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Why Complicated Doesn’t Mean Better · How to Retire on Time

• 0:00
  Mike: Hey, thanks for joining. Here's a question I was recently asked on my show, how to retire on time. Take a look. So I'll tell you a story. 2015, meet a guy, and he's got about $2,000,000, and 1.8 of it is in non traded REITs.
• 0:16
  David: Yes. Tell me what does that mean?
• 0:19
  Mike: So real estate investment trust Uh-huh. It's illiquid, and the the idea is you put some assets in real estate, and it pays you cash flow. Great idea. Yeah. Except for when those REITs stop paying cash flow because of whatever reason.
• 0:34
  So, I mean, he was he was trying to recover from 2008 even years after.
• 0:42
  David: Okay.
• 0:43
  Mike: That's an issue. If you wanna sell or get out of it, you have to try to sell it. Someone has to buy your shares of the real estate investment trust Mhmm. Which can be difficult to do if they're not paying the cash flow as much as they as you would expect. So you're selling out his discount.
• 0:59
  Took me two years to get the guy out of him. Woah. Two years. Wow. Illiquid.
• 1:06
  You don't buy stuff and set it and forget it and put all of your assets. Something like, don't know how that got through any sort of version version of suitability. But a non traded, an illiquid REIT is a good tool because if it's illiquid, more money goes to investment, which means you've got a higher potential of cash flow.
• 1:25
  David: Okay.
• 1:25
  Mike: The detriment is it's illiquid, and the REIT could go bust. So you wanna do your due diligence. You might want newer REITs. You might put a portion of your assets, maybe up to 20% in something like this. Up to.
• 1:38
  That's even pushing it.
• 1:39
  David: Yeah. And so if the REIT goes bust and it doesn't pay, does are you just out the money or do you eventually get some kind of claim?
• 1:48
  Mike: I mean, they they could liquidate the assets and pay you out. But if they're not cash flowing, there's some some things in there that make it tricky. Yes. So that's that's a difficult thing. Mhmm.
• 1:59
  Or if they decide to self liquidate, you get your money back, there's a tax issue, and then you gotta find new cash flow.
• 2:06
  David: Oh, right.
• 2:07
  Mike: So the things to consider. I'm gonna talk about the Argentinian bond for a while. Just out just for a moment. So, people forget that risk, higher the risk, the higher the potential reward. Mhmm.
• 2:23
  In bonds, it's the higher the coupon. So, David, if I were to say, hey, got a thirty year bond, pays five percent out, sounds like an okay deal. Yeah. You'll barely keep up with inflation, but you know
• 2:35
  David: Right.
• 2:35
  Mike: You'll get some cash flow. Yeah. We call it fixed income, which is like the dumbest name by the way. Fixed income, what's that? Bonds.
• 2:44
  Like, could we have branded that a little bit differently? But, okay, well hey I got this other bond that you can buy. It's gonna pay you 7% coupon.
• 2:52
  David: Well, that's sevens more than five, so that's more fixed income for me, right?
• 2:58
  Mike: Yeah, what about 10%?
• 3:00
  David: Yeah. Bring it. That's that's that's like
• 3:03
  Mike: I'm in in the market here. You know, I've got a deal for you. Alright. 15% coupon rate.
• 3:08
  David: And how are we doing this?
• 3:09
  Mike: You'd be you'd be dumb passing that up.
• 3:11
  David: Yeah.
• 3:12
  Mike: Wink, wink, nudge, nudge private credit. Oh. Okay. Uh-huh. How about 40%?
• 3:20
  Some point, you're getting a little nervous. Right?
• 3:23
  David: Yeah. I mean, it sounds great, but how are they doing it? Right?
• 3:28
  Mike: It's called risk. The risk of default. The risk you're not gonna get paid out. So what you have to assess, like if you're gonna get a private credit deal, and it's paying 12%, or 9%, or 10%, whatever it is. Mhmm.
• 3:44
  Why is it so much higher than other normal bonds? There's elevated risk. That doesn't make it wrong, it means you need to be aware of what you're doing.
• 3:54
  David: Mhmm.
• 3:55
  Mike: Because like the REITs, some some private credit, like there there are different funds that have a commission that goes to the broker who brokered the deal. Now, we can't get those commissions. We're fiduciaries. We have a series 65 license. We're not legally able to get security commissions, which gives us the advantage of neutrality.
• 4:12
  But these are things, they're tools that are great in the correct situation. Yes. Someone that's got more money that loses 500,000 here, and they're still fined, can afford to take these kinds of risks. Mhmm. Someone that loses if they you lost 10% of your portfolio that just went away, and that's a life event, you cannot afford to take these kinds of risks.
• 4:38
  Yeah. Please be careful. Alright. Let's do a couple more, and then we're gonna go to your questions. So I've got principal protected structure notes.
