RAIRA-Show-EDU-Y26E07

The Retirement and IRA Show provides insights on investments but not as advice. They discuss economic information, diversification, and asset allocation. The hosts, Jim and Chris, share knowledge on retirement planning topics like IRAs, annuities, and more. They explore structured investments like defined outcome ETFs, explaining their potential uses and risks. Morningstar's article on buffered ETFs sparked their interest, leading to a series of educational episodes. They aim to help listeners, especially DIY investors, understand different investment products and strategies for retirement planning, emphasizing the importance of portfolio diversification and careful decision-making. The retirement and IRA show represents the words and views of the show hosts exclusively and should not be construed as investment legal or tax advice. All information is believed to be from reliable sources, however we make no representation as to its completeness or accuracy. All economic and performance information is historical in nature and is not indicative of any future results. Any indices mentioned on the show are unmanaged and cannot be invested indirectly. Diversification and asset allocation strategies do not assure profit or protect against loss. Never make any investment or financial decisions based on information offered on this show without first consulting your financial legal or tax advisor. Financial planning services offered through Jim Saulnier and Associates LLC, a registered investment advisor. This is the retirement and IRA show coming to you from beautiful Northern Colorado. Join us as certified financial planner Jim Saulnier as well as Colorado State University finance instructor and certified financial planner Chris Stein teach you about IRAs, borrowing case, annuities, social security, pension plans, and estate planning in a fun and enjoyable show. Whether you are listening live in Colorado or streaming from their website or iTunes podcast, Jim and Chris want you to know that they're available to help you plan for your retirement. Just visit their website at jimhelps.com, that's jimhelps.com and click the meet the team button on the homepage. Now here's Jim and Chris with today's show. Hello everybody and welcome to the retirement and IRA show EDU edition for this week. This week's show is prompted by a listener who sent us in an article from Morningstar that entitled, I may as well just read the title and that will give you a sense for where we're going today. The title was Buffer ETFs are not for everyone. Here's how to use them in your portfolio. So it was an interesting article that kind of got our creative juices flowing if you will and we thought it would be great for Jim and I not only talk about them but bring in Jacob from the office here who works most closely with our clients in the positioning of their assets. What we describe our version of asset allocation if you will, we've talked about it previously but Jacob's going to help us kind of chat about how we find some of these new products what are called defined outcome ETFs or part of this whole world of structured investments if you will which are investments that don't behave as typical stocks or bonds but have a payoff that has been massaged we'll call it utilizing some sort of option strategy as part of it and these types of investments have been around for a while in the world of structured notes but have more recently cropped up these strategies and some new strategies in the world of ETFs so people have a little they're a little more available to the masses if you will. That said we certainly don't think that they're for everybody but could be of interest in certain cases in a certain application and we're going to share how we use them there's a lot of people use them differently than we do and a whole bunch of people who shouldn't probably touch them at all but today allow us to talk about this and I suspect that this will become more than one show we may not do successive shows on this topic but we'll probably have Jacob in at least a couple times if not more depending on feedback and if you have questions certainly send them to us and we'll either handle them on a Q&A show or if we get enough questions maybe that will become a new another EDU show on this. If you've been a listener for a while we talked first back in 2024 the summer of 2024 with Matt Kaufman from Kalamos talking about their buffer ETF products or ETFs and he's been on again we've had Matt on a couple of times so we've had the opportunity in those interactions to kind of share with you all what some of these new strategic products are all about but I'll bring in Jim and Jacob and they can I think they're going to take the lead probably walking through this article and we'll put a link to the article in the show notes so you can access it the article is kind of a summary of a broader reports research study if you will that Morningstar did they will give you the full reach research study but you have to supply them with your email address and name so they're gonna probably you know mark it to you if you will as the cost of getting access to the full report but you can get access to the article we're talking about free it's not behind a paywall so Jim or Jacob whoever would like to go first come on in and take it away well I will chime in first Chris thanks for that intro I know Jacob will be joining us on the show as well folks this is Jim case you're new and you don't know my voice and this is the edu version where we kind of do a deeper dive edu sometimes you get an email asking what is edu edu stands for education and it's where where we really want to take a deeper dive into a concept I want people to know and Chris did an excellent job trying to summarize in the two minutes before we started recording and I briefly told me is what we're going to talk about and here's the article I want people understand that this will be a series as Chris rightly pointed out because we want Jacob on this meeting he does much of the communications with people we work with on investing in the office he works closely with myself and a gentleman named Travis the charted financial analyst who together the three of us comprise the investment I guess you say due diligence team of the firm and all investments have to run through our due diligence process and our portfolios and investments we decide to use tightly regulated regulated in the sense of our firm we will do our best to try to understand fully what we are offering and where do they fit in to a retirement portfolio because predominantly we are a retirement planning firm or a distribution planning firm now we do have accumulation people that we work with and we may make mention of that even on today's show or a future show and where accumulation may fit in and then of course as we get into what we call not the accumulation portfolio and not the distribution portfolio but if you had two circles in front of you and you move those circles together and they overlap that's called that's called don't tell me it's called something it's then diagram I know you're gonna get there nailed it nailed it that's also called the transitional phase of retirement planning what I hope to do in this series that was kick-started to me through a listener who shared this article to Jacob who shared it with me Morningstar does a very good job in this article laying out what it likes about buffered products I thought it was one of the more positive articles Morningstar came out with their research report that the article is tied to that gets into it much deeper really does dive into the nuances of these products but as I read it Morningstar makes some excellent points on where these types of products would fit and by default where they don't fit and Chris rightly pointed out not everyone needs these but what I wanted to do and that's why I wanted to bring Jacob on and make this a multi-part series we want to share with all you DIYers who create all your own Excel spreadsheets I know you all geek out on it we call you VG years we love you it's it's it's a term of endearment not degradation but you are V Vanguard you mostly manage your own assets you probably have it at Vanguard or have a Vanguard investment at some point in your life and the ERS part the VG ERS is a reference to engineers you may not be an engineer but if you're