Protecting Your IRA/401(k): “Know who you are as an investor.” An interview with Brandon Steele, CFP®

This week I had the pleasure to interview Brandon Steele, CFP®, a financial advisor and co-founder with Mainsail Financial Group in Bellevue, WA. Brandon believes in an educational approach to helping his clients feel more confident in all aspects of their financial planning. He and his team focus on helping families in many aspects including […]

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This week I had the pleasure to interview Brandon Steele, CFP®, a financial advisor and co-founder with Mainsail Financial Group in Bellevue, WA. Brandon believes in an educational approach to helping his clients feel more confident in all aspects of their financial planning. He and his team focus on helping families in many aspects including wealth management, tax planning, estate planning, and more.

In your view, what’s the best defense against volatility and market shocks? 

The best defense against volatility starts with proper diversification and asset allocation. Often these terms are mixed up. For simplicity’s sake, generally, diversification describes the concept of spreading money across different investments. Asset allocation describes the specific percentage allocated to each of those assets. Knowing who you are as an investor is a key starting point to allow you to diversify and allocate properly given your goals and comfort level.  

From there, the best defense comes in small tweaks over time to manage the risk prevalent at different times in a market cycle. Risk changes as the economic landscape shifts, so a simple set it and forget it strategy may not manage risk very effectively. At this time, in Spring of 2021, we have seen interest rates rise significantly in a short period of time. When this happens bond prices fall, and those who were not managing risk in their portfolios may have seen their “safer” investments (the bonds) decrease in value.

The Fed has been pumping trillions into the economy. Should the average investor worry about the long-term effects of this on their IRA or 401k?

The impacts of the trillions of dollars injected into the economy most certainly will have some impacts. In the short run, it may mean an injection of growth or a band aid to keep the markets roaring, but longer term there may be some other considerations to be aware of. Of course, only time will tell the exact implications as we have never been in a situation where nearly ¼ of the U.S. dollars in circulation were brought into the economy in one year. However, looking to history there are a few trends that may be very likely to occur ahead.

The first is the most clear, and one we have already started to see. When the Fed stops buying assets and raises interest rates, this will have an impact to 401(k) and IRA investors who have bonds in their portfolios. When interest rates rise, bond prices fall. Most folks closer to retirement and in retirement rely on their bonds as the “safer” portion of their portfolio, and as we have seen recently, a change in interest rates may dictate otherwise. Managing risk within your bond portfolio may help to minimize this impact, but interest rates are certainly something to watch in the months and years ahead.

Second, it is very likely we see higher inflation to come. Although the measures of inflation we see reported may not show we are experiencing inflation at this time, pay attention to the cost of lumber or commodity prices. They have skyrocketed recently, which is a sign of inflation. As this money works its way through the system and we start spending more normally as the economy opens back up, it is likely we see inflation pick up as well.

Third, there are concerns about the impact of the rising national debt levels. As it would happen, interest rates are historically low right now, so for the time being, this may not be an immediate concern. The reason the debt levels may not be an immediate issue with low rates is that the cost to service that debt is lower, just like paying off a low-interest mortgage or car payment. However, as interest rates rise, it is clear this may become a bigger issue.

Are roboadvisors sufficient for developing a sound retirement investment strategy, or would you always recommend hiring a personal financial advisor?

I think roboadvisors may be good starting point for younger investors, but this year showed the challenges that lie within these programs. Although the costs may be less on the surface, there may be other hidden costs involved for these services, and it is critical to understand the ins and outs. The idea of a roboadvisor is a great concept, and may work well for those that can handle more risk or who are not looking for advice in other areas outside of just allocation strategies. However, for someone who has built significant wealth, I would suggest this may not be the best route. A personal advisor should be helping to manage risk in your portfolios and tailor strategies to your needs specifically, whereas a roboadvisor by nature is providing blanket advice to everyone. Generally a personal advisor may also provide advice in other areas such as tax planning, estate planning and more.

What’s the ideal balance between concentration and diversification in a portfolio?

Diversification is extremely important, but often this concept can be taken so far that you don’t actually experience growth. Many retirees understand the risk in having too many eggs in one basket or having too much concentration in one particular stock. However, if you were to take the concept of diversification to the extreme, it’s possible you could create a portfolio with little to no growth because the different assets may be moving in different directions all the time. This would defeat the purpose of investing, and although you may be diversified, you certainly wouldn’t be too excited with the results. It’s important to have diversification as you build your portfolio, but be cautious in looking for assets that are always meant to zig when others zag or adding so many different positions that it ends up slowing down your opportunities.

