Welcome to the Life Unlimited Podcast with Larry Heller. You deserve complete financial advice so you can confidently live your life your way for life. Now let’s get into this week’s podcast episode.
Aric: Hello and welcome to Life Unlimited with Larry Heller from Heller Wealth Management. I’m Larry’s producer Aric, and I’m here to learn along with you the audience. Larry, how are you?
Larry: I’m doing terrific, Aric, how are you today?
Aric: Fantastic. It’s good to be back with you. I I love the subject. I don’t know much of the content of what you’re gonna talk about today, but you kind of shared the subject with me. And I’m kind of geeking out about it.
Larry: Yeah. Well wanna talk a little bit about risk. A lot of people don’t focus in on risk until obviously something happens negatively and then they realize, oh, there was too much risk involved. So I thought we would talk about risk when it relates to all different asset classes. Everyone has read I’m guessing everyone has heard about what’s been going on with Silicon Valley [00:01:00] Bank and what has gone on with a lot of other banks out there that are, uh, That are either going out of outta business or struggling to stay in business and what does that mean for you?
And so I thought we talked about not only the risk in cash, but let’s talk about the risk in some of the other investments that we use.
Aric: Okay. I think it’s a timely topic. Obviously SVB was a big, huge issue, you know, when it first happened, and still people are feeling the repercussions of it, and I think there’s a lot of concerns out there. Could this happen to my bank? So I love the fact that you’re addressing this.
Larry: Yeah. So, well, let’s start with the Silicon Valley Bank. I mean, when you’re a um, a deposit or a bank, Give them money, and you basically think your money is safe, and then one day you realize that that might not be the case.
So with Silicon Valley Bank, what they do is they take your deposits and they invested in other vehicles and hopefully make more money than what they’re paying you. And then they’re, they’re profitable. But, um, that, that, so they don’t, if everyone wanted to take all their [00:02:00] money out one particular time, they don’t have all that just sitting totally liquid.
So, uh, so a couple things happened. So they invested the bulk of the money in 30 year treasuries, and what happened was they underestimated what. Which way interest rates were gonna go. Interest rates went up. So the bank lost money on these treasuries and then people started to get worried and there was a run on the bank, especially from a lot of large tech firms out in Silicon Valley Bank and they didn’t have enough deposits to pay everybody out, so they didn’t have enough money cuz the treasuries were at a loss.
So, so they were a forced to close and be rescued by the government. So therefore, what should you really be doing? Well, everyone has heard of FDIC insurance, so that covers $250,000 of an account. So one of the things you want to look at is, Making sure that your bank account [00:03:00] is not more than $250,000.
Therefore, if something like Silicon Valley Bank does happen, you are protected and you’ll be reimbursed from the from the FDIC insurance. So, but a lot of times there is also some things that you may not realize is subject to a bank. Like if you have a brokerage account such as the Schwab brokerage account and the sweet money market is part of the bank, so the bank can make some money on that.
So if you’re Selling and buying in a Schwab account and for, or just want to keep a lot of money sitting there, that could be subject, that is also subject to the same banking rules. So you wanna make sure that if you are keeping money in there, it’s less than $250,000. Or you could be subject to the same default if, if something would happen to one of the brokerage firms.
So what can you [00:04:00] do so you can move your money from a bank into a money market account. So now you don’t need the FDIC insurance cuz you’re. Assets are segregated in a money market account. So when a money market account, the bank will go out and buy overnight repo paper and very short items that are also very, very safe.
But there is still a little risk in there. Oh, I probably, I forget how long ago, Aric. I think I might have been 10 or 15 years. What? The one of the money market accounts, I believe the reserve fund didn’t do something properly and they broke what’s called the $1 buck. So your money market is always at $1.
So if you have a hundred dollars in times one, that’s what you have. But in that case, the value one below that, you actually lost money in a money market, very rare. But there is some slight risks in a money market that even on a very short [00:05:00] term, that that could, that, that could happen. So there are different money markets, there are treasury money markets.
