Power Up Wealth podcast – Positional Advantage – Episode 26 transcript:
Sharla Jessop 0:00
Preparing for retirement is best accomplished with strategic planning. I’m Sharla Jessop. Today, my friend and colleague, Jordan Hadfield, will explain how preparing for retirement can be compared to a game of chess.
Welcome to the SFS Power Up Wealth podcast where we provide impactful insight and expert opinions on timeless financial principles and timely investment topics, preparing you to make smarter decisions with your money.
Thank you for joining us, Jordan. Jordan is a Wealth Management Advisor with Smedley Financial. He holds a Certified Financial Planning designation and a Behavioral Financial Advisor designation. Jordan, people might not know that you are a chess enthusiast. And actually, you’re a really good player and have some amazing chess boards. Tell us what you love about chess.
Jordan Hadfield 1:06
Yeah, I do love chess. Chess is a fun game. I’m not much of a gamer. I’ve never played never been into too many games in the past, but for some reason, chess has just really grabbed me, and I enjoy it. I play it with my kids. I play it with my nieces and nephews. I play it with my father. One of these days I’ll talk James Derrick into playing it with me a little bit. He’s a chess player himself. I do love the game. It’s a fun game. It’s an intellectual game. It requires deep concentration. It requires strategy. It requires tactics. A lot of people don’t realize this, but it also requires creativity. It’s a demanding game. It’s entertain people for over 1000 years. So another thing I really like about it is there are platforms online, you can jump on this, this makes me sound a bit of a nerd, I apologize. But you can jump on platforms online, and you can play people all around the world. You know, you can play with people from Ukraine and from Russia. I mean, these are two countries we’re talking a lot about right now. And it’s sometimes fun to jump online. And you’re playing chess with somebody over there, you know, or Europe or South America anywhere in the whole world. Yeah, I enjoy chess.
Sharla Jessop 2:12
No language barrier.
Jordan Hadfield 2:14
No language barrier. Yeah.
Sharla Jessop 2:15
Well, when you contrast that with retirement planning, what do people need to know about positioning for retirement?
Jordan Hadfield 2:22
So a lot of people don’t understand this about the game of chess; positioning in chess is very, very important. In fact, you can lose a game very, very early by a bad position without having lost any pieces. There are three, three stages of the game of chess: the opening, the middle game, and the end game. I consider the opening to be one of the most impactful stages of the game. And that’s because that’s when you create your position. And that is a lot like retirement planning. Properly positioning your investments for the goals that you need to accomplish in retirement are very important. And if you find yourself with a bad position on the chessboard or with your investments, you may come to a position where there are no good decisions. Positional advantage on the chessboard is vital to success. And I think that’s also true with retirement and investing.
Sharla Jessop 3:23
Well, and especially when it comes to maybe retirement planning, because there’s so many decisions to be made, that you could focus on three of the four, and missing that fourth would be a problem. Talk about some of the positioning, things that people need to be aware of.