listening to this podcast chances are you have spreadsheets or multiple spreadsheets and you're trying to do your own retirement planning so we call you VG years what I want to do is get you to understand buffered products or buffered ETFs are just one part of what we call in-house principle protected or a degree of principle protection products and we'll get into explaining that but there's multiple products in addition to buffered ETFs that not only do we use with people who work with us you all may use so we're going to talk this series about other products that may even be better than buffered ETFs buffered ETFs a one tool they're not the only tool there could be some that are better there could be some that are worse and we're buffered ETFs are substantially better than certain other products what I hope to do is get you guys to understand and revisit a concept that we haven't talked about in a very long time as it relates to our approach to retirement planning we call our approach if you will the secure retirement income process and I like to tagline that with the fun number approach to retirement planning but as the name implies it is a process that we put people who we work with and you do that DIY errs if you if you adopt our approach or a portion of our approach you will program into your Excel spreadsheets as we put people through that process and they transition from accumulation to the transitional phase or the Venn diagram phase ultimately to the distribution phase of asset management as it relates to their retirement timeline as they go through that they have to start thinking in terms of their portfolio no longer being one big portfolio but a series of smaller portfolios that's what we call investment positioning and it's the concept I came up with after coining what I call the see-through portfolio that in order to come up with your fun number from your retirement assets you have to see into that portfolio you have to draw out different positions Jacob will be explaining a lot of this over the coming series you have to draw out these investment positions and ultimately what's left is what we have termed the fun number but rather than taking all those investment position in positions that you pulled out rather than throwing them all back into one big portfolio we have discovered over the years of doing this that it makes far more sense to invest a distribution portfolio based on the assigned spending each of your investment positions or investment reserves if you will are tasked with achieving so dollars that might be earmarked specifically as a legacy dollar which is the longest term in our investment positioning can be invested very aggressively and a probably not ideal for any investment product that includes a degree of principal protection whereas an investment position earmarked for spending immediately in retirement like the go-go reserve for the go-go fund or the reserve that you're putting aside for your minimum dignity for a food utilities transportation housing and health care those dollars definitely need a degree of principal protection and that degree could be 100% or it could be a percentage less than that 80% 70% whatever the case may be these are all the concepts that I want to review on this series it's been a very long time since we walked people through this but it is a crucial element to the secure retirement income process and it ties into all the way back to that episode we did goodness I think five years ago now or even longer called the opposite where I try to get people to understand based on the Seinfeld episode of the opposite that when you do distribution when you cross that threshold from the accumulation into the Venn diagram and you jump from the Venn diagram into distribution everything you did to get there to get right to the end of that Venn diagram so the entire accumulation phase and a couple of years of the transitional phase soon as you jump into distribution it's the opposite and you have to start looking at your portfolio differently and you have to acknowledge like it or not you're not getting younger stronger healthier or smarter I always keep that one out but I shouldn't I always say you're not getting younger stronger and healthier we also not getting smarter and you can fight it as long as you want you can say it's always the other guy who's who's going to have cognitive decline we all will and it tends to happen quite rapidly after your early 80s and you will lose either the interest or ability to follow financial concepts Chris and I have talked about this repeatedly people don't like to hear it but it is the truth and if you guys are managing your own money it's going to be very important you keep things simple not necessarily for you right now you guys are good at this but the older you 8, 10, 12, 15 years from now is not going to be as sharp as you think you can deny it all you want but deep down you know I'm right or worse something may happen to you and your spouse who doesn't get into this at all is left with a complicated difficult to understand no way in hell are they ever going to be able to do it portfolio but if you approach the distribution phase smartly and as simply as possible it's going to make your life easier as time goes on and sooner or later like it or not you will probably reach out for help either with a younger child perhaps who you trust deeply and shares in your geeked outness on investing or you're going to go to a professional to help you and we're going to try to use this opportunity this whole series to even at the tail end start getting deeper into that how do you look for a professional how should you structure the relationship what can you expect how do we evaluate how they're doing and more importantly how the hell can you get out from under the uncapped AUM which I think is the biggest ripoff in this industry but that's way down the line what I want to concentrate now is taking some of what Morningstar seems to like and not like about Buffered ETFs but relate them to a much wider swath of investment products and how does it fit into the see-through portfolio investment positioning concept of the secure retirement income process our particular approach or the fund number approach to retirement planning. Long intro but I'm trying to set the stage folks that this just isn't going to be another talk about Buffered products this article that I think the listener who sent it to Jacob just got my juices flowing to say hey we need to do this we've been talking about doing it now's the time this I think you're going to find very interesting over the coming weeks and or months if we if we spread out between EDU shows and I think people will will like it and find valuable tidbits. Okay Jacob with all that why don't you introduce yourself and say hi again and let people hear that wonderful voice of yours and why don't you share a little bit with us I hear you may become a Midwesterner soon as well. Yeah yeah well I'm happy to be back on here my voice hopefully sounds similar to the last couple of episodes I've been on I will say I'm coming off of as you guys know last week I came down with a interesting fever flu COVID type of symptoms right after the Super Bowl on Sunday night as we sit here in second week of February chatting so my voice is pretty much back to normal I think it might might be a little bit rough but I appreciate everybody bearing with me so I'm happy to start chatting about some of these Buffer ETFs and conceptually kind of the degree of principal protection that Jim mentioned there but going back to potentially becoming a Midwesterner here that is that is the tentative timeline so I've been in I grew up in Colorado been in Colorado my entire life grew up kind of outside of the Boulder area came up to Fort Collins in northern Colorado here for university as I obviously got introduced to Jim and Chris, Chris through CSU and then now my girlfriend of some time is actually she's actually been in Iowa City Iowa for the last couple of years doing her medical residency out there so last couple of years I've been going out there just working remote for a couple weeks at a time and trialing it out there and then but the plan this summer kind of in the July time frame would be it is time for me to make the big jump to move from Colorado to Iowa at least for a couple of years she'll be out there for at least two