So, so you, if you’re really concerned about some, as you’re really understand what’s the risk, what’s, what goes into even your money markets.
Aric: Um, Okay, so lemme pause there for a minute cause that was a lot to take in Larry. So first thing, first thing that pops to my head is it’s a wonderful life.
Right, the movie. Yes. George Bailey’s there and everybody’s rushing on the bank and, and they’re like, well, where’s my money? And he’s like, well, it’s in Mary’s house and it’s in Stevie’s house. And they’re like, let’s go to their house. They didn’t say that, but that’s kinda what this reminded me of.
I’m like, when you say a run on the bank, that’s a perfect example of, of what could happen if people panic. But rightfully so, they did kind of panic because they, the executives were getting paid, lots of bonuses were given out before they even announced it, which is just frustrating to me, because they shouldn’t have gotten all their money and then nobody else did.
So that, that’s the first thing. The, the question I have is outta curiosity. Maybe you know this, maybe we don’t, maybe we get this answer for the audience later. [00:06:00] When it’s FDIC insured, how quickly does that money get back to the person if it’s guaranteed? So the 250,000. How soon or how long do you have to wait to get your money if, if something were to happen?
Larry: Yeah. You know, that’s a great question, Aric. I I don’t know exactly how long that would take to, uh, to do that. I’m, I’m guessing very quick, but but I don’t know exactly what, not like taking your money outta bank what the timeframe is. Yeah. So, uh, so y yeah, I mean there are, in, there are instances in certain cases where that’s where that’s.
Possible here. Everyone was made whole by the government. So eventually they were getting their money back out and they were able to transfer to do something else with it. So, I’m guessing it’s very quick, but I’m not sure exactly the timeframe on that, on that haven’t been involved in that situation.
Aric: Yeah, thankfully. And well, I know that they closed on a Friday, if I’m not mistaken, and, and I can only assume no matter how quick it is, it’s still not instant like it should have been like just going to the bank and pulling your money out. They had to wait a certain amount of [00:07:00] time. So that’s still frustrating. And it’s the unknown, right? And I think that’s what scares people, and I think that’s why you’re really addressing these issues and concerns. You don’t, you would love to be able to trust the government to get your money back, but it’s our government, you know.
Larry: Right. And then that’s true. And then this was, they weren’t the only bank signature bank, first Republic Bank. Right. They had issues as well. Some of them were not processing payroll on a timely basis. People were trying to move money out as quickly as they could. They just came out First Republic, I think had a hundred billion dollars of. Depositors moves move out. So it’s kind of leveled off, but people are still nervous about that.
And the bank stock has just plummeted. I believe it’s gone from 55 to five. I don’t know what the high was, but I think it’s now at five. So, The, and, and obviously we’re recording this podcast, so that could change by the time you’re listening to this. Mm-hmm. But the, the point is that, what do they, what do you do?
Some of [00:08:00] the banking regulations that were put in place after 2008 were loosened for certain size banks, and maybe now they’re looking to put some of those restrictions back on in order to prevent this from. Prevent this from happening again. Mm-hmm. So, I, we haven’t heard the last of this. It’s still gonna be an ongoing type of discussion on how do we protect and make sure that your money is there, that you put your money in the bank.
Aric: Yeah, and we’re gonna give contact information at the end of the show, as we always do, Larry. But I, I like how you started this off, is that if you have concerns, there are a lot of different ways that you can protect yourself, which means they need to contact you, reach out to their advisor if they’ve got one and figure out what’s best for their specific situation because it’s never a one size fits all.
You’ve said that many times on this podcast, and I think people are starting to realize, I’m not the same as my neighbor. I mean, we’re close, you know, close proximity, but my situation’s completely different. So they need to have that personal conversation with you.
Larry: So, yeah, so I mean, what, [00:09:00] what the nice thing about it is now interest rates are back, back up one year again, as we’re speaking today, one year CDs are around 5%.
