Rick Bloom Talks Money

Investing 101

Episode Notes

Meet Rick Bloom of Bloom Asset Management. He's been helping people with their money since 1984.

In our first episode, Rick covers some of the basic tenets of investing, including:


Email the show: Rick@RickBloomTalksMoney.com

Bloom Asset Management Website: http://www.bloomassetmanagement.com/


Episode Transcription

Rick Bloom Talks Money Episode 1 - Investing 101 Rev

Rick: [00:00:00] Hi, this is Rick Bloom. I want to welcome you to my podcast: Rick Bloom Talks Money. This is my very first podcast. I'm very excited to be here and I appreciate you spending time with me and joining me. I want to tell you a little bit about the podcast. Our podcast is simply dedicated to you to help you make better decisions with your money.

I believe money looks better in your pocket than it does anyone else's, and that's what we're going to focus on in this show. Also, I want to let you know my commitment to you. There's not going to be any geek speak. We're not going to have any theoretical discussions. I'll leave that for others. We're going to talk in simple, understandable terms so you could take the information and use it and apply it to your individual situation.

The topics we’re going to cover – anything and everything that deals with your money. We're going to talk about everything that regards to personal finance, whether it's your investments, risk management, taxes, and even some fun things like how to save money on vacations. As I said earlier, simply anything and everything that deals with your money, we plan to talk about on this show.  And always remember the goal -- to make sure you have more money in your pocket. 

For those who are familiar with me, you know I'm an attorney, certified public accountant, and financial advisor. I've been in this business for over 35 years, and for as long as I've been in the business, I've been dedicated to providing you independent financial advice, and that's what you're going to get from this podcast. 

So when we first started talking about doing a podcast, the beginning of the year markets were at record high unemployment we're at record lows and things were looking very good in the economy, and then all of a sudden, everything turned on a dime.  Fear has replaced greed.  And as I record this podcast on April 13, markets have recovered somewhat, but still there's a lot of uncertainty left in the market and I want to help you become more certain about your money so you can make better decisions. 

First of all, let's talk about this crisis. This has been one of the fastest downturns we've ever had. However, we've seen downturns before. This is the 12th bear market we've had since World War II, and you know what's happened in 100 percent of the previous 11? We've recovered and reached record highs. In fact, on average it's only taken about two years to recover, so I have no doubt we're going to recover from this crisis as well.  That's what history teaches us. 

However, one thing I could tell you is mistakes investors make today is going to cost them big time, and that's why it's so important you just don't make mistakes during these difficult time periods. Because think about what just happened over the last two weeks. Go back to March 23rd - the Dow was at about 18.5 and since that point a little over two weeks the markets rallied over 5,000 points.  You would have missed out on a 5,000-point run in the Dow just by letting fear dictate your investment decisions. 

I believe investors should not be focused on what's happening in the market on a day-to-day basis because it's a fool's game. When you think about the market, over the short run it's irrational. Good news is bad news, bad news is good news. What you and I need to do as investors -- we need to focus on our own individual situation. For as long as I've been in the investment world, I've stressed to people the key is you invest based upon your goals and objectives.  And during these difficult times, it's important to go back to the basics and relook at your situation, and I believe it's goals and objectives; that's why you invest money.

The first question you ask yourself when you invest money is what are you looking for? I always use an example when I do speeches at public libraries and at civic events, I always ask people, you know, if you get a free vacation, what's the first thing you're going to ask me?  Well, you're going to ask me where we're going and how long we're going for. You want to know where we're going so you know how to pack. Should I take golf clubs on my next vacation? Well, if I'm going to Florida, yes, if I'm going to Alaska in the winter, no. So, it has nothing to do with the golf clubs, it has to do with where I'm going.  And it's the same thing with money. You have to know where you're going with it. If you don't know your goals and objectives, it's sort of like packing a suitcase for vacation and not knowing where you're going. So, you packed like you're going to Florida and you end up in Alaska in January. That's not the way you want to be, and for investors you need to focus on that timeframe you have to achieve your goals. Goals and objectives are the key. 

