Foundations of Investing with Will Potthoff | Others Over Self Leadership Conference

Thank you for joining us, ladies and gentlemen. My name is Shelley Rood, and I am just doing a brief introduction to our next keynote speaker. William Potthoff is a financial advisor with Edward Jones. He also serves in the Army— not Army, Air Force National Guard— as a service member, as a maintenance officer with the 127th Wing. Is that how I say it? Excellent. Will has education from Baker College, Western Michigan University, and also the Community College of the Air Force. I don't want to take up any more of his time. His bio is available in the app. So ladies and gentlemen, Will Pothoff. Thank you, Will.

Thank you. Thank you for attending. Like I said, my name is Will Pothoff. I am currently 22 years, working on my 23rd year in the Air National Guard. I'm a captain with the 127th. I'm a maintenance officer. We control and maintain the A-10 Warthog, and I'm looking to continue to do that for quite some time, as long as they'll keep me. I am also a financial advisor with Edward Jones. I moved into finance because I had a passion for investing and specifically helping people with financial goals that they otherwise may not have been able to attain, or they just needed more education. I do feel like I'm an educator at heart, and that's the reason I'm here today, just to provide a little bit of knowledge about investing and systematic, systematic investing and creating a system to reach your goals. We can start the slideshow. All right. So your goal is going to be unique to you. It could be anything from a retirement goal, which seems really general, but that's only general because you're thinking of the word retirement. You're not thinking of— you might have a specific age you want to retire or a specific budget that you want to have in retirement. So your unique goal is kind of what you start with, and then using an established process, we find out where you are today and where you would like to be. And the more defined you can make that where you want to be, the more, the better we can plan to get you there. The third step would be, can you get there? Is your trajectory from where you are today to where you like to be, is that sustainable? Are you able to do that? And then how do you get there? What are you doing to save? What is your process for saving? What is your process for investing? What are you investing in? Do those investments make sense and match your trajectory? And then how do you stay on track? What happens when something kind of unexpected happens? Do you pull away from your strategy because an unexpected event happened, or do you stick to that strategy? Your goal is your why. Your why is, why do I want to invest? That equals your goal. And that goal, uh, that why then leads to the how. How do I invest? And there are 5 rules to how we should be investing. Rule 1 is develop a strategy. Rule 2 is stick with quality. Rule 3 is diversify. Rule 4 is invest for the long term. And Rule 5 is focus on what you can control. You may already be using tools that use strategies, that use rules like this. Like you may have an employer-sponsored 401(k) or 403(b). You may be consistently every pay period putting money into one of these, um, accounts. You may even be getting an employer match. If you are eligible for an employer match and you are not taking advantage of that, you are leaving money on the table to meet your goal. You may also want to do things above and beyond your employer's 401(k). You may have additional goals other than retirement. You may be looking at maybe college savings for children or maybe a home purchase later on in life. The 401(k) may not be the best vehicle for any of those other goals, and you may have to open different types of accounts and have different savings plans for those. And rule 1, develop a strategy. We need to identify 3 things. A, we bring your goal back to the forefront. What is your goal? B, what is the longevity of your investment to reach your goal and maybe the longevity of the investment to make your goal successful? So if we go back to retirement, let's say you wanted to retire at 62 and you've been saving your whole life. At 62, you don't just leave your investment completely because at 62 you're not going to die. Hopefully not. You're going to live the entire rest of your life. You may have 25 more years of investment longevity before, you know, you pass. Also, when we talk about tolerance for risk, that's the third piece. You need to understand your tolerance for risk so that you can understand your behavioral reactions to setbacks in the market, to setbacks in your life, to make sure that your strategy is as strong and rigid. Risk tolerance is your emotional reaction to different situations. Normally this is learned by doing some type of questionnaire to answer how you would react to different market conditions or changes in your portfolio. This will help you from abandoning your strategy. The balance between the risk you're willing to accept and your anticipated returns makes it more likely for you to reach your goal. Stick with quality. So if we look at the two major groups of investments, stocks and bonds— stocks, we would advise you not to follow trends. Fads or tips. Uh, for every one person that has a success story for the hot item of the day, there are 50 that have lost everything they've invested because the tip didn't pan out. There are over 65,000 equities traded internationally, and picking the right ones has to rely on a filtering system for quality. So first we filter by geography, longevity, size, and then the quality of the stock. Usually that's placed on by a third party. Then we look at their sustainable competitive advantage and if they have an experienced management team running the company. Finally, we look at if they have a strong financial position, what are their earnings reports, and are they fairly priced? In the bond world, bonds are debt instruments, which we're gonna get into in a second, but understanding the risk of a bond. So lower quality bonds or bonds that have a lower credit typically may pay higher interest, but then you put yourself at risk that the bond could either default or may be unable to pay that interest. Successful investors invest, make their money over time, not overnight. Rule 3 is diversify. No single investment performs