Mm-hmm. Whereby last year and the years before, before you were getting almost zero on your, on, on your money. So the banks didn’t have to really worry about. About this because people weren’t moving their money into other vehicles. So, you know, some of the things that you can do you can buy CDs at different banks through a brokerage account.
Hmm. And if each one of them is less than $250,000, Now you’ve got $250,000 insured and you can have multiple different CDs. So we’ve done numerous CDs over the past six months in, in doing, in, in being able to get higher yields, but also have the FDIC insurance.
Aric: Ah, like that. That’s great.
Larry: Another is, is treasuries. Now we’re gonna be really careful now about talking about treasuries. So, cuz basically treasuries, you would think have [00:10:00] no risk at all because they’re backed by the United States government. So by buying a treasury now you don’t have to worry about the FDIC insurance cuz you’re really figuring that the government’s gonna be here also paying higher rates than they have been over the last Decade. So, so, so now you, you buy a treasury, you think it’s safe. And as we’re speaking today we’re gonna talk a bit about the debt limits that we’ve reached, the debt limits. So in other words, the government is running outta money and they’re reaching the limit that they’re actually able to borrow at.
So they have to raise the debt limits in order to have enough money. And now we’re in the court between a rock and a hard place. The house actually just passed the bill that that would increase the debt limits, but they’ve, they have a lot of other clauses in there and the Senate is not going to approve this.
Mm-hmm. Neither is President Biden. And again, I caution you we’re talking about this today. This could all be changed by the time you’re listening to this, [00:11:00] but but what would happen if the debt limit ceiling is not raised? Would that have an impact on your treasuries? So again, just understanding some of these risks, and I don’t think that’s going to happen, but you, you should at least understand what the risks that you have in all your investment vehicles.
Aric: Yeah, absolutely. All right. What’s next?
Larry: Yeah, so let, so let’s move up the scale a little bit in some of the other asset classes. So, before. People thought cash, no risk at all in cash and doing that. Now, we’ve talked about some of the things that can happen in cash, but bonds that, that’s another whole animal.
And what I’ve, I’ve found it’s really the most misunderstood investment vehicle. Yeah. And really people don’t understand how they work and what the risk is along those lines and all the different types of bonds that you have. So a bond basically is you’re giving money to either the government, a [00:12:00] municipality, a corporation, and in lieu of giving them them that money, they’re going to pay you back a fixed rate of interest that you’re gonna get.
And when you hold the bond to maturity, you’ll receive your principle back. Of the bond seems straightforward and, and easy to do that. However, when you’re going to buy a bond, unless you’re buying a original issue, bond a new issue bond, you’re gonna be buying a bond at either a premium or a discount.
So, and that’s where it starts getting a little bit confusing. So in other words, you can have a bond that was issued years ago and the coupon rate is at. 5%. So you may be paying less than the principal or more than the principal on that bond. So you wanna look at what’s the total return of that bond is.
So it’s a little bit more complicated. And just looking at the coupon, you wanna look at the total return. So that’s a little bit about how the bond [00:13:00] works. So now what kind of risk do you have in these bonds? So we’re gonna talk about all the different types of risk in the bond. Let’s start with maybe one of the easiest, One.
Now I’m gonna, let’s call that, um, interest rate risk. And what do I mean by that? So this is not risk that you’re gonna lose the bond’s gonna default and, and you’re gonna lose the value of your bond. But if you buy a bond that’s 10 years, 20 years, 30 years from now, and it’s, you’re earning, let’s say 3% on these bonds and interest rates go up over the next five or six years, what does that mean to your bond?
What’s the val, what happens to the value of your bond if interest rates go up?
Aric: It goes down, right?
Larry: It goes down, yeah. So, so the longer that you buy a bond, it may be great. You’re getting a, a nice return, but if interest rates go up, you’re gonna, you could have earned more money. By buying future bond, by buying bonds in the future.
So on the flip side of [00:14:00] rates go down, the value of your bonds go up. If you buy a bond and you hold it to maturity, you’re gonna get back the principle and you’re gonna get the same, exact same a amount that you originally purchased by. But there is some what’s called interest rate risk.
