This is Investment Planning (Ep. 7)

Welcome to Ideas by Mike, the podcast with Mike Milligan, where you will find one-of-a-kind financial planning advice for your one-of-a-kind life. With over 22 years of experience as a certified financial planner, Mike shares experiences and advice on crafting simple, easy-to-understand financial plans based on your values and priorities. He believes that taking a personalized approach is the best way to prepare for the future and give meaning to your finances. So follow along as Mike, and from time to time his guests, explore different strategies and tools that could help you secure your financial future in retirement. Now on to the show.

Hello and welcome to the Ideas by Mike podcast with your host, Mike Milligan. I'm Wendy McConnell. How you doing today, Mike?

I'm good, Wendy. How are you?

Oh, I'm good. It's always good to see you. So after our last 2 podcasts, I was really getting how the tax planning, retirement income planning in the broader context in financial planning, I was really kind of putting all that together. I was like, okay, yeah, I get it. But could you, could explain, could you explain to our listeners why you created the 5 segments for planning and how you determined their order?

Yes, that's a great question and it's one that we've had asked us. asked to us because people are eagerly awaiting to see what 3, 4, and 5 are and their context. But I created them because what I realized is retirees are visiting retirement now while they're still working. And then when they go to retirement or that destination, it's their first time there. It's no different than going to imagine Disney World for the first time. And when you come back, you realize, man, I wish I would have done this, this, or this. Well, retirement is a destination people don't want to go to, come out of, and go back to.

Right.

So, like, in the 5-step one-of-a-kind financial planning process, what we realize is that the most expensive expense anyone will ever have in their life is taxes. It's the most expensive thing. And we talked about that for 20-plus minutes. on podcasts, 2 podcasts ago, why tax planning is so important. And that's why it's first, is because it is the most expensive thing that you'll ever have in your life. So, then we go on to retirement income because we have a career, right? And when somebody is comfortable in their career, they see themselves staying in that career forever until retirement. Well, To be honest with you, Wendy, retirement is a career too. Once you go to retirement, it's what you want to do for the rest of your life. You don't want to work again. You don't want to change your lifestyle much. And so, having the basis of a retirement income, paychecks that come into your account every month that will never run out, creates the safety and security that people need to go to retirement. And so, that's why taxes and retirement income are first, because if we can meet those, then the tools that we need through investment management, prepping for long-term care, you know, the end-of-life health, you know, that we generally, you know, we don't have our best health in life, preparing for that. And then preparing for when we do eventually die with our legacy, how do we privately and effectively pass that on? You know, that's why the 5 steps or the 5 segments of this one-of-a-kind financial planning we have is so unique, because it's not about one thing. Today, you know, we're going to talk about investment management, and that is generally what everybody says is the most important thing to financial planning, is investments. Nobody really talks about taxes. And the way they talk about it is they say, go see your CPA. Nobody talks about retirement income. Oh, we'll do that when we get there, right? You know, but you know, That's not a plan. Nobody ever talks about long-term care. The conversation there is, man, I wish I'd have done something about this sooner. Right? And then the legacy piece is everybody always says, I need to do that. And it never, you know, it gets done like rushed at the last minute. So, that's why we have these 5 steps. That's why we do it with every one of our clients. That's why we create rhythms and patterns in our business to be able to make sure that we hit on these with everybody.

All right. So let's start at the beginning. What exactly is investment planning and the investment side of planning?

Well, we're going to dive into investment planning today. And investment planning is, you know, it's really about how to get started, what to consider, how to make informed decisions for your financial future. Investment planning is the process of setting specific goals. and developing strategies to achieve those goals through investment. It involves understanding risk tolerance, time horizon, and the financial objectives.

Got it. So, it's not just about randomly picking stocks or funds.

