Common Sense Financial Podcast

Episode 63 How To Create The Perfect Investment Portfolio

Episode Intro

When it comes to investing for retirement, following the status quo investment advice is one of the worst things you can do. Most people are deferring taxes in their 401k, storing money in a bank, and working to pay off their mortgage, all without realizing that doing those things won’t move them closer to what they really want in retirement. Find out how to ditch the status quo and build an investment portfolio that allows you to retire without having to worry about income, taxes, or what’s happening in the stock market.

Show Notes

  • There are no perfect investments that are right for everyone. Financial unicorns don’t exist, but it is possible to create a portfolio of investments that accomplish everything you would want from that one investment.
  • In order to find what you’re looking for in an investment, you have to know what you’re looking for. You need to know what your goals are and what investment features you need to accomplish those goals.
  • People often default to doing things that don’t always align with what they’re looking to achieve.
  • Example: A 45-year-old business owner storing cash in a bank account earning nothing while borrowing money from a bank and paying interest to finance equipment purchases.
  • We usually see people settling for the status quo out of a desire to do something, but it’s most often not what they’re looking for. They are usually following some generic advice they heard about investing that doesn’t really apply to them or their life situation.
  • Most savers are looking for financial security. They know they need to do something to achieve that, but don’t know exactly what actions they should be taking so they default to what everyone else is doing.
  • Deferring taxes in a 401k. Storing money in the bank, and paying off a mortgage are the three most common financial aspirations, however, these three concepts for handling money have caused more problems and difficulty for people than anything else other than debt issues.
  • They are simple, which makes them easy to understand and appealing for most people, but the results are often underwhelming and frustrating.
  • If you’re storing money at the bank, the bank is making money on your money while paying you next to nothing in return.
  • If you’re borrowing money from the bank, you’re giving up control of a portion of your cash flow to repay the loan while paying the bank interest.
  • When you fund a tax-deferred account, you’re essentially allowing the government to dictate when you can access your money, and have no real idea what tax rates will be in the future, gambling with your money in the process.
  • There are four broad categories to consider when pairing products together, you have long-term growth, consistent income, access to cash, and tax mitigation.
  • Aside from entrepreneurship and real estate, public markets have the highest growth potential over the long term specifically centered around capital appreciation. But there are two other aspects of growth that most people overlook, growth through income and uninterrupted growth.
  • Growth of income is centered around an asset that creates income to reinvest and is best achieved through private markets.
  • Uninterrupted growth is where your money continues to accumulate and earn interest in a vehicle like a specially structured whole life insurance policy while allowing you to borrow against it essentially for free. See our past episode on Infinite Banking to learn more.
  • Stacking these growth strategies together expands your diversification. It reduces risk and volatility and can increase your wealth more effectively, giving you more control over time.
  • Having consistent income ranks highest on the list of things needed to have financial security. Without consistent income flowing into your checking account, you cannot effectively manage your cash flow. If the source of the income is at risk, you add another layer threatening the longevity of your income.
  • The public stock market is the status quo default of retirement plans and is the least manageable of all the areas being discussed, yet most people only think of the stock market when they think about investing.
  • You cannot control the markets and therefore cannot predict the income account value or its longevity.
  • Annuities and private market investments are best suited for income and should be the primary source for fulfilling the goal of having consistent income in retirement, you just need to know what you’re looking for.
  • Having access to cash is also high on the list of priorities. Traditional stock market investments fail this requirement with age restrictions, market volatility, and tax liabilities all being major negative aspects.
  • Public markets are best suited for long-term growth and banks are best suited for moving money around to pay your bills and conduct business.
  • Tax mitigation is desired by everyone but seldom seen in real life because tax mitigation strategies fall outside the status quo.
  • Tax deferral does not equal tax mitigation. Deferring taxes may actually be causing you more headaches in the future as we can’t be sure what tax rates will be during your retirement with many experts predicting them to be considerably higher.
  • Tax mitigation is a complicated process and has a lot of factors. It’s best to consult a professional about your exact situation to come up with a plan for mitigating taxes and minimizing taxes along the way.