transcript

Speaker 1:
[00:00] When you're trying to build your wealth for retirement, which you probably have been doing for decades, it's pretty straightforward. Start investing as early as possible, control costs, invest tax efficiently, buy a portfolio, contribute consistently, and then allow the power of compounding to work for you over decades. And you probably have been doing this. But when you're near or in retirement, you really have to look at all this with fresh eyes in order to have confidence to go live a great life. And that's what we're going to talk about today on the show. Hey there, welcome to the show dedicated to helping you not just survive retirement, but to have that confidence and clarity so you can lean into your life and rock retirement. My name is Roger Whitney. I'm a practicing retirement planner with 35 years experience, co-founder of Retire Agile. And we're going to talk about how to build a diversified portfolio for retirement. We have some listener questions that we're going to answer. Before we answer those questions, we're going to do a retirement toolkit to explain what we mean by diversification and asset allocation. So you have a base knowledge of that. In addition to that, we have a rocking retirement in the wild story, and we'll answer some of your questions. Oh, that's a lot of stuff to do. So let's get this party started. Okay, before we get to the questions on that we have from listeners, let's set a baseline level of knowledge on what is asset allocation, and it will include diversification in there because I think it's important. It may be a topic that you knew at one point, but haven't revisited in a while. It may be something that you've never really conceptually understood. So we're going to define it a little bit, and I'll try not to go too far down the rabbit hole, but I think it's good to have some understanding of the history and the key components of asset allocation and diversification so you can build a portfolio that works for you. So what is asset allocation? Well, at its core, it's a risk management technique, and I'm going to go into the building blocks of it. But before we get to asset allocation, I think it's important we define this term of diversification. What the heck does that mean when it comes to investment management? So here's some foundational understanding. So what is diversification? It's essentially allocating your dollars to eliminate all the risks that you can avoid taking. So there are two major risks when you're investing money. Let's stick with equities here. There's unsystematic risk, and there's systematic risk. Another synonym for that is unsystematic risk is also known as specific risk. And systematic risk is also market risk. So the concept of diversification is a rational person would avoid risks that they can avoid, all of these unsystematic risks. So what might that be? Well, that's a risk specific to an individual company, industry or sector. So let's use an example here. Let's assume we're talking about a semiconductor stock, Nvidia. Well, if you just buy Nvidia, you have a lot of unsystematic risk. You have, well, they have to execute their plan well. They have political risk because regulations could change that affect the company. You have execution risk. They may have a great plan, but they fumble the execution. You also have the risk of what happens if Nvidia is a great company, but the technology semiconductor sector is not. You could be a great company in a bad sector and not really perform well. You could be in the wrong industry at the right wrong time because of economic cycles. Those are all specific risks that you can avoid with diversification. And the way that you do that would be not don't just buy Nvidia. You could buy, you know, other companies in different sectors, energy sector, consumer goods sector, industrial product sector, etc. to eliminate that one risk of just simply owning a semiconductor company. And over, as you build out a portfolio of different companies within different sectors, within different industries, even maybe different geographical locations, you slowly eliminate the risk of that one individual stock. And as you build out a diversified portfolio, and this is essentially what index is trying to emulate, the S&P 500 we'll use as an example, by buying a basket of stocks that are across industries, etc. You've eliminated most of the risk of just one company going bad. But you can't eliminate all the risks because you're still going to have the risk of the asset that you're in. In this case, we're talking about equities. So if we buy, say, the S&P 500 index via some product, we still have market risk, right? We still have the fact that we're invested in equities, and they go up and down based on the economy and economic cycles and the performance of the portfolio. So that's the risk that is just simply inherent in an entire market. You can't eliminate it. Now, one way to think about it, if you're going to go into a river, you're going to get wet, and the river is going to have a current that will pull you, but you can't always avoid the rapids. They're just going to be there. That's just part of it. Diversification eliminates all these specific unsystematic risks and just simply leaves you with market risk. And this diversification concept