On this episode of THE BOGART EFFECT, James Bogart, CFP®, CHFC®, is joined by Patrick Marcinko, CFP®, to define risk and how it plays a part in the investment and financial planning choices you can make.
ADDITIONAL DISCLOSURE INFORMATION:
Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal. Any specific securities discussed are intended to illustrate a general discussion point and should not be considered recommendation to buy, sell or hold any specific security.
Podcast Transcript Below:
| James Bogart | Welcome to the Bogart Effect, a Wealthy Wisdom podcast. The following Bogart Effect podcast is intended for general information purposes only. The information discussed is no substitute for personalized investment advice from Bogart or another investment professional. Please see important disclosure information at the end of the presentation. |
| James Bogart | All right. Good morning. Thank you for joining the Bogart Effect today. I’ve got Patrick with me. And we’re going to be talking about lessons on risk. You know, and this is one where we find there are many, many different types of risk when it comes to your portfolio, your financial plan, investing. But most investors really have not spent a lot of time becoming educated on what risk is. And so our goal today really is to just spend time on on, let’s just say desensitizing that conversation. Talk about risk at a let’s just say high level specific to your financial plan, but also specific to your investments. And then ultimately, as we have time today, we’ll talk a little bit about ways of mitigating it. And frankly, if we need to, we’ll continue to do more podcast episodes talking more about risk, because it’s one of those conversations we could talk about a lot, and go a lot of different ways with this discussion, even as we’re preparing for this one. |
| Patrick Marcinko | Yep. |
| James Bogart | So why don’t you kick us off? |
| Patrick Marcinko | So talking about risk, I think risk is something that’s it’s a buzzword in financial media. And so it means a lot to a lot of different things. Right. And I think one of the things at Bogart we really focus on is what is planning risk versus what’s investment risk. And those are two totally different things. And from a risk perspective, there’s always the, you know, stereotypical I had an investment that goes down. I took a loss.‚ There’s risk there to markets. But there’s also risk to the financial plan as we look out and predict probabilities of success. What are risks that could change cash flow, change the, you know, accumulation of wealth over time, or maybe eat away at some legacy things. So those are really two distinct things that we think about with risk, but really important to factor in for families. |
| James Bogart | Well, and I also think related to it is the frame of reference or mindset you have at that particular point in time that you‚re evaluating or assessing risk. |
| Patrick Marcinko | Yep. |
| James Bogart | Said a different way. Yeah. There’s two phases of life, the accumulation phase and then the de-accumulation phase. And I think you articulated it well, I’m just kind of pulling on that thread a little bit, but the accumulation phase is, is when you’re working, when you’re saving, you’re continuing to add to your investment portfolio more often than not, longer time horizon. And and truthfully, most people, they don’t even look at it. Right. Like or the or they might look at it once a year. But it’s not a frequent cadence where they’re thinking about it. And because of that, all of the noise that happens with the market and the noise that happens in life tends to be less of a risk. Right. And it’s one where I do believe when we talk specifically around investments, the longer time horizon you give something, the better it’s going to perform, right like that. The reality of it is, is if you truncate and look at any investment from some specific timeline, whether it’s a one year, six month, three year, you know, most people don’t realize Amazon stocks says 2021 is even. That’s not a narrative that you would see, you know, on, on the media. Right. Like you would think that these tech companies are performing gangbusters, which yeah, over the last 18 months they absolutely have. But if you, you know, spread the chart out. Right. We’re flat now by the way. If you spread that chart out even longer, it’s it’s back to the hockey stick. Right. But the point is, is it’s all a function of the timeline that we’re assessing. And historically when we talk about frame of reference, someone who’s in that accumulation phase of life, they’re not looking at it. Right. They’re they’re adding to it. They’re leaning into it historically more opportunistic. Right. Like I personally look at volatility in the market as all right, where do I’ve got some cash that I can go invest, right. Like that’s that’s typically the mindset of someone who’s in the accumulation phase. But very quickly you move to de-accumulation. And by the way, that doesn’t just mean a life event doesn’t mean just retirement. It could be you’re getting ready to buy a house or you’re getting ready to buy a car, something for for a kid, college, whatever. And you have a need for money, right? Now obviously, the mindset of a short term need for something that’s very finite is a little different than than lifestyle shift, like a retirement event, right? Where now you need your nest egg to actually work for you. But the point is, is that perspective shifts and so we‚ll more quantify. what risk is. That perspective shift is very, very important to have as we’re we’re manifesting and building out not only portfolio structures but planning structures as well. |
