Understanding Investment Risk, Reward, and Time

Shawn (00:00): Do you know where your investments fall on the risk scale and more importantly, why it matters? From ultra conservative to aggressive growth, understanding the relationship between risk, reward, and time can make the difference between investment success and failure. We’ll break down the essential principles that every investor needs to know. Let’s get some perspective. Matthew (00:29): Hi, welcome to Christian Financial Perspectives. My name is Matthew Barrovecchio, and I’m here with founder of Christian Financial Advisors®, Bob Barber. And we’re going to cover a very foundational topic today, Bob. Bob (00:47): We are, but it took me, I think I’ve been working on this one, the subject today for probably a couple months where sometimes Matthew, I’ll work on a topic that we cover, it can come out in 15 minutes, but this one is a very difficult one to talk about, and as you were looking at it before, definitely the “glazed, deer in the headlights” look can happen here. Matthew (01:17): Absolutely. Bob (01:18): But I think it’s important that anyone that’s hearing this, especially if they’re trying to do investing on their own, listens because they don’t understand truly what we’re going to be talking about. Most people don’t, and when they try to go do things on their own, I see that. Matthew (01:38): Yeah. Yeah. It can be, I’ll use the word “dangerous”. Bob (01:42): Yeah, yeah. It can be dangerous. That’s a very good word. Matthew (01:46): Yeah. Wonderful. So the title is “Understanding Investment Risk, Reward and Time”. Bob (01:53): Time, yeah. Hey, that reminds me of, was that Jeopardy? Matthew (01:58): It wasn’t, but it could be. It could be, Bob (02:02): Yeah. Matthew (02:03): Alright, scripture Ecclesiastes 11:2. Bob (02:06): It talks about giving your portions to seven or eight in Solomon’s warning of this, one of the richest men that ever lived in the world, if not the wealthiest, spread out your risk, “Give your portions of seven or eight because you do not know what disaster may come upon the land.” Matthew (02:23): And so what’s the investment principle here? Bob (02:26): It’s diversification. Matthew (02:27): Bingo. Bob (02:27): Like my grandma used to say, don’t put all your eggs in one basket. Matthew (02:33): That’s right. Yep. All right, so let’s take a look at this. I think the topic we’re going to talk about primarily to start is risk. And you frame this as a scale of zero, which is zero being the lowest risk and a hundred being the highest risk. Bob (02:48): And you could think of it like driving from zero miles per hour all the way up to a hundred miles per hour. And you know that the faster, if you get up to a hundred miles an hour, it’s dangerous. Matthew (03:01): Yikes. Bob (03:01): Yeah. Yeah. I mean, if you have a wreck at that point, it could be fatal. Driving 50 or 60, it can be one of the safest ranges. As you know though too, if you drive 15 or 20, somebody’s going to hit you from behind most likely. Matthew (03:17): There’s risk there as well. You could run out of gas. You don’t get there in time. Bob (03:22): That’s a great way to say it. Run out of gas, you could deplete your portfolio. All of this, these risk scales really run from zero to a hundred. And when you are looking at portfolios to diversify in and put your money in, I’m the portfolio manager here, and I put together these portfolios based on modern portfolio theory, and I put together these five portfolios and all of them come under a risk number. I explain this to our clients all the time so they understand where they fall in the risk scale, which is important and they like hearing it, but they also like to say afterwards, I’m sure glad you’re managing this for me. Matthew (04:07): Yes, sir. Yep. Before we get to those five, the first one is this range of zero to 20. This is more of your what we call cash, cash equivalents, real short time horizon. So tell us more about that. Bob (04:20): Money market accounts, you don’t have any volatility there. It’s just very low returns, but also there’s no volatility at all except you’ve got the risk. You’ve got a risk, don’t you? You’ve got a risk of not keeping up with inflation. For as long as I’ve been doing this, I remember a guy saying years ago, years and years ago, he says, “I call that going broke safely,” because of what inflation is deteriorating the purchasing power when all of your money is in that cash. But that’s good for emergencies. You want a good six to nine months of cash reserves. Matthew (05:07): Potentially. Yeah. So having that’s great. So having enough in there to serve the purpose of the goal of the emergencies. But the key there, and I feel like many people tend to fall into this category unintentionally, you have too much, probably have more than they need in there, and that’s where you need to reallocate potentially. Bob (05:31): But on the opposite end of that, the very opposite end of 80 to a hundred on the risk scale is your aggressive growth, and they could have too much there, too. Matthew (05:39): Absolutely. Bob (05:40): If they really don’t understand the risk behind it, the time that’s required there. So we got these five portfolios. I’m going to mention ’em real quick. Matthew (05:50): Let’s do it. Bob (05:51): Ultra conservative, zero in stocks, conservative, moderate or balanced – that’s where most people fit – growth and aggressive growth. That’s the five portfolios that we put together here along with a complete separate other one that we call real estate only. It’s just a real estate portfolio. Okay. Okay. Matthew (06:10): So let’s start with the ultra conservative. Tell us more about that. Bob (06:14): I put this on a risk score out of that 100 of 25 to 35, and the returns of an ultra conservative are just going to be a little bit better than what you would get in that cash. You have a little bit of volatility and you need to expect – look at a one to three year time horizon because the more you go up on the risk, the more time that you’ve got to allow it to do its thing. Matthew (06:40): Sure. Okay. The way that we look at this though is the ultra conservative portfolio, is that 0% equities, 100% bonds. Is that correct? Bob (06:49): Yeah, fixed income bonds, it can have cash in it, too. And it depends on where the interest rate movement is. When interest rates were rising up so much a few years ago, we had a lot of cash, but we had a lot of floating rate in there as it floated up, as the rates went up. But it has zero stocks, none at all. Use this over time. If they’re going to go on that vacation in two years, this is a great place to put that. A little bit more risk than just cash in the bank. But it’s a great place. And all these are 100% liquid. Every one of these portfolios, 100% liquid, because we’re a fee-based advisor. So there’s no sales charges in or out of these. Matthew (07:28): So likely not for someone who is saving for something 20 years from now, but for two years or something like. Right. Bob (07:34): Yeah. Right. Perfect. Matthew (07:35): Okay. Alright. The next one is conservative. Bob (07:38): And this is where we step up a little bit. We’ve got a risk score here. Think of it again like you’re driving Matthew (07:43): Speed limit. Bob (07:43): 36 to about 44 miles an hour. So you’re getting a little bit more risky. You’re getting some more volatility. Matthew (07:50): You’re in the neighborhood. There’s speed bumps, there’s beware of children crossing…but not on the highway. Bob (07:57): And this can have up to a 20% stock exposure in it. But that stock exposure is more in the large mega cap companies, more of your established companies where an aggressive growth will have more smaller companies and more aggressive companies. This is a typical time horizon of three to six years. So you’ve got to give it that time because it’s going to have more volatility. Every one of these we were talking about, you get more and more and more volatility, right? Matthew (08:28): So it’s the risk and reward, the higher the risk, the higher the potential reward and vice versa. Bob (08:34): Yeah. We want to say that potential, potential reward, correct. Because there’s no guarantees. Matthew (08:37): Absolutely. Yeah. Yep. Okay. Now middle of the road. Bob (08:42): Middle road is by far the number one for retirees. Matthew (08:46): Portfolio for retirees generally. Bob (08:48): And I look at what we manage on a bell curve and our moderate, our balanced portfolios are really it’s way up here. That’s the majority of what we manage. And then we taper off on the side, ultra conservative on the side of aggressive, (09:05): But moderate is where a lot of people feel comfortable. In a perfect world, it’s going to be a 50/50. You’re going to have 50% in stocks, 50% in fixed income bonds and cash equivalents. That’s going to be overweighted or underweighted depending on where the economy’s going or where we feel it’s going. And that’s going to be based on hard data. Makes sense? Matthew (09:30): Yep. Makes perfect sense. Bob (09:31): And so like I say, about 45 to 65, I like to drive about 60 to 65 when I get up around 75. And here in Texas, down in south Texas where I drive the speed limits can get 75 and 80 miles an hour. I get where I don’t feel comfortable at that. It just feels too fast. Matthew (09:50): Yeah. Yep. Yeah. And so I’ll pause for a moment because an underlying theme, especially for conservative and moderate, and as we continue with the remaining two is when you look under the hood, we’re not going to go into details on this now, but when you look under the hood, you mentioned mega large cap, there’s going to be medium sized companies, there’s going to be small companies, there’s going to be companies in all different sectors. Bob (10:15): All of these portfolios… Matthew (10:16): Coming back, coming back to Ecclesiastes 11:2, the diversification puzzle, so to say, is not just this macro stocks versus bonds that we’re talking about, but the reality is there’s several sub components to it that really matter. Bob (10:30): Very much matter. And there’s 11 sectors, and I like to see that you’re diversified across all 11 sectors and all of these portfolios when it comes to stocks and the different sectors for bonds, which is short term, midterm, long-term, high quality, low quality, whether we call high yield. So all that plays into this, and this stuff just swims in my head every day, and I’ve been doing it for so long. I understand portfolio theory, as you would say. Matthew (11:01): Perfect. Bob (11:02): So now we get into our last two. Matthew (11:04): So we’ve got our growth and aggressive growth is what we call ’em. Bob (11:08): And time horizon, you better really, in my opinion and what I’ve seen over the years, this is a 10 year time horizon or more. Matthew (11:16): For which one? Bob (11:17): For both of them. For growth and aggressive growth. Aggressive growth could even be longer. 