applies to equities. You know, by having a basket of equities across different sectors, etc., it can apply to bonds, it can apply to real estate, it can even apply to cash in some ways. So that's what diversification is. That's important to understand. Now, what is asset allocation? Well, we're assuming that we're dealing with diversified asset classes of equities, bonds, and cash, etc. Asset allocation at its core is a risk management technique. So here's some background of where it came from. I think it's helpful. So Harry Markowitz created what's called the Modern Portfolio Theory and published a paper in 1952. And it basically said a rational investor would maximize the return for a given level of risk that they're comfortable accepting, or they would minimize risk for a target return. Not any rational person would do that. And so he demonstrated by taking, mixing different asset classes, in this case, stocks, bonds, and cash that all act a little bit differently that if you mix them, you can literally create a frontier. What's called the efficient frontier of the most efficient portfolio along the spectrum of risk. So if you say, I want to take X amount of risk, it would calculate what is the most efficient portfolio, of this case, stocks, bonds, and cash, as an example. And that creates an efficient portfolio. And in theory, if you're rational, you wouldn't really deviate from that. If you had an idea of what return you were looking for, you would find the portfolio on that efficient frontier, and you would choose that asset allocation, because anything else wouldn't be maximizing return or minimizing risk. That was pretty monumental in investment management theory. In fact, he won a Nobel Prize for it, if I recall, is this idea of modern portfolio theory. And then his work was built upon by James Tobin with Separation Theorem, William Sharpe with the CAPM model, the Capital Asset Pricing Model in 1964, Eugene Fama with the Efficient Market Hypothesis, and then Brinson Hood-Beebauer study, which came out in 1984, which basically said that it concluded that asset allocation, how much you mix between different asset classes along this efficient frontier. That decision, according to that study, explained about 93.6% of actual performance. So, in layman's terms, that means what your asset allocation is, is the most important decision. Now, subsequent studies after Brinson Hood-Beebauer said that they probably overstated a little bit, and there's always nuance in these studies, but this is the foundational building blocks of why you have diversified portfolios than asset allocation is talked about. It was built on all of these foundational research that had been adopted in investment management. Okay, so that's the background. Let's put that geek hat away. Building a diversified portfolio or an asset allocation, what are the building blocks that go into portfolio construction if we're doing asset allocation? We already know we have diversified asset classes because we defined that. So the building blocks are number one, what assets do you want to include in your portfolio? So the simplest version would be cash, bonds, and stocks. That's probably the foundational decision. And then from there, you can trick this thing up any way you want. You can have value stocks, you can have growth stocks, you can have small cap stocks, you can have international stocks, you can have emerging stocks, you can see how crazy this all gets. There's no doubt you've had or seen portfolios like this. But the key is assets. Assets are cash, bonds or stocks. Maybe throw real estate in there. So that is one building block. And then for whatever asset classes you want to have in your diversified portfolio, you have to assume, well, what is the return on each one of those asset classes? So what return am I expecting for equities? What return am I expecting for bonds? Or what return am I expecting for cash? And generally, what we would do is look at history to tell us the historical average return. And that's one reason why we talk about those. And again, people can go down the rabbit hole of tricking these up with forecasts, et cetera. But that's the second building block. The third building block is we need to know how volatile each one of these asset classes are. And that is measured by standard deviation. So as an example, equities are likely the most volatile, which basically means if it has an average return, how much does it bounce around around that average? And bonds has a historical return and a how much do they bounce around their average? It's less volatile than stocks and then cash, obviously, or has the smallest variability. And that is measured by standard deviation. So that's the third building block that we need to build a diversified portfolio. And then the last one is the correlation. And this is the work that Markowitz did is, well, we know, okay, now we know the average return for stocks and bonds. We know how much they bounce around, but how do they interact when stocks go up? What happens with bonds? Do they go up in lockstep or do they go the other direction or do they lag in some way? And that's a correlation. It's like how much in rhythm are the return sequences of these asset classes? And what Markowitz showed on the sufficient frontier is you can actually have a