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The holidays mean more travel, more shopping, more time online and more personal info in more places that could expose you more to identity theft. But LifeLock monitors millions of data points per second. If your identity is stolen, our US based restoration specialists will fix it, guaranteed your money back. Don't face drained accounts, fraudulent loans or financial losses alone. Get more holiday fun and less holiday worry with LifeLock. Save up to 40% your first year. Visit LifeLock.com podcast terms apply. It's Brian Preston, the Money Guy, restoring order to your financial chaos. Retirement, investing, taxes. You've got financial questions. He's got financial answers. It's Brian Preston, the Money Guy.
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Welcome to the Money Guy Show. I'm your host, Brian Preston. By day, I am a fee only wealth manager, a certified public accountant and a certified financial planner. And thanks for joining us here on the Money Guy Show. It is pretty exciting, a great, great time here at the Money Guy show because we've got some pretty exciting things. Before I get into some housekeeping things. To kind of give you an update of what's going on with the Money Guy show, let me tell you what we're going to be talking about today. As I had the opportunity, I got asked by one of the big financial blogs out there, 5centnickel.com, because money does matter. Nicol asked me to do a guest post because he's going on vacation between February 21st to March 3rd and wanted to get some insight and see if I could throw out a topic. And one of the topics that came to my mind was since we're in such an uncertain period in the stock market, in the financial markets right now and we have all this noise out there that's telling you what you should and should not be doing in this financial market. Why not go look and see what one of the most successful or the most successful investor of our lifetime is doing, and that's Warren Buffett. So I went out there to the Oracle of Omaha and there's great sites out there on the Internet where you can go pull up a lot of the key historical quotes that Warren Buffett has used in the past in his chairman letters to Berkshire Hathaway as well as many other sources. I put together a list of those quotes while putting that project together for 5centnickel.com. I got inspired because I noticed a trend. I noticed that a lot of what Warren Buffett talked about had to deal with time and patience and the virtues of focusing on the long term nature and the value of your investment, not the market swings and the price changes for from that I kind of put together and realized this would probably be a great topic to come back and discuss. The virtues of being a long term investor. How really becoming rich is very easy, especially for the young listeners out there. If you're a young person and you're worried about all this craziness that's going on out there with the stock market, with the prices going up and down, do not let that bother you because you actually are sitting in the best seat in the house. You almost have a front row seat to getting some great deals here in the long term because you don't lose money in investing until you really pull out and sell those investments. With a long term horizon, you're carrying those things for 20, 25, 30, 35, 40 years. This is just a speed bump for an opportunity for you to get into some good value. So I'm going to be giving you some of the quotes that Warren Buffett has given, talked about that I think are kind of youthful. Meaning when I say youthful, I mean that they provide a lot of opportunity for young investors to really take advantage of compounding interest. And then I've got some slides that I use when I go out and do presentations and specifically talking to young people about the compounding interest and the need to start early on saving. Remember, there's never a bad time to start saving for retirement or saving for financial independence, but it is a game for the youth. If you get to work, it is so easy to become successful and to become financially independent. And that's what I want to kind of inspire some of you guys out there to put it to work. Don't let this, you know, all this financial noise you hear out there freak you out and cause you not to make the right decisions. So I appreciate the opportunity that Nichols provided me to get inspired to do this topic today. Now let's do it real briefly. I know you guys don't like me to get off topic. You kind of want to come in, get your information and get out. But I do want to give you a few updates. You'll probably quickly notice that that the MoneyGuy website is changing. We're making some dramatic changes. I've taken on a partner that's helping me do some of these things. James is doing tremendous work behind the scenes, but it's something that's going to take a little bit of time. So bear with us over the next two to three, maybe even a month worth of time as we're fine tuning the website to make sure we can get that information. Even better for you when you go check us out. You can check us out currently at moneyguy.net or money-guy.com, but I've also got great news to tell you. We have been in the process behind the scenes of negotiating with the individual that owned moneyguy.com for quite a while. Pretty much since I started doing this over two years ago, we have successfully in the last week and a half acquired that domain name. So you're going to notice a trend over the next few weeks where we will be moving stuff to moneyguy.com right now it's not active, but we will be focusing on moneyguy.com in the future because that's just such an easier, more intuitive thing when I'm giving out domain names and email addresses to say moneyguy.com so bear with us on that. I also have the exciting information to tell you that I've been asked. I don't want to give the specifics because I'm meeting with the founder and organizer of this event next week, but I've been asked to be the featured financial speaker for a conference up in downtown Atlanta focusing on young