more years if I go out there in July this this summer here and then we'll we'll see where we end up after that not going anywhere with the firm wise so you'll still hear for better or for worse my voice hopefully on the podcast every now and then but I will be joining from cornfields instead of the foothills and mountains I suppose. Are you going to make that jump in July of this year? Yep that is the the plan yeah. Will you be around for chocolate cake and white frosting day? I will not be in Colorado for the chocolate cake and white frosting day that I think I'm going to miss that by about a week or two what it's either going to be the first week of July or kind of the second week of July that we're targeting for me driving out there. Well I think you should make it the fourth week of July so you can be around for chocolate cake and white frosting day. I know well I'll ask her about that Jim we'll see what she says. You can always find your own source for chocolate cake and white frosting in Iowa and and celebrate. That's true right I'll go to an Aldi's or a Hy-Vee which we don't have in Colorado for folks listening in the Midwest I'll go there and I'll find my own chocolate cake and white frosting I'll send Jim a picture maybe. I would appreciate it that would be nice and and maybe our listeners will do the same and and everybody will enjoy July 24th which is chocolate cake and white frosting day. I'll also be waiting to hear since you'll be heading out there in the summertime the quality of the sweet corn out there. Now I know that most corn is that's grown is actually feed corn it isn't the sweet corn that we eat corn on the cob but with all that corn in Iowa one would think that they've got a fair amount of sweet corn. I'll be interested to hear your comparison because I think we have some pretty tasty sweet corn in Colorado in the summertime. Okay yeah that's what I'm going to wait to hear from from you. I'll have to give you the corn diagnosis when I when I get out there. Corn wise real quick one tidbit and maybe everybody else knows this but I had no clue about this one of the main reasons why Iowa gets so humid is that somebody told me the corn sweats and so the moisture coming off of the corn is a huge contributor to why Iowa itself is so humid even relative to other states in the midwestern area. I have no idea if that's actually true maybe I'm getting told a lie but a couple people told me that recently I had no idea I never even thought about it. It's not just that corn. Sweaty corn. Hmm it's not well it's transpiration here. Trees do it comes an evergreen tree or a deciduous tree or a little flower in your gut they all transpire. The thing is with corn is they're water hogs and they put a lot of water down because you have the same issue in Nebraska and yeah around the the farm country it's far more humid than it normally would be because of the crops sweating if you will but you'll find that anywhere that there's a green living thing they they all transpire if you will that's why going under a tree in shade is cooler because the moisture coming out of the leaves is actually cooling the air around you so anyway just figured I'd share that and it's one reason it's one reason folks that this pains me I cannot believe I'm about to say what I'm about to say yeah uh-oh I have made a command decision because of the extreme dryness we are experiencing in Colorado to reduce my garden by 25 percent this year yeah that's tough well that will reduce the humidity we have yes the humidity immensely if you saw the size of my garden so I've sacrificed the corn because it is a water hog it's a grass corn is grass people don't realize that corn is related to grass and it's a water hog so I'm getting rid of the corn I'm reducing my tomatoes and I'm getting rid of the specialty squashes I grow like last year I grew argan nut which is the biggest butternut squash you'll get mine I think the heaviest I got this year was close to 18 pounds they are massive but I'm getting rid of argan nuts and I got rid of my Long Island cheese wheel which again are another big specialty novelty style squash and the remaining squashes I'll be reducing down in quantity so all jokes aside I had to make that decision because Chris will and Jacob you're here too it's been so freaking hot and dry I'm I don't think I've ever Jacob you've been here your whole life I've been I've been here more than you because well no I've been here 20 not quite okay but it's one of the driest years I've ever seen do you guys agree am I missing something no I don't remember any time you know go ahead Chris yeah so far it is it things could still change it's only February 17th but this has been going on since September right I get it so anyways I made that decision this weekend the friends who helped me in the garden were over we all agreed it would make sense and from a gardening perspective it's going to allow me to now service the areas of the garden that won't have crops by getting some cow manure into there tilling it into the soil hopefully tilling it in I need moisture to be able to break through this very very hard soil but my hope is to improve with additional compost the pots of the garden that will be retired this year all right anyway enough of that people don't want to hear that so let's jump into what got my juices flowing the link to this article will be placed in the show notes but if you don't want to look just google morning star and then put buffer ETFs are not for everyone and it will probably pop up but if you want to get the full article you can continue typing here's how to use them in your portfolio but I believe you can easily find it by morningstar buffer ETFs are not for everyone and this article will pop up right at the beginning of the article will be a link as Chris rightly pointed out to get the full research report you guys are geeks on this get their whole report and read it they do a very good job and they highlight eight ETF providers right now that offer these products and they highlight some of their products and we will not be mentioning any product by specific name hey this is the XYZ ETF or the ABC ETF or as we get into other types of products with the degree of principal protection we will mention the product by name as a category but no specific investment within that category you all know that's how we operate we are a financial planning practice I have very strict rules set by the SEC and I don't want to piss them off and I cannot name an investment that we use so or even when we don't use but I can't mention them by name so if you are hoping oh god I was hoping he's going to tell us what he uses no I'll tell you the category but nothing specific okay so as I started reading this article it got me to understand I like the direction Morningstar's going but they're limiting it just to buffered ETFs and they're ignoring a whole cadre if you will of products that come with a degree of principal protection and I thought to myself this would be a better podcast topic if we share that so as I start reading the start of this article I'm going to be throwing it to Jacob every now and then if I can I'm going to throw things to Chris but if you don't hear Chris much in this recording it's not that we're trying to over talk him Chris's expertise as you all know is second to none on social security and Irma in my humble opinion and he specializes in that in the office and retirement planning he does not concentrate beyond what he needs to know working for the firm on the specific investments he doesn't sit on the investment advisory team of myself Jacob and Travis he doesn't attend our quarterly due diligence meetings he doesn't attend our monthly strategy sessions he doesn't attend when portfolios are being rebalanced so it's getting a little out of his wheelhouse but he definitely will chime in especially when we start relating this to our process but I don't want you to think throughout this whole series that God they never let that poor guy Chris talk he gets good time to talk in fact if a long time listener will know he barely shuts up it's like he takes over he will have ample time to talk are you okay with that Chris completely see he's probably already sitting back enjoying a a a do you drink cocktails or beer on none of that uh all of that is my response all of that and more all right well I didn't realize that I don't