Retirement Starts Today Radio: Taylor Schulte on Navigating Turbulent Markets
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Welcome to Stay Wealthy San Diego, where award-winning financial expert Taylor Schulte reveals the stories behind the leaders, entrepreneurs, and innovators who helped make San Diego one of the most beautiful cities in America. Listen in to their perspectives and advice on what it takes to live an abundant life and become wealthy in your own way.

This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services. Hey, everyone. Thank you, as always, for tuning in.

Last week, I had the opportunity to join one of the top retirement podcasts on iTunes called Retirement Starts Today Radio. It's hosted by a good friend of mine named Ben Brandt. And we just had a really good discussion on the recent stock market volatility and how to think about investing for retirement and income or just investing at all during these turbulent times.

I thought we had a really good discussion. I enjoyed some of Ben's perspectives and pushed back on some of my philosophies. Really enjoyed the chat and thought I'd re-air that episode here today. And I hope you enjoy.

All right. This episode has been a long time in the making, but it's my pleasure to introduce a good friend of mine. He's got the first name of a San Diegan and the last name of a North Dakota. And it's Taylor Schulte. Welcome to the program. Ben, thanks so much for having me. So Taylor, you are a fiduciary financial advisor, just like I am. You manage financial plans and retirement plans and portfolios for your clients. We have had one heck of a month in the markets.

What should we do about it? Yeah, let's dive into this. It's been an exciting few weeks. I think there's a lot of lessons that we can pull from this. I think there's a lot of things that we can do to improve our current financial situations and make sure we're prepared for when that next major event happens. So yeah, a few weeks ago, we went into correction territory. And some people call a correction a drop of 5% to 10% in the market.

And this is completely normal, right? I mean, this happens on average once a year. What wasn't normal was the speed in which it happened, right? It happened really fast. And I saw a stat that said it was the first time in history where we went from making a new high to being down 10% in nine days. So the speed at which it happened was not normal, but these types of things are completely normal. So...

I think it was just a good reminder that these things happen. Sometimes they happen really quickly and we didn't know how to properly react. I agree. You know, there's really no such thing as a perfect correction, but if there is such thing as a perfect correction, I would say that this is it, right? Almost immediate snap down of 10 to 13% across different indices, uh,

And then now, you know, we're recording this the second week of February. So these could be famous last words, of course. But we've built back 60, 60 something, 70 something percent of those losses already. So a snap down and a snap back up and sort of snapping us out of our complacency. So I think now is a really good time to reevaluate what you're doing.

own individual personal risk tolerance is. What sort of conversations are you having around that topic with your clients, Taylor? We met with a client yesterday and we had this exact conversation and we talked about exactly what you just said. And my question was, how did you feel when the market dropped that quickly and that severely? How did you feel like what was going through your head? And his response was, you know, the first thing that popped into my head was I should buy more, right?

And that's an indication that that client is tolerant of risk. If market drops in value and he's wanting to put more money into the market, that's a signal to me that he has tolerance for taking that kind of risk. But if you found yourself thinking... Losing sleep. If you found yourself losing sleep, that's a problem. That's something to pay attention to. If you found yourself panicking or wanting to...

change your risk profile or take money out of the market. Those are signs that maybe you're in a portfolio that's too aggressive for you, or maybe you just don't quite understand the portfolio that you're in.

So like you said, I think now is a really, really, really good time to make sure that you're in the right portfolio. Not only have we seen a recent spike in volatility, but you and I also know that the market has been racing up for close to nine years. And I think personally, this is just a really appropriate time to one, understand what you own in your portfolio. And then two, again, just make sure it's invested properly.

I'm going to share an analogy with you. Sometimes we'll talk about stocks and bonds. Clients' eyes glaze over. So most of us own real estate or own a house or have owned a house. And I think about it like this. If your house dropped in value by 20%, 30%,

Are you going to race out and hire a realtor to put your house up for sale and sell it after it's dropped in value by 20% or 30%? Probably not. You're probably going to hunker down, maybe cut some expenses, stay committed to owning that house, and when prices come back up again...

then you might reevaluate your situation and say, okay, should we sell this house? Should we downsize? Are we comfortable? And then you can start to have those decisions. So to me, that's kind of where we're at today. We're hitting all-time highs. Everyone's making money and it's all great. But now it's a time to make sure, hey, if we went through an event like this,

let's just make sure that we're not going to run out on the streets and put our portfolios up for sale after they drop by 20 or 30% because that's a losing game. You know, continuing on with this house analogy and keeping in mind that our listeners and many of your clients in mind are pre-retirees, baby boomers, you know, we wouldn't,

put our house up for sale because we know we're not moving anytime soon. But when we think about our retirement portfolio, we might need to access that money soon if we are close to retirement. How does that change the decisions that we need to be making? We put the question out to the email list, what are you worried about and what's keeping you up at night with this market volatility? And a couple of people responded that it's

Is now the right time to cash out my portfolio and maybe buy an annuity or try to catch this top tick of the market and then remove all the portfolio risk from my investments? How does that change when we are getting close to needing this money?