I get this all the time. People will say to me, Rick, you know, I'm 70 years old; how should I invest my money? I have no idea because I don't know what a 70-year-old is anymore. In the old days, we used to invest based upon age.  That's what the general thinking was everyone who is 65 everyone who's 70 is the same. Well, that's no longer true. We have some 70-year-olds that are working; others have been in retirement for 10 years. If you had two twins, they live next door to each other, they have the same family. In other words, each have two kids, they work in the same job, they make the same amount of money. Their portfolios may be totally different. And the reason is because their goals and objectives are different. 

So, the first thing, if you want to be a successful investor you need to take a step back and look at what your goals are. If your goals are long-term and you're 10 years down the road, what's happened in the market over the last month or two, it hurts, but it's really not material. On the other hand, if you need money a week from Tuesday, what's happened in the market is extremely material.  Goals and objectives -- you need to set those things first before you even talk about investing your money.

And the second thing you need to understand is risk. And unfortunately, most people don't understand risk and it is important.  When you talk about risk, what people look at is the stock market going up, and it goes down, and they look at that as the only risk. Unfortunately, that is not the case. There's a reason why so many 80-year-olds in our society are going back to work -- because they didn't take into consideration the purchasing power risk.

What is purchasing power risk? Well think about it. Does $100 today buy what $100 twenty years ago does? The answer is absolutely not. That's purchasing power. The example I use, 1976 I bought my very first car. It was a Pontiac Firebird. I grew up in a family that your parents didn't buy you a car.  I got my first car when I got my first job and I started to work. I paid $5,000 out the door for the Pontiac Firebird. Fast forward today, if I bought a similar car, a Camaro or something, it'd be $35,000. Think about a postage stamp.  When I was a kid a postage stamp was four cents.Today, who knows, it's 49 cents or 50 cents to mail the exact same thing.  That is purchasing power.  In the old days, it really didn't matter that much because people saving for their retirement, they retired at 65 and then they were going to be dead at 70, so it was no big deal. Fast forward today, someone who's 65 they have to plan at least for another 30 plus years of retirement. That's where purchasing power really makes a difference.

So, when it comes to investing your money, you have to look at what risk you're willing to accept. It's not a matter of just looking at your principal fluctuation.  And I get this all the time, I'll ask the people in the audience and I'll say, can someone tell me a risk-free investment? And, of course, the automatic answer is CDs, U.S. treasuries, you can't lose money. I turned to the audience and say, you can't make money on those. Let me explain.On a CD, everyone thinks a CD is a conservative safe investment, but it's not. If you're saving for retirement and retirement is 10/15 years away, and you get your one percent on a CD and you're paying tax on that money, after taxes, you're left with half a percent, something of that. Does your cost of living only go up a half a percent a year? I don't think so. So, you have to look at risk as a function, not just of the principal, but of purchasing power. That is the key. So, someone who's conservative, as an investor doesn't avoid the stock market and someone who's aggressive doesn't avoid CDs.You invest based upon where your goals and objectives are. So, if someone is a conservative investor and they need their money 15/20 years down the road, the bulk of their money should be in the stock market. That doesn't mean that they go with aggressive companies in the market, they can go with more of the blue chips, but that's how you set a portfolio based upon your goals and objectives and your risk tolerance. And the other thing that's important to realize as investors, there is no investment that anyone can tell me that is risk-free. Everyone wants a risk-free investment; unfortunately, it doesn't exist. As I mentioned with treasuries and CDs, you're not going to lose your principal, but you're going to lose the purchasing power.  So, if you think you can invest without risk, you're making a huge mistake. 

So, it's important that when we look at this crisis right now and we take a step back, it's important that your portfolio matches your goals and objectives and your risk tolerance level. I believe personally that investors need diversified portfolios.

Investing is not gambling. And when you target one company, one industry that is gambling.  You need to be diversified; you need to spread risk out in a variety of different areas. A typical portfolio that I manage is going to have large companies, it's going to have small companies, midsize companies, it's going to have international companies, real estate companies, emerging markets, which are new economies. It's going to be a well-balanced and diversified portfolio. And the reason why you have well-balanced and diversified portfolios is because you don't know what the future's going to bring. And by having diversification, it allows you to spread risk out in a lot of different areas.

