Near the end of the year, after the market has been up 20%+ for the past 2 years: now is a good time to check in on your portfolio balance. Do you still have the correct mix of stocks and bonds to meet your goals? 🤔

It’s important to understand your financial goals and have a portfolio balance that has the best chance to reach them. And if you had that dialed in (you did, right!?) – then it might currently be out-of-whack. The stock market has gone straight up, while your bonds have been stuck on idle. So you might find that your portfolio has too many stocks, leaving you at risk of a bigger fall.

Check out your entire portfolio, not just your 401(k). Don’t forget about your brokerage account, your IRA and if you’re married: double those. Add it all together and see where you sit in stocks versus bonds. Does that match your goals, risk tolerance, and risk capacity?

Find out more about Mike at https://www.mortonfinancialadvice.com and connect at https://www.linkedin.com/in/mwsmorton/

Transcript

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Now the full name, a lot of us have full names, right? Like my mother calls me Matthew, but most people call me Matt. So the full name is financial planning for entrepreneurs and tech professionals, but like in the movie, the social network, instead of calling it the Facebook just Facebook it's cleaner. 


Mike has gone with financial planning for entrepreneurs, the tech professionals get the old Heath. Oh, huh. 


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It is, we've been doing a run of shows and look, when people listen to these things on podcasts, they're pretty evergreen. Like all the topics we talk about, they could be totally relevant anytime of the year. But, we do record these throughout the year and we've just been in a run of shows recently of issues that are, I think, particular. 


On your mind, cause it's the end of the year. And we're thinking about what issues come up the end of the year. So we did tax planning, we did eight tips and tricks. We had a great two-parter recently that's in that financial planning for entrepreneurs, podcast room, like eight great tips to save on your taxes. 


Pretty easy things you can do. So I urge people to check that out and you've got another one today that I think goes under that theme of, Hey, here's some things to maybe think about towards the end of the year. 


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So now is a great time to make sure that you have the right balance left and right up and down in your portfolio. And so that's why I'd like to speak about today, but going back to the tax tips, I will say this. I took our idea of eight tax tips and turned it into a whole advent calendar of tax tips, a whole 25 tax tips for end of year or anytime of year on my LinkedIn profile. 


So if you want even more text tips, 


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So it's kind of a knockoff version. I don't know. Meanwhile, we've got the advent calendar going. We've got the advent candles going. We've got the menorah going. What we really need to do is diversify our household more and get the quantity. Thing. So anyway, the point is you've got eight. So if Hanukkah is on your mind, check out the eight version. 


If Christmas is on your mind, you've got a full advent calendar and we will do a Kwanzaa adaptation at some point. All Right. 


So portfolio rebalancing. What does that mean? I think I know what a portfolio is, but what are you talking about when you're talking about balancing and. 


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And what we want to make sure is that you have the right mix of assets within that portfolio to reach your. Okay. So typically we always start with stocks and bonds. Quick refresher stocks are an investment in companies. You've purchased a little tiny sliver of that company. You hope they continue to do well, make great products, sell services, make profits, and you own a small piece of that company. 


So hopefully it goes up in value over time. Bonds are an IO. And so what you've done there is you've lent money to a company or to the government, and they're going to pay you back over time. They often have an interest rate associated with them. So that's an IOU where you're lending money. So one is buying a sliver of that company and the other is an IOU. 


And bonds. And that's where we start the discussion around a portfolio balance because each of those, what we call asset classes, each of those investments has a different volatility, how much it might go up and down in a single year and a different historic rate of return. 


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Most people talk about risk. I There's a whole show we did together about risk. Look, the word risk is going to come into this. I'm sure we're about to talk about risk. I'm guessing, but I like the modification that you offer to people here is around goals that, that we have to think about the fact that there's going to be the other word you just used. 


There's going to be volatility. Any asset you have could go. I could go down. The value is going to fluctuate and you're taking on some risk in that. But the risk is not that it will go up and down because that is going to happen. That is the nature of these things. It's you're going to ride a rollercoaster. 


