AAR12 - Diversifying Outside of Stocks

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1:59Andrew Sather:Greetings, everyone, and welcome back to At Any Rate. My name is Evan Ray, and we're here to help you make sustainable financial changes without breaking a sweat. And today we are joined by someone who I think will be an interesting foil to today's topic or a good opposite, which is Andrew Sather, our resident investing mastermind. How are you doing?

2:15Evan Raidt:I don't know how I feel about being called a foil. I'm just getting pictures of being cooked at a barbecue or something so I don't appreciate it but hey we'll move on it's all good we won't label it as a pro or a con we'll just we'll just

2:27Andrew Sather:take it as is and then roll with the punches so we all know especially from the IFB content the fantastic investing for beginners content that investing is incredibly powerful and important and a lot more accessible than a lot of people think we'll dive into that a bit but it definitely doesn't cover everything it doesn't cover every financial situation it doesn't cover every goal It doesn't diversify you outside of stocks. But with all that in mind, Andrew, would you argue that investing is completely indispensable, that it's just a necessity for people?

3:00Evan Raidt:Absolutely. I think if you want to build wealth, if you want to have some sort of financial independence, one of the things I learned very early on, and I was fortunate to come across this book, Rich Dad, Poor Dad by Robert Kiyosaki. and he kind of shifted the way I look at money in the sense that he used this dichotomy of a guy who didn't really make too much money versus a guy who was a doctor and they were like these two dads of his and it was actually the doctor was not the one who was the wealthy one like you would expect with the financial freedom, with the choices, with the money saved and all of this.

3:42Evan Raidt:So it kind of opens your eyes to the fact that just because you have a large income doesn't mean you'll automatically be wealthy. And that's one of those things that I think we all take for granted, unless you've had this kind of financial education that we provide. And so for me, having that backdrop and understanding really shows you how important investing is. Because investing is kind of an important piece to that. You have make sure you're saving money and then make sure you're investing the money. And without those two things, you could be as rich as a doctor. You could be a professional athlete making millions of dollars a year.

4:23Evan Raidt:if you're not doing those two things, it's very unlikely that you will be able to build wealth and be wealthy.

4:31Andrew Sather:Yeah, I actually read that book as well. And I definitely remember how powerful that mindset shift was because you hear people just say, oh, you know, you don't need to make a ton of income to be wealthy or just because you are making a good amount of income doesn't mean you're actually wealthy. I mean, even just hearing us say it, you know, in the short term, but the book did a fantastic job of giving you that long-term example, you know, over, over years, over many examples, many situations where the, of his quote unquote interactions with each of the dads and kind of unveiling it at the end, realizing, oh, well, the rich dad actually was in this situation, making these decisions.

5:05Andrew Sather:And then the poor dad quote unquote was, was doing the opposite. That was definitely a incredibly powerful mindset shift for me as well. And it goes back to all the reasons that I think investing is just a given for people. It should be a given for people to be in the stock market. For example, ease of access. One of the big things that people always initially think about stocks is, well, it must be hard to get into. I probably have to call somebody. I probably have to know somebody. I probably have to have an aunt or uncle in some position or whatever. It's as simple as you downloading an app and you've got access from anywhere at your fingertips.

5:40Andrew Sather:You can use partial fares, which pretty much every brokerage has, and you could go invest right now with five bucks if you're not in the stock market right now you could go and be with five bucks or even less depending on the brokerage you go with so it's incredibly accessible for you to just do it whenever whenever you want to get started and not to mention the powerful returns i mean the market has a much higher average return than an individual would have access to in in pretty much any other way and save for real estate real estate is probably the only other way that somebody could get in these kinds of returns but they're going to be taking on much more risk and they're going to have much more maintenance to keep up with much more time equity is going to have to go into it but stocks can all do all of that with far far less time and risk commitment plus you're participating in like large-scale economics that was another mindset shift for me there was another book and i can't remember exactly what book it was was doing a really good job of explaining how investing in stocks is giving you access to owning a portion of companies and obviously that's the basics of the stock market and i get that but it does sometimes it doesn't really click same thing as saying well you don't have to earn a ton of income to be wealthy just because i say well if you go buy a stock of apple or a share of apple you now own a portion of apple that doesn't always click for people and and a big part of it for me is realizing that all of the large-scale economics of companies out there compounding their returns each year and growing at a crazy rate each year or using ingenuity to create new products each year and then furthering entire industries you can tap into that just through the stock market and your returns are just going to compound and you have so much flexibility to invest in whatever fits you best i mean that there's upsides we could we could easily and have easily had entire episodes discussing how powerful investing is but with with all of that in mind i'm going to ask you the taboo question to ask an investor where do you think investing falls short?

