131: Modular Financial Planning 09: Simple, Basic, Mindful Investing

[00:00:00] Intro: Do you think money takes up more life space than it should? On this show, we discuss with and share stories from artists, authors, entrepreneurs, and advisors about how they mindfully minimize the time and energies. Spent thinking about money. Join your host, Jonathan DeYoe, and learn how to put money in its place and get more out of life.

[00:00:33] Jonathan DeYoe: Hey there. Welcome back to Mindful Money. We’re in the second to last stages of describing the Mindful Money modular financial planning process. , last time we talked about what we do with excess income after we have a fully funded emergency fund, have paid off all of our high interest debts and our saving enough to be on the path of financial independence.

[00:00:51] Jonathan DeYoe: But that means is we talked about the big choice whether when you have excess income. You use that excess to pay down or pay off low interest debt, or you use it to [00:01:00] start to build your taxable savings. If you haven’t listed the episode, then definitely go back and listen And , just so you know, I fall on the side of, , if you have that choice, you know, pay off low interest debt or, or build taxable portfolio, you build taxable portfolio.

[00:01:12] Jonathan DeYoe: Today we’re gonna talk about how to invest all of your portfolios, retirement portfolios, and the taxable portfolios. So this episode is the ninth in our 10 part series, which covers everything you need to know to get started creating your own modular financial plan. I’m gonna start with a story. So, , after you’ve been a client for about six or seven years, mark approached me at an event and he said, Jonathan, I’ve listened to these.

[00:01:35] Jonathan DeYoe: January forecast and , this July halftime report for about five, six years, and I finally understand what you do. We hired you to manage our investments, but I’ve finally concluded, , that you don’t really manage investments. You’re doing something far more important. You’re managing us. You help those build a portfolio of appropriate investments perfectly suited to our life plans and the next day.

[00:01:56] Jonathan DeYoe: All you’ve done from that day to this day is prevent us from overmanaging [00:02:00] them ourselves. We revisit the plan regularly, but the prevention requires constant attention and communication.

[00:02:07] Jonathan DeYoe: This mark is 100% right here. This is accurate. I. Great advisors, in my opinion, do two things. First, they help people codify a lifetime of trade-offs in a well-researched, and deeply considered financial plan that looks at all of their resources and all of their values.

[00:02:25] Jonathan DeYoe: And second, they help people stay on the plan. When it’s hard to do so, especially so during my first 10 years in the industry, I personally tried every imaginable way to invest. In the end, I determined that I can’t predict or control the short term outcomes of investments, period. Full stop. I don’t take any shame in this because what I know is no one else can do it either.

[00:02:46] Jonathan DeYoe: My approach to investing my own money and my client’s money comes outta this experience and has been verified by reams of academic evidence and is modeled after a long list of humble advisors I’ve known over the years. So great fiduciary [00:03:00] advice is a progression, right? We help clients. First, express their values in terms of prioritized time, specific goals.

[00:03:10] Jonathan DeYoe: Second, create dollar specific plans to reach those goals, you know, inflation adjusted. Third, we build a savings and portfolio process with the highest probability of bringing those goals to fruition in the time allotted. And fourth, we filter the noise. From the punditry and their own thoughts to avoid rash decisions forever going forward.

[00:03:35] Jonathan DeYoe: And of course, we revisit some of the decisions and revisit some of the priorities over time. So numbers one, two, and four are the most difficult and time consuming. Number three gets all the attention. Once you get the goals, the first step and the plans, the second step, right? The portfolio, the third step is easy.

[00:03:54] Jonathan DeYoe: I. Once you have the portfolio in place, it doesn’t change unless the goals and the plans [00:04:00] change. It’s not just that we don’t change the portfolio in response to changing market or changing economic scenarios. It’s that we meet with wisdom and compassion. Our clients near constant desire to tweak and optimize things that cannot be tweaked or optimized.

[00:04:17] Jonathan DeYoe: We don’t manage investments. We manage people. However, in our market focused and performance driven culture, many advisors and many clients still believe that the expertise that an advisor provides has something to do with prediction. You know, better market timing and or improved security selection, mindful money. and all of my work with clients through EP Wealth is a no prediction zone.

[00:04:43] Jonathan DeYoe: There is no escaping for fundamental investing truths, first economies and markets are inherently unpredictable. In the short term, we cannot know what is coming next. Second, unpredictability. , the unpredictability of markets and [00:05:00] economies never stops people from trying to predict.