portfolio that gives you a higher average return with less risk by adding bonds to stocks. Because as stocks go down, bonds don't go down near as much. And that was, ooh, that's magical. But that is the idea. So those are the four building blocks that go into a diversified portfolio when we're talking about asset allocation. And functionally, what happens in the background is that these, you know, someone has to come up with what's called the capital market assumptions. What asset classes, what are the return assumptions, what are the standard deviation, and what are the correlation? Those statistical numbers go into what's called basically a software program that's called an optimizer that creates the most efficient portfolio along the risk-return spectrum. And that's basically how any asset allocation fund or model that somebody created for you, that's essentially how they're created. But okay, that's the geeky part of this that we should understand is that asset allocation is not about maximizing return. If we want to do that, just pick one stock and be right. Asset allocation is about risk management, meaning that how do I minimize my risk for a certain level of return or how do I maximize return for the level of risk that I'm willing to take? So what are the practical takeaways on diversification and asset allocation? Number one is diversify. There's a lot of risk that you don't have to take, so why take it? Number two, practical takeaway is, you have to accept that risk and return are inseparable. They go hand in hand. There is no free lunch. Number three is, asset allocation is likely your most important decision when you're allocating your monies to investments. What amount do you have in these different asset classes? Number four is the time horizon drives everything. Because these are long-term statistical models. If you're a short-term investor, you don't get the benefits of asset allocation or diversification because it's too short of a season to experience the power of all of this. So time horizon matters. And if we had to break that down into a nutshell, the lower your time horizon, the less risk you should take. The longer the time horizon, the more risk you should take. The fifth takeaway, and this was shown in some of the studies that I mentioned, is that costs and taxes matter. Those are simple wins. Don't overpay for this asset allocation because that comes right off the bottom line. We had Charles Ellis on it last year, winning the losers game, and he demonstrated that in that book. And that's a lot of his life's work is costs really matter. It doesn't mean you avoid costs at all costs. It just means you want to manage them well. Number six, behavior matters more than strategy. You want to get a good asset allocation, but if you don't stick to the process for the right time horizon, all the benefits of asset allocation or diversification are going to be diminished greatly. You got to stick with the process that you fundamentally agree with. Then number seven, which is always and everything, elegant simplicity beats complex. I feel very confident saying that. Now, how does this apply? That is asset allocation. If you've been accumulating assets for a long period of time, you'd likely had some level of asset allocation, and because you had these huge timeframes, you were able to take as much risk as you're willing to accept because you had the power of time to allow that all to compound in a beautiful way, as long as you behaviorally didn't sell at the wrong time, etc. Now, how does this apply to a retirement portfolio? Well, it applies in a very different way, and some people call it buckets. I call it a pie cake because it's layers of a cake or an asset allocation pie. The most important decision when you're building a retirement portfolio, in my opinion, we're just talking about the investment, the cash and investment part of it, is the decision between having a contingency fund, which is a buffer for uncertainty, for bad estimates that you're making about future spending, etc., for life events in retirement, because retirement is fundamentally an estimation problem about predicting the future on your spending and your preferences and the markets. So, we need to have a contingency fund to have some buffer for all those bad estimates. How much do you have in that contingency fund is an important decision. The second layer is how much do I have in a liquidity portfolio? This is having liquidity over the near term for spending needs where risk is unacceptable. That is that income floor. And then the last layer is how much do I have in a growth portfolio where I has a long enough time horizon that I can tolerate it bouncing up and down so it can compound and can grow using diversification and asset allocation. So, in retirement, it's not let's just get one portfolio because I got 20 years and I'm trying to build assets for retirement. That's simple. Now, in retirement, we have to rethink it. We actually need three portfolios. We need a contingency fund. We need a liquidity fund and a growth portfolio. That is the most important decision when you're allocating your retirement assets. And then from there, you can geek it out and make it as complex as your heart desires, which is the human tendency, especially in the advice industry. So, I just want to make