The concept is, it's not as simple as just two asset classes being rebalanced. It's actually can be many, many asset classes thought through, identified, allocated, and then as things happen, you harness the cycles, the cyclicality of the markets because we do know one thing. Everything is cyclical. Welcome to Keen on Retirement, a show dedicated to helping you thrive before and during your retirement years.
If you are looking to grow and protect your wealth and want to make the second half of your life the best half, then listen in as well as the advisor Bill Keen and his host sort through the key issues that you need to know in a lively and candid way. Hello and welcome back to Keen on Retirement. This is the podcast where we help you thrive before and during your retirement years. I'm your co-host Steve Sandusky and we are here today with Bill Keen and Matt Wilson.
Hey guys, how are things today? We're doing well here in Kansas City, Steve. I hope you're doing well in your neck of the woods. Doing just awesome up here.
Today we are going to try and demystify some of the acronyms that are frequently thrown around in our industry. So sometimes we tend to make things a little more complicated than they necessarily are. So today we're going to look at some of these acronyms and terms that are often thrown around in the financial industry and make some sense of them, Bill. We come up with quite a few terms today.
There's many, many others, but we've come up with some that appear quite often in our firm and our practice in the day-to-day operation. So I think it'll be a fun episode today as we walk through some of these, Steve. Yeah, well, should I start you off with a tough one? You know, I'd say, typically we like to start on a winning streak, but you have faith in us and I've also got, you know, with Matt here on the line with me, I've got some backup and some confidence here.
Okay. Well, let me start with one that I know you have the answer to. CFP. All right.
Well, I know that stands for Certified Financial Planner and that is what designation and credential that Matt holds and Matt, would you like to explain a little bit about what you had to go through to get that credential and what that means? Yeah, it was a rigorous process. There was about a year long course that I took to the University of Missouri, Kansas City here locally and, you know, sat through classes on that both in person and online and then studied for a test and, you know, passed the test became a Certified Financial Planner. There's minimum requirements too.
You have to have at least three years experience in the financial services industry to be able to sit for the test and use the designation. And, you know, I have it here among many of the other advisors that we employ at King Wells, you know, Certified Financial Planner is definitely crucial to our organization. It sure is. We always say there's two pieces to this successful financial planning endeavor and that's having an up-to-date and quality financial plan in place and then it's complemented by the engine to the plan, which is actually the investments.
And so having experts on staff that understand all the dynamics to financial planning for us is a must. So we're going to start off with Steve. All right. Now we're going to ratchet it up here a little bit.
So what is Monte Carlo simulation? Monte Carlo simulation. Okay. I don't think you're asking us about the roulette game over at the casino area.
I am not. So there's a connection a little bit there. There are some Monte Carlo simulations. So we use those in our financial planning process, but it's used to model the probability of different outcomes in a process that cannot be easily predicted due to the intervention of random variables.
That is the true definition of a Monte Carlo simulation. Now Matt, can you say that backwards? Yeah. Well, the reason that we use simulation statistical modeling is because we want to come up with reasonable rational probabilities of success for things that will happen out into the future.
And that helps us back up into the moment in the day and make educated decisions about what we're going to do on the ground in the trenches in each of our clients financial plans historically, even the folks that have done some financial planning have used what we call straight line interest on their Excel spreadsheets, which says you're going to get a certain rate of return each year. And we just know that returns don't come in a straight line. So looking at multiple simulations up to a thousand simulations of a certain data set and projecting that out and coming up with some ranges of probabilities, give us a more educated look at what might happen going forward. So it's a very, very powerful tool.
Yeah. Guys, I'm a bit of a student of history and there's an interesting history behind Monte Carlo simulation. It's actually invented by scientists working on the atomic bomb back in the 1940s and the people who were working on it, they named it for the city in Monaco. Matt, you mentioned that, which of course is famed for its casinos and games of chance.