[00:05:03] Jonathan DeYoe: Third, some of those who try to predict are gonna get it right. I mean, if, . Tens of thousands of people, or thousands of people are trying to predict, a few of them are gonna get it right and when they get it right, they’re gonna scream it from the rooftops. And finally, and this is important because out of the thousands or tens of thousands of people who try to predict, the few of ’em get it right, those who get it right aren’t skillful.

[00:05:27] Jonathan DeYoe: They’re lucky in the short term. It’s all speculation. It’s all a crapshoot. An individual investment for a short period of time can be tossed about by all manner of unexpected occurrences. There is no predictability. Full stop. We cannot manage risk or return in the short term, so we let it go. All successful long-term investors are continuously acting on a plan that is founded on their deeply personal values and goals.

[00:05:56] Jonathan DeYoe: They’re appropriately allocated. They’re broadly diversified [00:06:00] and they rebalance regularly. They are patient and remain mindful of their limitations. All failed Investors are continually reacting to yesterday’s headlines and every reaction is a form of prediction. Nobody knows what’s coming next. No one knows how markets are going to react.

[00:06:16] Jonathan DeYoe: We can’t build successful portfolios on the unknowable. Stop predicting. So what is simple, basic, mindful investing? What are the actions that we embrace? Now, I’ve always referred to myself and my basic style and financial advice as being goal-focused and planning-driven The portfolio is always long-term, and the portfolio design comes after and is informed by goals and planning.

[00:06:40] Jonathan DeYoe: The beauty of this is that I’m focused on levers that can be pulled to improve client outcomes. Meanwhile, the financial world, especially anything calling itself financial media, is short term market-focused and performance-driven It puts the portfolio of discussion before goals and planning, they are pulling levers.

[00:06:59] Jonathan DeYoe: That [00:07:00] study after study, after study have shown to be ineffective at, improving investment outcomes. Our simple, basic, mindful investing process is counter-cultural. If you embrace these three core practices, you don’t need to do anything else with your portfolio. They are necessary and sufficient to providing excellent, real life long-term investing outcomes.

[00:07:24] Jonathan DeYoe: The core practices are these first asset allocation, second diversification, third rebalancing. That’s it. Get these three rights and you’re 95% of the way there. The first one is asset allocation.

[00:07:37] Jonathan DeYoe: Asset allocation is the strategy of dividing your investments into a mix of different asset classes with the aim of appropriately balancing risk and reward and increasing the probability of reaching your goals.

[00:07:49] Jonathan DeYoe: So there are only three primary asset classes. There is equity. These are individual stocks, , equity, , exchange traded funds, [00:08:00] ETFs, and equity mutual funds. I refer to this portion often as, , diversified shares in the great companies of the US and the world, great businesses of the US and the world.

[00:08:10] Jonathan DeYoe: Second asset class is fixed income. This could be government bonds and corporate bonds and municipal bonds, and, , bond funds and bond ETFs. And the last is cash or cash equivalents, treasury bills, money market funds, bank CDs, and the like. So how you should allocate funds to these three asset classes is based on your individual needs, goals, and ability to tolerate volatility.

[00:08:32] Jonathan DeYoe: Volatility is the unpredictable change in price. That means there is no right or optimal asset allocation. The key to choosing a successful asset allocation is to first recognize that each asset class acts in specific ways. Generally, the more stable and predictable an asset, the lower the expected returns.

[00:08:51] Jonathan DeYoe: And that just kind of makes sense, right? The more volatile an asset, the higher the expected returns. Equity assets like stocks. Tend to pay [00:09:00] the highest rate of return over time, but are also the most volatile. They zig and zag the most owing to this volatility and risk. However, stocks are a reliable source of growth in the long term.

[00:09:11] Jonathan DeYoe: Fixed income assets like bonds are less volatile and therefore they tend to pay lower returns. But they play an important role in the portfolio as a way to, , mitigate stock volatility or the zigs and zags of stocks. Cash doesn’t pay much of a return, but it provides liquidity and also helps reduce volatility in your account.

[00:09:29] Jonathan DeYoe: Since its face value is always stable, the stability makes it a vital part of the mix. It also is really helpful to have cash to sort of meet the short term needs, so the long term success of your investment portfolio depends. More on asset allocation than the success of any particular investment in the account.

[00:09:45] Jonathan DeYoe: How you allocate your assets may be the most important investment decision you make.

[00:09:51] Jonathan DeYoe: So what percentage of your account should you commit to each asset class? I. The simple answer, it depends on your goals, specifically, how much you [00:10:00] need and when you need it for accomplishing those goals. Another crucial element is your ability to tolerate volatility.