drink much but um which leads me on remind me on the Q&A show um two people sent me an email a while ago and I forgot to read them of a mistake one of us made I won't give a hint of which one of us made the mistake but I forgot to read their email okay so let's begin wait that's all you're gonna tell that's that's all you're gonna say well I'm pithy and to the point no what what was the mistake you do you want to know the mistake now well I thought that's okay no no all right well well here it is they came in two of them almost back to back on January 31st mm-hmm and one of them is Chris misspoke dear Jim I quite enjoy the Jim isms in each episode well thank you listener alongside all of the learning from you Chris and the entire team there's a shout out to you Junior the juice may not be worth the tree in writing this there's a little day not a dig but a little shout out to you Chris but I'm delighted to point out a very rare night in his opinion very rare racism from Q&A show 2605 he tried correcting you for saying imbibing and claimed it should be M by Dean you in fact the correct it is M by the IBE keep up the great work quickly followed by another gentleman on the podcast that just released Jim used the word in vibe oh my gosh I mean to mean consuming alcohol Chris corrected him stating the word is M by D with a D I'm wrong in yes let me finish eating this in fact in this case Jim was right let me let me Jacob you probably didn't hear that right he said in this case Jim was right did you get that Jacob the right one proof I want a picture of it I won't prove and Chris was mistaken the word is in fact imbibe yeah they are correct and you were correct I'll give you credit for that yes and feel free to use my the juice is not worth the tree anytime you'd like yeah imbibe isn't a word apparently only two people picked up on that maybe we only have perhaps we only have two listeners I don't well especially when we start an EDU show on a topic and it's at 33 minutes and we haven't even gotten into it yet but that that's just how we roll yeah I will never make that mistake again because that's how I learned when I make a horrible horrible mistake like that that sticks in my brain more than anything else so I'll be imbibing for the you know enthusiastically likely maybe not even maybe before the show ends I don't know at this right yeah all right even though this intro was long people have an understanding of what it is and yes this is what makes our show fun folks but we are going to get into some some really important things so let's begin I'm going to start with the beginning of this article and again the article is for free and so is the report but you have to give your email to get it I'd get the report as well this article begins structured products are proliferating proliferating nailed it proliferating in exchange traded funds and defined outcome ETFs or buffered ETFs are amongst the most popular and Chris rightly pointed out what a structured product is we call them a degree of principal protection but that's true definition of structured products gets into something called structured notes and maybe we will cover that in another show we are specifically our morning star here is talking structured products in the sense they utilize options in this particular realm to offer principal protection morning star continues these ETFs use options to provide an explicit amount of loss protection over a given period but limit potential gains you all know this you can't have all of your cake and eat it too so if you're going to have some downside protection whether it's 100% downside protection or 90% or 80% or 70% downside you have to give up the upside you can't get all of the upside and none of the downside and with their relatively high price tag and morning star calls them out for having high management fees especially relative to a passively managed ETF tied to an index that can often especially you vanguardians out there you know could have a 0.01 or a 0.02 or 0.1 0.15 type expense ratio that these products that can have expense ratios of 0.9 and above the average according to this article as you'll see later is 0.7 ish but they asked dining to come down we we didn't name the carrier and it's not in morning stars report but a new sponsor a new provider of these buffered ETFs is offering a 10% buffer for 25 basis points so that's getting down even more i'm optimistic that fees on these will eventually come down so then morning star gets right into their research report morning stars new guide to defined outcome ETFs unpacks this rapidly evolving landscape outlines potential use cases and provides an overview of the largest eight defined outcome ETF providers and interesting readers can copy here excuse me click here and download it themselves go to the article click there and get the main report in this article we look at the rise of buffered ETFs how they work and explain how investors can get the most out of them and now they continue with the article the defined outcome morning star category had the most ETFs of any fund category that surprised me folks when i read it because these funds as a category are relatively new i don't you know off the top of your head jacob when the first one ever traded or not but yeah oh you do yeah you know well i was just going to say real quick i mean if you're following along listeners and you're looking at this article right where jim's kind of mentioning they do include a graph here and it kind of shows the growth and popularity of some of these defined outcome funds they're talking about and it goes all the way back the earliest they show is 2018 which i think kind of rings bells as to what i would expect based on across the providers what i've generally seen right and way back then folks there wasn't a hundred percent buffered ETFs those are even newer uh back then it was only protecting you where you would assume the first five percent of the loss then the ETF would kick in and protect you from the next 20 to 25 percent depending on which one you bought and then you would then assume everything above essentially 30 in other words first five you eat ETF picks up the next 25 any loss below 30 you begin to assume that's how they were first set up they've become much simplified over the years with a you can find a provider at a 9 buffer a 10 buffer a 15 or 20 so they're trying to simplify from that realm but okay that rings a bell too jacob i should have looked at the graph better around 2018 but the article pointed out as a category they have the most funds 420 right now are in that category it's also the fastest growing with an average annualized organic growth rate of 39 percent over the past three years and has amassed 78 billion dollars as of year end so i'm assuming they mean 2025 since it's only early 2026 so as a category these funds are gaining a lot of traction and they are for a reason the wall street journal coined them boomer candy a lot of wall street that doesn't offer these products are trying to come out with articles to convince you that they're no good and you can do it another way i'm not going to turn that into discussion on that argument i think this statistic from morningstar shows it all that there are people out there mostly boomers who are saying hey i don't need all of the upside i need to make sure my money is there i am consuming my money i am doing negative debits i don't have an accumulation portfolio anymore when a market correction is a buying opportunity i have a distribution portfolio and a market correction can decimate me that's where i think all those articles that come out and say don't consider these which also happen to be from companies who don't offer them and are seeing money from their accumulation side going to these distribution portfolios people miss the boat and that's what i want to get into distribution planning and there's products that go way beyond buffered etfs and that's where we're going to go but we're going to use this article as our core okay so we continue with the article defined outcome etfs have grown in popularity for for the past several years for their ability to shield the portfolio from losses the stock and bond market decline of 2022 was a perfect opportunity for these etfs to take hold everybody out there jacob should know exactly what even reading the article and i would assume chris because he he