Aric: Hmm. So, so let me ask you a question because I mean, it is kind of confusing, but I, I thought bonds were doing better now because the interest rates have gone up. Or is that not, they’re not doing well now.
Larry: So, yeah, so, so if you bought a bond two years ago mm-hmm. And you basically bought a bond, you had to b buy it at a premium to get a higher interest rate. The value of that bond is down a lot.
Aric: That’s what SVB did.
Larry: So that’s what I mean by interest rate.
If you, if you’re now today gonna go buy bonds, yes. You’re getting a much higher rate today than you were Got it. A year, two years ago.
Aric: And that’s what SVB did is they bought bonds a couple years ago, and so then their values tanked, right?
Larry: Yep. Yeah. And they bought 30 year bonds and almost their entire portfolio [00:15:00] fully the risk manager who was the, they didn’t have a risk manager for a long period of time, so I don’t know apparently who was watching the shop there to allow them to do that.
And they thought interest rates would only go up a little bit and interest rates skyrocketed. So they got caught. They got caught with that. So that’s what happened. That’s what happens. Then they were buying 30 year treasuries, so they’re thinking 30 year treasuries are safe, but they didn’t count for interest rate risk.
Aric: Yeah. Okay. All right.
Larry: So that’ll lead us into, kind of default risk. So again, we talked about treasuries and now they’re all different types of different bonds. There are corporate bonds. And so if you’re giving money to any type of corporation they’re gonna take that money and they’re gonna go do things with that.
And they’re gonna promise to pay you a fixed rate of return, but, The, that bond, if the company goes outta business, that bond is subject to default. So, [00:16:00] so there’s, you know, you, you wanna look at the ratings of each of the bonds, whether it’s a corporate bond or if you’re buying a municipality. What is the, what are the odds that the municipality is not gonna have trouble.
And then there’s. What’s called general obligation, you miss municipality bonds, there’s revenue bonds. There are so many different types, and it’s really hard just to look at the rating because the ratings sometimes are great. Now by the time something happens, the rating services are already coming in too late.
And then on the corporate side, there is high quality bonds. There’s. On the junk bonds, which obviously are lower rated bonds. So there’s so many different types of bonds out there. Are you really gonna understand what the risk is? So you’re getting a rate of return knowing what the risk is, knowing what the, what I’m calling the duration.
How long on average is your bond port? Folio. So depending upon how long that goes. So if your duration, for [00:17:00] example, is four, so that means all your bonds, short-term bonds, longer-term bonds, they average to a length that they’ll mature in in four years. So here, for an example, if your bonds go.
Up by 1% that your bond portfolio would drop by 4% cuz your duration is four. If you had a long duration, like 10, an interest rate rose immediately by 1%. Your bond portfolio is gonna drop by 10%. So, wow. And that really comes into play, especially if you own funds, at least if you own the individual bonds, you can elect to hold them to maturity.
But if you’re in a. Bond fund, there’s trading going on because people are either taking the money out, putting their money in, the managers, making certain decisions. Mm-hmm. And if they sell the bond, they may sell the bond at a loss and you don’t have any control over that. So there’s a lot that goes into [00:18:00] these types of bonds, what tax bracket you’re in the way you are in life, what risk, what returns you’re looking for.
So, so, so knowing, again, knowing and being educated on the types of risks involved in the bonds is important as well.
Aric: Well, I think you just answered my, my next question, which was how do you help clients decide what bonds would be best for them and what mixture, but like, like you said, stage of life, you’re in your assets, all those things come into play. Again, very individualized. Was there anything that you missed in that list?
Larry: Well, yeah, I mean, for us, we’d like to take the risk on the, on your equity side. Mm-hmm. So the bonds that we’re doing, we’re using very low risk type of bonds, so a mixture of a lot of different low risk type of bonds.
Aric: Okay. That makes sense.