[00:10:07] Jonathan DeYoe: You want an asset allocation that you’re willing to stick with over the long haul. This is an issue of commitment. You know, we are committing to holding an asset allocation, especially when it’s uncomfortable and. In a second we’ll talk about this. We’re also committing to rebalancing that asset allocation to buying more when it hurts.

[00:10:26] Jonathan DeYoe: So I’ve written and spoken extensively about the importance of your equity allocation. This is your commitment to owning the diversified shares of the great companies of the US and the world. If you want more on this particular topic, again, return to this , 10 part versus the Gathering Darkness series where I explain my absolute commitment to equities as the best possible long-term investment you can make.

[00:10:48] Jonathan DeYoe: Ultimately everyone must choose an asset allocation designed to generate the long-term returns they need to reach their own financial goals.

[00:10:55] Jonathan DeYoe: The second item, diversification. There are no facts about the [00:11:00] future and what we think we know is often riddled with sort of tragic shortcuts and reasoning and unconscious biases.

[00:11:06] Jonathan DeYoe: So instead of wasting time playing the guessing game of which investments are going to perform best. Own it all. Diversification is the disciplined practice of choosing a variety of investments within each asset class. Diversification keeps you from foolishly putting all your eggs in the wrong basket.

[00:11:22] Jonathan DeYoe: Diversification means you invest in the stocks of companies of a variety of sizes, industries and geographies. You own big and small companies, growth and value companies. You own international and domestic. Personally, I seek out and recommend owning the broadest available index in each geography. I say own it all.

[00:11:43] Jonathan DeYoe: And the same goes with fixed income. You buy an index that owns a representative piece of all parts of the fixed income market, from conservative and high yield government and corporate, short term and long domestic and international. It is super tempting to try to put more money [00:12:00] into investments that are performing well and avoid those that are doing poorly, but.

[00:12:05] Jonathan DeYoe: You don’t know and can’t guess what’s going to do well next. You don’t know what’s gonna become hot or become cold in the investment world, no one knows. By diversifying your portfolio, you will own some portion of the things they’re doing well, and at the same time, you reduce the damage caused by any catastrophic failures.

[00:12:21] Jonathan DeYoe: Diversification studies your returns and reduces the probability of your experiencing either huge gains or huge losses. Diversification is the investing equivalent of choosing to be the tortoise in AOPs Fable. It’s slow, it’s steady. It wins the race.

[00:12:40] Jonathan DeYoe: Once your asset allocated and broadly diversified, the only thing that’s left to do is manage it.

[00:12:45] Jonathan DeYoe: And we don’t manage it by picking and choosing. We manage it with rebalancing. We begin our investing journey with a plan appropriate asset allocation, and over time our portfolio goes out of balance as certain assets do well and others do less well. [00:13:00] Regular rebalancing. The selling of the things that have done well and the repurposing of the proceeds into things that have done less well, returns your portfolio to its original.

[00:13:11] Jonathan DeYoe: Plan appropriate asset allocation. There’s a tendency for both unnatural highs on unnatural lows in the markets to snap back to sort of a rising average trend line over time. This process is known as reversion to the mean. And it’s entirely unpredictable by rebalancing periodically, no matter what’s happening in the markets, you create a system that buys low and sells high, while always returning to your original risk return.

[00:13:39] Jonathan DeYoe: Trade-off the system is immune to human foibles, to short-term fads, and to the investor fears or fantasies that drive irrational market swings. So by rebalancing at specific intervals such as you know, usually annually or semi-annually, you automate the buy low, sell high process [00:14:00] without accidentally plunging into prediction territory.

[00:14:04] Jonathan DeYoe: In the end, there is one downside to diligently practicing asset allocation diversification, rebalancing. You are never going to knock the investment ball out of the park. But you won’t ever strike out either. Over the long haul, through all the zigs and zags, and through all the market cycles, you will end up faring better than most, and your path will be lower anxiety paved by patients and understanding instead of the need to predict outcomes or guess what’s around the next corner.

[00:14:31] Jonathan DeYoe: let go of the idea of finding the next Amazon or Apple. Let go of all your investment fears. Follow a simple, basic, mindful approach to investing.

[00:14:40] Jonathan DeYoe: It is really that simple, but it’s not gonna be easy because we really, really, really want to react to headlines or excitement or expectations or fears. We want to do something, and this is something we need to learn to avoid. [00:15:00] We know vividly what has already happened. We can never know what will come next.