And what was happening with those scientists was they were working on these, obviously, these physics problems as they were trying to invent this atomic bomb. And the models that they had, they had to model things like neutron diffusion that were just too complex for analytical solutions that were available at the time. So they had to come up with something different and they came up with Monte Carlo simulation, which was very effective at finding solutions to these problems. So I guess that old saying that necessity is the mother of invention was true when it comes to Monte Carlo simulation.
It is. It reminds me of another acronym, GIGO, G-I-G-O. I learned this in Stack-Class and College. Is that GIGO?
Is that the insurance company you're talking about? Oh, well, there's another one there. GIGO stands for Garbage in Garbage Out. So if we're putting garbage into our simulations, we're going to have garbage on the outcome.
So we want to make sure we're not putting garbage in, but we're being realistic and coming up with those probabilities as Bill mentioned. All right. That's right. Well, guys, here's another one for you.
D-C-A. Dollar cost averaging. Bingo. Dollar cost averaging.
What does that mean if you just tried to think that through? Let me explain. If you're putting in a fixed amount of money over any time period, it could be a dollar amount or a percentage. When prices are higher, you will buy less shares.
And when prices are lower, you will buy more shares. Yeah, this is essentially what anyone's doing when they're contributing to their 401K on a pay period basis. You take the decision making out of it. So you put it on an automatic and systematic process, and then it takes all the emotion out of it.
It just happens for you automatically. That's right. All right. Well, maybe along those lines, how about rebalancing?
If you had two things that you put 50% of your investment in, and one of those things went up, and the other one went down, and your goal was to rebalance those things, you would be having to sell a little bit of what went up and move it over into the thing that went down, which would now bring those two investments back into balance. So rebalancing says you set up a portfolio with a certain allocation that you've thought through, and the risk tolerance and parameter is in line with the specific portfolio in this client situation. And you say that when they get out of balance to some extent, then you simply pull those back into balance by doing what I just described. Now, a portfolio I think we looked at yesterday, is it 20 asset classes that we operate in our portfolio is Matt here at King wealth?
Is it 20 asset classes? Some people say stocks and bonds, like those are two asset classes where there's a lot of different variations of stocks and bonds and other asset classes as well. But the concept is it's not as simple as just two asset classes being rebalanced. It's actually can be many, many asset classes thought through, identified, allocated.
And then as things happen, you harness the cycles, the cyclicality of the markets, because we do know one thing. Everything is cyclical. And by rebalancing, you're harnessing those cycles instead of being quipsawed by them emotionally. Or otherwise.
So rebalancing is a key thing if it's employed properly. Yeah. I think to summarize, basically it's buy low, sell high. That's what rebalancing is.
Well, that's an interesting concept. Yes. It actually is though. That is the right.
Again, easier said than done though. There's a lot of other factors out there. So a lot of this people hire professionals to help them take the emotion out of the investment process. And some of these things are very, very impactful, easy to talk about, hard to do for most individuals.
All right. Well, since we were on and are there, let's do another are how about RMD? Well, Matt talks about these a lot that we're doing our end of your meetings with everybody. Yeah, RMD.
So I use this term a lot and I get a lot of what does that mean? So RMD, and this comes up as many of our clients approach age 70 and a half. It's a rule that requires a distribution from an individual retirement account. And so RMD stands for required minimum distribution.
And it's a formula based on a table that the IRS publishes. And there's a couple of them based on the age of your beneficiary. But it determines how much do you have to distribute from your individual retirement account on a calendar your basis. And it is a fixed hour amount because it's based on the closing value of the previous year.
And so we know what the amount is every year. But it is something that we have to be very conscious of because if you fail to take your required minimum distribution, the penalty is 50% of what you were supposed to have taken out. So the IRS is very serious about making sure you take your RMD each year. Just to make that a little bit more confusing, I've seen that listed, Matt, as a M.R.D.
in several financial firms research and statements, which is simply minimum required distribution. Why they flip-flop the letters, I'm not sure. But anyway, same thing. We do that purposely because we're trying to confuse consumers, right?
Well, it makes you think. Yeah. We're trying to make sure you get that 50% penalty put into them. Yeah.
Yes. All right. How about ARM? A-R-M?