It's not. I mean, you're exactly right, Wendy. Most experts want to create a tailored approach that aligns with your goals in risk tolerance. I personally think that the concept of risk tolerance is hilarious. If you were to get on an airplane, Wendy, and the pilot said to you, you have a 92% chance of reaching your destination today, would you stay on the plane?

No. So, are you saying that's what it's like?

It is. Risk tolerance is the probability that you're going to get through the rest of your life with your money. See, the number one thing that people worry about in life is running out of money. And in the investment world, we talk about how much you will tolerate risk. Well, the real tolerance is zero. Listen, we don't tolerate Gun violence for the most part in America. That's why we have a police force, right? So like we pass risk on to police officers who are brave men and women who are out there taking the risk so that people aren't, you know, shooting up everybody every day. And listen, gun violence is a problem, not to go political here, but risk is passed every day. And the real answer to tolerance is Nobody wants to take it. See, there's, uh, so, so in investments, risk tolerance is factored by your age, your financial goals, and the personal comfort with market fluctuations. For instance, how low are you willing to see your account go in the short term? That's really risk tolerance. A younger investor with a long time horizon, you know, people who don't need money for a long time, may tolerate more risk Then, you know, and they'll get higher returns for that risk than someone who's really close to retirement, who might prioritize the capital or the principal that they have to preserve it. At the end of the day, as one of my best clients says, the market goes up and the market goes down. Risk is really about will the money be up or down when you're ready to withdraw it. And that is about as simple as I can make risk out to.

You compared it to the, the flight though. So if, if the goal really is like zero, like how do we go about adjusting that? Because we can't promise that, right?

Yeah. I mean, there's no, so we can't guarantee it, right?

Right.

That's what the, that's what the government tells us is there's no guarantees in life. The only 2 guarantees are death. And taxes, right? Those are the only 2 guarantees out there. So, there's several options depending on somebody's goal and when you need the money, right?

Okay.

Stocks offer growth potential, but come with higher reward and more movement up and down. Bonds provide income and stability, but typically offer lower returns. Stocks and bonds can also be packaged together in the mutual fund or an exchange-traded fund where a company like American Funds or BlackRock or T. Rowe Price or Vanguard or others manage them for a fee to give more diversification. So then from that guaranteed spot, there are some guarantees in the investment world. Right? And it is, it's truly about, in order to get those guarantees, it's about diversification.

And that's spreading your investments across different assets so that you don't have as much risk?

Exactly. That's a key strategy in an investment plan to spread out the risk and get to almost a zero-risk portfolio.

What about retirement planning? How does investment planning tie into that?

Okay.

So the second part of the one-of-a-kind financial plan is retirement income planning. Okay. Retirement planning and retirement income planning are really 2 separate things. Experts try to group them all together. Retirement planning is a major part of investment planning. It involves estimating that retirement income you need and then selecting appropriate investments And monitoring your progress toward those goals. If this is where we start introducing guaranteed lifetime income, right? So, guaranteed lifetime income is part of the retirement income process. But you can have an investment that has guaranteed lifetime income in the investment world where you'll never run out of money. And that's a part of the overall investment plan. You put some money in stocks, You put some money in bonds and some money in guaranteed outcome to meet the total investment need. That is diversification.

So monitoring progress, does that mean you need to review your investments regularly?

Absolutely. Regular reviews help ensure your investments are on track with your goals and make it— and it allows you to make adjustments as needed due to changes. in not only your life, but what's going on in the market, which brings up this whole topic of Modern Portfolio Theory.

Well, that sounds fancy. What is it?

It is fancy, right? And listen, when it's fancy like this, right, most financial advisors want to demonstrate that they're experts and they start pulling out these really big words and theories and you can trust me because I know something, right? The Hunter Portfolio Theory— and listen, I know stuff too, right? I teach it in college, right? And then I put it into practice every day for clients. It was developed in the '50s by Henry Markowitz. It's a framework for constructing a portfolio to maximize expected return while reducing the level of risk. It's about diversification. And finding the balance between those stocks, bonds, and guaranteed outcomes. You've heard a saying, Wendy, don't put all your eggs in one basket. That's modern portfolio theory.