• 4:47
  So for a while, people were buying structured notes that were not FDIC insured. So what's a structured note? A structured note is a an instrument from the bank that's going to give a payout, whether it's upside potential or they're paying out a certain percentage, kinda like income, not fixed income, like a bond.
• 5:05
  David: Okay.
• 5:05
  Mike: But a structured note income play. Well, one of these companies that was famously doing this, you may have heard of them, called Lehman Brothers. I've heard that name. Are they around anymore?
• 5:16
  David: From days of of yore. I'd probably not. They're like a 2008 casualty. Right?
• 5:21
  Mike: Yeah. Yeah. They You're very kind. Belly up. They've made their ways in other other industries.
• 5:28
  David: But Okay.
• 5:29
  Mike: But but structured notes, a great thing in the right seasons. But you need to understand, if they're not FDIC insured, which a lot of them are not, it's only as good as the integrity of the investment bank that's offering them. Do your due diligence. Understand. There was a lady I I know that was trying to do structured notes to fund life insurance.
• 5:53
  Now hear me out. Okay. So she gets a kickback on selling the structured note, and then she gets a kickback on on the life insurance. She's double dipping, and the structured note, the first part, is highly risky. Like, it'd be one thing to like set up a CD ladder, or like a 10 pay on annuity, or like something like that.
• 6:20
  Those are guaranteed, a little bit one's FDIC insured, one's backed by an insurance company, but no. Doing insecure or unsecured structured notes to fund life insurance, that blew up in her face.
• 6:30
  David: Mhmm.
• 6:33
  Mike: You have to know the detriments. There's no such thing as a perfect investment, product, or strategy. I cannot emphasize that enough, and I'm really really hitting this home today because too many people are being sold. They're not buying, they're being sold the idea that this is gonna solve all of their problems. It's a product first plan, and it's how you get into trouble in retirement.
• 6:56
  And the reason why I'm so passionate about this is because right now, we're sitting on a market top. Yeah. It's been really easy to make money.
• 7:04
  David: And market top meaning, like, the everything's expensive. All the positions, all the stocks, the ETFs are
• 7:09
  Mike: Yeah.
• 7:09
  David: Yeah. Just they're they're like fifty two week highs or
• 7:12
  Mike: Oh, yeah. Yeah. All time highs.
• 7:14
  David: All time highs.
• 7:16
  Mike: So what does that mean? Yeah. What are we to do? According to the cape ratio, cyclically adjusted price earnings ratio, a way to value the entire stock market, generally speaking Mhmm. The next ten years are probably gonna be like 3% total return.
• 7:30
  You heard that right. 3% total return. This is not a time, at least in my opinion, where you're taking on extra risk. This is a time where you have your upside strategy and your downside strategy. That you've got your upside growth strategies and you have your flat market strategies.
• 7:51
  Mhmm. You've got to blend these things together. Plan first, strategy second, products third. That's how it has to work. Here are three more, and then we'll get to your questions.
• 8:02
  And these are kind of the the cautionary tales. Private placements and promissory notes, be very careful about these. Private placements and promissory notes are often like kind of packaged as Ponzi schemes. Mhmm. So, just just say no.
• 8:19
  Yeah. If you understand what I'm where I'm going with this. I mean, some of them could be legit, but do you really know? Like a promissory note? Okay.
• 8:28
  David: Alright.
• 8:29
  Mike: Go go for bonds or something more legit like the SCC has at least looked into before it went public. That's not an endorsement by the SCC. It just means at least someone looked at it before it was being sold as an investment. Mhmm. And then you've got a couple of others here.
• 8:46
  You've got, well, gold and silver in your IRAs. Oh, yeah. That's one that really runs rampant. And the way they position it too is whatever your political leaning is, they lean into like if your party's in power or not in power, what the thing you're scared of is why you should buy gold because someone's gonna destroy a government. Like, this has been happening for years.
• 9:10
  Obama Obama was gonna destroy the government by gold. Yeah. Trump is gonna destroy the government by gold.
• 9:15
  David: Alright.
• 9:16
  Mike: Biden's gonna destroy the government by gold. Trump's gonna destroy democracy by gold. Someone was just asking me yesterday,
• 9:22
  David: do you advise your clients to like buy like gold? And I was like, well, sometimes in an ETF like, no no no. The actual like coins like
• 9:30
  Mike: If you know how to sell it Mhmm. And you know what you're getting into, fine. Yeah. But your plan cannot depend on it, and you don't buy out of fear, you buy it because you believe the value of gold is going to increase at a faster rate than inflation. Or fiat money.
• 9:45
  David: Okay.
• 9:47
  Mike: An educated decision is better than fear and putting it into a safe and say, well, at least now if if currency goes away, can shave off a little bit of my gold to buy bread. Yeah. No. That's not how it works. You take it and you put it anyway.
• 10:01
  Yeah. And the last one, or there's two more. Crypto is not a savings account. Please don't use crypto as your savings money. It's highly volatile.