definitely does follow this industry but all of you should know jacob what happened in 2022 2022 is one of the the first big years where we ever saw stocks and bonds be down both a similar amount at the same time it was exactly there was no ballast if you will there was no diversification benefit of holding bonds in your portfolio in 2022 now it doesn't happen often but to me periods of high inflation with interest rates being low and still outrageously low i don't support the last few interest rate increases at or excuse me decreases at all with interest rates being so low another period of time in the future of high inflation will decimate stocks and decimate bonds because in high inflation the fed has one tool predominantly and one tool only and that's cut interest rates and when that runs out quantitative easing both of which drive interest rates down and when interest rates go excuse me when both of them will drive interest rates up the high inflation they have to raise interest rates so quantitative easing i misspoke is to drive them down even more i'm saying if there is a period of high inflation again in the future the fed has one tool and one tool only and that is to raise interest rates that will drive bonds down and that happened in 2022 and it could very well happen again and as the fed continues to cut rates now even though i do think it's going to pause for a while anyways but as interest rates continue to go down it just sets the stage for a quick and fast rebound in another high inflationary environment and that is a lot of risk so morningstar rightly pointed out that these products really started to gain traction in 2022 because traditional portfolio ballast if you will of bonds did not pay off so morningstar continues enter buffered etfs which explicitly defend against stock market declines they aren't without some risk however and many can lose money under the right circumstances if they ended the article there i would say that's very misleading but they do go on to explain what they mean perhaps not to the degree that i will explain on this show but yes many of them can lose money keep that in mind you have to understand if you invest in these or any of the other products that we're going to list as products that carry a degree of principal protection some can and will lose money you have to understand that standard buffer etfs expose an investor to any and all losses after the buffer level is breached only max buffer etfs should notice they use the word should not will should avoid losses altogether before fees no matter what percentage of losses an etf purports to protect all limit gains to some degree gee degree of principal protection that's how we word it and morningstar words it the same way jacob why don't you just briefly explain with what morningstar was saying there yeah with the buffers and essentially how the buffers work and the most common buffer levels of protection yeah yeah there's really two that they're kind of talking about and focusing in that paragraph that you just read i'll start by explaining the first ones that they mention where they say protect all losses after the buffer level is breached that that is essentially folks as you know probably referring to some of the the buffers that might provide protection from the first zero to ten percent loss zero to fifteen percent loss zero to twenty percent loss let's just say tied to that reference asset again there's so many different providers for these there's a lot of different reference assets these could be tied to could be the s&p could be the nasdaq 100 all these different ones you've heard us talk about in the past but those are the style of buffered etfs where they're essentially saying again hey you bought it on that first trading day of the month you hold it for the full 12 month period in general if you hold it for that full 12 months you know you're going to have protection from the first again zero to ten zero to fifteen zero to twenty percent drop any loss below that so an easy example on the twenty percent buffer let's just say if the market is down thirty percent at the end of that 12 month period that buffer is going to kick in it eats that first zero to twenty percent loss and then exactly like morningstar is saying in this article the investor is on the hook for that extra kind of 10 from 10 from 20 to 30 pardon me plus the fee of the fund itself that is always has to be factored into here those are going to vary depending on the provider that fee is also always going to be taken out over the course of that 12 month period regardless just like any other expense ratio that you all are familiar with on you know any etfs that you've used in the past that's the first kind of type of buffered etf that they're mentioning in that paragraph the second type they specifically use the language only max buffered etfs should avoid losses altogether before fees this gets back into those other buffered etfs specifically the hundred percent ones that we've kind of talked about and shows over the last couple of weeks they're referring to them as max buffered etfs which is another title that you sometimes hear these referred to as where functionally they're they're basically the exact same the same 12 month point to point period but if you hold it for that full 12 months you get downside protection from whatever the market ends up losing and the maximum that you can lose if you hold it for that full 12 months is the fee of the fund itself and that's exactly what morning starts just re-illustrating and kind of telling you in this article here excellent anything you want to add chris no not at this point i think things are going swimmingly swimmingly excellent are you imbibing over there not but i'm sure thinking about it okay the peace of mind provide i'm reading again from the article the peace of mind provided by buffers may be worth the foregone gains for some but to find out for some meaning some people but to find outcome etfs total returns are likely to fall well short of uncapped stock or allocation portfolios over extended time horizons what does that all mean this next sentence sums it up this makes defined outcome etfs sub-optimal holdings for long-term investors we have always tried to point that out to not only you guys but anybody we do not feel me personally but as a firm as well if you are in the accumulation phase of retirement planning in other words you're still growing your assets you're not even transitional you're not within five years of retirement you're still accumulating assets i don't feel buffered products are a wise choice for you you should be investing up to your risk tolerance and if you're up to me if you're in your teens your 20s your 30s even your 40s if you're still looking at a 65 age 65 70 ish retirement and you're 40 you should be 100 equities full-blown aggressive and don't even look at your statement because you are investing monthly on a steady systematic basis and a down market truly is a sale for you and you should actually be a static when the market is down because you're buying things that were a hell of a lot cheaper now than they were a year ago and they'll be worth a hell of a lot more 30 years from now so a buffered product is sub-optimal in my opinion for an accumulation portfolio but as you start to get into a transitional portfolio and a distribution portfolio investment products with a degree of principal protection not just buffered etfs should start playing a wider and wider role and morningstar is acknowledging hey in the right circumstances buffered products have a place and as i use the term buffered products from this point forward i'm talking all products that offer a degree of principal protection it's not just buffered etfs there's a lot of products out there that you can choose from some fit some don't they all work differently they all have their strengths they all have their weaknesses but the amount of products you guys have available to you to build the degree of principal protection into your portfolio is mind-boggling with that said before i get into them this is where i'm really going to hand it to jacob and actually chris might be able to opine a little bit more here but jacob let's just pretend you were instead talking to somebody who wanted to know how do you guys manage a retirement portfolio what will you always say it's a distribution portfolio