Managing Financial Risk

Today, we're gonna be discussing financial risk, especially during a downturn. Hello, welcome to Money Talks. My name is Ken Wink from Summit Financial Consulting. If you'd like more info about what you hear during the show today, give us a call, 586-226-2100. Or you can visit us on the web, summitfc.net. And if you go to that website, be sure to check out the podcast page. You can look at old shows, listen to old shows. You can subscribe on Apple Podcasts, Spotify, or Amazon Music. So be sure to check it out. So when it comes to building wealth, risk is something that we have to deal with, folks. And I would say it's something that you have to put up with if you really want a fighting chance of beating inflation. So you could argue that if you don't have any risk, you know, you're ultimately taking on risk because you're risking inflation, you're risking you're not going to get to your mark to be able to retire on time. And you risk maybe at the end of your life running out of money a little bit too early. So unless you've got tens of millions of dollars or lots of money compared to your expenses, there's a good chance you got to take some risk on at some point. So we're just going to break down a few key considerations and maybe questions that you should have answered as you get ready to approach retirement. But before we jump into that, I want to introduce my co-host, Tony Shore. Tony, have you done anything risky lately? My wife made fish tacos three days ago, and I'm thinking about having them for lunch, but I'm not sure if it's worth the risk. I don't want to miss any work at this point due to food poisoning or botulism. I don't know what you get from it.

Okay. First of all, Ken, warning. Yeah. It's like fish at work for lunch. Yeah. Nope. If you, if you, would you heat them up? You can't heat up fish in the microwave. That's a no-no. So that's, you know, here's what's happening. Yeah, if you try to, that's what will happen if you, no one at work will like you if you have fish for lunch, typically.

That is an office no-no, isn't it?

Yeah, well, it depends on the fish. I mean, you know, frozen type fish planks that are breaded, you know, sometimes those are made to microwave, but still it will linger. Yeah, that's a no-go. Grab a slice of pizza somewhere. Do not eat four-day-old fish tacos. I'm sure your wife's a wonderful cook, but I think you're pushing it on the age of the fish and eating fish at work in general, right? Yeah, that's good advice, Tony. I didn't even think about the office, but you're right. You were worried about getting sick. I'm worried about your health there in the office. I don't know. My popularity is at risk.

It's already on thin ice.

Well, I did recently meet with your brother, Jim, who also works there, a financial guru. Jim Wink, great guy. Really enjoyed getting to know him. I really hadn't met your brother before and got to spend some time with him. He is great. And I said, you know, growing up with Ken Wink, what must have that been like? Torture. Yeah.

He shows the scars, you know, emotional and physical of the Wink Boys growing up. For sure.

Yeah. Yeah. I took one look at him and I'm like, I don't have to ask you which one of you get the looks and which got the. I don't think after talking with you and Ken, I think we've got that. Yeah. Handsome Jim. I'm just no match.

It's.

He's the eye candy around the office, I guess. Handsome Jim, they call him. That's funny. I'm afraid so. No, that's great. Well, hey, the topic today, let's jump right into it. We're talking about managing financial risk. And I think that's a big one, isn't it?

Yeah, especially this year, because as most people remember, back in April, we had a little bit of a flare up in volatility. Stock market took a pretty big drop, just about 20% from some tariff related headlines. And I can't tell you, Tony, how many clients have reached out to me. Well, Our clients were OK because we were communicating with them constantly. But we had a lot of people, even in the last month, I had somebody come in and say, you know, I moved to cash in April because I was nervous. And now they've missed out on this, depending upon what you're invested in, 10, 20, 30 percent rally since then. So. You know, managing risk, managing your risk tolerance, despite what's going on on TV, despite what's going on with politics, you can really shoot yourself in the foot. So that's that's one of the first conversation pieces we have with people is what? What's your risk tolerance? What is your emotional comfort level when it comes to these market fluctuations? If the market is dipping, can you stay calm? You gotta have a long-term plan in place. Stuff's gonna happen. And we get people all the time. There was a ton of people that during the Biden administration, they just didn't want to have anything to do with the stock market because they didn't trust him. And now there's tons of people during the Trump administration that want to have nothing to do with the market because they don't trust him. And I would argue both sides are shooting themselves in the foot because the markets performed spectacularly over the past few years. And that covers both presidents. So having a game plan, sticking to it, not letting your emotions get the best of you. But for this point anyways, just determining what can I handle? What is the right amount of risk for me? What's the right amount of stock exposure? And maybe should we have an investment that has some downside protection or some hedging or a exit strategy? We're really, really big on having an exit strategy. We're really, really big on having people complete a risk tolerance questionnaire just to see what they can handle for No one has any problems with all the good times, but when the bad times come, we want to make sure we don't lose our minds and do something that could really hurt our long-term plan.