Jordan Hadfield 3:37
Yeah, there’s a number of things that we can talk about there. For retirement planning, there’s a number of different strategies that people can implement. And the one that we believe here at Smedley Financial is superior to all others is called Income for Life. And it’s something that we try and implement with all of our clients that are about retirement age, preparing for retirement or in retirement. There’s a number of risks that a retiree must confront and must handle, right, in order to be successful through retirement. And I’ll talk about the three main ones here. The first one we’re all feeling is inflation. Inflation is a big risk for our retirees. Inflation over the long term can be devastating to a financial plan. And so we must, we must take that into account when we’re structuring our investment portfolios throughout retirement. The next one that I’ll talk about is market risk. Market risk is stock market. If I say market risk during this podcast I’m referring to stock market risk. We know what stock market risk is. If the stock market becomes volatile or goes down, investors lose money. We’re going to call that market risk. And the third one is not known very well. It’s called sequence of return risk. And that has to do with over the lifetime of a portfolio or through a retirement plan when do the positive returns happen. So I’ll explain this in a little bit more detail because it’s a little bit complicated. But a financial advisor when they put together a financial plan, they use average annual returns. And so we get a really smooth line. If we do 8 percent average per year, or 5% average per year, whatever we’re choosing to use for that particular client, we get a real nice line. 5% every single year we can see what the asset assets do. But we know that’s not what the market does. In reality, it bounces around, and there are times where we’re up 15%. And there’s times where we’re down 15%. And the sequence in which those returns happen makes a significant impact has a significant impact on the on the portfolio on on what it does over the over a retirement plan. And you have to take that into account, you know. In our Income for Life brochure, we’ve got a nice little article that’s that explains sequence of return in great detail. And there are some images there that show, you can have the same investor with the exact same investment, with the exact same rate of return spending the exact same money, everything’s the exact same. And yet, if they have positive returns up front, right, they retire with, or they excuse me, the plan ends with a lot more money, 35 years down the road, they’ve got a lot of money. If they have negative returns up front, and positive years on the back end, they run out of money way before they need to right. It’s a huge risk. And in both those scenarios, the average annual return is exactly the same. And so it’s it’s a risk that a lot of people don’t realize, but as a financial advisor, it’s something that we have to take into account and Income for Life does a fantastic job of that.
Sharla Jessop 6:47
How does Income for Life incorporate sequence of return risk into investing?
Jordan Hadfield 6:52
Yeah, so Income for Life, the way its whole approach is to take the assets and invest them relative to time horizon and risk. The easiest way to think about this as buckets, buckets of money. Let’s pretend we’ve got three buckets, okay. The first bucket is going to be for years one through five. So money that an investor might need in the first one to five years of retirement is is that first bucket. We don’t put a lot of market risk, we don’t put a lot of stock in this bucket. It’s mainly bonds, cash, cash equivalents. So it’s very safe from stock market risk. So if there’s a downturn in the market, you’re not going to see a huge downturn relative to the stock market, in this bucket, a lot of protection. So this bucket protects you against market risk. However, because there’s not a lot of growth in this bucket, it’s susceptible to inflation risk. In other words, if inflation goes off to 8%, like we’ve seen recently, this bucket might struggle to keep up. The next bucket is years five through ten. And because we’ve got a little bit longer time horizon in this bucket, we’re going to add more market risk. By adding market risk, we’re going to reduce inflation risk. And the last bucket 10 years plus, we’ve got a long time horizon. So we’re going to add even more market risk in this bucket still. Now that bucket is going to protect us against inflation. So the first bucket protects us against market risk. The last bucket protects us against inflation risk. And these two risks really balanced each other. It’s balancing these risks is what’s going to reduce the overall risk exposure in the portfolio. So, a lot of clients come to me and say I’m retiring. I need to protect my nest egg, I’m going super conservative. That that eliminates market risk, largely. But that increases inflation risk. And so if we just subtract out one of these risks, we greatly increase the other, which can be disastrous. It’s balancing these risks that are very important. Now sequence of return risks. How is that handled? How is that reduced? It’s, it’s because the short term bucket isn’t going to be as susceptible to the large market swings. And the long-term bucket is. It’s going to have a lot more volatility. But because there’s a greater time horizon in that bucket, we can withstand it. Let’s say a client retired in 2020. We all know what the markets doing. What is this client dealing with? The money that the client needs from 2020 to 2025 is fairly protected. So the market volatility that he’s experiencing right now in that short-term bucket is very low relative to what the stock market’s doing. Right? So he doesn’t need to be concerned. Now let’s fast forward to 2030 the volatility that we’re experiencing now has had 10 years to recover. And, you know, if you look back through history there, there hasn’t been a recession or a large bear market downturn that has that has struggled for that long and so there’s a lot of opportunity there for the market to recover. And so he doesn’t have to worry about the volatility to the extent that investors who are aren’t well positioned, would need to worry about it.
Sharla Jessop 10:02
You talked a little bit earlier on about inflation risk. And you’d also mentioned 8% inflation like we’ve been experiencing. That can have a real impact on a retirement plan. And it can really change spending habits and the lifestyle people live. Explain why that happens.