Larry: Yep. So, so let’s, let’s really talk a, a little bit about, equities. So people kind of understand a little bit that there is risk in the stock market. [00:19:00] Mm-hmm. Um, where they may not understand what the risk is in cash and in bonds. So we all know you’re putting your money in. Stocks and you’re hoping that over time the stocks will go up and you’ll make more money than you will just keeping it in the bank.
But people know that there are risks involved in the in, in the stocks, in your equities. Mm-hmm. So there’s all, again, there’s all different types of equities. There’s. I call u a large cap. Us big, big, big, big companies there is small cap company. Even though they’re big, they’re considered small cap for US
There is international, there’s emerging markets, so there’s all different types of equities you can go into and each one of them have a little bit of a different risk and then. Do you go in, do you buy an individual stock? A few individual stocks, do you buy a group of stocks through either an ETF [00:20:00] or a mutual fund?
So the, what are the advantages of using an ETF or a mutual fund rather than buying a, a bucket of a few stocks? Aric?
Aric: It’s got a ton in there. Usually. I mean, you’ve got an ETF that may have 200, 300, 400 different stocks in it, right?
Larry: Correct. So you’re reducing your dive, your, your diversification risk. Yeah. So that by having a lot more in there that you, if one of those companies go out, it’s not gonna hurt as much as they only have a few stocks in one of those companies either goes outta business or just plummets. So, so you wanna know what the, the risk is and you we kind of go through this as well to show what the asset allocation is.
Because again, if you only have, let’s say, large, large stocks, and I’m gonna call some stocks growth, some stocks value. So your growth stocks really, a lot of times you’re up and coming, your tech stocks. That don’t have the best valuation, but they’re [00:21:00] growing. And then you have, you know, value stocks.
So which is the better class? Well, up until no five years before 2022 growth stocks were outperforming historically value stocks have outperformed 2022 value stocks outperformed. So how much do you have in growth? How much do you have in value? How much do you have in large? How much do you have in small?
How much do you have in emerging markets and international? So knowing all the asset allocation and, uh, what we do is we put together a allocation of all these different classes. So now we’re really reducing your risk by having a little bit of all these different classes.
Aric: Yeah, that’s very complicated. There’s so much information there. I mean, there’s so many different ways. It’s just, that’s crazy.
Larry: Yeah. And you know, we don’t expect everyone to understand what goes into this and what goes in behind the scenes. Of course, we have some clients that are really into the mm-hmm. The [00:22:00] nu the numbers behind them.
We can go into details and show them all and have detailed conversations. But we do like to at least show and explain the, the risk and why we put a portfolio together. Mm-hmm. And how do we customize it for you That works within your time horizon and within your risk tolerance.
Aric: Yeah, that’s great. Because I don’t understand it all, so as long as you don’t expect me to understand it also, we’re good.
Larry: Yeah. Yeah. This is why I’m here. I learn from you every time. Yep. So, uh, so again, again, it’s your money. You should understand some of the risks and some of the rewards and some of on the equities. We have a great chart that we show based upon what your equity portfolio is how they would’ve performed on a short-term basis over the last 50 years and they, we show like the 10 biggest gains, percentage wise and the 10 biggest losses percentage wise, and how long if you, it took to recover from those losses. [00:23:00] And now people start to really start to, to see what we’re talking about. When you can see that if you had a 60-40 portfolio, 60% equities, 40% Bonds and it was down 20%.
Well, you look at, if you have a $2 million portfolio or you’re down 20%, you’re down $400,000. Yeah. And we show that can happen and let’s say a six month timeframe. Yeah. So having those and letting them understand that and uh, in communicating that. Is really helpful because when we go through that timeframe and we will, they’ll at least be able to say, yeah, you know, I was kind of expecting you to talk to me about this a little bit.
On the flip side, when we have one of those big upward increases in the market and now was saying, okay, let’s take some of the profit off and let’s rebalance. We’re doing it because we know that we’re going to, there’s gonna be some times where they’re going through an under performance. [00:24:00]
Aric: Okay. Can I confess something to you, Larry? Sure. A well, for the last few years I’ve been really looking at playing around with penny stocks. Right. Like, okay, oh, I could do, you know, I could put some money in here and play with these penny stocks, but every time I think about it, I always, not that you’re my father or grandfather, but I always imagine myself getting caught smoking in a bathroom stall by you. Hey, you’re not supposed to be doing that.