people and financial moves they can do when they're just just now out of college or moving to a brand new city. So I'll let you know what comes of that if it works out when we talk next week. I will be providing those details in later shows about the conference at the end of March. That I'll be the featured financial speaker at. That should hopefully open us up to a whole new audience of people that can listen to the Money Guy show and take on the information because we are here, remember, to restore order to your financial chaos and hopefully give you the tools to make the right financial decision decisions that are going to provide you that true peace of mind. So let's talk about some of these quick quotes that Warren Buffett had out there on the Internet that I was able to track down and research as I was doing this piece for 5centnickel.com and I'm just going to read a few of these because like I said, I don't want to detract from what I'm doing for 5 cent nickel. But I do think some of these quotes do specifically kind of hit the youth as well as expand upon the virtues of being patient with your investments. And here's the first one. It says if you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period, many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stock prices rise. Prospective purchasers should much prefer sinking prices. And that's what Warren Buffett wrote in his 1997 chairman's letter to Shareholders goes on. Here's a quick one. The future is never clear and you pay a very high price in the stock market for a cheery consensus. Uncertainty is the friend of the buyer of long term values. Are you noticing a trend here? Next we've got the most common cause of low prices is pessimism, sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment not because we like pessimism, but because we like the prices it produces. It's optimism that is the enemy of the rational buyer. And that's from the 1990 chairman's letter to Shareholders. This stuff is great. I mean, I could do this all day long just reading these things because they're so inspiring just to read what Warren Buffet, who's been so successful is saying. Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well. And then let's see on this last page, I think I got two on this last page and then we'll jump in. I want to give you some actual numbers here because you know, a guy like me who has a background in accounting, I love the numbers side of things. Someone sitting in the shade today because someone planted a tree a long time ago. And I think that's a very telling thing if you think about that. You've got to go ahead and get to work now and plant the seeds of your success. Now if you're going to be able to enjoy the fruits and sit under that shade of that big tree that you're planting. And the bigger it's going to be is the earlier you start with it. So I think that's a great quote. And then the last one before I jump into the numbers is the stock market is designed to transfer money from the active to the patient. And I think that's very true. You see a lot of people out there. And I've got some stats that I'm going to drop in here in a minute that tie into that specifically. But I want to talk about, because this gets A big reaction when I go and speak to groups of people about how to accumulate $1 million by the time you're age 65. And I've used this in past podcasts. But the thing I always forget is that we've been doing this well over two years now. So something that just seems like it happened yesterday that I did a topic on might have been close to a year and a half ago. And I've picked up so many new listeners that you guys have never heard me discuss this. So for my old timers, y' all are probably this is just, you know, this is just common sense to you now. But I think I always have to remind myself there's a whole new group of listeners out there that need to be reminded of this. And plus, all my old timers, I think this is great information just to reference back to from time to time. But talking about how to accumulate a million dollars by age 65, because I think we all like to it's a sense of accomplishment when you can call yourself a millionaire. So that's why when we talk about how to accumulate $1 million by 65, that's the American dream of trying to have that millionaire status. So let's talk about. We're going to assume in this analysis, we're going to assume that you can get a rate of return of 10% over the long term. Now, I know saying 10% in this crazy marketplace might seem really out there, but that's not that unusual for a person that has a very long time horizon on their investment outlook. So 10% is what we're going to use, and we're going to look at this from different ages. Like if you were just one years of age, you only been on this planet for 12 months, you had 64 years until you reached age 65, and you earn that 10%. What would you have to invest or what would your parents have to invest for you to be a millionaire by the time you were 65? You would have to invest $14 a month. Now, if you were 10 years of age, you know, about 10 years of age, you're hopefully able to do some chores around the house to earn your keep. You've got 55 years before you reach 65. You only have to save $35 a month. And then this is the one. The next one that I'm going to give you is the one that kind of got me into this whole doing what I do for a living is at age 20, you have 45 years until you reach age 65. You only have to save $95 a month to be a millionaire. And why I say that touched me is that I had a high school economics teacher who was the rumor around high school back when I was there was he was like a Green Beret in the military. So he's like a special forces guy. He went on and now he was like the track coach or some type of coach at the high school. But then he also taught economics. And I never can forget what he told us, which I just thought was just amazing because this is back I was working at the Hardee's fast food restaurant, which is a burger establishment. And I was the drive through guy. You come to the drive thru, I'd be the one that take your order