Well, right. And you make a great point. I'm sure, though, some of our listeners and viewers are like, well, why are they talking about this? The market's been great. We've had record highs this year and we had some good highs last year as well. So the last few years have been great. But 2022, the stock market was way down and bonds, which are typically considered safe, were way down. So I think it is an important discussion because you do have volatility. There's always going to be market volatility, like what happened in April. That will happen again. What goes up must come down. The market will drop by 20, 25% again at some point, right? Absolutely. When it does, you need to know how to handle it and how much of that can you handle. Should all your money be in the market? Should some of it be, like you said, in principle protected options? I think it depends on a lot of factors, doesn't it? And that's what we're talking about today.

Yeah, and I think part of it is just each person's capacity for risk, too. Sure, you mentioned risk, tolerance, right? Yeah, so there's sort of tolerance, and then there's capacity. Your brother talked about tolerance, Ken tolerance. We're talking about it. How much Ken can you deal with one day? Tony's Tony's only stuck for one hour per day. Thank goodness. Once a week.

No, everyone loves Ken. So at any rate, we're talking about actual risk tolerance with your, with your savings and your retirement funds and your investments. So I didn't mean to rudely interrupt you. So it starts with, it starts with your own personal risk tolerance. I couldn't resist though. I can't wait for my brother to listen to the show. Um,

So yeah, risk capacity is basically looking at your situation, like the fundamentals of your situation. What is your time horizon until retirement, or, or if you're already retired, you know, what's your life expectancy as it relates to goals that you have? How much money do you have? What's your income that's coming in? Are you depending upon your investments to be able to pay all of your bills, or are they covered through Social Security and pensions, and the investments are just sort of a and add on for vacations and gifting and Christmas and that kind of stuff. So you got to look at your risk tolerance and you got to look at your risk capacity. And one one is the market and then one is just the fundamentals of your situation. And just make sure that all that stuff lines up. We've got to have heart and emotion, but also some math and using your resources just to make sure that you've got a very sound strategy in place.

Yeah, but the reason for all this and finding out your risk tolerance is so that you can sleep well at night and you don't end up making emotional decisions. Some people panic when the market drops 10%. They want to sell everything and get out. or 20 percent or whatever it is that it drops when it has a big drop, a correction like at 10 or 20 percent or bigger than just a normal correction like we've seen, you know, in 2022, you know, we can see 40 percent drops or worse to 2008. Right. The financial crisis. So, you know, and we hope we're not going to hit an AI bubble here or a banking bubble. You know, people are you know, the media is full of fear. This is going to happen. This is going to happen. Uh, but they're just, they're always saying the sky is falling. It might not be falling, but when it does, it's usually not for that long of a time period and people end up panicking. So that's where risk tolerance comes in. So, um, yeah, it's, people are better off if they stay put, but maybe you're in retirement and you need that money. So having all your eggs at risk or in one basket, not a good idea the way it sounds.

Right, yeah, I can't overemphasize enough how nice it can be to have a financial advisor. So we would give each of our clients a risk tolerance questionnaire to see what they can stomach. We'll create a full financial plan that looks at what's your income, what's your expenses, what do you wanna spend on vacations, what do your outcomes look like? If you're someone where I sit you down and say, look, there's only a 60% chance your money's gonna go the distance, maybe they can't invest as aggressively because if things do go south, that could really harm them. On the flip side, we meet with clients all the time that have a 100% chance of success, so it doesn't even really matter what happens to the stock market based on past performance, can't predict future performance, of course, but if we run a thousand scenarios, taking into consideration the last 100 years of stock market data, which includes plenty of difficult situations for the stock market over the last 100 years, there's a really good chance that it doesn't almost matter how they invest. So maybe they go for it. Maybe they play it safe. Those are the kinds of conversations that we're going to have. But what I can tell you is that if you are misaligned and you are consistently selling low and buying high, because that's what human emotions tell us to do, right? They say, when things are going good, gosh, I want to buy more of this. I'm making so much money. And that's when people are greedy. That's when you should actually, in some cases, be selling.