Larry: No, but you know what? There’s nothing wrong. There’s nothing wrong with taking a small percentage. Mm-hmm. And trying to hit a grand slam with something, as long as you understand the risk. Yeah. So we have some clients that they wanna buy or they wanna hold some stocks.
Some of them have had great success with. Some of the apples and the Microsofts out, out there. Mm-hmm. It’s all just keeping the allocation the same. You wouldn’t want to have a hundred percent portfolio. I’ve seen somebody come in with a hundred percent of their investments all in Apple. Oh Lord. And obviously they’ve made a lot of money on their, well now [00:25:00] they have some taxable situations, how to handle diversify, but they don’t, they didn’t wanna diversify.
They were like very comfortable with that. Will Apple just keep going and going and going? Or will they eventually have a correction? I mean, we’ve seen some, some companies you never thought would Yeah. Would go through those. So, uh, but just getting back to your point, there’s nothing, you know, there’s nothing wrong with doing that.
You have to kind of understand the risk. I mean, People have asked me about cryptocurrency. When cryptocurrency was flying. I never understood it. We never did it for our clients. But again, there’s another example of how things can go up and how things could go down, and really trying to understand the risk of each investment that you own.
Aric: Yeah. Yeah, absolutely. All right. What else are we covering today?
Larry: I, that’s about it. I think we’ve talked a, I think we’ve talked a little bit about all the different, you know, all the different risk. I mean, one of the things that we kind of, discussed, and there’s been a lot of studies out there, is asset allocation really [00:26:00] accounts for most of your return, the allocation between equities and bonds and cash. So it’s really critical to look at that allocation because that’s a great way of minimizing your overall risk.
Aric: Yeah, well, I’ve been blessed be because of the podcast, Larry, learning from you, but more so because the fact that I know that you’re just on the other end of the phone. I could call you at any time, ask you questions and get clarification on things, and you’ve always been available to me.
And I know that you do the exact same thing for your clients and obviously the audience as well.
Larry: So what’s, so don’t buy that penny stock nom. Just kidding.
Aric: Just $10. Come on. Just $10 worth now. It’s like, it’s like scratch tickets. I really, I I’m not gonna get those either.
Larry: Exactly. It’s like everyone buying the lottery, especially when it’s 500 million.
Aric: Yeah, right. Seriously. There’s mad rush at the gas station. Yep. So, so here’s the thing is that I know that you do that for anybody. Who wants to give you a call and ask you questions because you’ve covered a lot today, but there may be some other risks that people have in the back of their mind, like, well, what about this? And you didn’t cover it, and they wanna ask you that question. What’s the best way to get ahold of you?
Larry: Yeah, a absolutely. So the best way to get ahold of us is through the [00:27:00] website. Heller wealth management.com. You can go right in there and you can click on a on, on my calendar and schedule a 20 minute call with me where we can talk about some of these risks and you can ask me some of the questions and see if we’re a good fit for you.
Otherwise, if you don’t wanna do that, you can feel free to call the office at (631) 248-3600.
Aric: All right, Larry, thank you so much for your time today.
Larry: Ah, thank you Aric. It was a pleasure.
Aric: You bet, and of course our last Thank you always goes to you listening. Audience, thank you so much tuning in and listening to the Life Unlimited podcast with Larry Heller. If you have not subscribed to the podcast yet, please click this follow button below. This way when Larry comes out with a new podcast, it’ll show up directly on your listening device. If you’re watching this on YouTube, we’d appreciate it, like and follow there as well. We humbly ask that you share this podcast, rate it, and leave review as this actually does help others find the show.
Again, thank you so much for listening today. For everyone at Hello Wealth Management, this is Aric Johnson reminding you to live your best day every day. And we’ll see you next time.