7:35Andrew Sather:What do you think investing misses out on even with all the upsides?

7:40Evan Raidt:I think unbridled investing can lead to a lot of issues, risk being a big one there. If you don't know what you don't know, which is everybody when you first start investing, you just don't know what all the risks are. And you can lose a lot of money by making just one really bad decision. I mean, the double-edged sword of it being as easy as opening an app is you could blow up your financial future by a couple swipes of the app. And so not saying that a lot of people necessarily do it, but we're always at risk. We're human beings. We have bad days. We have bad months. We are emotional. Things happen.

8:24And so that risk of being able to blow up your wealth is definitely there.

8:31Evan Raidt:And there are ways to manage it. There are a lot of ways to manage it, a lot of ways to mitigate it, a lot of ways to get people on your side to help you so you don't blow up like that. But it is definitely a risk, and it's definitely there.

8:46Andrew Sather:And those Reddit posts exist, definitely, of people taking screenshots of. Oh, my goodness. Yeah, I've seen people. I mean, this was mainly back when people were investing in stuff like GameStop and everything, where they would post a screenshot of the Robinhood account that went from$50 ,000 down to zero because they were making very, very risky decisions. Obviously, they got themselves in that situation one way or another, but those stories exist for sure.

9:13Evan Raidt:And then the ones where people are using margin is even more sad. Oh, yeah. of now you owe the brokerage, which is nothing that we would ever recommend anybody do. But it's just one of those things that if it's easy to access, some people will fall into it. And then you can combine that with the negativity of thinking, oh, I can beat the market after learning it for a week. That can lead to a lot of bad choices for sure. What about you? What are other places where you think investing falls short?

9:46Andrew Sather:a couple things that come to mind first off is is liquidity for me especially having very recently purchased a house which i promise there will be an episode on very very soon is is just a lack of liquidity to pull out of the market so for me for example knowing that we're planning to buy a house soon-ish i i sold pretty much all of the taxable investing investment stocks that i had not my retirement or anything like that but i sold those stocks the taxable investing stocks to to be able to access them whenever I needed. I knew that if I left them in the market, then the market could have a downturn.

10:22Andrew Sather:And suddenly, you know, two days, like we'd say, okay, we're going to close soon. And then two days later, I go to pull out the money, I could have a significantly different amount of money in there than I did two days ago. And I didn't want a situation like that. I didn't, sure, there's the possibility that I have the upside of it just going up since over those two days or whatever period of time it is, but there's always a risk it'll go down significantly. And so I wanted to take the short-term security and pull it out and put it in something else for the time being, knowing I would use it soon.

10:53Andrew Sather:But again, that doesn't apply to long-term ideas. So retirement, or if you're planning to have a big purchase five years from now, 10 years from now, maybe you're moving 10 years from now or something, then you can absolutely leave it in the market. And statistically, over the long run of the market, you are more than likely going to see generous returns over that period of time. But in the short term you have much less access to those funds and much less certainly of where they're going to be and then the other thing especially for beginners which is obviously the kinds of people who want to help here the the apparent complexity of the market is is very very high what i mean by that is when you look at it when you hear people discuss the intricacies of the stock market or how they got where they got or how they got rich off the market or something like that it comes off as this incredibly complex monster that you could never never understand And I'll be honest, you never will be able to understand every single aspect of the market.