| Patrick Marcinko | And to that point. Jumping back to the accumulation phase, you know, we talk about the two buckets building wealth to a point and then ultimately, you know, distributing income out of that. There’s different phases of accumulation. Take someone early 20s, a market pullback they’re all they have to be excited about that because they’re able to buy assets at a discount. You could still be in the accumulation phase maybe ten, 15 years from retirement. The appetite for risk and the appetite for things to go, you know, a little haywire in the markets, isn’t there. So even within the accumulation phase, you’re going to have different people with different tolerances for risk. And a big part of that is because for younger folks, you can, you know, supplement market fluctuations by adding income, adding savings back, where if you’re maybe 1, 2 or 3 years from retirement, if you have a down market, you don’t have that flexibility. And I think that that enhances people’s sensitivity to risk depending on where they are on that spectrum. |
| James Bogart | But when we quantify what risk is, great thesis by the way, when we quantify what risk is. It’s not the movement itself. It’s the way that each of us respectively responds to that impact. Right. And and so said another way, specifically thinking of the investments. More often than not we get volatility and we get clients that said, well, you know, why are we holding this position when things are going down? Why didn’t we go to cash? Why you know, whatever it is. Right. That’s emotion at the end of the day. Right? And and emotion is not an investment thesis. By the way it’s not a financial planning thesis either. Right. But the reality of it is, is that when, when you look at how something is built, the structure, whether it’s your investment portfolio or your financial plan, the whole design is set around how do we remove an emotional response? Because at the end of the day, it’s when someone reacts to an environment that can create change, which more and more often than not, especially when it comes to investments, creates financial harm long term. Every market pullback where we‚ve had a client who’s changed their risk profile, right, which means you go from let’s just say moderate to conservative or growth even to balanced. Anytime we’ve seen that happen, I can tell you every single instance looking in the rearview mirror, they‚ve harmed themselves. Now short term might have been a great decision. Right. But if we then come back and look at what is that that decision over the 2 year, 3 year, 4 year. 5 year. I mean, 2020 is an easy one. We had several at the time had about 600 clients in the firm. We had about, excuse me, we had seven specifically that changed their risk profile. Specifically went to cash, right, against our best efforts and everything we recommended. But if we look at their returns at the end of the year versus the returns of clients that let’s just say followed the, the, the structure and mandate |
| Patrick Marcinko | Staying invested and diverse. |
| James Bogart | Stayed the course. It was on average 15% difference. Right. So, you know, quantifying that $1 million portfolio that’s $150,000 of of economic difference. You know multiply that out. Right. But you know, on a $4 million portfolio, that’s a $600,000 difference, right? So the reality of it is, is no one ever actually knows what the market’s going to do, what the timing of it is. And so when we talk about quantification of risk, it’s extremely important to align your financial plan, your investment portfolio structure with said risk profile. |
| Patrick Marcinko | 100%. Because if you think about it, some folks don’t have the time. It could be. And it’s even within themselves. They could have different buckets. You talk about buying a home, you know, all sorts of different time horizons for different sets of funds. As you allocate money within a balance sheet, every bucket effectively has a timeline, has a purpose, and you need to have investments, you know, allocated appropriately because if you’re going to buy a home, let’s say six months from now and you’re just in the S&P 500, there’s a pretty good chance that the S&P could move lower. It could move up. I mean, we don’t know in such a short time horizon. So are you willing to jeopardize the opportunity to buy a home if let’s say the S&P fell. And for some folks, I’d say it. They may not really quantify and go back. Let’s say I have $1 million in cash. Well, if the S&P were to take kind of a pullback or broader markets in general, you could be talking about hundreds of thousands of dollars. You’re not able to bring to the table any more than you otherwise might have. |