sure we understand what asset allocation is, the key takeaways and then retirement. What the really big, big decision to make is. And that is the three layers. So with that foundation, let's go answer some questions about building a diversified portfolio. Okay, our first question on building a diversified portfolio comes from T-Bone. I love it. Hey, T-Bone, how are you doing? T-Bone says, thank you very much for sharing your wisdom and knowledge on the podcast. I've learned so much. Awesome. What are your thoughts on using allocation or balanced funds or ETFs, as opposed to a portfolio combined of the individual funds or ETFs, exchange traded funds? Then he goes on to say, the typical 60% stock, 40% mix of an allocation or a balanced fund generally fits in with the risk tolerance for me and my wife. We like the simplicity of allocation funds for managing the portfolio. Now and for the future, when aging, cognitive decline, possible death, et cetera. We are primarily considering global funds versus US only, and would appreciate your thoughts on that as well. Well, hey T-Bone, it's a great question. I think asset, well, let me define what that is for people. So an asset allocation fund or exchange traded fund is essentially one mutual fund that owns a bunch of other little funds in it. So it's like an instant asset allocation. You buy one fund and it's going to have stocks, bonds, and cash, and it will be diversified to the nth degree with international and small cap and all that other, but you just buy it in one fund. So it's like simple. I just got it, I just buy it. I just bought a medical kit, and in one little package, it has everything I need for three or four different kinds of injuries or wounds. So that's essentially what T-Bone is talking about. So is that good enough? I think it's good enough for accumulation, actually. I think it's a beautiful thing for accumulation, like for my kids or I'm still 10 years plus from retirement. So for me, yeah, just put it in one fund and let it go, and you only have to think about it. I love it for that. In retirement, I think it could be appropriate. Here's how I'd approach it T-Bone is fundamentally you first want to allocate, let's assume you have a million dollars. First, you want to allocate, how much do I have in my contingency fund? Let's assume it's $100,000. How much do I have in my liquidity bucket or my income floor to cover let's say the next four years of your life, and let's assume you need $100,000 a year. So that would be $400,000. Then, how much do I want in my growth portfolio? That would leave what? That would be $500,000 for growth portfolio. That is the fundamental decision T-Bone first. Then the contingency fund and liquidity fund would not go into one of these asset allocation funds. That would be the decision for the growth bucket, that growth layer of your portfolio. So that would be $500,000 is the money that we're actually talking about. That's the primary decision you need to make first, T-Bone. Now, if we're talking about allocation funds in the growth portfolio, what are the advantages and disadvantages of buying that one kit of a portfolio versus buying the individual pieces? And that's going to be a little bit stylistic. Yes, it's a lot easier. You know, the advantages of using a asset allocation fund would be simplicity. You have behavioral protection because you're not going to tinker with it because you don't like small caps because they've gone down. You're not going to notice the individual pieces that are underperforming or overperforming. So it'll eliminate your propensity to try to tinker with it. It'll also eliminate the behavioral risk around rebalancing because to have an asset allocation implemented, you want to have a good rebalancing program. What does that mean? Just for those that don't know. Let's assume you have 60% stocks and 40% bonds, and then you have a great stock year, and your stocks do really well and bonds stay the same. Well, in year two, because stocks did so well, you would have say 65% stocks and 35% bonds. The act of rebalancing would be to sell your stocks and buy your bonds to bring it back to that 60-40 allocation that you had decided on initially. That's a really important discipline in order to get the benefits of asset allocation. And allocation fund would do that automatically for you because it just does it internally. And that eliminates a lot of behavior risk, because if you think about it, if stocks do really well and your bonds are sort of blah, when you rebalance and you're doing it yourself, you have to sell the things that have done well and buy the things that have not done well. Well, that's annoying. Usually we want to do the opposite, right? And that's behavior risk of, no, I'd rather buy the things that are doing well. But it enforces discipline to buy low and sell high and to maintain a constant risk budget or balance. So it will eliminate that. That's an advantage. They have lower minimums. What are some disadvantages of using an allocation fund? Well, there's no tax control, right? Because you can't harvest losses or trigger gains to help manage taxes. So you have less control there. It's a one size portfolio. There could be a bit of expense layering, a bit of extra expense as a result of having a fund of funds, which is essentially