12, 13 years because the volatility is like a rollercoaster ride Matthew (11:25): Can be. Bob (11:26): And the growth portfolio, it’s never 100% invested in stocks. It could be up to 80%. And we try to keep it at that with 20% in fixed income. But then the aggressive growth and the aggressive growth you’re getting all the way in. I mean, you’re 98-100%, and you better have a stomach for it. You better understand that there’s a lot of volatility that’s going to happen there. Matthew (11:49): Yeah. So what did we speak about earlier? We spoke about speed limit going too fast. You go a hundred miles an hour, yikes, y’all might wreck. But then there’s risk on the other side of going too slow. You might run out of time, you might not make it there in time, might run out of gas. So in my experience, what I have seen is if individuals put themselves in a position to where they are taking on more risk than they should be, then ultimately when things don’t go well in the markets, they react… Bob (12:25): They get emotional Matthew (12:26): And they don’t react back to where they should be. They react beyond what they should be. So they try to correct a bad decision by making another bad decision. So this could look like someone who growth or aggressive growth is way too risky for them. And instead of going back to where they should be, they go all the way to ultra conservative, which is not where they should be at. Bob (12:50): They go from one extreme to another. Matthew (12:51): Bingo. Exactly. Bob (12:53): Matthew, tell people how long you’ve been doing this now. Matthew (12:55): Yeah. So, I’ve been in the financial services industry for 20 years and in this role as an advisor for eight years or so, and living through 2008, 2020, and 2022, some not so great years and some great years. And so I’ve seen it. Bob (13:13): You’ve seen this. Matthew (13:13): I’ve seen it all. And I’ve seen some great situations and some not so great situations where individuals have reacted. And a lot of times people need our help to protect them against themselves. Bob (13:28): They do. And emotions have no play in it. Now we’re going to do a program in a couple of weeks. We’re going to talk about how you can use your emotions to actually invest, but that’s actually going against them. So when everybody’s buying, you’re selling. And when everybody’s selling, you’re buying. Matthew (13:41): Oh, interesting. Bob (13:41): That’s what Warren Buffet does. Matthew (13:43): I look forward to that. Bob (13:45): Yeah. So there’s really a conclusion to all this is that it’s hard to do on your own. And I’ve met many that have tried to do it on their own. And when I start talking about all the different portfolios and the risk and reward, they really don’t – you can see the glaze, the glaze gets in the eyes and understanding investment, risk, reward, and time, and understanding the difference also between an investor and a trader. The media is so good about calling an investor. I mean, they call a trader an investor, and it’s not true. Investors think in the long run, and I wanted to just go to some of these people writing this, go, “What are you doing? You’re doing a disservice,” because investors are not going to be concerned about the day to day movement. Matthew (14:39): Correct. Right. They’re not going to allow fear and emotions to drive the decisioning, which is why a foundation to all of this, and a lot of what we do, everything we do is taking things from a biblical worldview, not a view that is of this world, especially American culture. Bob (14:58): And when you get out there and you try to start day trading, you’re in a different league. And those that do it and are successful at it, they have full research teams behind them. And I always like to use the analogy, if I got out there and tried to play – I’m Texan – so if I tried to play with the Houston Texans, I’d get hurt bad. Matthew (15:17): Sure, me too. Bob (15:20): I’m not going to get out there with those big football players. And when somebody tries to do day trading, they try to get out there with the true pros and they have the technology. They may be successful at it for a time, but I never have met any personally that have been successful at it over a long period of time. Matthew (15:40): If you’re going to take on a side hustle, that’s not the one, right? Bob (15:43): Yeah. That’s correct. Matthew (15:45): So it’s great. Hey, a good investor never allows emotions day-to-day news to drive their decisioning. And we can help, Christian Financial Advisors® can guide you through the maze that is the risk reward, trade off, and help you create a well thought out portfolio. So give us a call by reaching our office. So you can text us at 830-609-6986. Or you can go to our website, www.christianfa.com, and click a button to schedule an appointment. Bob (16:17): Thanks. You did great with helping bring this complicated subject. Matthew (16:21): Well, teamwork. Bob (16:22): Teamwork. There you go. Matthew (16:23): You, me, and the Lord. (16:25): Praise God. All right. God bless y’all. Have a great day. [DISCLOSURES] * Investment advisory services offered through Christian Investment Advisors Inc dba Christian Financial Advisors®, a registered investment advisor registered with the SEC. Registration as an investment advisor does not imply a certain level of skill or training. Comments from today’s show are for informational purposes only and not to be considered investment advice or recommendations to buy or sell any company that may have been mentioned or discussed. The opinions expressed are solely those of the hosts, Bob Barber and Shawn Peters, and their guests. Bob and Shawn do not provide tax advice and encourage you to seek guidance from a tax professional. While Christian Financial Advisors® believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability.