Transcript

Wiser Financial Advisor – Does the Best Defense Always Win?

Hi, Everyone. This is Josh Nelson. I’m the founder and CEO of Keystone Financial Services, a wealth management firm based in Loveland, Colorado. We work with clients in Colorado and nationwide, and we now manage over a quarter of a billion dollars in assets. Seems like a lot of money. When I started Keystone back in 2010, that number didn’t even approach my mind. But we’re very blessed, very. For those of you who are clients, I’m thankful that you have trusted us with your money. Those of you who are not clients, we appreciate you and are just glad that you are here listening to the Wiser Financial Advisor.

What we’re doing is what King Solomon advised in the Book of Proverbs: He said that seeking wisdom is the wisest thing that we can do. Wisdom is acquired in a couple different ways. One of those is by trial and error, learning from mistakes that have been made. But that takes a long time and it could be painful. So we also want to learn from each other and learn from the experts who have walked before us.

Today, we’re going to talk about defense and offense. There’s a statistic and it varies all over the place, but you hear this phrase thrown around related to Super Bowls and championships—that defense always wins championships. And the reality is, that isn’t always true. Oftentimes it’s true, but not always. In fact, I asked Chat GPT because I wanted to get a different take, instead of just reading articles that throw these statistics around. According to Chat GPT, in the last 15 Super Bowls, ten were won by the team with the best defense, which means that the other third were won by the team with the best offense. And I think that also applies to financial planning and investing.

Defense is important. It’s really important. In fact, oftentimes it’s people who don’t pay attention to defense that end up losing all their money or having some type of catastrophic financial event. So it’s important to manage risk. It’s important to ensure your long-term stability, especially as we start to reach some milestones of financial security and build wealth. It’s important to get that solid base set and have a good prudent strategy. Nothing guaranteed, of course. We can’t ever use that word in our industry. But we do want to do things that have been proven, things we can look to in the past and see high odds of being successful.

So let’s talk a little bit about defense and what that means to me. First of all, it means having a solid emergency fund—and depending on which financial planner you talk to, it’s recommended to save anywhere between 3 to 12 months’ worth of living expenses. That’s in a savings account, checking account, money market, maybe some short term bonds, things that are very conservative and liquid, because that money is going to be used at some point. There is going to be some kind of unexpected expense that will come up in your life and in my life. That’s part of the reality of being human. Bad stuff happens and it’s not always predictable. So we want to have that cash buffer there. Also, it’s there because sometimes the market goes down. We can’t completely rely on our investments. We also need to realize that there are going to be times when we may need to live off of savings for a while, especially if we’re in retirement. Therefore, some planners will recommend saving up to a couple of years’ worth of conservative liquid investments.

That way, we’ve got some buffer, we’ve got some time at least to let things recover when the inevitable market storms happen, and they happen every now and again. Seems like every decade or so, sometimes more often, but every decade or so the market goes down a lot. What I mean by a lot is like 30, 40, even 50% plus in some circumstances. The nice thing about history is that we can look back and see that there’s never been a bear market that wasn’t followed by a bull market; that the market has always recovered in general terms. Now, that doesn’t mean that every individual investment will recover, especially if you weren’t diversified.

The other parts of your solid base of defense are going to be having the right insurance, getting your debt paid off, budgeting, certainly knowing where your money is going and not overspending. But then when it comes to investing, making sure that you’re very diversified, we use a term called asset allocation. That’s the jargon in our industry for making sure that you’ve got lots of different types of investments that are not related to each other. We want to make sure that we’ve got different areas covered, because there are different seasons in the market and in the economy and of course different investments will perform differently during different seasons. If you put all your money into one stock, of course, that’s very high risk. But equally so if you put all your money into one sector of the stock market—that’s also very risky. And I would say that putting all your money just in stocks is probably also risky. You should have some other things covered, even if it’s other types of investments like real estate or a business or private equity, other types of asset classes that may not behave exactly the same as stocks.

So a balanced investment strategy will allow us to play offense and it’s a free lunch, because diversification doesn’t cost us any money. We can diversify and asset allocate to our heart’s content, and that does not cost us any more money. Then we won’t get killed on the downside. What I mean by that is that if you put all your money in one thing, like Tesla stock or Apple or Google or any one stock, there are all kinds of historical precedents where companies that once were great suddenly are not. This is either because something really bad happens, maybe an Enron situation where there was outright fraud and they were cooking the books, or it could just be that the company didn’t change fast enough with the times. And in today’s world things are moving faster and faster and faster. Ultimately, the companies that we think of as the greatest companies right now will not all be here 30 years, 50 years, 100 years from now.

Jeff Bezos recently gave a talk to his employees, and he told them matter-of-factly that Amazon will not always be here. It will certainly not always be on top. He didn’t mean that to be discouraging. What he meant by that is that it’s our job to carry the torch as long as possible here and to keep things going as long as possible. Be good stewards of this business because someday there will be other technologies, other companies that come along that surpass us.

So it’s important to recognize there are a lot of individual risks. There are a lot of sector risks and of course, an asset class, even stocks, carries risks. We want to make sure that we’re very diverse. So let’s look at some real life examples. Consider Warren Buffett, known for his defense. He is definitely known as a value investor. He does not shy away from making bold moves sometimes, when he sees potential. But if you look at his portfolio, which is Berkshire Hathaway, it’s very diversified. It covers many, many sectors and only a small part of it is portioned out to higher risk, higher reward assets. Many of the types of businesses owned by Berkshire Hathaway are boring, but those are more defensive and reliable as far as cash flow and dividends. The things that they look at are about managing risk and not losing money. That is one of Warren Buffett’s primary rules of investing: Don’t lose money, (at least try not to). There are no guarantees, and plenty of examples where Warren Buffett has lost money on different investments. But because he was balanced and diversified in his approach, he didn’t drastically overpay for those investments. He lived to fight another day instead of making one big bet on one thing.

So the whole point here is stay diversified, be focused on defense and understand the level of risk that you’re taking in your portfolio, so that you can have a sustainable life in retirement and hopefully pass on a legacy to other people. That translates to a strategy that safeguards your assets. There are lots of different ways to do that, but we also want some growth. That is the moral of the story for today: It’s not just about defense, it’s also about offense. Having a balanced approach with some of each. You want a portfolio that matches up with you and your risk appetite and the types of rates of return that you need to make your plan work long term. As Certified Financial Planners, our job is to encourage you to use a balanced approach, use a planner, use somebody who cares about you and is a true fiduciary and looking out for your best interests.

Thank you for joining us today on the Wiser Financial Advisor. I hope you enjoyed this episode and I hope you enjoyed the Super Bowl as well. But moral of the story is, it’s not all about defense. It’s not all about offense. It’s about a balanced approach in your financial life. Until next time, stay informed, certainly stay balanced and keep striving for your financial goals. Let us know how we can help you or your family. Your friends certainly help us by clicking subscribe or by sharing this out to other people. We appreciate you.

Have a great week and God bless.

This episode has been prepared for informational purposes only and is not intended to provide and should not be relied upon for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors. Investment advisory services offered through Keystone Financial Services, an SEC registered investment advisor.