Now, is this anything to do with leg? I'm not talking about the appendage that we all have here. Okay. Okay.
All right. Well, I think what he's referring to, Matt, is the adjustable rate mortgage. So we always like to talk to folks about having debt as they go into retirement. We talked on our last episode of just about responsible use of debt and trying to avoid having money on credit cards for kids and grandkids and for everybody.
I think everybody typically has a mortgage for at some point in their life as they start to build equity in a home. But the thing that we always caution people is to make sure that that mortgage, unless you really understand what you're getting into, doesn't have the letters A-R-M in it somewhere. That means adjustable rate mortgage, again, and that means that your mortgage is more than likely tied to some sort of base interest rate, either the prime rating in the US or LIBOR. And here's a couple of other acronyms we could explain as well.
LIBOR, the London Interbank Rate, right, Matt? That's right. A London Interbank Offered Rate. Okay.
So there's another acronym that they might tie your ARM to. We see why people get vastly confused here, but we want to make sure that we are able to reduce the things that might come up and buy this. So if we're working and we understand what an ARM means, it means that, hey, you're interested to go up as rates rise. Again, retirement, one thing we talked about too is carrying a mortgage in retirement isn't all bad.
It could be okay as long as that mortgage be fixed. So we know that's not a variable. We have to look for surprises. So we always say eliminate surprises in retirement.
So try to avoid adjustable rate mortgages at all possible. And in this interest rate environment as well, we believe if you have an adjustable rate mortgage, it's probably going higher here pretty soon. Yeah. And someone might say, well, why would anyone ever choose an adjustable rate mortgage?
Well, they generally or typically have lower rates charged than a 15-year fixed or 30-year fixed mortgage. So that's why people sometimes get enticed into those loans because the rates are lower. I know I had one at one point because I knew I was going to be refinancing anyway for a specific reason on the property. And that particular one had a five-year ARM, which means it was fixed for the first five years.
So I was able to lock in quite a bit lower rate by having a five-year ARM and I knew I was going to be out of it anyway before the five years was up. So there are reasons to use those, but we've just got to be educated going in on the front end. So it's not a surprise. It's all track later on.
Okay. Well, guys, I've got a couple here that are related. So I'm going to give you both of them and you can work in the definition of the two together. The first one is EPS and the second one is PE.
So what are those and how are they related? The E stands for physical education. You're so right. Well, that does go into staying active and thriving in retirement, right?
We want to be active. Is that what you're talking about? See? No, is that wrong?
I don't think that's quite what we were thinking here on today's show. Yeah. So EPS stands for earnings per share. And this is a widely followed acronym and the investing world is because we look at companies and we take the earnings that the company makes and we divide it by the number of shares outstanding to determine what's the earnings per share for that company.
You've heard me talk about both of you and all our listeners over the course of long periods of time, the market, the stock market, the valuations over time. I have always traded back to the underlying earnings of the company. So all the crazy speculation we see of the day and the news and the headlines, the markets have always traded back to their underlying earnings. And so this is an important metric to just be conscious of what are companies making per share that they have outstanding.
And that rolls right into the price of earnings ratio. What's the PE ratio? And what does that mean? Well, it's the price of a security on the top and the denominator would be this earnings per share that we just talked about.
So the price divided by the earnings per share. And let me give you an example, a simple example. If you had an investment of $1, so your P, your numerator is $1, and that was for one share. And in the very first year, your earnings on that dollar were $1.
So your denominator is now $1. You invested $1, and within one year you made $1. Your price to earnings ratio would be $1. That would be a pretty good investment.
You got your money back essentially in the first year, and you still own the investment. So the way we look at this is the lower, typically, the PE ratio, the better. So if you had to pay $10 for $1 of earnings in the next year, now you have a 10 PE. If you had to pay $100 for a dollar of earnings, now you have a 100 PE back in the dot com bubble.
People were paying large amounts for the price, and the company said no earnings. So how do you do that calculation? So there is no PE ratio at that point. But understanding these metrics, at least gives folks a bit of understanding a little bit about what we're looking at as some of these financial metrics that frankly, most of the people we work with, Matt, they're expecting us to be paying attention to these things, aren't they?