how do you believe in it what's this concept what's the see-through positioning how should i be looking at things share with people this is where we're going to diverge now folks from morningstar morningstar setting the stage that hey these can actually make sense they're one of the fastest if not the fastest growing category fees are still high by our standards but they're down from where they once were custodians or managers in this particular case not custodians are offering a wider and wider variety of them but we want to dive a little bit more into where would they fit they're telling you it's suboptimal for anybody who has a long time horizon but not suboptimal for people with shorter time horizons how do we look at that jacob share with people just pretend you're talking to someone who's reaching out and saying what do you guys do i don't get the security time and income process and this concept you guys are calling the investment positioning and see-through portfolio well let me chime in for one second because typically what i do with the team happens before we go to that step and hand it kind of hand it over to jacob so let's pretend we're doing it in that chronological order where we've done projections and looked at a case and with the goal one of the main goals is to identify what is your money needed to do and when so what is its job and when does that job happen it's that detail that then gets shared with jacob who then says okay now that we know what your dollars need to do for you and when we can use that as the overriding information probably the most important information to decide how best to structure your portfolio so then we hand it to jacob exactly exactly and that's that's true elizabeth and we've talked about in the past as well but that's why when we focus on positioning and decumulation planning you hear us use some of these terms you know internally as a firm here that's really why we rely on and require folks to go through a retirement plan analysis with us before we can even get to this step because like chris mentioned that data that whether you work with us whether you do it yourself the vgrs using your own spreadsheets or whether you use a different advisor that data that you're able to determine from going through the planning side of things and the retirement plan analysis side of things is really truly crucial to determining how you're going to start applicably investing all these different dollars what chris was talking about there i'm going to throw some additional terminology that you've probably heard us talk about in the past as well but when you go through the planning process you start to get some of these different positions these different reserve lined out chris mentioned you know we're starting to look through the lens of when is that money going to be needed and for what job specifically that is a huge point to focus on in a decumulation and a position portfolio and the two terms that i'm going to talk about that are going to ring some bells but i'm going to rehash them are going to be the difference between risk tolerance and risk capacity risk tolerance as you probably know is your emotional comfort level with market risk that's the one that over the course of the last 40 years as you've been working to save up your portfolio that's the one you've been focused on is looking and saying hey from an emotional standpoint how comfortable am i investing these dollars for longer term do i am i comfortable with a moderate level of risk a moderately aggressive whatever it might be that's the one that folks focused on for the majority of those accumulation years as you start to get into this transition phase that jim was talking about and you you get into this full-blown kind of positioning decumulation phase that's when you really want to start focusing on listeners risk capacity not as much risk tolerance risk tolerance still applicable and i'll touch on that here in a second but risk capacity is the key one and that is essentially illustrating exactly what chris you know prefaced where you're looking through all those different assigned spending needs in the planning side of things and starting to determine okay based on all the projections and the trends that we're seeing in the plan when do i anticipate needing to access these dollars to supplement some of the spending that i've listed in the plan itself that's the risk capacity right it's looking at a certain position a certain set aside and saying all right when do i anticipate needing those dollars to cover the expense they've been assigned for and let's make sure that those investments are chosen appropriately to make sure that they fit the time horizon that we're kind of talking about so when we're starting to walk through all this and we're starting to look through all the different positions all the different reserves you hear us talk about the fund number worksheet the see-through portfolio where you might have a delay period and minimum dignity floor a long-term minimum dignity floor obviously your fund spending your fund vision number any dollars earmarked towards seal which again stands for savings for emergencies aging and long-term care i'll get into that in a future conversation maybe not on today's episode once we start to have all these different positions laid out we're truly looking through and saying all right we've got retirement planning we've got the data from the plan on my on the left island if you will if you can follow me here we've got the assets and the accounts the investments on the right island let's start to build that bridge in between these two islands that bridge in between folks is the positioning where we're talking about and we're going to start to look through and say all right for example a delay period minimum dignity floor again these are dollars that we know you're going to need whether it's over the course of the next one to five years one to ten years whatever it might be depending on your age and when you anticipate your secure income fully turning on that is a position where much like jim was kind of talking about we're really going to focus on allocating those dollars with a degree of principal protection in mind that is going to be a position where we're typically going to prioritize and say all right we know this money is going to be needed over a one to ten year period let's just say we want to start laddering those dollars out and making sure that from an emotional standpoint listeners regardless of what is going on in the broader market if there's a bear market whatever is going on our fear is that you don't have that money you know you're going to need in the near term invested applicably so that it's not fluctuating with the broader market it's accessible it's liquid for you to continue to be able to spend on so the two positions are the two kind of set asides that jump to my mind when jim mentions degree of principal protection for most folks this is not everybody it all depends on your ages and your situation but for most folks the two positions that jump to my mind are going to be the delay period minimum dignity floor and go go fund spending because those are two positions listeners or two set asides that generally we know you're going to need to access in the near term over the course of the next one to five one to seven one to eight one to ten year period that's the position those are the dollars where this degree of principal protection jim jim keeps talking about are really truly going to apply and we're going to start looking at those those spending related positions and sit down and say i mean much like we talked about on a podcast a couple of weeks ago those two positions it's really changing your mindset and focusing on a return of those dollars not as much a return on those dollars at this time you're going to have other positions that can remain allocated and can grow in the background but those two generally for most folks are going to be two that you're really going to invest and say hey i know i'm not going for the moon on this i'm investing these appropriately so that i know they're going to be there for me to spend from even in a down market and so when we start to look through each of those positions it really becomes saying all right you know maybe for the first one to kind of five years or so of spending we're really going to prioritize