11:47Andrew Sather:There are too many factors, too many millions and millions of factors that are global, that are every single company. I mean, there are factors down to when exactly a small person at a company decides to send an email could in the end affect the stock in one way or another. And that's not meant to scare you. That's just meant to emphasize that there are factors beyond your control and beyond your potential understanding. but what you can do is understand how the market works and understand the the history of the market that more than likely statistically is going to help you understand what will happen in the future because the market has seen so much it's seen it's seen many different presidents it's seen many different world leaders it's seen world wars it's seen recessions it's seen housing bubbles it's seen a lot of craziness it's seen many crazy upturns and crazy ingenuity and companies It has weathered all of these things.

12:40Andrew Sather:And so you can more than likely look back at history. And a quote I saw recently that will probably slightly misquote is that history doesn't necessarily repeat itself, but it often rhymes. And so you can definitely look back and get a solid idea of what may happen in the future. So with those kind of shortcomings in the market, what would diversifying outside of the market do? And could you also give a quick summary to what diversifying out of the market even means? What is diversification?

13:12Evan Raidt:Yeah, it can mean so many things for so many different type of investors. We focus and talk a lot about stock market because it does have that history, that very long history of sustainable, high average returns. but investors have gone into things as wide as gold, silver, other types of commodities, whiskey you could even do. Obviously, there's real estate, and some people go heavier into the real estate than others. Accredited investors, which are investors who go to prove that they have a certain level of money, can access things like private markets, which are private equity, the smaller businesses that haven't gone public in the stock market yet.

14:03Evan Raidt:And that can be a way of diversifying. Some people would argue crypto or Bitcoin is a way to diversify. A lot of different options for diversifying. I'm sure I'm missing a few too, but those are the big ones that kind of pop in my head. Bitcoin is one of those really divisive topics. And depending on where you stand on it, either you ignore it or you can see its future utility and the things it powers. And so in a time like today, we're all wondering how much exposure makes sense and how can I get that exposure in a simple and easy way? Where you aren't subject to countless fees, endless passwords, and constant micromanaging with too much time spent on websites and apps.

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16:58Andrew Sather:And what does it do for an investor if they decide to invest in something like that? How does that help them?

17:05Evan Raidt:Yeah, you can smooth out some of the volatility. There are certain types of, hedge funds, for example, one of the big moments I had was when I realized hedge fund has the word hedge in it. And so a hedge fund might not necessarily need to beat the market. It just needs to hedge the market so you get smoother returns. So if the market drops 20 % next year, which it has done plenty of times, but your hedge fund should be up maybe like 5%. So you're getting those smooth kind of year after year after year returns. Now that comes with a trade-off and we need to always understand there's always trade-offs to doing things.

17:45Evan Raidt:If you want the higher returns, you usually have to take those 20 % or 50 % drawdowns. So you kind of get what you're paying for in a sense. But hedge funds can do that and give you that more steady returns. Things like bonds can be, duh, I completely ran over bonds. But things like bonds can be a great way to get smooth, reliable returns. And people can use that for lots of different reasons. People could be in retirement and drawing from the bonds as income. And so you don't need to reduce the nest egg, but you still get to take some of the investments and use those to live while your core investments continue to live on.

18:30Evan Raidt:And businesses like insurance companies buy bonds too. So yeah, lots of different institutions and people buy different investments for different reasons. And then obviously you have the people who think they have an edge and maybe they do have an edge and want to pursue above average returns. So they might lean heavily on some private equity or things like that to find higher returns. Those are all benefits, I think, to diversifying outside the market. Big one being the predictability and getting protection from market swings.