It's going to go up and down. That's what it's all about. It's the risk that you're undertaking is you will not reach your goals. And so I just think that's an important context here that what we're not talking about is volatility. As a bad thing, per se, what we're talking about is managing across all the assets you have so that you have the best possible chance of achieving your goals. 


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So there's one, potential financial goal that we need to work towards and put dollars aside so that we can reach that goal. Now, when you're talking about the portfolio again, rebalancing, so we're talking high-level stuff. And bonds. And you mentioned the word risk. So that's going to come right in here. 


And there's two parts to the risk of your portfolio. There's risk tolerance and there's risk capacity. So risk tolerance, everybody has a different tolerance for risk. Some people like to score. Some people like to, go on high wires or do other risky ventures, other people, and not so much like to play it safe. 


So it doesn't necessarily translate one-to-one into investments. People that want to do risk taking with other aspects of their life don't necessarily want the risk to. In their financial life, but of course there are, risk-taking how much risk you're willing to take. 


Hey, if the stock market goes down, if you're a portfolio, your dollars, that a hundred thousand dollars you have in your 401k goes down to $70,000. How bad will you feel and what might you do about it? That's a risk tolerance. Risk capacity is think about it this way. If you are retired, And you have just enough to live on. 


You really don't want to take a risk with that money. You have just enough to live on. You have to be very prudent and conservative around that money. Whereas if you're 25 and you got a great career ahead of you, you have lots of risks, capacity, that thousand dollars you're putting into your 401k, it could go up and down. 


You hope it's going to grow over time, but you have huge risks capacity because of where you are in. 


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I guess those two things don't always necessarily line up, a skydiving risk-taker and their investments. All right. That's actually, that's a distinction I've heard before. Risk tolerance, risk capacity. That's a good explanation. So how does that then play into portfolio? 


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I have a million dollars saved. Now my million dollars is worth 800,000. What are you going to do? You have to know that ahead of time. We just had this a year and a half ago, March. You remember those three weeks, you don't remember at this point, but it went down 30%. So your million dollar portfolio. 


Might have gone down if you were heavily in stocks down to $700,000. And how did that feel? So I don't want you to sell out at the bottom if that happens. So therefore that would not be the right allocation, risk tolerance allocation for you now, risk capacity. You've got to balance that out. If you're 35 and you have that million dollar portrayal. 


Good for you. And if it goes down, and you say, oh, no problem. I'm still adding to it. I'm still on my job. I'm adding two more 401k. I'm buying in why stocks are on sale. I know it's going to come back and I'm not touching this money for 20 years 


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You want to play it off with your risk capacity to him and understand? No, it's okay. Minnows for the. 


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And so they actually still have a lot of risk capacity. Even though they're retiring, they have a large portfolio, which gives them more flexibility to take on more risk because they have over saved. So there's an instance again, where you have more risk capacity, even though your tolerance might be like, geez, I do not want to take any of this and be risky. 


That's fine. You don't have to necessarily, but just understanding both sides of that equation. 


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I'm going to go to the bank and I'm going to put this away. And someday it will go toward my college fund. I really, I seriously, I talk about this with my wife all the time. It's if we ever have a little extra money, it's Should we try to live a little no, we never go anywhere. 


We'd never do anything. We're dull. I'm. 


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Okay. So now this idea that if I'm investing a dollar for 10 years from now, I can probably put that in company. By a little sliver of the companies invest that in stocks, because over 10 year periods, they generally do pretty well. If I need that money next year, heavily leaning towards checking savings, account money market, short term bonds. 


I need that money next year. Okay. So we've got a framework and I want you to understand that your portfolio is a mix of those. So if you're young again, you might have, 70, 80, 90% invested in stocks. Okay. And the rest. If you're in retirement and you're that conservative, I have just enough to live on and I'll be fine. 