Okay. So, is this different from traditional investment strategies?

So, traditional strategies, right? So, day traders, for instance, they're not really worried about You know, the long term. They're worried about how can I maximize gain in the short term, right? People who trade in and out of stocks, people who don't have a plan in place, they're just trying to maximize return, right? Which there's nothing wrong with having a part of your money that you play with to try to maximize return if you understand that the risk that's there is that money may not be there in the future. See, most people, while they're going through life, are worried about the return on their money, O-N. But when people start getting close to retirement, what they really should be concerned about is the return of their money. And so instead of the return on their money, of their money, that's where Modern Portfolio really differs, right? Because we spread those eggs out so that if one of the baskets falls, Everybody, your whole life is not ruined.

Yeah.

Because you have no money, right? That's the Modern Portfolio Theory. Not putting all your eggs in one basket helps alleviate the fear, the number one fear people have of running outta money.

So I like it. I like it a lot. How do we go about constructing a portfolio using MPT principles?

I am going to sound like such a nerd right now if I'm not already doing that. I mean, I, Listen, there's a lot of really— there's a lot of smarter people than me that know how to do this, and we use those people, right? Because the great thing about Mike Milligan is I can take, you know, those very nerdy contents, right, of content of people who do this and do it well, simplify it, and bring it to clients who can understand how it affects them. So that process, though, involves like where I am the middleman for that. It involves creating like this asset allocation. How much is in stocks? How much is in bonds? How much is in mutual funds if we need that? How much is in real estate? How much is in annuities? How much is in private placement if you've got a lot of wealth? And so, that asset allocation, what you're invested in, and so, the risk is spread out so that you have money That's up in value when you need it. We don't want to ever be taking money out when it's down in value. All of that is an asset allocation. And then we— I've talked about the risk tolerance, like how people would tolerate risk. I don't do risk tolerance because the reality is nobody ever wants to lose a dollar.

Okay?

So, we do risk assessment, assess the risk of each asset, So that the money will be there when the client needs the money. And then we just look to optimize it, right? So from asset allocation, risk assessment, and optimization, those are— that's how we implement the big modern portfolio theory, or don't put all your eggs in one basket.

So are there common mistakes that people may need to watch out for?

Yeah. So, that's an exceptional question, Wendy, because the number one mistake people fall for is they fall that I should just buy mutual funds because that solves my diversification problem. Well, the mutual funds, and mutual funds are right for certain people. It's been a way that most people have accumulated their wealth in 401s and TSPs. and IRAs, but at some point in the future when you've accumulated, you know, 5 or 6 figures of wealth, you want to really start worrying about fees, and you want to understand how they're broken down. So it's very important to calculate the overall fees, and fees can be both disclosed to you, like advisor fees, but they could also be hidden. And that's the thing that most people just don't realize is that there's nothing for free in the investment world. There's nothing for— there's nothing for free, right? Vanguard makes money and everybody calls them, you know, oh wow, they don't charge me anything. Well, they— I mean, they're not a nonprofit. T. Rowe Price is not a nonprofit. Fidelity, Charles Schwab, none of these companies are nonprofits. They are highly profitable companies making money. Through advisory and hidden undisclosed fees. And if you separate the fee that the manager makes from the fee that the advisor makes and you add them together, well, the average fees are between 0.5% and 2% on somebody's investment portfolio. So you've got to ask people, what are my real fees? Tell me all of them. Tell me what the mutual fund fees are. And if somebody says there are no fees in mutual fund, just go on to the next person, right? I mean, that's just like meeting somebody at the bar, Wendy, and they're like, oh yeah, I've never done that in my life before, right? People lie at the bars all the time, right? Because they're trying to impress somebody.

Yeah.

