Cam Harvey returns with Coach Pete D’Arruda to discuss the challenge of turning accumulated savings into retirement income. They explore diversification, the balance between growth and protected money, precious metals, tokenized gold, and the temptation to chase a hot investment. The conversation closes with Harvey’s perspective on illiquidity and non-traded REITs, including why an investor’s time horizon and overall holdings matter. This is the second part of their interview from the March 14 Financial Safari show.

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Transcript

Automatically transcribed from this episode; timestamps are approximate.

00:00 Folks, this is Coach Pete. We're back with Professor Cam Harvey from Duke University. Cam, so many different choices for the, like, let's say someone's watching this and they're 55 years old. And they've been watching all these news programs. You know, you can't help it. You turn the TV on, there's Kramer saying buy, buy, buy one day and then sell, sell, sell the next. And you go online. There's all sorts of places you can get on that freeway of buying and selling your own stuff. You don't need a broker anymore. Why do we even need brokers anymore, people say. Many times you don't. But how important is it to have a real plan, though, as we are 55 and up, a real plan for income and retirement? Because we don't want to work all our lives. So we get to that checkered flag, let's say age 65. That's what we were always told retirement age was. So we're there, time to retire.

00:46 But then we realize all I have is my 401K and it has over 403B or TSP and it has a big balance on it. But it doesn't tell me how much I can take out of this balance to make sure I don't outlive this money. I mean, that's a big problem for anybody as we get older. Because, number one, I've seen we're going to live longer. Peter Diamandis, who's a futurist, told me years ago, he said, Coach, you'll be able to buy years in the future. And I think we're coming, you know, all the fancy DNA technology and all that. Maybe you can. How important is it, though, for anyone watching to make sure they have lifetime income, not just Social Security income? Yeah. Yeah. So, number one, you cannot count on Social Security. Yep. So that trust fund will run out of money in 2033. We're getting close.

01:32 We are close. Yeah. And there is very little disagreement about this. It's very easy to forecast. And that means if nothing is done, there'll be at least a 20% haircut in the Social Security. So you cannot rely upon that. So it makes it even more important to plan for retirement. And I do believe that this 65 retirement is becoming a little more fluid. And people actually think, well, 65, I've got at least 20 years. And I want to continue working. And it might not be 35 hours a week. So what I see happening in the economy is that people will continue to work, but at reduced hours.

02:21 So you come in a couple of days a week. Just to keep your mind moving. Exactly. Exactly. Yeah. But never, so that's important because it means you've still got some income. Right. But it is just much more relaxed than today. The other part is your financial portfolio. So that needs to be carefully structured. And again, you're investing for the next 20 years. You're not investing for what's going to happen tomorrow or next week. Right. So you need to have a longer term perspective. And indeed, it would be, for example, a mistake if you've got a 20-year perspective to be 100% in a money market fund. Yeah. So you need to still take some risk. And there's so many opportunities in the U.S. given what's happening with so many disruptions.

03:13 AI is in our face, obviously. But there's other things going on. So our financial system becoming much more efficient with decentralized technologies, quantum computing, and you mentioned biomedical. Yeah. So this confluence of DNA, RNA, and proteins, dealing with them all at the same time. So this will extend life. And I'm a big believer in that. All of these demographic projections are wrong. So again, you need to plan. You cannot rely upon a government that's got a $38 trillion debt right now. Yeah. And a $1.9 trillion deficit at a time where we've got decent economic growth, low unemployment, inflation that is below 3%, and a stock market that's at near record highs.

04:11 So it doesn't make any sense. So you cannot rely upon somebody handing the money out. So when the time comes, I mean, yeah. So again, it's even more important now to depend on yourself instead of other people. So if someone's watching now and they're just starting to work, save some money every year somewhere, right, to save for retirement. Earmark it for 40, 50 years down the road, a time capsule. Pay yourself first, we always say. But let's say someone's watching now, they're in their 50s, or let's say 40-something, and they do have a good balance in the 401k, but they've never thought about having to turn that balance into a stream of income they cannot live. That's going to be more and more important as we get older because we're going to get older and older. So the key thing is to have a diversified, balanced portfolio.

05:00 Right. And the focus, when you're younger, let's say 55, is on building the capital. And you need to be careful here. So it would be a mistake to take an unreasonable, undiversified risk on a certain sector. And you could be just a giant loser on that. It's also, in my opinion, a mistake to just invest passively. You can do better than that. There are low-cost products that are available that I've got a recent paper, for example, that I didn't know this. It's kind of remarkable that if you take a portfolio of like Russell 1000 value and then blend it 50-50 with Russell 1000 growth, you exactly get the Russell 1000.