They're buying NVIDIA at the top. Right. And then they're selling it when it drops. And so they're losing a lot of money. Yeah. That's 90% of individual investors who do investing end up buying high and selling low.

It's really tempting. It's like your brain is hardwired.

I think it's 85%, 90% of people end up doing that.

I'll get Jim on that exact stat for us. Oh, yeah.

Brother Jim's good for that. Yeah.

All right. All right. Perfect Jimmy. I like that.

No, handsome Jim. That's it. Handsome Jim. Perfect Jimmy. Handsome Jim. He has a lot of nicknames there. Yeah, he's on the case. Yeah. That's awesome. Don't sweat it. I'll tell you, if you've met Jim, you'd feel confident. He just exudes confidence. Great guy. No. So so you have to I think the solution, though, to all this is work with a trusted financial professional like you and your and Jim and the team there at Summit, because that's what you do. You help people. You provide that you level out your level out. You're not going to be emotional about it. You're going to look at the big picture and say, OK, no, here's your plan. Here's where we're going. Here's how you should be allocated so you can sleep well at night, even when there's a market correction or a downturn.

Yeah, that's usually why we use the bucket plan. So we normally set aside some money, typically five, sometimes even 10 years worth of income into something safe so that if the market goes up or down, well, I don't need to touch this money for 10 years anyway, so I'm just gonna let it do what it's gonna do. And that can potentially bring a tremendous amount of financial peace.

Sure. You want the growth and you want compounding interest. You're not telling people to get money out of the market per se. You need that money in the market, but what is your tolerance? And if you're in retirement, where's your income coming from? You don't want to constantly be pulling out of the market because then you'll end up pulling out when it's down. If it's as a down year, you don't want to pull out that year. That's why that's for long term. And the shorter term is in safer money options that still have some growth. There are. And the great news is there are options for that. Right. I mean, yeah, there's. At least try to keep up with inflation. You want at least to earn that interest even on your shorter term money, right? Right. Yeah.

Whether that money is set in the bank or a money market, we don't want too much in the bank. Like you were saying, we're not going to beat inflation in the bank in most cases, but, um, Yeah, you want to have a pool of money that has just some safety. So you really can sleep at night knowing that when the market drops, you don't have anything to worry about. There's so many different kinds of risk. One description of short-term risk is shallow risk. So that's just like the everyday ups and downs of the market. So if somebody feels uncomfortable with those, We really gotta look for some investments that have good downside protection and our goal for every client, financially speaking, is to sleep well at night. So again, meeting with an advisor, getting an idea of what exactly makes you feel warm and fuzzy.

I mean, there are a lot of shorter term options where your principal can be protected or you get protected from most of the downside and get to participate in some of the upside. I think that's, you know, buffered index portfolios. There are a number of options and it depends on your situation which option is right for you, right? I mean, everything from bank CDs to MIGAs to buffered index portfolios, fixed indexed Products where you can have your money and your principles protected. You participate in the upside and, you know, you have money that you know will be there each month in retirement. That's really key, isn't it?

Yeah. And I don't want to get into specific product ideas, but just theoretically speaking, let's just say like an example of a buffered index product might be that if the stock market goes down, the company that we're working with would eat the first 30% of losses. But then if the stock market goes up, you can make up to 27%. So over a two-year period.

So And they're constantly, you know, the good news about these products is it's gotten competitive. So usually you can find some pretty good deals on those products and things like that. But it depends on the situation. I know you guys work really hard to do whatever is in your client's best interest and is going to fit their needs long term. Right.

Yeah.

Yeah. Yeah.

As a independent fiduciary, we shot these things out with at least 20 different banks and Wall Street firms. So we we aim we work hard, Tony, to find the best of the best that's out there. So whatever a person's goals are, whether they're getting ready for retirement, already retired, we'll we'll find the right I believe we'll find the perfect mix for what you're looking for.

Yeah. You've been doing it a long you've been doing it a long time there.

Yeah. Yeah. Twenty four years now.