Maybe your 50% in stocks and 50% in bonds, right? That's always the first split that we look at. I'm probably going to keep it there for this discussion. We've talked about different asset classes in large companies and small companies and U S and international, of course, we want to do all that diversification. 


Okay. It's one of the only free lunches in the stock. Is diversification, but for now, for this discussion, let's talk stocks and bonds. So you've dialed in where you like to be, whereas comfortable from you, risk tolerance and risk capacity, and you decided, Hey, I'm in the middle, late part of my career. I'm going to be 70% stocks, 30% bonds. 


And that's a good allocation for me. 


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I'm a former federal employee and the federal employee 401k is basically called the thrift savings plan. 


Why did I have to make it complicated? Why don't they just say it's your 401k, whatever. Anyway and they try to make it easy by saying, all right, you can put yourself into this mix where this makes and the mic. Of stocks involves international small cap international, high growth domestic. 


Anyway, you've got, it's more exotic under the, under that surface, but what you're saying is look, keep it simple. There is an average of stock volatility and risk. There's an average of bonds. That's good enough for balancing your portfolio. 


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A lot of the, there are tools, a lot of the websites where you have your 401k, we'll give you, that breakdown, that pie chart of, stocks and bonds. And then, like you said, Matt, us and international have little color codes for those different things. 


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It's because I'm either an entrepreneur or a tech professional, yeah, but that's the very first thing that they show on the screen these days they'll show your pie chart. They'll show like the average pie chart for someone like you. And that's I find that super helpful, 


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So double all those accounts and you really want to know across everything. So that's important. 


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So many me bill kinda let that slide. That's an episode we should talk about to my gosh, talking about a practical problem for people. 


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How often should I be doing this? And I think the whole point is you shouldn't be fussing with your accounts that often. 


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If you've decided that 70, 30 is the right mix for you, then you need to maintain that 70 30. Okay. So let's just say, Matt, that you haven't checked in. In the last couple years, you just working life. I don't know. Maybe it has been busy the last couple of years for, one reason or another. 


And you haven't really checked in. The market's gone up about 20%, both years, so far. Okay. So now that's 70 30 mix. You had 70% stocks. That's 70% side has gone up by 20% last year and 20% this year. So now maybe you're over 80% because the bond side has not been. All right. It is not risen nearly as much. 


Okay. So you got growth in that, that 70% side, not so much growth in the 30% side. So now when you look at the big pie chart, it's staring you in the face and says, yeah, cool. You're at 80% stocks and 20%. And that is not what you decided you wanted to be. You decide, Hey, I want to be 70, 30. So that's when you need to make a shift is when the market's been going for a while, you check in and you say, geez, if you're off by a couple of percent, no big deal. 


But as soon as you get off by, 70 to 75 or to 80 that's when you need to dial it back in. 


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So congratulations. You've stuck with it and they've done really well. And it's great. Then you need to sell some of those. So you have to look at your, if you have a million dollar portfolio and now it's 800,000 in a couple of stock mutual funds and 200,000. In some cash and bonds, you need to sell 100,000 of your stocks and buy cash and bonds and money market funds. 


Okay. Fixed income. 


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So there are probably ways you could think about doing that, that can minimize the tax 


[:me that the market comes down:

Okay, because it's good to hear the same message over and over, right? The stock market is fairly valued to over-valued. That's fine. That happens all the time. Probably 50% of the time it's fairly valued or overvalued. So just be defensive. If you're normally 70, 30 stick with 70 30, if you normally 80 20 stick with 80 20, don't get too aggressive. 


Don't let your portfolio float out of balance and get you more aggressive than you want. 


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This is when you're sending your kids to college with a little bit of an exception. I think it involves defensiveness. Is that. 


[:[:[:w you're retiring probably in:

That's like I said, great place to get started, but just understand as maybe for the average consumer may not apply to your specific situation. 


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and That's good news. I don't think that's a good sign for the activity you're doing. All right. We're going to have to sign off here. Mike Morton financial advice, financial planning for entrepreneurs. Thanks so much. 


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