Jordan Hadfield 10:17
Inflation risk is the biggest fear that we have for our retirees. And that’s because 8% increase in spending every year is unsustainable. I mean, if you project that over 30 years, I mean, it’s a tremendous expense. And that is why the Fed is so gung-ho about reducing inflation. I mean, if you were to ask the Fed right now, if you keep raising rates, you’re gonna, you’re gonna cause a recession, is that okay with you? And their response would be, yes, as long as it brings inflation down. We are willing as the Fed, we are willing to bring inflation or to cause a recession, in order to bring inflation down, because inflation is long-term pain, and a recession is short-term pain.
Agreed. And also people who are on retirement incomes, these fixed incomes, they’re impacted more than the average worker, because an average worker, if we’re dealing with inflation, they’re probably getting pay increases. Unfortunately, for many retirees, the only pay increase they get might be a cost of living adjustment in social security. But other pensions and fixed income distributions do not have any type of a cost of living adjustment.
Absolutely, if you’re working, inflation is still a concern, and you still feel it. But you’ve got more options. If you’re in retirement, your king is cornered, and the opponent is on the attack, and you don’t have a lot of options. And so you need to make sure that your defense is very solid, otherwise, you’re going to be checkmated. And nobody can afford to be checkmated in the game of retirement.
Sharla Jessop 11:47
Why is it so important for investors to have a professional or an advisor who’s helping them with positioning?
Jordan Hadfield 11:54
That’s a great question. A professional at chess board is called a grandmaster. And I like to think that I’m a decent chess player, but I wouldn’t stand a chance against the Grandmaster. They understand the game of chess in a way that I don’t. They see the board in a way that I can’t. They can recognize proper positioning almost immediately. Now, one thing that’s really interesting about the game of chess is despite the fact that this game has been played for 1000s of years, there are still positions on the board that have never been played. In fact, this fact sounds shocking, but it’s true. There are more possibilities on a chessboard than there are known atoms in the universe. So there’s a tremendous amount of possibilities on the chessboard. And a grandmaster can recognize these changing positions, and immediately know what is best for them, and how to move their pieces to best position themselves for success. And that if I’m going to relate that to financial advisors, or to a money manager, the professionals in the industry are the grandmasters of the industry. And as the environment changes, we need to move our pieces accordingly to maintain that same defense or that same attack, right, to protect ourselves, and to advance our pieces down the board. And that’s changing. And so for someone who, who doesn’t fully understand what the raising interest rates does to a portfolio, or what inflation does to a portfolio, or what a war in Ukraine does to investment opportunities, for someone who doesn’t understand all the intricacies of the investment options and how they’re impacted by a global pandemic. And it can be very, very difficult to know what changes need to be made to a portfolio. And so to have an investment advisor, a grandmaster, who’s watching over, you know, your pieces, and can quickly make adjustments as they see fit based on the changing economic conditions, can be very, very beneficial.
Sharla Jessop 14:05
I can see that Jordan, thank you for joining us.
Jordan Hadfield 14:08
Yes, my pleasure.
Shane Thomas 14:13
Thank you for joining the Power Up Wealth podcast. Smedley Financial is located at 102 S 200 E Ste 100 in Salt Lake City, UT 84111. Call us today at 800-748-4788. You can also find us on the web at Smedleyfinancial.com, Facebook, Instagram, Twitter, and LinkedIn.
The views expressed are Smedley Financials and should not be construed directly or indirectly as an offer to buy or sell any securities or services mentioned herein. Investing is subject to risks, including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice. Securities offered through Securities America. Inc., Member FlNRA/SIPC. Roger M. Smedley, Sharla J. Jessop, James R. Derrick, Shane P. Thomas, Mikal B. Aune, Jordan R. Hadfield, Lorayne B. Taylor, Registered Representatives. Investment Advisor Representatives of Smedley Financial Services, Inc.®. Advisory services offered through Smedley Financial Services, Inc.® Smedley Financial Services, Inc.®, and Securities America, Inc. are separate entities.