full principal protection maybe not even talking about any of these you know 15 10 20 buffer etfs we were talking about but full principal protection where you know you have that downside covered and there's a handful of different you know options out there that i'm sure we'll get into on a future episode but we're really going to prioritize that full downside protection making sure that money's liquid available ready for you to spend from in that first one to kind of five year period the degree of principal protection concept really kind of starts to come into play for dollars that might fall into the six to ten year time horizon where we're taking a step back we're sitting there and we're saying hey you know again this money's maybe six to ten years away in my example not for everybody but in my example you know we don't necessarily need to go with full principal protection and lock it into a single-digit interest rate but it is still money that's been assigned to minimum dignity floor or go-go fund spending so from a conceptual standpoint with us at a firm we would still say that those are two important positions that we want to at least have a degree of downside protection on and that's where something like these buffered etfs a couple of different options that we'll talk about in a future episode could apply where you're essentially sitting there and saying all right it's six to ten years away not that far but it's also not you know next door it's not one to five years let's protect maybe the first 15 percent the first 20 percent you know downside loss but still be able to participate up to some of these cap rates on some of these underlying assets over the course of the next couple of years acknowledging listeners right it's not going to be the same forever you're going to want to set this up and you're going to start somewhere you're going to ladder out those 10 years worth of spending in my example and start somewhere but it's not going to stay in the same allocation for all 10 years you guys know as well as I do as you start to spend down some of those dollars each year going forward you start to get closer to year six year seven year eight of course you're going to progressively want to start to dial back some of those future years spending as you get closer to them and move them from a degree of principal protection into investments and maybe more of a full kind of principal protection so it doesn't stay the same forever you got to start somewhere you got to set it up and have it applicably allocated to start there but each year as you start to spend down some of those year by year amounts things are going to change you're going to want to progressively start to dial back some of that depending on when that money is anticipated to be needed the risk capacity I cannot cannot overemphasize how critical risk capacity is to when you're looking at investing a decumulation in a position portfolio as opposed to risk tolerance in your accumulation years where you've been so used to a moderate or a moderately aggressive across the board there so a lot of information there Jim anything you wanted to add or anything that I missed that you wanted to touch on with that a little bit and I'm hoping Chris might have the time today I don't know he keeps track of the time to try to explain quickly because he's much faster than I would ever be of how we come up with these positions just a quick summary so people who are relatively new and don't quite know our full approach how does he on the planning side quickly get these various positions because Jacob mentioned some of the positions that we we do I'll let Chris decide in one second if he thinks he can do that now I just want to make mention for all of you guys out there thinking god what they're describing sounds like bucketing so I want to acknowledge right off the bat that what we have described what I have termed the see-through portfolio what I have described as investment positioning is an offshoot of what academically goes by time segmented investing the industry calls it bucketing but in a time segmented investing approach for managing a distribution portfolio and they usually use three buckets or three time segments they would say there's going to be bucket one or short term so it's usually defined as one to five I would say in the industry one to five years some people might go one to eight but standards about one to five then you would have bucket two or the intermediate term which is generally five to ten years and then bucket three which is goes by the long term which is ten plus years and in time segmented investing the idea is bucket one or short term dollars have principal protection what we call a degree of principal protection but these are dollars that are going to be available and available right away I have seen some bucket approaches where bucket one or short term is not five years it's only two years so you might see anywhere between two three four five but that's one bucket midterm is where they often tell you the middle bucket the intermediate bucket they tell you that should be fixed income that should be bonds because when bucket one is empty if stocks are down you can debit from bucket two that's where I think time segmented investing or bucketing loses its luster with me because 2022 showed you bucket two could also be down and then the longer term bucket or the growth bucket generally has 100% equities or 80% equities or something of that effect it is the growth portion so that's time segmented investing what I did as I came up with this process over the last 26 years I began to realize the concept of the fun number truly resonated with my clients y'all know the story behind I'm not going to rehash it here go listen to the old show how I came up with the concept and called it the fun number to help someone who was apprehensive about buying a trailer to go with the brand new truck they bought so they could start enjoying visiting every national park in the lower 48 which was their early retirement goal they felt uncomfortable doing that and I felt they missed the boat of what I was trying to talk about and I came up with the concept of fun number with them and what I started to realize is that if I could simply help people by showing them not time segmented but spending segmented investing and started pulling out what we now call positions from the retirement plan from their portfolio by default what is left is the fun number and that's what people truly want you don't want to go into retirement with a 2.8 million a 1 million a 5 million whatever it may be dollar portfolio and limit yourself to four percent of that it's asinine you want to go into it and say hey how much of my retirement money whether it's less than a million a million 2.8 million 5 million or more how much of that can I truly spend on fun tell me on day one don't tell me 10 years into retirement I could have spent more tell me on day one how much can I spend on fun and don't tell me now to limit my fun spending tell me I could spend as much of it as fast as I want that's my approach to retirement planning well in order to do that I started realizing rather than us figuring which is the old way of doing it we'd figure out the fun number we throw everything back in I use the analogy of a toy box we throw it all back into the toy box into one big ass portfolio which these people had I determined their fun number I knew they could afford both the truck and the trailer at the same time but I threw it all back in and they had one big portfolio and they saw it drop by 30,000 which what the truck cost way back then that was a lot of money back when this happened and I couldn't convince well I did eventually convince them when I showed them again on bundling everything it is at that meeting the concept of fun number truly took hold but the concept of investment positioning that if I simply kept these dollars out I call them toys from the toy box each position is a toy and I use the metaphor they all remember when we were kids and we had toy box pine toy boxes way back in the day and you the toy you invariably wanted was always at the bottom of the damn box and you'd have to pull out all these toys find the one you want and then if you had a mom like mine who I love dearly she would scream and yell at me unless I put all the toys back into the toy box so I was bred to hey you