Well, I guess the first thing I'll say is you can't time the market. It's impossible. Look, like I said, the market's been racing up for almost nine years. Could it keep going for another nine years? Absolutely. That's definitely a possibility. We're buying a house right now and real estate out here in Southern California has been exploding. And I caught myself in the same predicament. And I told my wife, I'm like, man, maybe we should just wait for

for real estate to kind of take a breather and come back down. And then I caught myself. I'm like, wait a second. Who says real estate has to drop? Like,

This real estate market could keep going for another 10 years. And then we're really going to be kicking ourselves. So the same thing with your portfolio, who says it has to, we have to go through a recession or bear market. We could go through a long period where we're just in this really strong bull market. So, you know, let's not try to time the market. That's impossible because you got to know when to get out and then you got to know when to get back in. That means you have to be right twice and no one's ever consistently done that in history. So let's take that off the table. Um,

In terms of needing your money, you should have a comprehensive plan in place to manage this bucket of money from that emergency savings account that's just cash, that's super accessible, and then having that portfolio of stocks and bonds. And when we manage this portfolio for retirees, we manage what's called a total return investing. We're looking at the portfolio from a total return perspective.

not just stocks, not just bonds, but everything working together. And we're stripping distributions out of that portfolio. So we've already factored in if that portfolio dropped in value, we're still going to continue taking our distributions as planned. And we know stretched out over a long period of time that the probability of success should be high for that.

We're talking with Taylor Schulte, DefineFinancial.com. He's a San Diego financial advisor. As financial advisors, we have to act as fiduciaries for our clients and cannot recommend any individual securities because it wouldn't be prudent. But with that disclosure in place, it sounds like you're doing some interesting things with your portfolio that might be a little bit out of the ordinary. Can you share with us what that might be? Yeah, I don't know if you want to call it out of the ordinary or just really, really simple and boring.

But yeah, maybe that is out of the ordinary. When we look at a portfolio, we break it up into two chunks. We have our stocks and our bonds. And internally, we call this our aggressive portfolio and our boring portfolio. And clients have a mix of each of these. So in our aggressive portfolio, we have a mix of US stocks and international stocks and real estate securities.

And then on our boring portfolio, we only use government bonds. We don't use corporate bonds. We don't use high yield debt. We don't use floating rate securities. We don't use mortgage backed securities. We only own government bonds in that boring portfolio.

And the reason is, is we look at that as our safety net. And government bonds for the last 90, 100 years have proven to be that safety net. Typically, when US stocks go through a really tough time period, like 08, 09, government bonds do very, very well. They hold the portfolio in place or they actually sometimes increase in value.

And so when we look at the portfolio, we want that boring portfolio to hold up during really difficult times.

If a client needs a higher rate of return or they want a higher rate of return, we'd rather take the risk in the stock market and not the bond market. So we don't want to increase risk in our bonds. I'd rather just allocate more to that aggressive portfolio and take the risk in equities. That make sense? It does make sense. So if I could play the devil's advocate...

I am a 60-year-old retiree. I've got a 30-year timeline ahead of me. If I have too much cash or cash equivalents in my portfolio, I'm not going to get the growth that I need to properly hedge inflation. Where am I wrong? Well, you either need to make adjustments in your financial life to make that happen, or you need to take more risk in your portfolio. And if you need to take more risk in your portfolio...

We're going to shift more money into stocks and out of bonds. It's as simple as that for us. We're certainly not going to add corporate bonds to a portfolio to try and increase the rate of return. I would rather add more stocks to the portfolio to improve that expected rate of return. Again, that bond portion of the portfolio is our safety net.

Sometimes corporate bonds start to look and act like stocks. We don't want that. We want our boring portfolio and our aggressive portfolio to move in different directions. We want that diversification. So if our bonds start to behave like stocks, that doesn't do anybody any good. So yeah, to answer your question, if we need a higher rate of return, the client needs to accept more risk or they need to make adjustments in other places of their life.

We're going to take that risk in the stock market. That's our philosophy. You're separating growth from income, growing the growth stuff, and then as far as income, you're separating that down further to saying, I don't necessarily need income as far as a dividend from my non-stock investments. I just need consistency.