These investments may be down, these will be up, and in the long run, that's how you'll be successful. 

You know, Warren Buffett is one of the great investors of all times, and one of his famous sayings is “It's not timing the market, it's time in the market that makes someone successful.” And I know one of the questions I've gotten so often is when is it time to jump back in; you know, when has the market reach the low? I don't know and neither does anyone else. And I don't think that's the way you should invest. That's gambling. And when you gamble, you generally lose. I always say they don't build those big beautiful hotels in Vegas because people make money, they lose money. So, you don't want to gamble on the stock market.

And I always say, you know, you need to do your homework ahead of time.  By having diversified and balanced portfolios, it also means that when markets are going up, you may not go up as much. But it also means it protects your downside risk. And so, I think during these times, investors need to get back to the basics to make sure that their portfolio reflects their goals and objectives. And you know your portfolio is sort of like a garden.  You know, you could do all the right things at the beginning with a garden and you plant it and it it's beautiful. And then you don't tend it, and then two months later, you know what it looks like. Well, same thing with your portfolio, you constantly have to make adjustments to it. 

And one of the things that you do, and this is a great time to do it, is to consider rebalancing your portfolio.  And when I say rebalancing, your portfolio let me take a step back. When you build your portfolio, I know this may sound crazy – your focus should not be on your investments. If your focus is on your investments, they're in the wrong place. Your focus should be on your allocations, how much you're going to have in stocks, how much you're going to have in bonds, how much in large companies, how much in small companies.  All the studies show if your focus is on your allocations, you will be much more successful than if it's on your investments. 

And when I say on your investments, you know, someone will say, you know I got $10,000 to invest; where should I go; you know, what's hot right now? No, that's gambling. When you buy what's hot, that's generally gambling and in fact, it's not a good way to make money. I always tell investors the key to making money in the market, you buy low and you sell high.  You buy what's out of favor, not what's hot. And that's what people do. They buy what's hot and then when it slows down. Everything is cyclical, they sell it low. Buying high selling low is not a prescription to make money on the stock market.  You need to buy low and sell high. That's how you make money.  And you know one of the reasons people don't want to buy low and sell high, and I know this will shock you, but then they have to pay taxes.

And it is one of the things that throws investors off all the time. And I say this in just about every speech I give -- your goal is not to lower your taxes. I know that sounds crazy, but it's not. And I can prove it to anyone. Who wouldn't want to win the $500 million lottery? If you win the $500 million lottery, it's going to cost you a minimum, $100 million dollars in taxes.  So, if your goal is to lower your taxes, you don't want to win the $500 million lottery. I'll tell you what I do will do for you. If you win that lottery and you don't want to pay the taxes, just give me the ticket. I'll be more than happy to pay all the taxes because what I would focus on is on the three or four hundred million that ended up in my pocket, not what ends up in the tax person's pocket.

It is one of the mistakes that investors make all the time -- they think their goal is to lower your taxes. Your goal is to never lower your taxes. Your goal is to be smart with taxes. And the way our system works, the more money you make, the more you're going to pay in taxes. So, I bring that up because it's important to say to yourself that you can't let the tax tail wag the dog.  You have to do things that make good economic sense. Your goal is to never lower your taxes; it's to increase your net worth. We want to be smart with taxes and keep this in mind. I believe it's not more patriotic to pay more money in taxes than you have to. However, there's not one of us listening today that would not want Bill Gates, his tax bill if we can have his balance sheet.So always keep that in mind as an investor as to what we need to do to maintain our portfolios. It's not taxes. Taxes are a necessary evil. We want to be smart, but your goal is not to lower your taxes. 

Now, when you look at what's been happening in the market, obviously we've had big swings in the market these days.  I mean up a thousand down a thousand, the whole bit.  And that just shows you how uncertain the market is. And I think it's going to be that way for a while. I think you could expect that we're going to have lots of volatility over the next few months; at least until America and the world is back working.  And so don't be concerned if you see 100, 200, 300 point movements on the market on a daily basis. It's based upon uncertainty that no one knows.  But as investors, as you and I should look at this time and say, where are our opportunities? What can we do to take advantage of the situation? 