and then help take the cash and then provide you your order. So I worked at Hardee's for like three years during high school and learned a lot there, but also started learning the value of money and how much you bring in and so forth. I remember that economics teacher telling us that if we could save $100 a month, we would be rich someday. By the time we reached retirement, if we saved $100 a month, we'd be rich. And that hit me because I don't come from money. But I remember thinking, Hey, $100 a month, I can do that. And I was working at Hardee's at the time, so $100 seemed very realistic to me. And actually my economics teacher was actually off because I just told you at 20 years of age you only have to save $95 a month to be a millionaire. Well, I was only 17, 18 years of age when he told us that. So he was setting us up to even be more successful than he realized. So I think that's very, very powerful. If you're a young person or if you have children, grandchildren, get them saving as fast and as soon as possible because it's just going to make success that much easier. Now let's jump. We went from age one, a one year old, a 10 year old, a 20 year old. Let's jump out to age 30 because you're going to start to see how time can be your friend as well as your enemy. Because we were at $95 a month for a 20 year old to become a millionaire. Well, if you're 30 years of age, you've got to save $263 a month. You see how it went up two and a half times, 150% increase. Think about if you're a 40 year old instead of saving the $100 a month for the 20 year old, the $95 a month. Now, at age 40, you've got to save $754 a month. If you wait until you're 50 to start saving, you've got to save $2,413 a month. So you can quickly see that if you wait too long, it gets really hard because you don't have the power of compounding interest. The wind's not to your back now. You're kind of swimming upstream with everything. I have another slide that I do when I go out and do presentations. And this is the advantage of starting early. And this actually takes even a more modest interest rate rate of return. It uses 9% rate of return in this analysis. And what it does is it compares two individuals. You've got one person that starts saving right after college, like when they're 22 years of age and they save $2,000 a year. That's not that much money. That's saving a little over $160 a month to save $2,000 a year. So you've got a person who saves immediately out of college $2,000 a year for only nine years, meaning that when they reach age 31, they stop saving. They say, you know what, I'm going to go at it wide open for the first nine years out of college, but then I'm probably not going to be able to save anymore because I've got the mortgage, I've got all kinds of other things going on, but I'm going to save while I'm young because that's important. So you've got that one person that starts saving immediately and they invest $18,000 over nine years by doing two grand a year. Then you got the friend that comes out of says, you know what, I have worked hard over these last four or five years to graduate from college. I deserve to be rewarded. So I'm going to go buy myself a new car. I'm going to go load up and get myself some new clothes and do all these other things and then I'll save later. Why save now when I can do it tomorrow? It's kind of like the, you know, it's one of those things where procrastination just seems like the easy choice because, hey, we're all going to do it. So this person starts saving at age 31. They put it off that first nine years, but then they're consistent. They're very consistent. They invest $2,000 a year for the next 35 years. So they invest $70,000 they invest from the time they're 31 years of age until they're about to turn 66. So they've invested quite a bit more. You got the one friend that invested $18,000, $2,000 a year for the first nine years out of college. And you got your friend that waited nine years because they were out there living the party. But then they start saving once they reach age 31. And something very interesting happens. You have one that invests $70,000 by doing that $2,000 a year for 35 years, versus the one that did $18,000 over nine years, the one that got out and started saving immediately, even though they only saved for nine years, their portfolio will be worth $579,000 when they reach at the end of age 65. Whereas their friend that saved $70,000 by doing that $2,000 a year for the 35 years, only worth $470,000. There's a difference of $109,000. And it's benefiting the one that only invested $18,000. That is how powerful this compounding interest is. I think it is just. It is amazing. That's why you have people like Albert Einstein when they're talking about some of the most powerful things in the universe, he mentions compounding interest. It is that strong and powerful to you. You've got to think about it. I've got a few other slides. I don't want to go off track too much, but I do think it's interesting to note when we're talking about some of this uncertainty. I've got a slide here that shows the returns from January of 1950 through December of 2007. And it has how often the market is positive. And I've got different asset allocations. I'm just going to look at the most aggressive one. The most aggressive allocation that they've got in this slide is 90% stocks, no bonds, and 10% cash. Your fluctuations. The worst year with that type of portfolio, if you had s and P, 590% of your portfolio was the S&P, 510% was cash is, you could have lost 34% in one year. The best year you ever could have had is you could have made close to 56% in one year. You could have made 55.9% in the best year ever. But on average, you're going to make 12.2%. If you were looking at from January 1950 through December of 2007. But what's interesting to me is that the percentage of how often you'd be in positive territory after a year is 79% according to this handout. But you still have that chance of losing 34% in one year. But look what happens when you spread that out by three years. Meaning that instead of just looking at one year, now you're