But like, if somebody tells you, oh, there's no fees in mutual fund, just move on to the next person. There's plenty of ethical financial people who will tell you the truth. Like us, we'll tell you the truth about where the fees are. So, a couple of other common mistakes. I don't want to go into that one forever about fees. I mean, we are all about uncover hidden fees in the place, right? And help people understand what the impact of that is over their life. Some other things though is people neglect diversification. They have too much exposure to unnecessary risk and they just don't understand it. You can't let— another one is you can't let emotions drive your investment decisions. For instance, Warren Buffett is considered the most ethical and greatest investor of our time. And I read, I study him a lot, and he has a lot to say about investments. And he has a lot to say about these common mistakes that I love. He has a lot to say about how you grow money, The common mistakes and all that. And so, one of the things he talks about is if there's a company out there that you know is going to be in business 50 years from now, okay? 50 years from now. So, just think of companies that we see every day, Wendy. And I mean, do we really think Walmart's going to be here 50 years?

Probably.

I mean, do we think that Americans are still going to be eating fast food? Probably.

Yeah.

Right. So McDonald's. Do we think that people will still be driving cars?

I think so.

Yeah. So carmakers.

Do—

will people still have homes, right, that they live in? Yep. Homebuilders. They'll still be here. So, I mean, there's all of these things like in his mind is like if you, if you see like there's an industry or a company you think is going to be here in 50 years, it's a great company. And it's such a profound statement. Yeah.

You know, that's something to really think about.

Yeah, I totally agree. So, there's a lot of rules that I've been able to derive from Warren Buffett over the years by reading his stuff on building wealth. And they include, you know, investing for the long term, staying informed, you know, maintaining a competitive advantage. And he says rule number 1 of investing is don't lose money. Rule number 2 is go back to rule number 1. Right. And so his theories on investment management and his ethical approach are very good. By the way, he has a theory on what a fiduciary is, because that's something that's often talked about in this world of investing. Well, I am a fiduciary. Well, I can be a fiduciary, but the company I work with may not be a fiduciary. So he says that on a fiduciary, and this is a guy who for the last 30-plus years has only taken a $100,000 salary.

Wow.

From an $876 billion company, right? I mean, he lives in the same brick ranch that he's lived in for years, and he has a sausage biscuit and a Diet Coke for breakfast every day, right? It's just a—he's just a fascinating, simplistic man who's created one of the biggest empires ever are. But one of the things that he says from this is like: if you—if you are—if you don't understand the markets and you don't have somebody. who can help you from an advisory standpoint just by the index.

So how does maintaining a competitive advantage play a role in Warren Buffett's approach to wealth building?

He suggests that you should invest in businesses or assets with unique strengths and quantities that can generate sustainable returns.

Why is focusing on quality mentioned as a strategy for wealth creation?

So prioritizing investments in those high-quality assets or potential business with strong fundamentals can potentially reduce risk than those that are associated with lower-quality investments. So careful risk management is essential to protecting investments and minimizing potential losses. So, when you align with Warren Buffett's long-term wealth-building strategies, you end up with more likelihood of success into retirement.

So, what insights does the traditional financial advisory industry offer about investment management?

That's an interesting question you ask because you know that our mission is to be different and help those who don't fit the mold of the traditional investment advisory world. So, the traditional investment advisory world comes with— they emphasize risk tolerance. They're okay if that airplane only gets 92% of the way there. They're perfectly fine with it, right? Matter of fact, a lot of the advisors will drive portfolios into positions where there could be some failure in the future if the stock market goes down, because traditional financial advisors are worried about and advisory firms are worried about getting as much money under management as they can so that they can charge their fee and therefore increase their profits. So, there's a lot of times in this industry where we really want to get to this world where we think that the person that we trust dealing with our finances has got my best interest at heart. That's the fiduciary rule. But unless you can ask that financial professional, you know, how is your income? What are your assets? Are you in a lot of debt? Right? If you don't understand that about who you're dealing with on the financial side, I mean, because they get to ask you all those questions, right, Wendy? But if you don't understand where they are, where their lifestyle is, and where their position is, how can you really invest in or know that they're making the best interests or the best decisions for you? When it comes to your money. And so, like, the traditional financial advisory world, investment management, is all about collecting as many assets as we can, keeping them fully invested, and charging the fees so that they can collect as much profit as they can while on this, you know, this, we're going to tolerate risk with you. We're going to keep you invested, right? Whereas the individuals, Whereas most individuals, they only worry about one thing. Am I going to run out of money? Right. And in the traditional world, can't answer that with certainty and say, no, you're not.