| James Bogart | And I want to build off of that. That is the description of of what someone would not understand, the risk that they’re taking. And again, that’s the reason for doing this podcast. It’s like alignment is very, very important. And when we think about like the implications of the decisions that we’re making, that’s why I believe the true value proposition of any advisor has to be integration of financial planning with the investments, add on tax. Right. Like there’s nuances in in addition to the value proposition. But the reality of it is is a plan has to integrate with the investment strategy. Right. And you articulated it so so well. And why that plan for any household, no matter what your phase of life is, has to be organic. Now I’m specifically meaning if you’re in your 20s and you’re starting to to save for the things, right? The house, the kids, education, cars, whatever. I mean, 20s are hard because everything’s chipping away at the exact same discretionary dollars. It’s when you move into the later phases of life, you know, and by the way retirement, right. But it’s when you get into the later phases of life where you start having some discretionary income, and now you can really save. Well, again, if you have something that you’re specifically going to be saving for, we need to make sure that we’re aligning the risk of that strategy. So if, for example, if something you need the money in the next 18 months, maybe 12 months, 18 months, it should not be in the equity markets period the end. Right. Like and the uncertainty and unquantifiable is is the hardest part because yes, you know there might be some opportunity in a stock or some investment opportunity. But if you know you’re going to need that money, we can’t take the risk. Right. Like we can’t take the amplitude. But said another way, even a 60 year old who’s retired and you and I were talking about this before we got on the podcast, so I’m kind of just jump jumping in. But even a 60 year old retired, they don’t need their entire nest egg today, right? They need their nest egg to last for 30 years or hopefully longer. And so the point that I’m going to make is, is that when we talk about risk, even a conservative person being conservative also carries risk, right. Because if you get too conservative, it actually makes it so the plan theoretically cannot work. We need some element of growth. Now this is where risk tolerance is very, very appropriate. And we‚re kind of talking about it when we talk about the two different phases of life accumulation, de-accumulation. But the reality of it is is understanding your risk profile, risk tolerance and comfort level with risk is why having that plan is the grounding element then tied into the investment strategies. |
| Patrick Marcinko | In unpacking that a little bit, I think one of the things you talked about with the retiree, you know, being too conservative, one of the things I think about risk for retirees just as much as, yes, markets are up 10%, down 10%. You know, we have risk in that sense. But there’s also the risk of does your spending change because of market conditions? A good financial plan should be accounting for that and preparing for that and saying, okay, even if we were to see turbulent markets at the beginning of retirement, you know, the planned lifestyle that we have isn’t going to materially change. And so being too conservative on that same vein, let’s say and we all know inflation’s been running hot the past few years. If you’re too conservative eventually expenses in retirement are gonna creep up. And if you’re not having a portion of the portfolio that’s keeping up with those elevated expenses, in real dollars you’re actually going to be behind in a few years. And you may have that principal stability that feels good now. But as we’re planning for extended longevity for clients that are now retirements of ten, 20, 30, even 40 years, that has to be a factor in well, yes, today, as you noted, it can be comfortable to sit in the money market fund. It could actually be more detrimental to the long-term plan. |
| James Bogart | I want to quantify that. That’s where I was going a second ago. Right. But like money markets and treasuries are paying 5.1, 5.3, somewhere in that range, which is fantastic. Right? Especially relative to where we were two and a half years ago at .0 nothing. But it, it might feel really good to have that cash position and watch the stability. But you know, remember beginning period of time inflation was at 8.3. So the real purchasing power of your dollar was absolutely going down. And sure simultaneously 2022 markets had a really rough year. Right. If anyone’s taking on any level of risk for a one year period of time that I’m going to tell you right now, the markets is not the perfect place to be investing. Whenever you’re going into an equity based strategy, it’s a three, five, ten and year beyond strategy, right. And I always say full market cycles. That is how you actually determine success. The number one barometer for probability of success and