The reason they have us is because they don't want to have to pay attention to most of these issues, but it's still good to have a baseline understanding. That's right. We really do like to help people understand these concepts, but many times people tell us, hey, that's what I've got you guys for. Good.
That's right. All right. So the IRA registered investment advisor is what RIA stands for. Now, a lot of people get that term confused with IRA.
So we take the same letters and we mix them up and we come up with something that means something totally different. So an IRA account is an individual retirement account. So completely different from RIA, but that is simply the accounts that folks open to say for retirement. Those were, came on the scene a number of years ago, decades ago, to allow people to put money in accounts that had some sort of tax preference going forward.
One thing I might mention there too is an IRA account. Those are called individual retirement accounts. So they're always titled in the name of the person that owned that asset. If there's a husband and wife, typically, not always, but typically the spouse is the beneficiary of that account.
All right. Got a handful more here if you guys are up for it. So how about, I'm going to give you a three here together because these are also somewhat similar. 403b, 401k, and 457.
Lots of numbers here. Yeah. Lots of numbers on that one. It sounds like maybe we've thrown some of these things into the Monte Carlo simulator and come up with new things here.
Yeah. They're not just randomized. They might seem like it. Okay.
Okay. Is a retirement savings plan that's established by an employer and you're able to make free tax and after tax contributions into that. And then with the advent of the Roth IRA, there's also been a Roth 401k added to the mix here. A 403b and a 457 are both available to public schools, colleges, universities, charities, state governments, local governments and other tax exempt entities.
So those organizations have the ability to open up a 403b or a 457. All right. Well, guys, I got a couple more here, but I'm just going to throw it open here. Do you have any other turns off the top of your head that you want to go through?
Well, since we just were talking about the random nature of all these acronyms and the concept that it looks like Wall Street in a good portion of cases was designed to confuse the consumer as opposed to provide clarity and transparency. I've got BS as one of my acronyms, Steve. Okay. Well, I have an idea with that might be, but I don't think it's what you have in mind.
Oh, is this going to be an explicit episode today? Oh, my goodness gracious. I see where you guys minds are. Absolutely not.
One of the things that we're most interested in when we sit down with clients is their belief systems. And we want to make sure that we understand their innate belief systems. We asked a lot about family history, family tree. What was it like growing up for you?
Did you have any bad experiences with financial people? Did you have anything happen in your life that was, you could say was a turning point for anything good or bad with respect to how you handled your financial affairs? So for us, belief systems are a big deal to understand when we're about to advise our clients. Well, Bill, I'm going to go a little deeper with that.
So tell me from a practical standpoint, you ask some questions, you get their belief system, you get some of their history, some of their experiences, then how do you take what you hear and how does that apply to a portfolio that you develop or how you might work with them in the following years to make sure that they're sticking to the plan? The first thing that comes to mind when you ask that question is finding out from folks how they've responded in prior market corrections. So going back to 2001, we had the largest attack on our nation at that point. The market was in free fall.
How did you react and respond during that period of time? And most of the clients that we do work with were invested to some extent back then. A lot of good portion of them were working. We had some people that were retired back then already.
But did you at some point sell out all your investments and go to cash? Were you afraid and feeling like that was the best thing you could do for yourself to in essence preserve what you had left at that point, if you will? Or did you perceive that as normal, cyclical volatility and comparing that to what happened in 73, 74 or going back to some of the other corrections that have occurred over a lifetime, our lifetimes? And did you say the course and did you add more to your 401k?
Look at that as an opportunity. So how people responded to those events, even though that's 17 years ago or 15 years ago or as recently as the 0809, how did you respond to that when the news was telling you the world was coming to an end? Banks were failing. It did not look good out there.
Everybody had used their homes as ATM machines. There was mortgage fraud that was occurring and it was a scary time. Did you sell out your investments at that point? Or did you look at that as an opportunity or at least something not to run from?