Well, for someone just starting out with investment planning, what advice would you give?

Well, you have to figure out what you're investing for, right? So you have to, you know, most people will say you have to define a goal, but I just say you have to decide what you're investing for. And if the investments are I just want to have as much money as I possibly can. Well, I mean, that's not really a goal, right? Having as much as you can. If it's, I want to retire when I'm 70 years old, and I have 40 years until that time, well, yeah, you want to be totally exposed to the market, because over the long term, it'll go up. So, you have to define goals, and you have to figure out if there's any goals in there through life that you can't subject your money to risk to. Like, for instance, if you've got a 15-year-old and they're going to college in 3 years, you can't really have your money subjected to risk if you need that money. Because remember, risk is taking your money out, pulling your money out when the market's down. And if you only got 3 years, that risk of the market being down is too great. If you need the money 40 years from now, No real risk, right? Because the market will go up over time.

So that's pretty good advice. Now, as we wrap up, any final thoughts on why investment planning is so important? Let's hear from the professor side now.

Yeah. So like if I were to take off like my planner side, right? And I just put on my professor hat, the, you know, we teach students that there's, The investment management world is complicated because it involves a lot of math. Okay? There's alpha and beta and standard deviation. There's geometric return versus average mean and average median return, right? The investment world has compounding, but it also has simple in its returns, right? Compounding interest. Versus simple interest. We spend on the academic side, from an investment standpoint, there's quantitative analytics, qualitative analytics, get very detailed. I don't bore clients with that, but we do drive home that with our students. If you cannot simply explain the outcome, to a client in the future, then all of this knowledge you have is not worth it. Okay, so you've got to be a master at numbers, right? So not only a master at numbers, but you've got to be a master communicator, right? Being able to break it down in such a way that somebody who's, you know, teaching 4th graders and has done that for 40 years, and they're so tired, and they're just asking you a simple question, can I retire? You've got to be able to do it and give them 100% certainty that they can. The person who is 30 years a federal employee who's asking you to take the 12 statements that they have and combine it into an investment plan, that you're able to make it simple enough for them to understand. That's what we tell is like, get the knowledge, but then bring the stories and the communication style to it to be able to help individuals to be able to, to know with some certainty. And certainty is not, not shown on paper. Certainty is in the mind, right? Because you can show it on paper all day, right? But, but until somebody can can feel it and in their mind process it, right? The mind's going to tell you, man, that can't be right, when looking at paper, right? That can't be right, right? There's no way that's going to be. But so, until you can get the mind to realize, I can actually retire, I'm going to have paychecks coming in, I'm not going to have to worry in the future about ever running out of money, that's what we're teaching students. Right? Because there's so many people who will say, I'm the smartest person at this table when they're talking to clients, just trust me. Right? And we know that puts clients, that puts people who actually have the money and gives them more anxiety and more fear.

For sure. So, this is all sounding like a great planning process.