That's true. Yeah, we certainly don't approach this from a dividend income side of things. Again, we take a total portfolio approach here. And Vanguard has a great paper on this. If you just Google Vanguard total return investing, they talk about using this approach to manage a portfolio.

during low interest rate periods like we're in today. So it's this total return approach for the portfolio. Sure, there are some dividends that get paid, but that's not our primary approach here. We're looking at the portfolios all working together, stocks, bonds, real estate, securities, and everything, and then devising an income plan from there.

We'll drop a link to that Vanguard Total Return Investing in the show notes. If you want to click through to the underlying blog post, you can click on that link and read that for yourself. Taylor, if I'm a do-it-yourself investor and I'm approaching retirement and I'm thinking about retiring during turbulent markets and I'm thinking about the income that I need to sustain my lifestyle, what if my risk tolerance doesn't match how much income I need? So to give you an example, let's say that my lifestyle that I want to have in retirement would require

require me to take out 8% of my investments every year, 8% of my balance, which would, by most accounts, would be too high of a withdrawal rate, which would say I generally need to have more stocks to sustain that.

But my risk tolerance, I went to Vanguard and I took the nine question quiz, and I know that I'm a conservative investor. If those two things are in conflict as a financial planner, how would I start to remedy that? Yeah, let's talk about this because I know you share some different opinions here. We talk a lot about risk tolerance. It's a really fancy term. Every advisor talks about it. They give you a risk tolerance questionnaire. It's great. It's really important. But there's a term that's not used enough, and that's risk capacity tolerance.

Risk capacity is how much risk do you need to take? And some people have to take more risk than they're comfortable with in order to reach their goals. But some people are on the other side of that. We're like,

they're in a very good position. They don't need to reach for more risk to reach their goals. They're already in a really good place. So they might be able to actually reduce the risk in their portfolio and sleep better at night and know that they're on track to reach their goals. So risk capacity is really important. It's something that's not talked about enough in these conversations with financial advisors. So if you're ever talking to a financial advisor and ask a question, let's talk about risk capacity. Going back to your question earlier,

Managing risk is really important. One of the most important things to me when building and investing in a portfolio is, can the client stick with it? Because if you can't stick with it, that's a problem, right? If you buy that house and the house drops 30% in value and you sell that house...

You just realize that 30% loss. When are you going to get back in? That ruins your whole financial plan. So most important for me as a client can stick with that portfolio. And then second, they sleep well at night. I don't want a client losing sleep over this stuff and anxiety kicking in. And this is retirement. This is supposed to be fun. You're supposed to travel and feel secure and safe and confident.

So that's what's really important to me. So what I would say is this client needs to make some other changes in their financial life if they're not able to accept a higher level of risk. It could be reducing expenses. It could be downsizing that home that they've been in for 30 years that they're so attached to they don't want to leave, but maybe they have to.

It could be, and we've talked a little bit about this, maybe some part-time consulting. We've got a lot of retiree clients. I mean, I can count on one hand how many just sit at home and do nothing. They all do something on the side, earn some extra income. So that's something to consider too that might help supplement and reduce that withdrawal rate. But yeah, I'm curious to hear your thoughts as well.

I would agree with that to some extent. If our withdrawal rate is way too high, 8%, 10%, and we're not planning on reducing that in the future by paying off a house, getting on Medicare, claiming Social Security. If we're already past those milestones and we're still taking out 7% or 8% a year or more than that, that is where we need to probably – tweaking the portfolio will only work for so long. We're going to have a bear market and then you're going to be withdrawing 10% or 15% of your portfolio a year, which is not sustainable.

So I would say to some extent, if it looks like it's perpetual, that you're always taking out more than you do need to reduce. But I would say I don't like to approach it from a risk tolerance standpoint.

first, I like to approach it from an income standpoint because that's what the goals are based on. I really think you can coach a client and if you're a do-it-yourself or coach yourself through education to become a more talent risk investor. Now, if you have your mind made up and you're completely scared of the market, last week was a good indicator. If you were scared out of your wits, then you don't have the capacity. But if you said, like Taylor said, I'm willing to buy more or I know this is completely temporary. We've been here before and I'm not that

Yeah.

But I would say through that written financial plan, if you decide ahead of time, and we'll talk about some of this in the webinar on March 6th, if you decide ahead of time that if the market does this, if my portfolio goes down this amount, I'm willing to reduce my income. Or if the portfolio goes up beyond this amount, I'm willing to increase my income. So deciding ahead of time, being proactive with your financial plan instead of reactive, I think you have the capacity for much more risk than you might realize.