05:54 And I'm thinking about that with some co-authors. And that's not really what you want because it means that you're investing in expensive, low-growth stocks. That's a pretty bad combination. That's a bad idea. So it's really hard to justify that. So doing very simple things like structuring a portfolio that's got a balance between value and growth, which are well accepted in terms of risk premia, but excluding those stocks that are expensive and low-growth at the same time. You can be expensive and have high growth. That is fine. But there's no economic or financial justification for investing in expensive, low-growth stocks.

06:44 Strip those out. Folks, what would Professor Cam Harvey from Duke University say, yeah, when you talk about expensive and low-growth, sometimes they do a good job of disguising that, though, for the average investor. I mean, you have to look behind the scenes to see because no one's going to admit they're low-growth. I mean, no one would invest in it, right, especially if it's expensive. Yeah, so this research, the paper's called Fundamental Growth. It looks at very simple measures of growth. So things that we can easily observe, like sales growth or R&D growth. Like, that's fundamental. If you're investing in R&D, that's growth. Yes. And then it's easy to identify these stocks that are super expensive and low-growth and just exclude them from your portfolio.

07:32 And the results are remarkable. Peter Lynch founded the Fidelity Magellan Fund back in the day. And I still remember his quote. He said, invest in companies you know. So if you use it, like Facebook, that's why I invested in Facebook years ago when they IPO'd, then they went way down. When the insider's lock expired, they were able to dump. I got my Facebook at $17 a share because that's the first place I always go. You know, I admit it. When I log on in the morning, I check Facebook, see what my friends are doing. See, nowadays, I see who's, unfortunately, who's passed away or who's had bad news in there. That's where we go for our news. I went to my 40-year high school reunion last year, and I almost didn't even want to go because I already knew everything about everybody there. We saw it on Facebook. But we look at, like, index.

08:19 Like, Vanguard has VOO. It's S&P 500. It's where I put a lot. To me, I call that a passive fund for me because I'm not buying and selling it. I just put money in there every month. I'm double-cost averaging in. And the S&P over history has done pretty well. But if someone wants to totally eliminate any chance of loss with some money, we do this with some fixed annuities that are out there that tie their return to a share of some market index. I kind of like the S&P because not many games can be played there, but there's some other indexes out there in the annuity world, again, protecting the principal but have a chance of growth. And if the market goes down, you don't get any share of the loss, which, to me, that gives people peace of mind. Annuities are great for income like that. But we also need some more maximum potential horsepower somewhere else.

09:05 So if you had a strategy like that where you were using, let's say you're 60 years old and using the rule of 100, maybe put 50% of the money in annuity with income for the future, so now you know what your income's going to be, what would you advise for the other 50%? Somebody like that. What do you think would be a good place for them? So I totally agree that this idea of a fixed index annuity is a good idea in that it provides peace of mind. Yeah. So you don't have to bear that downside. And I think psychologically, that's really important. So as for the other part of your portfolio, again, I would be hesitant to do just purely passive investing. Some blend of value and growth for equities is, I think, important.

09:54 But it's not just equity. So a portfolio needs to be diversified. There should be some fixed income, high-quality fixed income in the portfolio. And there should also be a safe portion of your portfolio in addition to the FIA component. And that safe component might be inflation-protected bonds. It might be some commodities like gold. So to have part of your portfolio ultra-safe, I think, is important also. Gold's been fun to watch. I watch this show on Friday night. They go out and they look for gold in Alaska. And they used to say when they'd find like 10 ounces, it was worth $10,000.

10:41 Now 10 ounces are worth almost $50,000. It's crazy how the gold market is going crazy. What about silver? Silver's done pretty well, too. And silver has an industrial use. Of course, there's a lot more silver out there, right? Yeah, so silver is the number two. And there is a lot of distance between gold and silver. Yes. So both in the past have been currencies. And we kind of lost the gold standard in August of 1971. It's been a while now. Yeah, it's been a while. Gold also has tangible uses. So 5% of gold is used in technology. So your mobile phone has got gold in it. 2% in dentistry. And over 50% in jewelry. And that's not going away.