Is your belief system telling you, I'm going to be okay waiting this out as long as I don't need any of this money in the next few years? So what someone has done in the past has a large part to do with how we recommend they invest going forward. I mean, do not want to set somebody up for failure. Can you think of any other examples about belief systems, Matt?
I mean, there's other ones around having debt in retirement, when to take Social Security, those kinds of things. That's right. Those were the two that just popped into my head as you mentioned this. Was that because there's some that want to carry the longest biggest mortgage they can into retirement.
And as we mentioned, as long as a fixed rate mortgage and we can control it and account for it within the retirement plan, hey, we're all for it and the rates are reasonable. And then others don't want to have any debt. And if they're heading into retirement and they want to pay off their mortgage, well, one, what are the tax ramifications? It may not break the plan, but it might cost you a lot of taxes.
So let's just be aware of what that's going to do. And then others who don't have any debt and don't believe in any debt, we're not going to recommend that they go take on some debt in retirement because we know that's going to fly against their belief system. And so we're going to be aware of that when it comes to Social Security as well, you know, very similar concepts with, hey, what do we feel we ask, we ask people a ton of what are your thoughts and beliefs on Social Security and the future of the trust funds and how well do you think Congress is going to make sure this is there for you. So we want to be aware of that too, because we can show them a financial plan that mathematically says, yes, you'd be better off waiting, but if they're going to struggle with that concept, then we're going to maybe shift some of our recommendations just in light of what that means for the plan.
We're not going to recommend a plan that doesn't work, but we're going to take that belief system into context when we make our recommendations. For sure. And clients come to us for us to advise them what we think they should do. That's why they come to see us.
They wanted to delegate these decisions and they respect our opinion and our experience. So essentially when we ask folks, what do you think about the Social Security plan? We said that was someone recently and instantly they said, we're going to wait till 70. We've looked at the numbers.
We're going to wait till 70. We're in good health. We believe we're going to have long life, although nothing's guaranteed and they got that. But they said, in our minds, we're going to maximize it and that's our plan.
And then we've had other people say, we're spooked by this whole system right now. We don't think the funds trust funds are going to be there. We're going to take it as soon as we can. Now, neither of those will determine what we tell the client we think is the best option for them because they're hiring us and coming to see us for us to give them advice.
But knowing what they believe about it helps us in communicating with them. There's not necessarily a right or wrong answer on Social Security, right? You don't know until you've passed away how long you lived, which was the right answer. Yeah.
I think people make educated decisions and getting aware of the numbers, the break even points, where we stand, what the variables are and making educated decisions. That's the mantra around keen wealth. Well, guys, I think you have single-handedly cleared up all the fog that has existed since the beginning of time in the financial industry with today's show. Thank you.
Well, Steve, oh, you're so kind. You told me to look at some financial acronyms here and I'm seeing another 1,700 of them that we could cover it. Yeah. So.
Yeah, I think we'll exhaust our listeners patients long before we get through that list. Okay. That's fair. Well, hey, guys, let's wrap it up for today.
Any final thoughts from either one of you guys? Steve, we always have a fun time doing our episodes. I can grow up to somewhere in the mid-40s now that are out there online for our listeners to go back and look out at a lot of these topics. They're timely based on what was happening around the time that they were recorded.
We've been doing these since 2015 now, but a lot of them are wisdom that could be repeated and listened to over and again. And we have a fun time with this, but it is a very serious topic and we're committed to putting the resources and the time that I consider making an investment back into our clients and making an investment back into our friends of keen wealth to try to be a resource for people and share the information that we are every day going over anyway in the firm. So we've got some wonderful feedback. We now have many, many financial advisors across the country reaching out to me, letting me know that they're listening to our podcast.
We're sharing information and comparing notes. And it's just been a really very positive thing for us here at Keenwell. So you're a big part of that, Steve, and we're grateful to have you as part of our program and look forward to many, many more episodes to come down the road, sir. Sounds great.
Bill Mack, as always, a pleasure. Thank you. And we'll look forward to the next episode. All right, you got it.
All right. Thanks, Steve. The opinions expressed in this podcast are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry.
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