19:10Andrew Sather:Yeah, predictability is huge for me. Something we discuss a lot is financial planning and budgeting and everything along those lines. and with the stock market you you just can't use that as some stable way to budget or long-term know exactly where you're going to be especially short-term but even long-term you can't know exactly where you're going to be sure you can assume like something 10 10.5 percent average return from the market or something along those lines but that's still going to be a ballpark because whenever you go to pull out that money it could be in a short-term downturn or a short-term upturn or something and you never know exactly where it's going to be so having i really like your example of in retirement bonds can be used to have a stable income that you can predict because you're literally in a contract agreement with the government to pay you x percent annually and so you can know exactly where that money's going to be and when you need to access it you know it's going to be there to get to receive so you can just get by and cover things you need to cover and then the market can be there for much more significant growth and another thing i think diversifying outside of the market does well is it gives you direct access to other markets so some of those other things you mentioned like you mentioned gold and whiskey and something else i think of as collectibles that people invest in and even though they sound a little bit more kind of intangible because you think well why does this you know collectible matter why does this gold matter sort of but they they all have a history of significantly increasing over time way above inflation and and generating other returns and just because the stock market sees a significant downturn doesn't mean that whiskey or gold is any less valuable than it was before.

20:47Andrew Sather:And there are ways to invest in those commodities through the stock market, but to completely get away from any exposure to the market and any of those more volatile swings, you can directly invest in these things. You can actually purchase a bar of gold or you could purchase a gold coin or you could use a separate trading platform to buy a thing of whiskey or a barrel of whiskey and get direct access to these other things. So you can have that smoothing out. And these are all great ideas, but I want to go into how I personally diversify out of the market. Again, I'm a massive advocate for the stock market.

21:20Andrew Sather:I think it's the most powerful wealth building tool that a lot of people don't use and are scared to use, but it's still important to have other places to put your wealth. so for me my first thing that comes to mind is a checking account i've got money in a checking account that is accessible for me to use whenever and i know for a lot of people you probably think well that's not diversifying out but in my mind if it's money that's going anywhere else wherever that money is going then i'm diversifying in some way if i was pulling out in cash then which i don't really then i would be diversifying it into cash but for me i have money in a checking account that is completely liquid.

21:58Andrew Sather:I can access that at any moment, any time of the day that I need to with no delay. So I can pay bills through that. I can pay expenses through that. And it's very predictable. It's not going to go up. It's going to go up absolutely zero, but I know I'll always have access to it. The other way that I know I've talked about a lot and will continue to talk about a lot is a high yield savings account. So that the money is going to go up. Currently, I believe that the rate of a lot of high yield savings accounts is about 3.8 % or 4%. So you're not going to earn a ton of money above inflation or anything but at least that money will keep pace with inflation and again i can access that money close to whenever i want since it's a savings account there's usually a couple days delay for that deposit to go from my savings account hit my checking account but that is a much faster much higher liquidity much more accessible than the market where you would have to sell your stocks and then after it sells you're going to have to wait for the funds to settle for a couple business days and then you have to do the transfer and that'll take a few business days.

22:56Andrew Sather:So we're talking about at least a week or so before money in the market could hit your checking account to be available for spending. But a high-old savings account, it's still growing and you can use that to have a much better prediction of where your savings are going to be. For us saving up to purchase a home for the down payment, closing costs, upfront expenses and everything, the high-old savings account was what allowed me to predict exactly where that money was going to be. I know where it is now and I also know how much I'm putting in each month and I know how much that money is going to grow.

23:25Andrew Sather:And so the math becomes pretty simple to know where it's going to be in the short term and it's going to be accessible and I'm done. I still want to be in the market to grow my wealth significantly more quickly outside of that, but the high-old savings account allows it to be very predictable. And then the last thing that we've mentioned is real estate. So now that we are homeowners, now we are part of the real estate market one way or another and we're building equity in that home and there are many, many times in history where the stock market will see a significant downturn, but the real estate market doesn't see nearly as significant of a downturn.

23:58Andrew Sather:It has definitely happened vice versa in history, but the point is you're protected from volatility in one way or another. The real estate market also just tends to not be as volatile as the stock market, and so I'm still getting growth and compounding on that investment through real estate, but in a little bit more of a stable manner that keeps me outside of that. So if there was money that I needed to access, I can take a loan out against equity or something and ignore what's happening with the stocks, even if they've taken a 50 % downturn or something. Absolutely atrocious. So those are the main ways that I diversify to try and stable my wealth outside of the market.