took it out but put it all back in if you simply pause and not put it all back in I thought that's a better way of getting people to understand the concept of fun number and then it made me realize all of these toys or investment positions are deferred spending and they all have a timeline of when they're going to need it or a risk capacity and if I just started visualizing this for people instead of time segmented investing I can do spending segmented investing and that's what gave birth to the see-through portfolio and to the importance of using a degree of principal protection in these various positions Chris how I don't know if you want to do it on the beginning of the next show or wrap up this show but can you explain at a 30,000 foot level how we get these positions sure I think I can do that now right before we wrap one thing I'll say when I describe it if bucketing is time segmented investing positioning is time and purpose segmented investing we don't focus simply on time but rather time and the job that must be done and take that into consideration as well so if you're still trying to wrap your mind around what positioning is maybe that helps a little but to identify all these toys as Jim described in his story there we kind of take a structured approach where we first focus on the most important expenses that people need to meet in retirement and that it's the minimum dignity floor expenses of food utilities transportation housing and health care and we view those in two phases of life of retirement the phase of the delay period when they must be funded before all your secure income is turned on and then the post delay period if they're you know during the delay period obviously you'll need assets to cover them because your secure income is not on yet things like social security pensions or otherwise and so asset distributions are needed so we first carve off or identify the toy that is covering the minimum dignity floor during the delay period then we look at the post delay period after your secure income is on and if there is a shortage at some point from there to the end the end being well into your 90s is usually what we're looking at as far as a assumed mortality if there's a shortage there we identify what it might take in the post delay period to fund additional secure income to close that gap and through a variety of calculations and and polling estimates for income annuities is the best way that we have found in order to estimate a reasonable amount to create secure income we can then figure out the second toy which is the amount of money that might be needed later for the older you to generate more secure income to cover the minimum dignity floor because that's a core concept for us covering the minimum dignity floor with secure income in the long run then we bring the rest of the story into it which is the fund spending and other things that you might have particular goals about if there's inheritance that's a priority for you or charity to someone or those types of things and we then start estimating hey you know in my fund vision what I'm dreaming I'd like to do in retirement what does that distribution of cash flows really look like and you know obviously there's the go-go period the slow go period and the no-go period we talk a lot about with with fund spending so it it's a little detached from the con the concept of the delay period and post delay it kind of has its own transitionary period through time and we know that dollars needed for for fun is really just dependent upon when that's needed as far as calling it a different you know this toy or that toy and once we've assembled all of that we essentially have a sketch of you know the dollars that are needed and when for what purpose that we can provide to Jacob or to you know people who have had us do this and they want to go do it on their own and then they start positioning appropriately now having kind of an x-ray that's been done on their whole retirement cash flow situation breaking it out into those pieces that Jim was describing. All right I like that very quick and pithy that wasn't too didn't take too long yeah. So that folks is probably where we're going to wrap this up setting the stage again for those of you who are hoping this was going to be dedicated to just buffered products no we're going to be covering a wide swath of principal protected or degree of principal protection products but we'll be keying off of this this buffered article because we even acknowledge here at our firm that buffered products do play a role and it's a role that even people we work with are curious on and are constantly asking us questions on and based on some of the emails we receive a lot of people have questions on them. So for those of you who already sent in questions prior to today's show on buffered products I do have them I did save them and Jacob will be coming on as we get deeper into this edu series Jacob will be coming on to some dedicated Q&A shows where we will address specific questions on buffered ETFs and it's likely after we start mentioning some of the other products that we use for degree of principal protection because again let me stress it's not just buffered ETFs we don't put all our baskets with one uh so close we don't put all of our eggs in one basket when it comes to that we use a multitude of products so you can ask specific questions as we get deeper into that if you have any on some of the other products that Jacob and myself will be will be chatting about so I'm excited for this series I truly am I think today set a good stage but also gave a lot of people food for thought and if you have questions send them in and put something in the subject line so I'll I'll know that they kind of pertain to this series whether it's a Q&A individual question or a question on our process and approach that I'll leave that up to you guys and then Jacob we intend to bring you back on to cover a lot more on this so hopefully people will find this valuable I have no idea if this will be a three series a five series a seven series no idea as long as the questions and the interest seems to be there we will continue covering this on edu and dedicated Q&A shows great well thanks a lot Jacob for coming on for everybody else if you want to send in your own feedback or questions regarding this topic or just send in a general question for the Q&A show send it to Jim directly jim at jim helps.com is the email address that's jim helps.com and put the in the subject line indicate that it's a question for the podcast and include the topic and a buffer etfs would be probably a good one to to catch jim's eye as we move through this topic along with jacob yeah everybody take care and we'll be back with you next week with a brand new show you have listened to jim on the radio read his quotes in the media and enjoyed his banter on itunes but even now you may wonder what sets jim sawmere and associates apart from other financial planning companies the answer is quite simple jim's diverse team of professionals specializes in retirement planning they form a lifelong relationship with you and measure their success not through product sales but through the security and prosperity you may achieve in your retirement jim's entire team shares his unwavering commitment to placing their clients best interests first while offering their services at fair prices with full disclosures the professionals at jim sawmere and associates are available to assist you with your retirement planning needs visit jim health.com that's jim helps.com or call 970-530-0556 the retirement denier ratio represents the words and views of the show hosts exclusively and should not be construed as investment legal or tax advice all information is believed to be from reliable sources however we make no representation as to its completeness or accuracy all economic and performance information is historical in nature and is not indicative of any future results any indices mentioned on the show are unmanaged and cannot be invested indirectly diversification and asset allocation strategies do not assure profit or protect against loss never make any investment or financial decisions based on information offered on this show without first consulting your financial legal or tax advisor financial planning services offered through jim sawmere and associates llc a registered investment advisor