This week I had the pleasure to interview Rick Salmeron, CFP®, president and owner of Salmeron Financial, a wealth management firm in Dallas, TX. Rick helps others create personal financial wealth so that they can worry less about their money.
Photo courtesy of Salmeron Financial.
In your view, what’s the best defense against volatility and market shocks?
For long-term investors, the best defense is having a strong mindset. Assuming that one’s portfolio is allocated in harmony with the time frame, risk tolerance, investment objectives involved, the only item requiring attention is one’s mental attitude. Be comfortable with market volatility and its shocks. Welcome them. Embrace them. Be grateful for them. Easier said than done, I know. Yet without them, long-term investors would not have enjoyed the incredible, historic accumulation of personal wealth it has delivered since our grandparents were born. You simply must be willing to accept some form of volatility if you would like to earn anything on your long-term capital. Volatility has always been part of the markets, and that will never change!
The other best defense against volatility and market shocks is to have your money sit in cash and earn nothing. Is living through market volatility hard? Yes. Is watching your money sit in cash earning nothing hard? Yes. So, choose your hard! If you want to earn anything on your long-term money you learn to live with volatility. Even better, learn to welcome it and be happy that it exists. Celebrate when the market drops! Without the bad days, you don’t get the good days.
The Fed has been pumping trillions into the economy. Should the average investor worry about the long-term effects of this on their IRA or 401k?
The average investor should not worry about anything they cannot control. Every year the global financial system is predicted to experience an utter collapse. Subsets of people will claim markets will break, are rigged, or are manipulated due to some external force never seen before. This new external force may be real, however, markets are constantly evolving so it’s impossible to gauge the exact impact these forces have. For sure, the impact can be huge (as we’ve seen in 2008 and 2020) yet each of these forces was temporary, not permanent!
Anyone tempted to declare “this time is different” needs to read a history book or two! When was there ever a glorious period where markets were completely free and without intervention from the powers of governments, monetary policymakers, or investors who overstepped the bounds of fair play? Yes, markets can be broken and even manipulated at times which can affect prices short-term. The stock market isn’t always perfectly priced every moment of every day, however, historically it usually gets most things right over the long haul.
Are roboadvisors sufficient for developing a sound retirement investment strategy, or would you always recommend hiring a personal financial advisor?
Robo-advisors are sufficient for simplicity and can offer a great solution for small accounts with very simple situations. I would not always recommend a personal financial advisor for client situations that only require a “just add water” approach. Robos are good in these situations because they develop sound enough investment strategies as a result of a few questions and answers. While they are by no means perfect, robo-advisors are a great option to gain access to a broadly diversified portfolio at a low cost for those just starting out. Yet most other people can certainly benefit from a personal financial advisor.
Saving and investing can be complicated, and most need help making decisions on asset allocation, diversification, and retirement vehicles, to name just a few! As assets grow, so do potential alternatives and income tax issues which is an entire language in itself, and robos do not speak this language. Frankly, the largest challenge, in my opinion, is the behavior of the investor because it plays such a huge role in an investor’s lifetime success. Helping clients behave well in scary markets is massively valuable and that is the true value of a personal financial advisor!
What’s the ideal balance between concentration and diversification in a portfolio?
The answer to this question all depends on the person’s investment objective! Is it income? Growth? Aggressive growth? What is their risk tolerance? The more concentrated a portfolio, the riskier it will be. They may say that they welcome risk, yet is that actually true? Is that how they live their life at home? How did they behave in March 2020? There is not a general rule of thumb to apply here. Most high net worth individuals grew that wealth due to a high concentration of 1 or 2 or 3 things. And most people who became bankrupt collapsed that wealth due to a high concentration of 1 or 2 or 3 things. So the “ideal” balance must match the individual. It’s the Goldilocks approach: Not too hot, not too cold…just right.
Diversification is not fun, and it’s not sexy. Being diversified means that there will always be something in your portfolio that you don’t like, and you will be assured to experience FOMO as you watch other investments that you do not own skyrocket. It’s about accepting good enough, knowing you will miss great, yet avoid terrible! I realize that life would be a lot easier if you could just invest in the best-performing stocks/sectors/strategies on a consistent basis all the time. Nobody can.