quantification of risk is you give it time. The longer you give it, the higher the probability of success. Right. But when we compare money markets to inflation, money markets are actually losing money. And by the way, that same period of time, if you smooth it out right. And look at an equity based strategy, even if you use an equal way S&P 500 versus the market cap weighted one, which is, I argues, all tech stocks. But the reality of it is, is an equity based strategy. Over a 36 month 60 month period of time has dramatically outperformed money markets. It’s that again emotion right. It feels really good. By the way. The markets are predicting and telling us exact same thing that a lot of our clients are right is we’ve got over $6.1 trillion sitting in money markets right now globally. Historical average is closer to three. So the point is, is there’s a lot of money sitting in money markets right now because it feels really good and the yields really great. I would also anecdotally argue that it’s become an additional incentive, stimulus initiative for those that have accumulated versus those that don’t have savings. Right. So the gap socioeconomically is getting bigger. But I don’t want a tangent on that. |
| Patrick Marcinko | Well on the money market, you know, there’s a lot of talk in financial media about mortgage rates are up, personal loan rates are up. Higher rates hurt consumers to a degree. I mean, they make things more restrictive. On the flip side, though, for people who have money market funds, it’s actually a great time, even with the fed looking like they’re going to cut rates. I mean, before I mean, just a couple years ago, we were getting 0% on cash. You had to take risk to get an element of yield. And now for the yield we’re getting. It’s pretty good relative to effectively no down. |
| James Bogart | And by the way that’s one discussion around risk right. Cause we’ve actually had a lot of comments lately of bonds. Right. Like why do we even have bonds in a portfolio for what you just described. Right. Rates were very, very low as rates rose, value of those bonds went down. So on paper we’ve got losses. But I would argue that with bonds they are a stabilizing element. And we’re in them for their income. That’s a quantification though, why we would describe why something is in a strategy. I think of building a portfolio a lot like building a cake, baking a cake, excuse me, where each ingredient is there for a very specific reason. And if you start removing any of those particular ingredients, you get a different outcome. By the way, coming back to my comment about time to bake a cake and have it taste good, you need to give it a certain amount of time, right? But the point is, is it’s the same thesis around an investment strategy, right? You can give it a, you know, element of time in order to be able to manifest the desired outcome. Right. So we kind of jumped a little bit around here. But the reality of it is, is we’re quantifying what risk is and why this conversation is so important because the ultimate goal, again, is to reduce emotional response to whatever we’re trying to, to, let’s just say fence around, right. And the goal being is to enhance the probability of long term success. There’s general guidance points that we can continue to talk about. I do think that at the baseline of this discussion has to be your financial plan. It’s even more important than the investments themselves, because the investments become a subset that are fitting into the nuances of the respective plan. That then needs to directly correlate with someone’s actual risk profile. And every person’s risk profile is different. And we talk about the accumulation the de-accumulation phase. Obviously that’s the case. But even people within the accumulation phase, their risk profile is different. Even people in the de-accumulation phase, their risk profile is different. I mean, we retire clients that are in their 70s that don’t want to have any bonds whatsoever. They want to be all in aggressive equities. And, you know, my general level of guidance for them still is let’s have at least a period of time of cash available. Right. So that we don’t have to deal with the amplitudes where we’re how we‚re having to get it, excuse me. But the reality of it is, is that each and every one of us has a different risk profile. Alignment is important, and that’s why we have to come back to cash. Now, when I think of of risk in terms of the different types, we’ve got market risk, we’ve got timing risk, we’ve got cash flow risk, we’ve got single stock risk, we’ve got long term debt, long term risk. We’ve got, premature death risk. Lots of different types of risk. But again, the base fundamental comes back to that plan. |
| Patrick Marcinko | And I’ll tell you some risks. You know, we talk about risk in this podcast today. And it’s an easy topic to talk about. You know from a textbook perspective it says well risk is X. You don’t exactly know until you’ve sat in the seat. We talked earlier about how did it, how did you feel about the 2020 market environment. Is that an environment where people wanted to swing to cash? Were you logging into your account more frequently? What actually happened in that. Or 2022? In using that, as you know, it’s easy to say what, you know, markets being positive this year. Great year last year to say, you know, I feel I like risk. When I take risk I’m rewarded as a part of recency bias. That can go the other way too. And so trying to go back to what actually happened to your investment journey on these prior periods of stress and using that as a guiding point to do we need to make tweaks or do we need to stay under the current construction? |
| James Bogart | And again, I think of it from client conversations, you hit the nail on the head, right? Because how someone behaves in a volatile market environment is a better precursor predictor of what their actual risk profile is. It’s so easy to get lost in the, in the up moves, right. That oh okay, everything should be invested in Nvidia stock. Right. And then you watch the down right. And it’s when the down gets manifested and quantified. Then all of a sudden it’s like oh wow I’m not comfortable with that. And I even also think it’s easy to say, how do you feel about a 20% loss on your portfolio. Right. Like you hear that number, I’m like, yeah, it doesn’t feel good, but I’m not panicking. How do you feel about losing an actual dollar amount? Right. Like 200 grand, 500 grand, $2 million. When you start assigning the dollar value, it actually changes the perspective. |
| Patrick Marcinko | And I may have heard you say this before, but I can’t spend percents, but I can spend 200 grand. 300 grand. And when you frame it like that, it really level sets and has an honest conversation. And I feel like sometimes folks are maybe, embarrassed to say they’re conservative or they may not embrace it. Hey, I don’t like that level of risk because in today’s society it’s hey, big risk, big reward. That’s kind of what is attractive for people in media. But in reality, what’s most important is looking in the mirror and saying, you know what, maybe I’m not the hammer down equity investor. Maybe I’m something a little bit more important because we want to find out what that is. And part of the reason is, is we look at long term returns for investment portfolios. One of the best, you know, additives to performance is staying invested, staying the course and letting the full market cycle play out. As you noted, what’s the biggest attractor? Making a swing. And so if we can help on the onset, get to a point where we’re not going to have you in a position where you make that swing. We’re ultimately helping returns. Because we are trying to remove an emotional element as much as we can. |
| James Bogart | Well. And absolutely. And the one thing I will add to that is, and this is an open wound right now, right where clients are saying, well, why aren’t we beating the S&P 500? Right. And this is one where I from from a, let’s just say more of of the 30,000ft view. The S&P 500 is not diversified at all to me any longer. Right. It is. It is one step away from being the Nasdaq which is very heavy in one sector of this economy and especially for the, by the way, for accumulation phase I have no problem with that. Right. Like if you’re looking for growth and and build, build, build build build. Yeah absolutely. Take that risk. But for those that are in de-accumulation phase, it’s even more important to really understand what you are investing in. And I feel like a lot of investors, especially retirees, do not fully comprehend that. Our job is to educate them. But the reality of it is, is that when it comes to one of the best ways to amplify probability of long term success is to be diversified, hands down. Right. And there will be years that it works. There will be years that it doesn’t work. And I’ll tell you every, every financial advisor in the industry right now is struggling with this conversation because of how the S&P has performed on a market cap weighted index. You got the Magnificent Seven last year. This year it’s been the year of Nvidia. I mean, it’s literally one stock is driving a third of the performance for the benchmark like that’s that’s not analogous of of a broad market move in any way shape or form. Point that I’m making is, is that we don’t invest over a six, 12, 18 month period of time. We invest over a full market cycle, which is historically 12 to 16 years. And so there’s going to be periods of time within that longer duration where certain asset classes perform fantastically well and certain other ones don’t. And what we really care the most about is essentially the combined benefit of all of it moving together. You know, and like I had a client that I was talking to recently, he was upset about the recent correction and like, you know what, we’re up 8.6% since we started working together five years ago. Frankly, I’m sorry, but that’s a great number. And and he was upset. And, you know, I’m like, all right, well, maybe we’re not aligned correctly on risk profile, right? |
| Patrick Marcinko | And then there’s a conversation to be had. You know, some folks, if. You have to understand, if you want the highest return, you have to have the highest volatility. You can’t have both. And so for investors who maybe want that, you know, I want the max return. We have to be willing to accept the max withdrawal or not withdraw necessarily |