looking at the average over three years. You're looking at the return each year for a three year period of time and you're averaging it out. The worst return you could have over, you know, annual return. The worst annual return you could have over a three year period, looking at the exact same period from January 1950 to December 2007 is you would have lost 14% a year for three years in a row. If you're looking at from an average, but the best three years, you could have averaged 30.6% a year on average during the best time. And then the average for all 57 years there is, you would have made 11.2%. But it's interesting to note that we go from 79% of the time you would have made money to now 91% of the time you would have been in positive territory. Let's expand that out to five years. The worst five year period ever. The worst annual return you could have ever made from January 1950 to December 2007, taking a portfolio of 90% s and P 510% cash, is you could have lost 3% a year. Not too bad, 3%. You know, I know that's not great, but you can recover from that. The best five year period is 27.4. And on average you're going to make 11.1. But what's interesting to me is that 94% of the time you're going to be in positive territory. What this slide also shows is that if you go down and mix up and use diversification and you go down to a portfolio allocation of 60% stocks, 30% bonds and 10% cash. If you look at historically over the last 57 years, on a five year average period, you would have made money 100% of the time. No matter what five year period of time you looked at, you would have made money at some point. There wouldn't have been a negative annual average for an allocation. So that kind of shows the power of diversification as well, is mixing your money up so that you don't get beat up so bad that you can't recover when the markets do come back. These are some very, very powerful slides that show the power of being a long term investor. Don't get caught up in the performance of one year, three years, or even five years, you need to think about holding and being a patient investor and having a very long time horizon. So you're not out there trading all the time. Because I've got another research study which I know is getting older. It's 2003 Dow Barr study, and they went out and looked at from 1984 to 2002 and they found out that the average equity Investor only made 2.5%. They made 2.57%. Inflation during that period from 1984 to 2002 was actually 3.14. So the average investor didn't even keep up with inflation. Meanwhile, the S&P 500 during that exact same period of time made 12.22%. So do you see how the average investor is outsmarting themselves? Instead of buying low and selling high, we kind of just buy and sell whenever based upon what's going on with our emotions. We're trading way too often. The average holding period in this study was found to be less than two years. That's the stuff that's killing your performance. You're not showing that you have the backbone to stand up and be consistent and patient with your investment portfolio. So don't do that. Now, you don't also want to just go buy the S&P 500, even though that would be better than what most people are doing. But remember, there is risk with just buying all S&P 500. And that's why I shared with you on that previous slide that if you can do a little bit of diversification, you can still get the majority of the gain, but also lower the volatility and and hopefully not have as much drag on your emotional strain. That's kind of just some information I think you guys could find very useful on the power of compounding interest as well as being patient as well as consistent with your investment portfolio. Now, I do want to mention one more thing because I've been meaning to talk about it for the last really two or three posts that I've done on the show, my last few shows, but I run out of time every time. But I'm going to make sure I have time. Now, I had something that kind of bothered me a little bit and I want to express my concern about it because I hear this from time to time and I don't want to put a black on a whole industry because I don't believe it. I'm a big fan and I'll go ahead and tell you what I'm talking about as you guys know I'm a big advocate for making sure you have enough life insurance to protect and support your family members if something should happen to you. If you have children, if you have a mortgage and other things, there's no reason you shouldn't have term life insurance that covers approximately 10 times your earnings. That way if something happens to you, your income is going to be recovered and replaced by that insurance, that life insurance, it's going to protect your loved ones. I'm a big advocate for term life insurance. I have over $2 million on my life just to protect my family if something should happen to me. But I do run across situations which kind of just get me a little bit because there's enough good insurance people out there that it gives these bad ones that poke their heads up and you get these stories that they put a black eye on all the good ones that are out there actually trying to do good work for their clients. And I know quite a few of the good ones and they really are trying to do good work and provide the insurance and protect the needs of who's left behind. Kind of pick up the pieces and after bad things happen when we pass away or accidents and other things that can occur with disability. But I had a person call me from the community and they make a decent income. I mean it's low six figures. But they got approached and I'll tell you, they're at an age where they still probably got 20 years before they reach retirement. But they got approached by a friend. It's always a friend or a relative, it seems like that are pushing these things. It is brand new in the insurance industry. They change mid career, you know, into this field of insurance. And I just don't think maybe they don't know any better or just they're so hungry for the. For a sale that they don't think about what's appropriate, they don't think about suitability. But I had this