So, I want to run through a few things that I think that, make sense for you. One of them is a Roth conversion. Now, for those of you don't know Roth IRAs have an advantage over a traditional IRA. Roth IRAs grow on a tax- free basis. They're never, you never have to pay money on Roth IRAs and what's also nice, they're not subject to the 72 required minimum distribution rules.  Don't forget they changed the age regarding required minimum distributions. It's now 72. So what that means is that at 72 you have to start taking out of your retirement account whether you want the money or not. In a Roth IRA, you don't have to do that. The money can continue to grow tax free for as long as you choose.  And if you pass away and you leave it to a relative, they take it over tax free as well. So, Roth IRAs there are lots of good things to them.  But you could convert, you can take money in your traditional IRA and put it into a Roth conversion. The downside of that is you have to pay tax on the money. Whatever you're converting, you have to pay tax.However, you'd have to pay tax anyways.So, the thinking about doing it now is the fact your account is lower, so you can convert more shares than you could have just two months ago at a lower tax cost. So, it's a strategy I think everyone should be looking at. You don't have to be working, it doesn't matter what you earn; anyone could do a Roth conversion.

I want to run through quickly the rules that I live by in doing a Roth conversion, 1) it makes sense as long as it won't throw you into a higher tax bracket. Remember, as I mentioned, when you convert, you have to pay money on the conversion. That money is taxable, so you don't want it to throw you into a higher tax bracket; 2) you have money to pay the additional tax without touching the money that you're converting; and 3) you can leave the money there at least five to seven years.If you meet those three criteria, doing a Roth conversion makes sense, and doing it now is great timing because you're getting it at a discount.

Another thing you should look at doing is making your 2020 IRA contribution now. Most people wait until the end of the year to make an IRA contribution. You don't have to; you could do it now. Take advantage of lower market.  And in fact, the other thing is if you're sitting on cash that you've been waiting to invest, this is a great time.

I know someone's going to say, but Rick, it may go lower. Of course, it may go lower. We have no idea, but it can also go higher. You can't hope to ultimately invest at the ultimate low or sell the ultimate high. You can't do that. Think about it, Wall Street is on sale. The stock market is the only store I know that when they're having a sale, people run away from them.  When Macy's has a sale, people run to Macy's. When the stock market has a sale, people run away. It doesn't make sense. If you're sitting on new money and you're a long-term investor, this is a great way of going. 

Another thing that you can do to take advantage of the current market conditions is what’s called tax harvesting. Now, as I told you earlier, your goal is not to lower your taxes, but it's also to be smart with taxes and this is one strategy that makes sense. So, let's just say that you have a loss in an investment. Well, you could sell that loss and deduct it for tax purposes. However, because what we have known as wash-sale rules and what wash-sale rules basically say is that you can't buy an investment back that you took a loss in within 30 days.  So now you've recognized this loss for tax purposes, you really want to buy the same investment, but you can't. So, what you can do is you buy something that's similar. So if you're in a large cap growth fund, you buy a different large cap growth fund, something that's pretty close. So, it now allows you to recognize your loss for tax purposes and still be in the market.  So, I think a great strategy is to go through things and look at doing some tax harvesting.Tax harvesting makes sense, it's a very good strategy and it's something more and more people should do. 

I also want to let you know that something else that people should look at doing as a reminder is estate planning is so important and with all these people getting sick, it's a reminder how important it is to have a medical durable power of attorney.  A medical durable power of attorney allows someone to make medical decisions for you if you are unable to do so. And one of the beauties of medical durable powers of attorney -- you don't have to pay anyone to do it. You can get free fill-in-the-blank forms. Free is probably my favorite word in the English dictionary.You can go on my website, bloomassetmanagement.com and you'll see on there a free medical durable power of attorney. It's a great form and everyone needs to do it. My advice is anyone who is 18 years of age and older needs a medical durable power of attorney. It'll help during this crisis. 