• 10:08
  I think crypto could have a place for certain people in their portfolio. It's not wrong. I'm seeing crypto make its way into the debt market or the bond market. Mhmm. That's an interesting strategy, but it's highly volatile.
• 10:20
  It's risky. It's not your life savings. I knew a guy that had a ton of crypto Mhmm. And said he was unwilling to sell it, any of it, because that was his retirement. That's how he made he like had nothing saved, and then crypto made him several million dollars.
• 10:36
  Oh. What's a wonderful situation. Well, he held on to it, then it crashed, and now he had to go
• 10:40
  David: back to work. Yeah.
• 10:42
  Mike: Maybe it will come back.
• 10:44
  David: But we don't know.
• 10:45
  Mike: No one knows. Yeah. It's better to have a risky, or it's let's see. A prepared reaction is better than a risky prediction.
• 10:54
  David: Mhmm.
• 10:54
  Mike: It's okay to have crypto. It's okay to have some structured notes when it's appropriate. It's okay to have REITs in your portfolio. It's okay to have annuities. It's okay to have life insurance if you want the death benefit.
• 11:06
  Mhmm. It's okay to do some option trading. All these are fine within proper context. The last one is my biggest concern, and that's all of these new pop up research firms. You don't need a securities license to do research.
• 11:21
  Oh, if you're publishing investment research, you're under the exemption, the publication exemption. You're just sharing research, you're not making recommendations. Mhmm. So what happened, there's been an explosion of these new research tools where you can ask AI, hey, if I were to buy the dip here, what would that look like? And then it looks back and says, well, know, the probability of success here, let's model this, let's create a system.
• 11:47
  Mhmm. The problem is a lot of these systems are based on short term trends and or only look back a couple of years. Mhmm. So it creates a bull market bias, an up market bias. And what typically happens is when the markets go down, this algorithm or these systems have no idea what to do.
• 12:11
  Yeah. And so you're just you're just accelerating many times your losses because it was built on a biased up market. And we've seen this. If you want a case study, go back and go to Google or your favorite AI and ask about what happened with f squared. F squared?
• 12:29
  F squared, a fund that basically paid a college intern to create an algorithm that just was slick. And this thing, now they got in trouble because they touted hypotheticals as actual returns. Oh. But this thing was slick. And then they realized it was basically back tested bias, it failed miserably, and I don't know if anyone went to jail for it or not, but like I know that people got in trouble.
• 12:59
  David: Yeah.
• 12:59
  Mike: So be very careful about the individual in their basement using AI to create a sophisticated trading algorithm platform without them understanding basic financial principles, and trying to cheat the system because the last five, ten years, even fifteen years, it's it's been really easy to make money. It people don't fully appreciate or understand, I think, what's ahead of them, and how difficult it could be. And that's not me, you know, offering, you know, bare propaganda of, oh, the market's gonna crash. The market might not crash for a couple of years. No one knows.
• 13:39
  Mhmm. But what I do know is that we've seen this tale over and over. Warren Buffett was doing that kind of stuff when he was at school with Benjamin Graham, creating sophisticated algorithms and all this stuff, before computers were a thing. Mhmm. He was charting it out.
• 13:57
  And then he realized it didn't really work. And then he went to fundamental analysis, proper investing.
• 14:05
  David: Yeah. F squared had to settle its case by paying $35,000,000 and admitting wrongdoing. It was back in 2014.
• 14:13
  Mike: Yeah. And they had SEC oversight. Yeah. These investment research AIs that look very sophisticated, I don't wanna say them out loud, because I don't wanna get into any sort of unnecessary fight with any of them, but you know who I'm talking about. They have published great back tested returns, and they're not promising returns, but they let your hope and your emotions fill in the blanks.
• 14:35
  Doesn't make them wrong, doesn't mean you can't use them. I'm saying proceed with caution, and isolate a part of your portfolio, so that if it goes wrong, you still have the proper mechanisms, the proper systems in place to keep your plan going.
• 14:51
  David: Mhmm.
• 14:53
  Mike: This is my cautionary tale. And I I share it with you in the name of Warren Buffett, and all of his research, and Benjamin Graham, and Charlie Munger, and the greats that have gone before us Yeah. That have tried these things and it failed, and just because we have AI doesn't make it different. It just means they can get to the same conclusions faster.
• 15:12
  David: Oh, the AI yeah. The AI can get to the
• 15:15
  Mike: Yeah.
• 15:16
  David: Conclusion faster. Yeah.
• 15:18
  Mike: Fast. Alright.
• 15:21
  David: Did we is that all of the
• 15:23
  Mike: Those are ones I had earmarked. Yeah. That was a fun thirty thirty minutes of just crapping on. Yes. Things are there's it's inappropriate what's being done.
• 15:31
  It's predatory advertisement that doesn't share the detriments. That's what bugs me. So put in the chat if you have any questions or comments on any of that. We're gonna dive into the other questions that have been submitted throughout the week, and we'll we'll go from there for the rest of the the hour.