the board. The monkeys stocks won more than the broker stocks. And it was just random chance. And man, I need to, I need to look that and see if that's on you. That's interesting, but it's funny because it is. Literally throw the darts, right? And you could, you could say GE five years ago or ten years ago was a phenomenal company. I mean, if you would have talked to brokers, oh yeah, this is the best dividend paying stock out there then. Now look at it. You know, if somebody would have knew how to get out of that, we wouldn't have clients losing so much. Yeah, United back in the day declaring bankruptcy and everybody loses their pensions and all these people lost their stock and then it reopens, but they lose all the stocks and then they're allowed to relaunch their company stock and their different ticker number and everybody can reinvest. What about all those people that lost all that money? It's crazy to me that you don't have to pay back when your company failed and you can relaunch right now. If your company failed, it failed. And okay, you're not going to be able to repay back. But when you're allowed to fail, declare bankruptcy, everybody loses the federal government and then they are allowed to restart and those people that lost money don't get it back. That's just dead. That's crooked man. And so that's why I'm just not a variable person.

Well, let's end on a note that a lot of Safe money guys end up discussing diversification within an indexed annuity, talking about the index allocation strategies.

Yeah, you can pick multiple different indexes. Like there's one right now that had in my opinion a very unrealistic. It says it's made over 12% over the past 10 years. I haven't used it but if I did with that company, which I'm not right now because it's not number one. But if I did do that, I would pick six different indexes in that or five different indexes in that. Not just put everything that top one because I'd be going.

That seems a little bit skeptical.

It is. But there are some indexes I really like where it's already diversified in the index. So I really like that index. Volatility control indexes I like a lot right now.

Yeah. Consider what the index is actually exposed to, what it's reporting. If it's not just one thing, then you're probably dealing with something that's already internally diversified at some, at some level. But yeah, you've got the option to allocate in different ways. But look too at the back tested returns, the 10 year worst, the 10 year best, the last 10 year. And, and don't, don't put a ton into an index that has big giant gaps.

I want the worst average. I want to sell a product that if there's like a 12% high and a 2% low, I want 2% spread between, difference between let's say 5%, a high of 7% consistency. That's my, that's my what? Shows consistency, shows rate integrity.

That's true.

So.

Oh, that's a good point. And a whole nother thing in and of itself that we'll have to do on another podcast.

I hope this helps you guys. You have a great day and as always, happy selling.

Ram.