One last thing to end up - I want to give you a homework assignment; something that you could do that really will make a difference in your financial affairs for everyone, and that is since we're all home looking for things to do, you should do a cashflow statement and a family balance sheet. A cashflow statement is nothing more than a listing of what comes in and what comes out on a monthly basis.  And you know why that's important? I'll tell you why it's important, because that'll tell you what it costs you to live a month. And why is it important to know what it costs you to live a month? That's how you do any planning for retirement. You have to know what it costs you to live. And the other thing it does, if you do these on a regular basis every six months, you could then see what your cost of living is.  You know, we talk about inflation, those are government numbers, and they apply to the government. They don't apply to you and I.  Your inflation rate and my inflation rate are different. So, by doing a cashflow statement, it allows you to see what your personal inflation rate is. You could see where your cost of living is going up. 

And the other thing is, I'm a firm believer that everyone needs an emergency fund of money. They had emergency fund of money - three to six months of living expenses is based upon what it costs you to live. And the reason why it's so important to have an emergency fund of money -- because you don't want to have to sell in weakness.  What makes a good investor is someone who doesn't have to sell. So, if someone had to sell, you know, a few weeks ago when the market was at its low, they took a tremendous hit.  If they even waited a week after that, their account would have been up 20 percent.  So it's important that you don't let the market dictate to you, you dictate to the market and one way to do that is to make sure you have an emergency fund of money -- three to six months of living expenses, and that's why it's important to do that cashflow statement so you know what it really costs you to live.  Not what you think you could live on, but what you actually do live on. I was talking to someone once and I was going through their list and I said, wait a minute, you tell me that you take the family every year on a Christmas vacation; I don't see that in there. And she says, well that's, you know, something that, you know, it's not really a cost of living. I go, it is, it's your cost of living. That's what makes your life worthwhile. And so, put those expenses down because why lie to yourself.  You want to be honest with yourself. That's why, and this is a great time since, we’re all quarantined. Go through and look at what your expenses are so you know, moving forward, what it costs you to live. 

And the other thing that everyone needs, you need a balance sheet. You need to know where your assets and your liabilities are.  I ask people all the time, what their liabilities are. They say, I don't know, I think I have this, I think I have that. Well, you know, take the old pencil to paper and write down what your assets are and what your liabilities are. And the reason why that's important because once you see what your liabilities are, you can start being a little more efficient when you pay them off.  I mean, I amazed when I see someone paying off a four percent loan when they're making extra payments on that, when they have an 18½ percent non tax deductible charge card that they're not making extra payments on. Well, when you see it in black and white, all of a sudden you see 18½ percent versus four percent, you know which debt you should pay off first.  And also, what it does it allows you to see over time how your accounts growing. I know if you go back, I always love going back and looking at, you know my cashflow statement and my balance sheet 10 years ago and compare them to today and I go, wow, it did great. And that's the thing; you got to be able to put some homework in to make sure that you're successful.  And I'm telling you, doing a cashflow statement, doing a personal family balance sheet are two things that the first time it's difficult, but after that it gets easy and it's something that'll help you be a better investor and a better custodian of your personal financial affairs, and that's exactly what we want to do.

I hope you enjoyed today's podcast. I did.  And I want to remind you, if you have questions, you can always email me. We'll take them on the podcast, and I'm a big believer that you know, I want to hear what you say. So, if you can provide any constructive criticism, I definitely want to hear that from you. Our email address for the podcast is Rick@rickbloomtalksmoney.com.  Again, that email address is Rick@rickbloomtalksmoney.com.  And Bloom is spelled very simply, B-L-O-O-M.

And again, I want to encourage you to email me with your questions and also comments. If you have any suggestions for future guests, we'd love to hear from you because look at this, we're a team on this and I want to provide the best up-to-date information that I can to make sure you make better decisions with your money.

I want to remind you that you can subscribe at Apple, Google, Spotify, or wherever you get your podcasts. 

Closing: [00:27:33] This podcast is brought to you by Bloom Asset Management, building financial futures since 1984. Bloom Asset Management is a fee-only investment management and advice firm.  With its team of expert financial, legal, and tax professionals, you can be sure that Bloom Asset Management will be your long-term partner in building your financial future.