Now, of course, whether you're doing it for yourself, you're investing or you're working with a financial advisor, don't invest in anything that you don't understand or that you're not comfortable with. But through education and through pre-planning, through a written financial plan, I think people are more willing to take risks than they might realize. Sure. And I guess what concerns me a little bit is just the starting point. I think about it like if you're going to... I'm in this real estate analogy world right now. We're buying a house, so it's just on my mind.

If you're hiring a contractor to remodel your house, what's the one thing everybody says? It's never done on time and it never comes in on budget, right? And it always costs more. And so I think what concerns me a little bit about handling this is the starting point. If a client is just out of the gates, already needing a 7% or 8% withdrawal rate...

We're already way outside a reasonable scope here. So I just start to get concerned about that starting point and just bringing that client back down to earth and finding a way to traditionally get this plan to work without reaching for risk and having to coach. I'd rather have a really good start. Because you know, expectations.

extra expenses come up or the client wants that new car, that new house or that new vacation or sailboat or whatever it might be, these things just come up. Or on the flip side, you have a medical emergency or unexpected expense. And yeah, so if I think we're starting at a 7% or 8% withdrawal rate, I get a little concerned and I'd rather find ways to cut other things in their life to get this to pencil out in the beginning and then work towards coaching on risk. But

But I guess another exercise you can go through is back to 08, 09 and learn a little bit more about how your clients behave during that time period too because that would tell you a lot as well.

That's a fantastic indicator. How did you feel in 2008? If somebody is 60 years old today, they weren't near retirement during the 2000 tech bubble. They were a little bit closer to retirement, probably had it closer in their minds during 2008, but then we were spoiled by pretty fantastic returns between then and now. I do feel like some complacency has kicked in. This head fake correction might be just what we needed to sort of snap some of that back into focus and realize that there is real risk on the line here in the form of our portfolio balance.

So if I'm understanding you and if we can find some common ground, it's realistic expectations and planning for contingencies under the guidance of a written financial plan. Absolutely. And I think we do agree that a financial plan should be guiding your investments.

You don't go to a doctor and tell a doctor to write you a prescription and he just writes it for you. He asks you a series of questions. He or she does lab tests and x-rays and MRIs and everything, and then we'll write you that prescription. So the same thing. You need that comprehensive financial plan first. You need to go through all these what-if scenarios and Monte Carlo analysis, and then you can put that investment plan into place and feel really, really confident about it.

The best portfolio in the world is worth exactly nothing if you're scared out of it, if you're waiting in the sidelines. If you own XYZ Mutual Fund in your employer-sponsored plan because your cubicle mate said it did really well last year, you're setting yourself up for some headache and some heartache. You need to know what you own and why you own it, what the reasonable spectrum of returns could be, and could you handle that downside?

If not, now is the perfect time to reevaluate that, especially as you approach retirement, whether you're doing that for yourself or under the guidance of a certified financial planner. Yeah, 100%. And something else I want to point to, too, is this recent correction, it was a really short period of time, right? And a lot of times we're looking at quarterly returns or annual returns or maybe even returns over the last couple of years. But

Most people have time horizons much longer, right? Typically, a time horizon of a retiree is close to 30 years. But 30 years is a long time. So let's just shorten that to a 10-year time period. Going all the way back to pre-Great Depression, a portfolio made up of 50% US stocks and 50% US government bonds, right? So a 50-50 portfolio.

The worst 10-year period going all the way back, the worst period is positive 2.4%. That's the worst 10-year period. So when you stretch this stuff out over longer periods of time, 10 years, 20 years, it starts to look even better. It's not that bad. So we just need to learn how to ignore these short-term blips and continue on with that longer-term plan. Yeah.

Excellent. Taylor, if our audience wants to learn more about what you do for clients, where can they check you out?

Yeah, you can visit our website, definefinancial.com. You know, we're all over social media, Facebook, LinkedIn, Twitter, but you can find most information on us at definefinancial.com. If you want to hear Taylor talk more about his housing situation, one of my favorite Stacking Benjamins episodes, search Stacking Benjamins, Taylor Schulte. He had a very interesting house buying experience a few years back. This was probably two months ago that you were on Stacking Benjamins. Great episode. If you listen to this, you probably are aware of Stacking Benjamins podcast, but I would invite our audience to check that out as well.

Taylor, thanks for coming on the show. Ben, thanks so much. Make every year better than the one before. Subscribe to the podcast to stay up to date on all our episodes and join the Stay Wealthy movement to learn proven strategies and current trends that will help you maximize your wealth at staywealthysandiego.com. We'll be right back.