[00:15:06] Jonathan DeYoe: The humble recognition and remembrance of this truth should prevent us from reacting. We will be tested first.

[00:15:15] Jonathan DeYoe: We’re gonna envy returns that we see other people having, but we are not experiencing. Sometimes a small fraction of the investible universe starts getting lots of investor and media attention.

[00:15:25] Jonathan DeYoe: Often it’s a new technology, 3D , printing that electric vehicles or ai. Or maybe there’s a new investing product like a cryptocurrency, a spac, or an NFT, or maybe there’s a single company like Nvidia that ca captures the collective imagination and the growing attention attracts investors dollars and folks begin overpaying a letter first, and then eventually overpaying a lot for those investments.

[00:15:48] Jonathan DeYoe: The more folks are willing to overpay, the better these companies and their investors, often our neighbors, and perhaps our brother-in-Law, appear to be doing. Based on stock price and returns alone, [00:16:00] our retention is then drawn to those returns that our brother-in-law or neighbor reports his portfolio is achieving, which are owned, broadly diversified portfolio is not achieving.

[00:16:10] Jonathan DeYoe: It’s so boring and feelings of jealousy and missing out fomo, , move us to sell the broadly diversified portfolio. That isn’t working as well as their whatever’s working for them currently. And by whatever appears to be making our brother-in-law, rich in hindsight, we can see how well the strategy works.

[00:16:30] Jonathan DeYoe: The internet stock boom led to the.com bust CDOs. , the things that led to the, Great recession. The collateral debt obligations led to that great recession. Meme stocks exploded higher and then they exploded. . Multiple alt coins created millionaires before they went bust. Pandemic growth darlings, everyone chased, became post pandemic canaries in the pandemic coal mine. So large upswings in specific [00:17:00] investments usually lead to large collapses in the very same investments. If you’re getting into them because they increased in value recently, you’re trying to buy other people’s profits, but you are likely overpaying.

[00:17:14] Jonathan DeYoe: It’s impossible to know how far for how long such episodes are gonna last before they fall apart. But we do know that they will fall apart. This is what is meant by reversion to the mean, so we do not buy out of envy. The second thing that’s gonna happen, , and I hear this one. Probably more often these days, we fear impending doom.

[00:17:36] Jonathan DeYoe: On the flip side, we may not be motivated by GRE at all. We may be losing money or fear, losing money, and decide to sell our current portfolio to protect ourselves from this possibility. This, I hope you can see, doesn’t work any better. Strangely, the financial punditry reacts to every 10% correction as the end of the world, and we broadly accept this reaction as truth.

[00:17:55] Jonathan DeYoe: It isn’t such corrections are, as anyone with the slightest sense [00:18:00] of market history knows a common occurrence. The average annual peak to trough drawdown loss in the s and p 500 is about 14%. Whatever their screaming about today may ultimately reach that mark, or it could be more or less, no matter how many people opine on the subject.

[00:18:20] Jonathan DeYoe: Nobody can know and it can’t be predicted and of greater importance to long-term goal-focused planning driven investors like us. It does not matter. You cannot predict your way around market declines. If you cannot ride out a market decline approaching 15% on an annual basis and declining averaging twice that about twice in a decade.

[00:18:42] Jonathan DeYoe: You simply should not be investing in equities. We might be afraid. We do not sell out of fear.

[00:18:49] Jonathan DeYoe: So before we wrap up today, I wanna introduce two mindfulness practices to help you manage your own investing, investing behavior. We can’t eliminate the fear and envy from our lives. We can, [00:19:00] however, be aware of their prevalence and attempt to not act on them.

[00:19:04] Jonathan DeYoe: So when I’m caught in the moment and the fear or the envy rises with in me, there’s two practices I rely on to get me unstuck. There’s a deep breathing exercise for quick relief. And a longer body scan exercise with more challenging, you know, those scenarios that kind of hang on quite a bit over time.

[00:19:22] Jonathan DeYoe: , , paying attention to your breath is most people’s very first mindfulness exercise. It’s simple and it’s always available because you’re always breathing and it’s most basic format. You sit comfortably, you your back kind of straight, and you attend to your breath. You pay attention to your breath.

[00:19:37] Jonathan DeYoe: You might say quietly as you breathe in. When you breathe in and out, when you breathe out. The deep breathing exercise I would recommend has a little bit more structure to it, but only takes maybe three minutes. You aren’t just paying attention to your breath, which can be hard for some people. You actually have something you are doing.