person call me up that was practically in tears because they had been sold a whole life policy that was costing them approximately $750 a month for insurance. They told me how much insurance it was providing and it wasn't enough to cover if something should happen to them because they were using as an investment vehicle. And I'm using the quote marks in the air because I think you have to use the word investment very loosely because they told me that their problem is that they also had about $13,000 of credit card debt. And because of the credit card debt and some of the other decisions they had out there, this $750 a month they were having to put into this insurance product. They weren't able to save anything really for retirement, they weren't able to save anything for the kids college savings and they weren't able to knock down this credit card debt like they wanted to. And that stuff just irks me because truthfully, they could have gone out for just a few hundred dollars and a year, a few hundred dollars a year and bought more than enough insurance to protect them so they could focus on those other goals of knocking down the credit card debt, knocking down and doing some retirement savings as well as saving for the kids college because that's important to them. But instead they were having to put $750 a month into this whole life policy. And what she was so upset about when they contacted me is that they had been in it exactly a year, a little over a year and they got their annual report on the insurance and of course it didn't have much cash value. And that's what they had been sold on was the cash value. Because the first year cash value is going to pay commissions and other things. It's just things like this. I think insurance is a tremendous tool. But if you are ever in a situation where you've got credit card debts, you're not saving what you need to be saving for retirement, that 15 to 20% and somebody comes in and you tell them those concerns and they still come back right to that and push a permanent life insurance policy on you, get up and walk out of the room because they're not your friend. There's enough good insurance people out there that recognize the power of what they're doing and the benefits that can come from having a good risk management and life insurance plan that you don't have to deal with this product salesman and that's exactly what you've got. When a person doesn't recognize that they need to be thinking about all the other things that go into your financial life and not just the sell of that product, you need to not be in that situation. So be very skeptical when somebody pushes something on you when you're not in the perfect situation. Permanent insurance. By the way, I have recommended permanent insurance for, for a number of my clients. So I don't want to get the emails from all my insurance list, you know, clients that are insurance people saying Brian, there you are beating up on the insurance. I'm not whatsoever because I have sold, I'll tell you, just a few years ago I sold a 5 million dollar permanent. I didn't sell it. I don't sell insurance. But I referred it out to an insurance person, a five million dollar life insurance policy that was, you know, permanent, meaning that, you know, this person could not outlive this policy because the person was very, very wealthy, had a lot of ill liquid real estate and if they pass away tomorrow with the estate laws the way they are, that person would have had to have liquidated a lot of that family interest in that real estate and they didn't want to do that. So they were the perfect situation because they were very tremendously financially independent already. They could afford the large, large premium and it served their need on the estate planning. But a person who's got credit card debt that is not saving for retirement, who is not funding the kid's college education, is not a candidate for permanent whole life insurance. You're just not in that stage of your life. So be smart, think about these things. Don't get sold a product that's not good for you. I just want to, like I said, I wanted to get that off my chest because it's been bothering me because from time to time I have these horror stories that come to me and I just want to pass that on so that hopefully some of you guys out there listening can take this in. And then when that situation comes to you, you won't be tricked into a situation, but by the same token, you need to have life insurance. So make sure you go out there and research. You can find a good insurance agent that's going to take into account what your needs are and try to put together some type of product that's going to be right for you and your family. But just be careful because sometimes I think the commissions can jade some of these guys where they don't make the best decision or maybe they're just trying to, they're new to the industry and they're just trying to knock down those sales so that they can keep their job and pay the bills. Who knows? But be careful out there. And that's what I'm here to do, is try to give you the right tools to make the right decisions. So hope you'll join me next week. Until then, I'm your host, Bryan Preston. For the Money Guy Show. Check us out on the Internet. You can go to moneyguy.net and hopefully very soon we're going to be able to go to moneyguy.com since we acquired that domain name. You can also write the show at Brian B R I a n@moneyguy.net and I'd love to hear your comments, but thanks so much and we'll talk in about a week.
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This is Brian the Money Guy podcast is hosted by Brian Preston, and Brian Preston is a partner with Preston and Cleveland Wealth Management. Preston and Cleveland Wealth Management is a registered investment advisory firm regulated by the securities and Exchange Commission. In accordance and compliance with securities laws and regulations, Preston and Cleveland Wealth Management does not render or offer to render personalized investment or tax advice through the MoneyGuy podcast. The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.