A good example we often see on concentration comes from those meaning well in diversification as well. Many of the broad index funds now have a huge allocation to only a few stocks when you break them apart. Because these stocks have grown so large, the index has a larger percentage to these as compared to other holdings. Many times those who are hoping to diversify with an S&P 500 fund may not realize that a huge majority of their assets are primarily in a few big names. We often see these investors contributing to multiple funds that actually all mirror one another. This is where thoughtful diversification can come into play.

What place do alternative assets such as cryptocurrencies, precious metals, and real estate have in an IRA or 401(k)?

Alternative assets are not tied directly to stock market volatility and generally are not correlated to market returns directly allowing for great diversification. However, alternatives typically are not very liquid. If you own real estate, you may not be able to pull off a piece of the roof and sell it for short term cash. A great way to think of alternatives is similar to running a retail business. If you opened a storefront selling winter coats, the busy season would likely be the fall and winter months. Now, if you start selling swimsuits, your busy season for these goods will land in spring and summer. But, what if you also decide to sell toothbrushes?

The season most likely will not have a direct impact on your sales. If you think of stocks and bonds as coats and swimsuits, you can see that generally these goods sell at different times. When sales of coats are up, swimsuit sales are down. This actually means they have a negative correlation to one another – they move in opposite directions. Alternatives can act as the toothbrush in your investment portfolio. This doesn’t mean these assets are always up, but the toothbrush sales are not directly impacted by coat or swimsuit sales – meaning they do not correlate, allowing for more diversification.

Can you describe your overall investment philosophy? Is there a particular mindset or rule of thumb that risk-conscious retirement investors should adhere to?

We typically approach investing by starting with a long term allocation and strategy based on our clients objectives, but it is critical to understand the different risks prevalent at different times in a market cycle. When establishing and reviewing your portfolio, you should start with the long term game plan to win the war, retirement. However, battles occur every quarter, every year, every day, and often times any given battle may cost you the entire war. So, by making slight adjustments to your portfolio over time to win these battles you can set yourself up in a better position to achieve your long term success.

Looking at asset allocation once without adjusting to market risks over time is like testing your temperature as the only test to determine your health. You may not have the flu, but there are so many other illnesses you may need to be concerned about.

Is there an ideal asset allocation for someone less than 10 years from their target retirement age?

Generally, those within 10 years or less from retirement may want to start with a 60/40 portfolio as a reference point – this is 60% stocks and 40% bonds. This is meant to be a framework, and not the end all be all. From here, if you feel comfortable with risk you may be able to allocate more to stocks, if you are earlier on in this 10 year time frame you may be able to allocate more to stocks, and if you have other income sources (rental income, pensions, etc.) you may be able to allocate more to stocks.

The reason this framework can be such a great starting point is it gives you a good base, the 40% in bonds, to drive income and provide stability. But we also need growth, you may be retired 20 years or more so the 60% in stocks is meant to help outpace inflation and be sure your money grows. As we had touched on previously, there may also be different risks at different times where you may want more or less in either asset class. You may also want to bring in alternatives to help diversify, but this can be a good starting point.

How often should retirement investors rebalance their portfolio?

This is a question we run into all the time. The challenge is, it’s not always a cut and dry answer because there are two theories around rebalancing. One theory is to rebalance based on a time structure, the other is to rebalance based on market fluctuations. In my opinion, the best strategy is a bit of both. Generally I would suggest you rebalance at least annually to be sure your assets are aligned given the changes over a course of year.

That said, in 2020 with the drop in the market and quick recovery due to COVID, a rebalance when the markets dropped and again when they picked back up would have benefit you significantly. When stock markets drop, often your stock exposure in your portfolio becomes a much smaller percentage. Maybe you started with a 60/40 portfolio and the market moved you into a 50/50 or even 40/60 portfolio during the downturn.

If you don’t rebalance, you only have 40% of your portfolio in the stock portion that bounced back up. However, if you were to rebalance, adjust back to your original 60/40 blend, you now have the percentage of stocks you had intended for and will allow you to recognize more of the recovery. The same applies when the market picks up, rebalancing allows you to “take the chips off the table” and reinvest into the assets that may not have experienced the same growth.

For more insights, follow Brandon Steele on Instagram, LinkedIn, or Twitter. Connect with Mainsail Financial Group on YouTube or Facebook.

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