what they are. But usually that's very nominal if you're using efficient funds in the first place. And there's no customization if you want to tilt a little bit to small cap, et cetera. But that's just on the edges. I wouldn't worry too much about that. Now, what are some of the advantages of using an individual, all the individual pieces? Well, you have more tax efficiency potentially because you can control how you rebalance and you can do tax loss harvesting to pull money out in a way that you want to. You have more customization, you have more transparency, you know exactly what you own and why. Rather than just have it be all in the bag. But you take on the burden of behavioral risk, rebalancing burden. You can, what we call complexity creep, because sticking with something that's elegantly simple, it's human nature to want to add. Oh, let me just sprinkle a little merging markets in there. I read this article on semiconductors. Let me just buy a little bit of semiconductors so we can have that complexity creep and then you have the functional, I'm having to do this work. The other part of it that I didn't mention is, and this is more advanced if you have significant dollars, is asset location. There are certain assets that are more tax efficient to own in an IRA rather than a taxable account. Like a bonds would be an example of that. You'll have less customization there, but all of that stuff, we're just talking around the edges. So T-Bone, to sum all this up, I would not use an allocation fund for those three layers that I mentioned, not for liquidity and not for contingency, but for the growth layer, I think it's appropriate, assuming for simplicity sake. And you can choose your allocation fund as a result of that, but just understand the trade-off. So what do I do in my practice for smaller accounts? And that's going to be relative to the person, but generally under $100,000, we're using allocation funds, like a small Roth that we're maybe doing Roth conversions to. We'll just use an allocation fund. We don't need to add complexity there. For larger IRA accounts or larger after-tax accounts, we're using the individual pieces. We're buying a US equity, we're buying an international, we're buying a bond, we're buying emerging markets. But we typically will have five or six positions. So we're not over-complicating it. I've seen allocation programs, Fidelity, I think, is one of them, where they have these programs where you look at the portfolio and there's like 40 different mutual funds or ETFs. That's overly complex. We use five or six and have a nice tidy closet. So that's how we operate it on our end. But I think you're fine within the context of what I've said, T-Bone. Our next question is an audio question.

Speaker 2:
[26:55] Hi, Roger. First, I'd like to thank you for a truly terrific podcast. My question today has to do with portfolio diversification. I am 65 years old and my spouse is five years younger than me. I plan to retire in about one year. We have approximately five to ten years of liquid assets for meeting all expenses and no debt as our mortgages paid off. Additionally, we have about two million in pre-tax retirement accounts, and about 250,000 in Roth savings. Almost all the retirement assets are invested in S&P 500 index funds. I'm wondering if there's a substantial advantage to changing this to total market index funds. Also, I'd like your opinion on Paul Merriman's two-fund strategy for equity assets with allocations going to a S&P 500 index fund and a small cap value fund. If the two-fund strategy makes sense, what percentage would you dedicate to each fund? Kindest regards, BB.

Speaker 1:
[28:18] Great question, BB. We just had Paul Merriman in the Rock Retirement Club, and he's actually coming to the conference this year, which is exciting. Now, I've not consumed much of Paul Merriman's content, so I'm going to give that caveat when I talk about the two-fund solution. I did some basic research, but I'm not intimately familiar with it. I want to recap the facts set before I answer. So, you're 65, your wife is 60, you're going to retire in one year, and you have five to ten liquid assets. So that essentially, that five to ten years, in my mind, BB, is going to be your contingency fund and how you're going to pay for your life over the next five or ten years. No debt, two million pre-tax, 250 in Roth, and you're basically all in the S&P 500. The S&P 500, and now the question is, should you stay in the S&P 500? Should you go to a total market index or even consider Paul Merriman's fund? Well, the key here is going to be timeframe, BB. And it sounds like you have a minimum of a five and likely a 10 plus year timeframe for the monies that we're thinking about moving from the S&P to a total market or to Paul Merriman's portfolio. And that's really important. Time horizon matters when we're thinking about our allocation, because that's the volatility. We want to set it up so statistically you have a good experience and time horizon, the longer the time horizon, the more likely you're going to have a positive experience return wise, assuming you can handle the volatility. I personally am not a fan of the S&P 500 index because I think it is constrained by how it is constructed in the way that it's so market cap focused and so many dollars are