[00:19:59] Jonathan DeYoe: You’re [00:20:00] counting. This three minute exercise will quiet most momentary emotions and repeat, these repeating thought patterns that happen when elections we’re always worried about the outcome of election. And so this is a repeating thought pattern, this breathing exercise might work. So take a deep in breath four count, hold it for a four count.

[00:20:24] Jonathan DeYoe: Breathe out for a four count hold for a four count, and then breathe in. If you do this for 10 breaths, the rising emotion, the fear or the envy will subside. The emotion will lessen, its hold, and you will find yourself calmer. , we call this box breathing, four, four, four, four. So that’s one way.

[00:20:51] Jonathan DeYoe: Or when it gets really bad and you need something a little stronger, an antidote that works a little bit better, you can do a body scan. So you sit comfortably, breathe [00:21:00] normally, bring your attention to your body, and as you scan your body, you pay attention to different sensations. There may be. Warmth or there may be coolness.

[00:21:08] Jonathan DeYoe: There could be pressure where your body contacts the cushion or the chair or the floor. You may feel the fabric of your clothes on your skin. Perhaps there’s the tingle or a pain point. So start the body scan at the top of your head. Feel the hair on your scalp. You know, scan your awareness down your face.

[00:21:28] Jonathan DeYoe: Relax your jaw, you know, around your neck. Cross your shoulders. Relax your shoulders. Scan down your chest and your stomach, relax your stomach. Scan down one arm and then the other.

[00:21:47] Jonathan DeYoe: Go back up to your shoulders. Scan down your back, maybe feel the pressure on your sit bones. Scan down your right leg and foot, come back up to your [00:22:00] waist and go down your left leg and foot. So a body scan can be as slow or as quick as you need. You can spend two quick minutes simply focusing on relaxing your jaw, your shoulders, and your belly.

[00:22:15] Jonathan DeYoe: Three places we hold a lot of tension. Or you could spend 20 minutes on a thorough scan of every surface and tension point in your body. These exercises are very simple and they’re gonna break the emotions. Hold on your psyche. That’s what we’re trying to do. , you have a feeling in the moment about what markets and economies might do.

[00:22:32] Jonathan DeYoe: , you have this fear or greed. You have this envy or this desire, , and you’re using these exercises to break the emotions, hold on your psyche, , and return you to the experience of the present moment. So becoming embodied in the present moment is a powerful antidote to whatever stories are running through your head.

[00:22:51] Jonathan DeYoe: If the narrative resurfaces, you know, as is changes slightly or intensifies, repeat the mindfulness exercise. Again, remembering this is a no prediction [00:23:00] zone. Remembering our three core practices work over long periods of time. Remember that the desire to act or react is normal. And remember always, always, always, that the less reactive you are, the better your investments will do long term.

[00:23:17] Jonathan DeYoe: These practices can be applied effectively in the moment. However, to really experience the power of mindfulness on your investing outcomes, try to initiate a daily, 10 minute mindful breathing exercise. If you do, you’re gonna see the benefits of the practice more clearly. With practice, you will solely discover the fear and envy.

[00:23:36] Jonathan DeYoe: These narratives have a harder time grabbing you. , when they do grab you, you become quickly aware of them as they take hold, and it becomes easier for you to release them and come back to the present moment. Awareness. As you come back over and over again to the present moment, you will stop being pulled by predictions.

[00:23:53] Jonathan DeYoe: Your emotions won’t move you to action in the same, well, in the same way. And you will remember the three core practices of [00:24:00] simple, basic, mindful investing, asset allocation, diversification, and rebalancing. I. The original promise of better investing outcomes and a better investment experience will be yours.

[00:24:12] Jonathan DeYoe: As always, thanks for listening. We’ve almost completed the entire cycle of the modular financial planning process. Next time, I look forward to describing the final step in our 10 part series, the portfolio optimizers. Simple, basic, mindful investing is gonna get you 98% of the way there. The last 2% can be managed by considering a few very small things that add a little bit of additional value over time.

[00:24:34] Jonathan DeYoe: Things like, you know, maintaining your expenses as low as possible, managing your taxes, and considering the factors of investing. So stay tuned next time to hear the final step and are modular financial planning process portfolio optimizers. Thanks.

[00:24:48] Outro: Thanks for listening. Full show notes for each episode, which includes a summary, key takeaways, quotes, and any resources mentioned [00:25:00] are available at Mindful Money. Be sure to follow and subscribe wherever you listen to your favorite podcast. And if you’re enjoying the content and getting value from these episodes, please leave us a rating and review ratethispodcast.com/mindfulmoney. We’ll be sure to read those out on future episodes.