What should listeners do to get access So, like, you know, from a planning process, so we talked about from a standpoint of like our tax planning, we have a system called HolistaPlan that will analyze taxes and give you, you know, an outcome that's better with your taxes. We talk about retirement income. We actually have a forecaster that will show you where you will be getting income from your assets and guaranteed sources for the rest of your life. On the investment side, we do comparative analysis or comparative reports. that takes where all of your money is invested now, right? And we put it through modern portfolio theory and efficient frontiers, all of this technical stuff, right? So, really just come out to say, at the end of the day, we should diversify, taking some of your eggs out of the same basket so that in the worst of times, you'll have no risk. And risk, remember, is When I need my money, will it be down in value? Right? So we make it from an investment planning standpoint. The goal here is to put everything we know, everything you have and everything we know, put it in a simple one-page report to say from there, you know, if we allocate here, you will never be taking money when it's down in value.

So expert guidance, it's just not really easily accessible. And the fact that we can tune in and have access to you, Mike, the planner and the professor, well, that's just really valuable. Well, thanks.

Thanks. You know, my goal is to change this industry that we're in, right? We, we have, you know, when you study history, I'm a history buff because I'm academic. But, you know, I'm also, you know, someone who has deep carings and feelings for people, right? When you, when you realize, when people realize that you want to be with a firm that's dynamic, right? Not a firm that's living in the past and doing things the same way they've done forever. But we are literally a dynamic financial planning firm to help those who don't fit the mold of traditional financial planning so that we together can all make an impact and have a better future. So, you know, my goal here, Wendy, is to educate and reach people that may not have access to the education and resources needed to make— so they can make the best financial decisions for their life.

And I think you are accomplishing that goal, Mike. I think that it's been You know, this is a really great way to break it all down.

Yeah. Well, thank you, Wendy. I mean, the questions today, you were spot on with your questions today. I mean, the people who listen to this, you know, investment planning is for everybody, no matter your financial situation, whether or not you're just getting started because you're in your 20s or 30s, or maybe you're just getting started because life happened. Maybe you're in your 50s and you have nothing and you're just starting. It's not over for you. Life is for the living, as Nicole says on our team often. And if you're 50 and you've got nothing, there's still time for you. If you're 60 and you've got nothing, there's still time. Investment planning though is for everybody, no matter your financial situation. You have to take the first step toward a more secure future tomorrow.

Okay. Well, this is, you know, what we've been talking about is this is investment planning. So Mike, if people have more questions, how do they get in touch with you?

So all the socials, like if you go to Google, right? We often don't think of Google as a social media thing, but it is. So just search Mike Milligan CFP and you'll have articles and videos just where I explain things. But there's also, you can go to our website, ideasbymike.com. Ideas, I-D-E-A-S, by, B-Y, mike.com. Instagram @ideasbymike. YouTube @ideasbymike. You catching a theme here, Wendy?

I have a theme. Yeah, it seems like there's a theme. All right, well, thank you so much, Mike. Absolutely, Wendy. All right, and thank you guys for listening today. Please like, follow, and share this podcast with your friends. Until next time, I'm Wendy McConnell.

Thank you for tuning into Ideas by Mike, the podcast, the show where ideas turn into money. If you enjoyed today's episode, make sure to click the follow button to stay up to date on future releases. For additional information on becoming a part of the Ideas by Mike community, check out our website at ideasbymike.com. Don't forget to take a look at the show notes and for more financial insights, Subscribe to the Ideas by Mike YouTube channel or visit the website to find one of the upcoming webinars. Also, connect on Instagram or Facebook at Ideas by Mike. Ideas by Mike is an LLC headquartered in Virginia with offices in 42 cities. The company owns an insurance agency registered in all states directly or through affiliate companies. Mike is an investment advisor representative with JB Wealth Advisors. Any financial planning information shared on the show should not be construed as financial advice for you personally. For your one-page financial plan, please reach out to Ideas by Mike through the website. The information covered and posted represents the views and opinions of the guest and does not necessarily represent the views or opinions of Ideas by Mike. The content has been made available for informational and educational purposes only. The content is not intended to be a substitute for professional investment advice. Any financial planning information shared on the show should not be construed as financial advice for you personally. For your one-page financial plan, please reach out to Ideas by Mike through the website.