going into one little funnel of investing in that index. What can happen is that it can get very lopsided in terms of what it actually owns and what drives performance. That said, long enough time frame doesn't really matter. Total market index BB is going to diversify that portfolio more than just simply the S&P 500. So as an example, if we look at the S&P 500 index, it's well the 500 largest US publicly traded companies, whereas the total market index, the main difference is it tries to capture the entire US equity market. So it's going to have 3,500 to 4,000 plus companies. What's interesting if you go to Morningstar or some other online analysis tool, stylistically, yes, it is a much more diversified portfolio in terms of number of companies. It's going to have a little bit more small and mid-cap exposure, but it's generally going to act the same. So there's nothing wrong with switching from the S&P 500 to the total market. Absent tax and cost considerations, I probably would do that. Now, your question related to Paul Merriman's two-fund solution, and again, I haven't studied this, but Paul Merriman's two-fund solution, as I understand it, is to split your money between the S&P 500 index or total US market fund, which is your core US large cap holding and a small cap value index, which is going to tilt smaller and tilt more towards value companies. And the logic behind that is a lot of the research done by Eugene Fama and others on a premium in terms of return to small cap value. Statistical data in their research shows that that does have a performance premium over, say, a normal S&P 500 index. Now, there's a lot of noise around that conclusion because the small cap index from Fama and French's research has had long periods where it has underperformed. So the jury is out on that, but data seems to suggest it. That is a reasonable strategy, this two-fund solution, if you have a very long time horizon and your objective is capital appreciation. Totally fine. And again, that time horizon is the key to this, to allow the volatility of having an all-equity portfolio time to do its work, elegantly simple, totally reasonable, assuming it's for capital appreciation. Again, go back to those core decisions. So hopefully that gives you some perspective on S&P 500 to total market. I probably would lean toward total market. And then in terms of Paul Merriman's two-fund solution. Now, how much do you put into each fund? I think that was part of it, S&P versus small cap. I've seen people say 50-50, I've seen it be 70-30 to the big one and the small cap being the 30%. I don't really have a lot of data on that because it's not something that I've researched in depth. But again, if it's long term appreciation, totally fine. Okay, we're going to pivot from the title question to a few other questions to finish out the show. And this one comes from Michael. So hey, love your podcast. Retiring later this year, I have about 4 million in brokerage account or after tax money and 4 million in a 401k IRA. House is paid off for about a 4.5 million in real estate. I've been reading a little bit lately about buy, borrow, die strategy, which takes advantage of the step up in cost basis that happens at death in order to avoid capital gains by borrowing against assets instead of liquidating to fund lifestyle. Haven't heard that topic discussed on your podcast and wanted to get your thoughts. It's a great question, Michael, and we haven't addressed it on the show. This is a technique that I've used in moderation with clients when appropriate. Essentially, what we're talking about is someone has substantial after-tax assets and they're appreciating assets, meaning that they grow over time, given the time horizon, that rather than sell those assets to fund goals when it comes to retirement, you would borrow against your appreciating assets that are growing, and then ultimately when you pass away, that all gets reconciled in the estate process, and then the heirs would receive a step up in cost basis on those appreciated assets. And it's a way of essentially avoiding capital gains tax rather than selling something because you need the money. That is a reasonable technique, and it's a great thing to use in moderation. And in some cases, it is the technique to use 100% if you're drastically overfunded. But who is this most appropriate for? This is most appropriate for high net worth individuals, individuals with investible assets that need to fund the retirement. And we're talking 5 million plus in after-tax assets, but maybe more practically 10 million. And where they're gonna borrow against those assets rather than sell them to fund their lifestyle. And if you have that asset level and you have after-tax assets where you have significant unrealized gains, where that 10 million dollars that you have in a joint account is actually, maybe you worked at a high tech company and you have very low basis in the stock. So almost all of that 10 million in this example is appreciation that if you were to sell, you would have to pay capital gains tax on. That would be an element that would make this strategy more attractive. And the third element would be, do you have an intent to want to transfer assets to someone else and take advantage of that step up? And then the last one would be people with a stable