in every condition. So if your strategy has one single investment and that is what you are relying on for your strategy to be successful, and that single investment drops at or near when you need it to be withdrawn, then your, then your strategy will most likely fail. There are several layers to diversification. One we're going to talk about right now is called asset allocation. That is dividing your investment among different investment categories. Asset allocation is the single most important step to increasing your return potential. And 90% of the variability of your investment's return is going to be determined by allocation. That far outweighs timing the market or picking the right investment. That has a huge impact. Now, there are several asset allocation categories. We could be talking about cash income, growth and income, growth and aggressive, which are all tied to the stock market. Cash investments may be the safest investments. Cash in like a savings account may earn you some interest and it, and it will be stable. It won't be volatile. However, the risk cash takes is that it does not keep pace with inflation typically. Inflation is on average 3% per year. And if we use the rule of 72, what that means is the services and the goods that you are buying today are going to double in 24 years in cost. Your allocation is measured— your allocation is set by your tolerance for risk and the longevity that you have to remain in the market. That will help us set the balance of how you should be invested. We talked about, or I mentioned bonds. Bonds are a debt instrument. Bonds can outperform cash but will typically underperform the stock market. Bonds being debt instrument can be issued by municipalities, the US government, or companies, and they come with a credit rating. That credit rating determines whether or not the bond is sustainable or at risk. A bond pays interest to you, typically semi-annually or twice a year. That interest is not a repayment, it is income. The bond has a term limit. That term is the duration that the bond— that that interest will be paid. At the end of that term, the bond will be The principal from inside the bond will be returned to you. Each bond is— has a typical par value of about $5,000 for an initial investment, and then a subsequent $1,000 to $5,000 increment to access the bond market. Now, that doesn't necessarily mean that you will be purchasing the bond at par. You can buy bonds that are existing that trade at a premium, which means higher than the par value, or a discount, which means lower than the par value. Now, investors get surprised because the par value is not consistent to the market value. The market value of bonds changes in changing interest rate environments. So in a rising interest rate environment, the market value of the bond will fall. And in a falling interest rate environment, the market value of a bond will rise. But if you are a long-term investor and you hold the bond to maturity, you will receive your premium back. It is only in the instances where you need to liquidate that bond that, that market value will come into play. The next form of diversification is what most people think of when they hear the word investment. They think of the stock market. So why do we hear the word bulls and bears? Well, the bull and bear is a metaphor. A bull swipes up with its horns when it's attacking an opponent, and a bear swipes down with its paw when it's attacking its opponent. So when the market is trending up, it is a bull market. When the market is trending down, it is a bear market. Why do you buy stocks? Why do you— what are you looking for for your return? You are looking for capital appreciation and/or dividends. Capital appreciation is the rise of the price of the stock. So in this example, uh, investor bought a number of stocks at $20 per share. The stocks rose to $30 per share and were sold. That created a capital appreciation of $10 per share for each stock sold. The stock market is, like we talked about, an equity share, which means that for every single stock that you own, you own one share in a company. You are effectively, effectively the owner of that company. The other way we can make money in the stock market is through dividends. Dividends are payments from the company's earnings. They are not guaranteed. They are voted on typically by the board of the company. They can rise, they can fall, and they can be eliminated. However, some of the most high-quality investments you can make are in dividend-paying stocks. Dividend-paying stocks have outperformed non-dividend-paying stocks over the period of time. These are typically well-run companies with very strong and consistent earnings. The other way you can diversify in the stock market is through sectors. So sectors, for an example, can be made up of consumer discretionary, consumer staples, communication services, or technology. If you focus all your eggs in one basket, let's just say technology, you may have experienced a very bumpy ride over the last 30 years. If you invested in tech solely in technology in the early 1980s, you would've been very happy with your investment. But by the end of the '80s, that investment would've fallen off sharply as personal computers were just too expensive. By the mid-'90s, microprocessor technology changed, personal computers were now available to the mass markets, and The stock prices in the tech sector all shot up right up until the early 2000s when we had the tech bubble and they fell sharply again. So if your strategic goal was relying only on that one sector, your roller coaster ride of your investment would've been very uncomfortable. Diversifying into multiple sectors would've stabilized that investment and allowed you the ability to rebalance and things like that as those opportunities arose. Another way we can diversify is through packaged investments. So packaged investments, what we'll talk about today are mutual funds, and I'll touch on what ETFs and advisory programs are. But a packaged investment can be made up of one or more combination of investment categories to include stocks and bonds. They are built-in diversification and typically fall into categories and have their own rules as to how they are set up. Like I said, built-in, built-in diversification. A mutual fund is a diverse investment product. It is made up of multiple companies. Some mutual