11:27 So gold has got this tangible use. Plus, it has got this track record of millennia in terms of the world's oldest financial asset. It's been a currency before. It is held by central banks and reserves. So there's a lot of like check, check, check for gold. And now it's just incredibly easy to hold, either through an ETF like GLD or in your wallet as tokenized gold. So like a stable coin but backed by gold. See, that's going to be interesting as more and more people hear about tokenization in the crypto world because you'll have a real-world asset behind the crypto. So that's a great combination. So your point is super interesting. Yep. So we lost the gold standard August 15, 1971.

12:17 So the tokenized gold holds the possibility. I know it sounds crazy. The possibility of a de facto return to a type of gold standard that is opt-in. No central bank needs to be involved. But you've got something else that is a medium of exchange, a store of value that you can use to pay for stuff. Yeah. Very easy to do. So it's a very intriguing idea that, you know, forget the Fed or the Bank of England or Bank of Japan. And we can return to a type of gold standard. And it's your choice. So I think it's very exciting. Do you think there may be some folks out there that don't want to go back to the gold standard? It's their choice. Totally.

13:03 If they don't want it, fine. Well, the people get away with a lot of stuff because we're not on the gold standard. You can leverage crazily without being on the gold standard. So I think it'll be more controlled to the consumer if we go back to the gold standard. It is true that today the central banks have a monopoly over fiat. And we see what happens with that. They print more money and then we suffer the inflation that results. It was out of control a few years ago. This is different. So gold's inflation is very steady. And what I mean by gold inflation, the new mining. So the mining adds to the gold above ground. For the last 10 years, that inflation is less than 2%. So think of that as roughly real economic growth. So this is an asset with a long track record that over the very long term has held its value.

13:59 And it is a credible currency because it's been a currency. It's been around since King Tut before that. Two questions. That's it. We'll finish up with two. Number one, flavor of the day. All right. So we get this every single year. People start calling our show or ask me when they meet me in person, in public. And they say, Coach, what do you think about blank and how can we get in it? Right now, SpaceX. We're hearing about SpaceX all the time. What's your opinion on these flavor of the day kind of stocks? Because I know people run into them when it's going to be a crazy IPO when it comes out. That's when a lot of people get hurt, right? When they're buying on the run up. Yeah. So it is the greatest investment mistake that people make. Yeah. And they continue to make it. And that is buying high and selling low.

14:47 My students know that that's one of the main lessons in my course, to do the opposite. You buy low and sell high. Yes. But it is just so tempting to extrapolate, to jump on the bandwagon. And as people are jumping on the bandwagon, the price continues to go up. Validating this hypothesis. And fear of missing out. People jump in. This is Warren Buffett's words. Until... Tipping point. The tipping point. And it unravels. So you need to exercise discipline. And buying at all-time highs is generally a bad strategy. That's a good point on that. Finally, now we've seen this happen a lot locally.

15:32 Lately I've seen a lot of it. Your opinion on non-traded REITs. You're familiar with that. It's an illiquid investment. You're investing in real estate. It's sold a lot of times. Like, hey, you can't afford to buy your own nursing home, but why don't you invest with a thousand other people that are all going to pull the money and buy this nursing home. The problem with non-traded REITs that I see is that they're non-traded. Once you put your money in, it's very illiquid. And we've seen several of these lately go Chapter 11. So they're sold as an income stream, what I hear. And can it really be sold as a lifetime income stream if there's no chance a lot of times of having lifetime income from them? So it's an excellent question. And this has to do with an illiquidity premium. So if something is not liquid, you've got a lockup, there's a premium associated with that.

16:22 So if you're able to hold something for the longer term, you can reap that premium. This is the reason that university endowments invest in venture capital and highly illiquid investments. Because time's on their side. Exactly. They've got a 50-year horizon, and they can harvest that illiquidity premium. So I don't have a problem with an investor that's got a long horizon, that doesn't need the money in the short term. Yes. Investing in something like that. However, let's be careful here. People need to look at their portfolio as a whole.

17:09 Your portfolio is not just the stocks you're invested in, but your human capital. And also include your house. Yeah. And that's real estate. So you don't want to be undiversified. And if you're investing in some illiquid, non-traded REIT, make sure it's more than one. Yeah. So you just don't want to hold one because you're correct. Yeah. That it could go Chapter 11. Yeah. So you need more than one. And one of the great things with kind of tokenization and things like that is you can hold a very small fraction of many. So instead of having one, you've got 100. So now you're really diversified in a good way. Well, Professor Kim Harvey, thanks for your time today. Thank you. 800-661-7383.

17:55 800-661-7383. Or text the word plan to 600-700. That's plan to 600-700. 800-800-800.