lifestyle with substantial income from whether that's dividends or pension or other assets that will throw off income to help pay for lifestyle as well as the carry of interest on those. Very, very appropriate to consider. This is totally an optimization strategy. It doesn't fit into elegant simplicity at all. Now, what are the downsides to this strategy? The downsides to the strategy are, number one, we have interest rate risk. Generally, the loans that are using a portfolio for collateral are going to have floating rate interest rates. So what might be 4% today as an interest rate cost, depending on the interest rate environment, could become a 7%, 8% interest rate carry later, depending on where interest rates go. And you're going to be paying interest all along the way. So just because we're in today's lower interest rate environment doesn't mean it's always going to be that case. Second is margin call risk. So a collateral, using a line of credit against a portfolio is very similar to a margin account, meaning that you're borrowing against your portfolio and the lender who's using the portfolio's collateral is going to have requirements on the ratio of the loan to the value of the account. So if you have these appreciating assets long-term that go through a very big storm and go down in value, and if it goes down in value enough, the lender can say, hey, our ratios are off, so you either need to bring more money into that collateralized account, or you're going to need to sell positions to get the ratios to where they need to be. And that is generally when, if we ever get to that point, that's when you can have a cascading effect in the negative direction that can go really bad really quickly. So you want to be careful about where you're at with those margins. The third drawback to this strategy is going to be just complexity. You have ongoing management. This isn't going to be a set it, forget it thing. And then always legislative risk if they change what you're allowed to do in terms of collateralized loans or if they change the state tax rules in terms of step of a cost basis, that might make the initial strategy a little bit less interesting. So a reasonable tool where I tend to use these type of things are less in this long term strategy of never selling assets, but to choose my points to help fund an initial purchase, say, of a second home or to fund something, a home for a child or college education for a child where we don't want to sell the assets and we'll probably just cash flow pay off the loan and it gives us flexibility to be able to move quickly because these kinds of loans don't have the same underwriting requirements as a traditional mortgage or something like that. So literally you can do it very quickly. I think we just did that with the client not that long ago and got it all done in a much simpler way than you might if with a traditional mortgage and also the underwriting costs are pretty much nil compared to a traditional mortgage. So they're good for their spots. So hopefully Michael, that gives you at least some context to think about it. Next, I want to go to just a listener that emailed in with an idea of what to do with old t-shirt collection. I guess we talked about that a few weeks ago on the show. Michael, I think this is a different Michael. He says, Hey, I have a suggestion for your brother-in-law and anyone else who is unsure what to do with that t-shirt collection. Oh, I must have been talking about Kevin. Michael says, In my case, I had a four-decade collection of more than 30 shirts that were taking up space with no idea what to do with them. My sweet wife cut out the panels and had them made into a quilt, which now adorns our bed. So now every day when I see the quilt, it brings up cherished memories of all these, and maybe concert t-shirts. I don't know. What a beautiful gift and wonderful solution thanks to my wife. So there's an idea. I actually love that one. I think that's a great idea. All right. Now let's move to a Rocking Retirement In The Wild story or two, and then we'll get to a Smart Sprint. All right. I have two stories here and a quote I'm going to throw in between. A few weeks ago, we talked about this idea of, hey, you got to have a purpose in retirement, and how that can set things up for a lot of unintended consequences, thinking that we must have a purpose in order to retire, and it's just simply not the case. And Dennis, who emailed in, is a great example of this. He said, there was a Wall Street Journal article, and there were many people who don't feel the need to have a purpose in retirement. This despite the fact that virtually every retirement article book podcast insists it's the secret to happiness. Being two years into retirement and not having a purpose, I was beginning to worry that I would be somehow unhappy. So far, not the case, Dennis says. So you're right, Dennis, I don't pay attention to talking heads. And sometimes that includes me because I used to do that as well. You don't have to have a purpose. Everybody telling you what you have to have, whether it's retirement goals or purpose, or how much money you need to have. These are all scripts. They're other people's scripts. And they can be useful to inform our journey. But you are writing your own unique script for you. So you can use these