funds hold up to 100 different stocks, and those stocks may have competing products or services that they are providing, with the key being that when one may not be performing as well, another may be performing greatly. There is diversification inside of the mutual fund, and you can further diversify by owning multiple mutual funds that are doing multiple jobs. There is also professional management with mutual funds. This can be made up of traders, financial analysts, research analysts. We have tax professionals in there. There's a variety of investment professionals that make up that professional management team, and it takes the burden off you as the investor to rebalance and manage all your individual investments. How do mutual funds make money? Well, bonds pay interest in the fund and stocks pay dividends in the fund. That gets combined to a dividend payment to the investor. Additionally, the share price of the mutual fund could rise as the underlying investments arise, and a capital distribution could be made. A capital distribution is when the fund manager decides that they would like to sell something inside of the fund for a gain, and then they pass that along to the investor as a capital gains distribution. Important to know that mutual funds can also fluctuate in value. They can go down because of the underlying stocks or bonds. Another packaged investment is an ETF. An ETF is similar to a mutual fund in that it is made up of multiple companies. However, an ETF eliminates the professional management. There's typically not a professional manager on an ETF, and therefore, the cost of cost structure is a lot less. And advisory programs. Advisory programs are fee-based programs, usually highly monitored, actively managed. Investments are professionally selected and continually reviewed to make sure that they are appropriate for the program. And best for the last, for the long term, is Rule 4. So you are not just investing for your goal today, you are investing for your goal 25 years down the road. Now, by a show of hands, how many people have ever been hesitant to put any money in the stock market? So in 84 years, the United States has experienced multiple wars, extreme political unrest, extreme social unrest, and extreme financial unrest. The 1930s was the worst decade in the stock market. It broke even. Okay. The US economy and our financial economy have sustained themselves. And typically after a period, a bad period of time, the stock market has tremendous returns, 13.1% on average. Understanding your risk tolerance and appropriate allocation will help you avoid a knee-jerk reaction early in your strategy or even halfway through your strategy. In good and bad markets, you may make tweaks to your strategy and to your investment plan, but because you picked quality in the very beginning of this, you're not going to have to, uh, completely overhaul your plan. You won't rework everything because you started with quality. And another way that you can invest over the long term is with systematic investing. Systematic investing is investing systematically over a period of time. In the example above, what we did was we just showed a single investment. So if we looked at the left, we're looking at investor number 1 put $5,000 in into the market over a period of time. He was able to buy the shares at $20 a share and he received 250 shares. Investor number 2 used systematic investing. He put $417 per month into the market. And what he did was he averaged the market's volatility. He was able to acquire an average share price of $17. And by the end of the year, he had 300 shares. Systematic investing is buying more shares when the stock market is low, when the prices are low, and less shares when the prices are high. And rule 5, focus on what you can control. You cannot control the economy, but you can control your savings and spending habits. It is very important to have a budget to understand where you are spending so that you can have a better grasp on how you can save. You can have an emergency fund. I would recommend a 6-month emergency fund to help you from avoiding something that will derail your plan. You put a strategy in place, you have your investments that are working towards your strategy, you don't want to have to rely on that as your emergency fund. Your emergency fund should be separate. As a sidebar here, women are 8 times more likely to be pulled out of the workplace because of their— because of multiple obligations that they have. So having an emergency fund is very important. And you can control your level of debt. I'm not talking about your home or education that you're paying for or a car. I'm talking about credit card debt and expenses that don't— you don't need to really be paying, like high interest rates and things like that. If you let your credit card debt get out of control, it will control you. Things that you can't control: the stock market. But you can control your response to the stock market. You can't control tax laws. I cannot tell you what the tax structure will look like for you 20 years down the road. But what you can control is you can control how you take advantage today of your taxable income. Several ways to get into tax-deferred accounts or tax-free accounts can change what your tax structure is going to look like in the future. And you cannot control that every investment has some risk, but you can learn about your own risk tolerance. You can avoid short-term setbacks by doing that and understand your own investment behavior. You can control the quality of your investment. You can control your diversification across multiple investments, and you can control how long you hold them. So we covered a lot. I'm going to go over the rules one more time. Rule 1, develop a strategy that is, you know, answering your why, figuring out what you want to do, understanding your tolerance for risk. Rule 2, stick with quality. Filter out things that don't make sense for a long-term plan. Rule 3, diversify. Make sure that your allocation is appropriate Rule 4, invest for the long term. Rule 5, focus on what you can control. Does anyone have any questions? Questions? Questions? None. All right. There is— if you have questions or you have a personal— something you want me to look at on a personal level, I'll be happy to talk to you and get to know your situation better. Thank you very much.