| James Bogart | Draw down. |
| Patrick Marcinko | Drawdown in 2022. |
| Patrick Marcinko | And if you were to talk to most investors in fall 2022, they weren’t quite sure that mode. |
| James Bogart | You know. I’ll admit, I probably have the most aggressive risk profile of anyone in the firm. Right? It’s just. You know, and no, 2022 did not feel good at all, because I was very heavily weighted in our tech, you know, exposure, which was down 35% that year. But what did I do empirically? Like I looked for literally every dollar I could allocate from cash savings or other areas. And I added to those strategies. And of course, you know, fast forward two years since then, that worked out right. And the point is, is that’s the mindset of somebody who’s in an aggressive accumulation phase. And I have a very aggressive risk profile, whereas somebody who’s on the other end of that spectrum shouldn’t be there. Right. But the point that we’re making is both ends of that spectrum carry risk. Right? The the very aggressive one, you’re going to have a lot of amplitude. But the very steadfast one, you’re ultimately running the risk of not being able to keep up with inflationary pressures as well. So the whole purpose of this talk was to essentially goalpost. Like what is risk? Let’s talk about it. Let’s have a natural conversation, educate ourselves respectively on how do we quantify the risks and then building that respective plan associated with how to how to mitigate those risk factors. |
| Patrick Marcinko | And I think to that, you know, we talk about risk. And as you can see even in our discussion, there’s so many different examples where risk is different for everybody. And there’s not one right or wrong answer to risk. And I think working with a financial planner to really help quantify that, understand what all of the risks are beyond ‚Äòwell I’m moderate.‚ Well, what does that really mean. Should you be, you know, moderate in this bucket versus that bucket. And that’s really where, you know, true professionals can come into play. |
| James Bogart | Well and and I you made the comment before we got on the podcast, and I really wanted to emphasize it because it spoke to me. Having your risk component factored in directly with your plan is extremely important because we’re we’re able to truly manifest, like what is risk and define that. We’re not just checking some box on a, on a cookie cutter type of, risk profile assessment tool and then never revisit it. Right? Like risk is something that is constantly changing. Right. And and the risk factors are constantly changing. But most importantly, what we’re trying to do is mitigate the emotional response associated with risk. Once we can do that, the probability of success in almost every context amplifies. Right? And that’s ultimately what we’re trying to mitigate here. |
| Patrick Marcinko | And, you know, as advisors, we want to hear from clients. If you feel like, you know what, maybe there’s been a circumstance. Children, a job change, |
| James Bogart | Health change. |
| Patrick Marcinko | Yeah. That definitely does change tolerance. And it’s always good to revisit. Hey, am I on the right path? Does this allocation make sense now that these facts have changed? And let’s talk about it and let’s make sure we’re 100% on the right page, because we got to figure it out before we turn into a bear market. Because once we’re talking about it with markets down, that’s a very different conversation. |
| James Bogart | Well, and I like the way you phrase that, because the reality of it is, is that the only benchmark that actually matters is your plan. Right. Like we can compare against the markets. We can compare against whatever index you want to talk about from an investment perspective. But the only one that actually matters is how are we doing relative to your plan, your goals, your aspirations, and how are we mitigating the risks that are necessary in order to maximize probability of success? This is a great conversation. You know, we could probably spend another hour or so diving into the nuances. And for anything, I think we’re going to do some extra ones to, to kind of satellite to this. But really appreciate the time today, Patrick. |
| Patrick Marcinko | Thank you. James. |
| James Bogart | The previous podcast was intended for general information purposes only. The information discussed is no substitute for personalized investment advice from Bogart or another investment professional. Different types of investments involve varying degrees of risk, and it should not be assumed that the future performance of any specific investment, strategy, or service will be profitable, suitable, or successful. Bogart is not a law firm or accounting firm, and no portion of its services should be construed as legal or accounting advice. There is no guarantee a client will experience a certain level of results if Bogart is engaged. Our brochure describing services and fees can be found at www.bogartwealth.com |