to inform your journey, but don't think somebody else has the answer. Nobody does, not even me. And purpose is one of those funny things. You don't think of it on a whiteboard. Generally, you discover it over time, and it doesn't have to be purpose with a capital P. It can be just a chill P. And my purpose is to be curious and be kind. That's good enough. Thanks Dennis for giving us that perspective. And the quote I want to use that I think captures this when we think about why we talk about purpose is an old Chinese proverb that I was reminded of. It being, oh, I think Tom sent this to me. Thanks, Tom. Being not afraid of going slowly, but only afraid of standing still. That may be the essence of what all the purpose people are talking about, is we don't want to stand still. We want to be moving forward in some way, but it doesn't have to be a big purpose with a capital P. So hopefully that's some perspective. All right, now onto a Rocking Retirement in the Wild story with some people that seem to have a capital B purpose, which is wonderful. I'm just going to read you a couple of excerpts from what they sent me. This is from Tim and Tammy. Hey Roger, this message is well overdue as I've been listening to your podcast for many years finding great value in all that you and your team gracefully offer. Thank you so much. My wife and I share your passion for adventure in the outdoors and have lived 21 years in Colorado for some portion of the year near Carpondale. Okay, cool. I'm not sure where that is. And then they spend the other part in Florida. Tammy is 63, I am 61. We're several years away from retiring from Ohio University, where we teach remote courses now. But for 25 years we were working in corporations and they primarily teach remotely. And it sounds like, Tim and Tammy, that you're in pretirement. You get in the best of both worlds. You get to serve and use your skills and teaching, but you have lots of flexibility, which is a beautiful thing. Tim goes on to say, Our passion center on serving God, staying active in the outdoors and remaining ever curious to learn and engaging deeply with family and friends. And they give us a lot of context on this. They do say, we have visited all 63 United States National Parks. We love parks. And we just spent our first summer volunteering at Rocky Mountain National Park. They probably need that, Tim and Tammy. That's a busy park. I've been there. Wow. It's like going to Disney World. There's so many people. We love to camp at our Airstream, hike bike, fly fish trail, etc. Fantastic, Tim and Tammy. It sounds like you've created an amazing life of being able to practice your faith, being able to teach, being able to explore and give back. What a beautiful place to be in. Thank you for sharing your example. All right. With that said, let's get on to our smart sprint. On your marks, get set. And we're off to a little baby step that you can take in the next seven days to not just rock retirement, but rock life. All right. If you're within three years of retirement, take a hander at your allocation and define what is in your contingency bucket, what is in your liquidity bucket, and what is in your growth bucket. Is that decision dialed in? Because that's probably the most important decision when it comes to your asset allocation. And if not, take it as a note to explore that when you have the time and inclination to get that dialed in. You get that one right, a lot of things become a lot easier. It's called stacking good decisions. So for the last 12 years, which is about as long as this podcast has been going, when we've had online meetups, you've seen Sherlock sitting in the background, laying on the couch usually, or coming up and wanting attention while I'm talking on an online meetup or not. And I've referenced him throughout the show and he's become the unofficial mascot of the show and definitely of the club. Well, I'm gonna have to not tear up here. I want to let you know, since you've been involved in his journey a little bit, and Sherlock is our 12 year old Great Dane, that this last week, he passed away. And it was, now I'm getting a little teary-eyed. This was hard. It was just a yucky, yucky day, is all I gotta say. And I feel so blessed that he gave us 12 great years of companionship and laughter and personalities. That's something only a Great Dane can do in a Great Dane way. So I just wanted to let you know, pets are beautiful and Sherlock was a beautiful dog and we will miss him and we will cherish the time that we had with him. With that said, I'm not on a great note. It is a great note because we were blessed to have that time with him. And now we're blessed to have a little bit more freedom to go to explore the world without trying to throw Great Dane in the backseat. It's bittersweet. But I wanted to share it with you. Always hopeful for the future. Have a wonderful day. The opinions voiced in this podcast are for general information only and not intended to provide specific advice or recommendations for any individual. All performance reference is historical and does not guarantee future results. All indices are unmanaged and cannot be invested in directly. Make sure you consult your legal, tax or financial advisor before making any decisions. This podcast may include testimonials and or endorsements.