Retirement Red Zone

March 2022

Contributors: Colby McFadden, Justin Singletary, and Patrick Morehead

Using the Herd to Your Advantage

These People Know How To Turn a Red Zone into a Green Rush

To listen to this months Red Zone, CLICK HERE

One of the perks that has come from working with savvy, well-seasoned investors over the years has been gaining valuable insights from their life stories. Hearing about their highs, their lows and everything in between that life can serve us while we are persevering to build families, businesses, and a retirement nest egg.

After listening to hundreds of stories, it has become apparent to these contributors and observers of many different lives that savvy, well-seasoned and comfortably retired individuals seem to invest using a handful of principles.

While mastering retirement looks and feels very different for each and everyone one of us,

the following five (5) principles come from observing some of the greatest investors in modern times turn their personal Red Zones into green rushes that created family wealth lasting generations.

1. Use the herd to your advantage

2. Know your money personality

3. Understand what risk tolerance really means

4. Leverage time to your advantage

5. Create a guide based on these principles

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Use The Herd To Your Advantage

There is a famous quote from Warren Buffett about investing that says “It is best to be fearful when others are greedy and greedy when others are fearful”.

The “others” in Warren’s mind, is what we term “The Herd”.   

Invest long enough and you’ll find that markets will ebb and flow from moments of fear to moments of euphoria. This is how financial markets shift from bull to bear markets.  It is also how emotions of “The Herd” transfer through financial assets like a continuum from fear to greed traveling through phases of despondency, optimism and thrill as you can see here.

Warren Buffett is essentially suggesting investors that are able to keep this continuum in mind over long periods of time (AKA: Play long ball) with a willingness to be patiently contrarian when extremes develop in emotions and prices, on both sides of the continuum, tend to manage the risks associated with investing much better than short term thrill-seekers.

There is an art and a science to mastering this process and for most investors, it can take years to be able to recognize where markets and economies may be within this continuum.  Luckily for you, we can save you a lot of time and energy as we have been tracking and gathering data on these ebbs and flows for over two decades and it is applied into each of the models we manage for our clients.

If you are interested in seeing how you can use the herd to your advantage, check out our video: Using the Herd to Your Advantage.

Know Your Money Personality

Let’s have a little fun with ourselves, let’s talk about our money personality. 

Yes, we have a money personality, and it’s complex and it’s twisted, mostly because at the end of the day, most of us have learned our money behaviors from our parents. 

Yeah, we know,  before we get too depressed thinking about that let’s transition and talk about some popular money personalities and how they may influence our money decisions.

There are many money personalities and in most cases, our decisions surrounding money are influenced by a mix of personality traits with one or two personality types being the dominant motivators supported by a couple of background personality traits.  The combination of these traits forms our money personality.  Here is an image of a few of the more dominant money personalities.

Let’s expand on a couple of popular money personalities so you get a better understanding. Starting with the one personality that could be feeling the current pinch of inflation more than others - Sarah Saver.  

Sarah Saver’s tend to shy away from risk because their priority is “not to lose money”.  Sarah Savers tend to be more interested in reaching their goals by saving money and living within their means as opposed to taking risks.  This can mean Sarah Savers will be attracted to investment vehicles considered to be a lower risk which usually means lower expected returns as well.  As a result, the finances of a Sarah Saver will be more susceptible to changes in inflation and interest rates compared to other money personalities that are more comfortable with risk-taking.  

On the other side of the spectrum is Mr. Big.  For Mr. Big, the risk is a thrill, and finding opportunities is the priority while “never stop” tends to be their mantra. Mr. Big is the one who is quick with money and seems to be in the right place at the right time.  

It’s important to remember, Mr. Big can also be susceptible to big losses.  This can make emotions like “fear of missing out” (FOMO) a potential kryptonite to the longer-term plans for personalities that are dominated by traits of Mr. Big. For this reason, Mr. Big's personalities tend to benefit greatly by remembering how to “Use the herd to their advantage”.

In between Sarah Saver and Mr. Big, there is a spectrum that includes money personalities stretching from Vigilant Virgil to Arthur the Avoider and each of them is motivated in different ways.  

If you are intrigued and curious to know more about your money personality visit here for more info: Leveraging Your Money Personality

Understand What Risk Tolerance Really Means

If there is one word related to investing that has the potential for being the most misunderstood, it would be “Risk”.

Many times when someone hears the word risk they think “no thanks, not for me”.  However, not all risks should be viewed the same.

One of the best ways we have seen savvy investors become comfortable with risk is by visualizing risk on a scale of 1 to 10 as you can see in this example.

As you can see, the left side of the scale starts with the most conservative number 1. This individual may be invested in real estate by owning their home and they may have some savings at the bank and that is about the extent of their investing life.

On the other side of the spectrum at number 10 is the investor that has the whole enchilada.  They’ve got real estate that they live in, they've got real estate that they rent out, they've got commodities, stocks, bonds and they do a little trading…..their portfolios are managed to be diversified and strategic.

Between these extremes, we find where various personalities may land as a number on a scale from 1 to 10. Managing the risk of a portfolio can be done by adjusting the investment diversification up and down this scale.

Viewing risk from this perspective can help investors understand what risk really means as a tool to achieving financial goals.

Leverage Time To Your Advantage

One key trait we have observed in successful investors like Warren Buffet has been their ability to embrace risk while leveraging time.  

A starting point for this can be creating a diversification that divides assets into buckets based on the time frame those funds might be needed for a specific goal.  Here is a possible example of this.

As you can see in this example we have created a few buckets based on time frames.  As the time frame of the bucket is extended the risk of that bucket can be extended as well.  This is where the value of leveraging time can be very helpful.

With longer-term time frames, we can possibly add elements of strategy and tactics as well as dividend harvesting to a portfolio that may help us achieve financial independence a little sooner than just being a passive investor in an index or target-date fund.

For example, our long-term bucket may be where we focus on investing in higher quality dividend-paying investments.  Doing this can help leverage time by harnessing the strengths of compound interest, plus we get paid to wait. 

At the end of the day, the art of this process is being able to view our finances in terms of time buckets and the science of this process is knowing which percentages of our portfolio should be divided into different time frames to help guide us in determining how much risk we should be taking within that bucket as well as in our entire portfolio. 

The combination of these four (4) investing principles, Using The Herd To Your Advantage, Understanding Your Money Personality, Visualizing Risk On a Scale and Leveraging Time To Your Advantage lead to the most important part of investing in the Red Zone - Having a plan.

Create A Guide Based On These Principles

Having a plan or guide when making financial decisions is key to having a higher level of confidence in those decisions.

In the industry, we call an investment plan that entails these four (4) principles an “Investor Policy Statements” (IPS) and we can tell you from experience when an IPS is in alignment with your money personality, your risk tolerance, and time frame you tend to be well-positioned to use the herd to your advantage, especially during times when emotions and asset prices find themselves on the extreme edges of historical norms which is how you can turn the Red Zone into a Green Rush.

Listen to this month's RedZone:

Meet Our Contributers

Colby McFadden Founder, Quiver Financial

Justin Singletary Director of Retirement Services, Quiver Financial

Patrick Morehead Director of Alternative Investments, Quiver Financial

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