What place do alternative assets such as cryptocurrencies, precious metals, and real estate have in an IRA or 401(k)?
I can’t give specific advice, but generally speaking, in my opinion, these three have no place in IRAs/401ks.
Cryptocurrencies: These are void of fundamentals. Good luck guessing where these will end up in 5 or 10 years. Their pricing is based solely on what somebody else thinks the price will be in the future. Based upon 100% pure human emotional reactions. And the hardest part about pure human emotion when it comes to cryptos is that fear, greed, panic, exuberance and irrationality often rule. Blockchain hasn’t ended world hunger nor cured cancer. What it has done in its upward spiral path is created a universe of euphoria among individual investors. It’s an elixir of dopamine which can trigger very bad decisions
Precious metals: Meh. They’ve always been touted as inflation hedges, and yes they can add diversification from a standard 60/40 equity/fixed income portfolio. Yet historically I have never seen precious metals stand out as a knight in shining armor (pun intended). What I have seen is a great deal of volatility, mostly downward. Is this worth it? Yes, you’ve diversified your portfolio. At what cost? Most investors have a hard enough time dealing with the swings in the stock market. Adding precious metals? For many investors, the higher the volatility, the higher the chance of making dumb mistakes. Successful long-term successful investing is like your golf game: It’s not about maximizing the number of good shots, it’s about minimizing the number of bad shots. And precious metals as an inflation hedge? How about this inflation hedge: The stock market!
Real estate: Individual real estate — no way. Not in an IRA or 401(k) plan. Where do I begin? You can’t mortgage the property in an IRA. The IRA itself must maintain all operating costs and expenses, as you cannot pay these out of your own pocket or do any maintenance work on your own. Any rents collected must be deposited inside the IRA. And any tax breaks go away. IRAs still must adhere to required minimum distribution rules at age 72, no matter what asset is being used so individual real estate holdings make that challenging to create liquidity for this purpose. Can you invest real estate in your IRA? Yes. However just because you can does not mean that you should!
Can you describe your overall investment philosophy? Is there a particular mindset or rule of thumb that risk-conscious retirement investors should adhere to?
My philosophy: The results of your long-term investments are a result of your behavior, and very little to do with your investment selection. This is great news, because so many believe that the key to success is being an investment expert…and that is untrue! Instead, the key to success is how you act — the actions that you take or do not take – will translate into your success (or failure). In the long run, successful investing is largely a battle that takes place in the investor’s mind. It’s a battle between two strong yet separate beliefs about the outlook of the world: fear of the future, or faith in the future.
In the end, an investor’s lifetime return will be largely governed by which side of these impulses wins. I’ve found that the most successful long-term investors have always had a strong faith in the future. They retain the belief that whatever is going on in the world, we will figure it out and become a better economy and world. It’s the only mindset that squares with the record. Fear of the future, on the other hand, is impossible for me to accept. To buy into the fear that the world event is so new that it will become the end of the world and all will stop forever and the markets will drop to zero forever is a huge mistake. Not only must I believe in something that’s never happened, but in the opposite of everything that’s materialized!
Is there an ideal asset allocation for someone less than 10 years from their target retirement age?
Only the one that matches the person’s risk tolerance and investment objective! (See above answer regarding concentration vs. diversification)
How often should retirement investors rebalance their portfolio?
The answer, as with most investment related questions, is — it depends! No perfect rule of thumb here, however there are several factors: Are their tax consequences involved? Are there several retirement accounts to take into consideration or just one? One thing certain: without rebalancing, designing an asset allocation matching a risk tolerance and investment objective becomes more pointless as time carries on as the allocation drifts into something unrecognizable. And rebalancing can feel very odd and contrarian! Selling what’s done very well and reinvesting into something that’s performed poorly. Weird! Goes against the crowd. However, it’s a solid form of risk management that supports long-term objectives and short-term nerves, which was the point of asset allocation in the first place.