Yeah. But regardless of whether someone works with you and your team at Summit or another trusted financial professional who's a fiduciary, that's important. You need to be working with somebody, especially as you get closer to retirement or are in retirement, correct?

That's our number one call is somebody who, you know, I've been doing it on my own for the last 40 years. I don't want to try to manage this hectic market during retirement. So that's when they come in and we're happy to help. And the number one thing that I see with people when they're sitting down with us, when they've been doing it on their own is actually another risk. And that's concentration risk. I will see way too much exposure to either one stock or Or one sector or one asset class, whether that's by design or accidental, if the market tanks and that little area that they're invested in happens to tank hard, it can really magnify losses. Just really hurt the financial plan. So, you know, they don't usually have the tools.

Yeah. They don't have the tools. So what's the, what's an example of that? Like having, what have you seen? Like somebody, when you say too much concentration, what are you looking at?

Yeah. So I've seen people that have maybe five different mutual funds or ETS or stocks even, and then we'll do a independent research x-ray report on it to see, okay, you got five different funds, uh, But what are those funds actually investing in? So then we'll look and it's like, Oh, you got the same stock. Yeah. You got, you got 50% of your money in the same seven stocks, even though you got different investments on paper, you know, behind the scenes, they're all investing in the exact same thing or the exact same sector, or at least over, not a lot of true diversity, but even I've even heard worse where people will have, you know, we've, I've mentioned this on the show.

I talked to, An advisor, and they said a lady came in and had $700,000. I don't know if it was you or somebody, other financial person I was talking to. A lady came in, she had $700,000 in a checking account. And that was her retirement. All her entire retirement savings was in a checking account. Yeah. Boy, oh boy. Oh, and well, and that's at risk. If the, if the bank ever failed, only 250,000 is insured and, and she's not keeping up with inflation by doing that. So she's losing money. Um, or, I've seen people where their dad worked for a company, they work for a company or their mom worked for, they've worked for companies, uh, and that company, they're loyal to that company and they have profit sharing. So all their money and, and is tied up into that company stock, right? Like 80% of their retirement savings is in one stock. Have you seen that? Oh, yeah. Yeah.

Yeah. I've got a client that worked for a company that does restoration after fires and floods. Yeah. And to their credit, the stock had just been on an absolute tear for like eight years in a row. Didn't matter what was going on with the economy. The company just seemed to do phenomenal. And now the last two years, it's just been losing money when the stock market's going up. So it was not a, you know, necessarily correlated to the overall stock market, but yeah, they had 70% of their net worth in that one stock. So they reached out to me a couple of weeks ago saying like, where should we take our money from, you know, for some extra income during retirement? I was like, well, We got a lot of money in that one stock and it's it's not doing so hot. So why don't we go ahead and start pulling from that? Yeah. So, yeah, that that concentration, it's a double edged sword. You know, I mean, it could work out great, but.

But you can't know in time the market when you actually need that money. Is it going to be down? Like you said, if it's currently way down, then you're taking money out at a loss and it's going to deplete it a lot sooner. That's why you diversify. I mean, otherwise you'd just. Put all your money in the Magnificent Seven and call it good, but you can't do that.

Yeah. That's very, very risky. It can work. It can work for a while. That's for sure. But eventually, yeah.

I mean, if you're 30 years, 30 years of your retirement and for eight, eight of those years, it works great. And then, and then five of those years, I mean, if you have one year where it's down 20% and you're pulling money out, um, You're going to lose all those great gains pretty quickly.

It can it can. The math doesn't look great when that happens.

No, no. Well, hey, we should wrap it up. But before we go, let our listeners know how they can get a hold of you. Yeah. Give us a call.

Five, eight, six, two, two, six, two, one, zero, zero. Or you can go to our website, summitfc.net. We would be happy to discuss your specific situation, where you've got money allocated right now, and how we can potentially work around all these risks that we discussed today.

Sounds great. Thank you, Ken. Listeners and viewers, thanks for tuning in. That does it for today's episode of Money Talks with our host, Jim's brother. Thank you for joining us for Money Talks. Don't head into retirement without a strategy that addresses both income and taxes. For more information, please contact Ken Wink at Summit Financial, working with people you trust. Call 586-226-2100 or visit summitfc.net. Join us again soon for another episode of Money Talks.