How to Build More Predictable Investment Growth

0:00Well, it's first of all, we have to ask what is the market? Because no one gets what the market says it gives. By that I mean, most people would say the statistic is that the market would give us a 10% annual return over the last century. That's a common refrain. You might hear it up or down a percentage or two. — Sure. — Let's say 10% over the last century. Wow, that's pretty good. But what did real investors get that actually invested in the market? And you know, I have long dis- long-term studies.

0:3430 years is a long period of time for a real human being to invest. No one's invested for 100 years, at least not anybody I'm aware of. Maybe Warren Buffett's getting close, I guess, but But over a 30-year period, what were real investors actually getting? And the best research out there is a company by the name of Dalbar, d a l b a r. If folks want to look them up, look up the quantitative analysis of investor behavior study, and they put out this report every year. Kirby, this blew me away.

1:06Real investor returns when factoring in volatility and fees, but not taxes. So, we haven't even talked about taxes, the real investor returns were closer to 4.3% over 30 years. — Hmm. Not 10. — What What causes that? — These are index fund people, too. You know, this is index funds or mutual funds, people just tracking the S&P 500. It should be that 10% piece. — Yeah. — Here's what causes that. Let me give you a little math experiment to show you what I mean. Averages are meaningless when factoring in volatility.

1:40That's the that's the slogan of this little math experiment. So, let's say you and I invest some money together. Let's say we throw in 10,000 bucks into some sort of investment. And let's say that it gives us a 100% rate of return this year. I'm loving life, right? Our 10 grand is now 20 grand. And we're loving it. So, we're going to stick with this investment, man, cuz it's going to the moon. Unfortunately, in year two, our $20,000 gets cut in half. We have a negative 50% market drawdown.

2:14So, our 20,000 bucks is now back down to our original 10,000 bucks. So, we started at 10,000 bucks. We went up to 20,000 bucks, 100% return. We went back down to 10,000 bucks, a negative 50% drawdown. First of all, Kirby, do you feel any wealthier 2 years later in this experiment? — No, not at all. — No. What do you feel like your return is? — Zero. — Zero. Okay. Now, if I told you that your average rate of return was 25%, would you believe me? — Mhm.

2:46I can see how you could calculate that, but yeah. Yeah. — The CAGR, the compound annual growth rate, was zero, but your statement, your 401k statement, your brokerage account statement, the 10% annual average return the market gave us over the last century is a myth. Because real investors don't do that. They don't have an average, you know, a a year. They have real years, which have averages over time. But real years are very different.

3:17They are jagged edge. You know, it's sort of like, one more analogy and then I'll hush on this on this unless you want to go deeper. But let's say you and I, both work at the same office, and we both have a house like next door to each other. So, we work at the same place, and we we also live in the same neighborhood, same street, same block. Let's say that I leave the office, and I need to go to the grocery store, and then I need to go to the dry cleaners, and then I need to pick the kids up at soccer practice, and drop the other one off at violin practice, and then whatever, back to the dry cleaners, and then finally back home.

3:52However, Kirby's smart and he did all this online or whatever on Instagram Instacart and all that. And so he can just drive straight from the office straight back to his house. Between the two of us, who will use up more time and energy? Well, obviously I will. Right? That is the volatile market. You took an you know, a straight line a bee line path, which took a lot less fuel, time, energy, whatever. The average return, the point A to point B straight line takes less energy, but it's the volatility that destroys our compounding.

4:27And that's why we all get way less than the average returns the market advertises. We can add to that fees. And now I'll be done after this. I really promise. I'm sorry. I'm rambling. — No, no, it's good. It's interesting. — are destroying compounding. A Department of Labor study said that a 1% fee on your account, 1% fee on your account could eat up 28% of your entire account balance over a 35-year retirement span. That's a third of your life savings just gone to fees. So the advisor, the mutual fund, the wrap account fee, none none of those, you know, the not to mention taxes, but we won't even go there.

5:06All of these things are flat tires on our financial vehicles. And they're the reason why most Americans look at their statement and they're like, I feel like I should have more than this. And then they go back to playing Parcheesi or watching Wheel of Fortune. They just don't fully follow that thought through. They just think, oh, I feel like I should be earning more. Why don't my numbers look like feel like I'm getting that big juicy 10% that everybody says I should be just falling off the log to get. — Yeah. Parcheesi and Wheel of Fortune, they must be in the '90s, I think.

5:38But — I'm trying to bring those things back. Bring those days back, man. — Yeah, they were good — Where's my VHS tape? — Very good days. No, that that makes a lot of sense though. I Yeah, I never I guess considered to average it. You know, you just hear average and you're like, "Oh, yeah." Then everyone's making 10%, but that that makes a lot of sense. Does Does dollar cost averaging you know, does that make it any better or it's it basically is the same? — It's like putting a mute on your trombone. Dollar cost averaging, once again, only works if you never lose money.

6:10And people lose money every 15 minutes in the markets. You know, even if you temporarily lose a dollar, you have to earn more than that to get it back. — Yeah. — and again, your your overall the the higher your volatility or beta in your portfolio, the the higher your average return needs to be to equal a straight line projection in between one and the other. So, you know, it's great when you dollar cost average, but only if it never loses money. — Yeah. Okay. So, it all makes sense. Going I guess going back to the the the original question that around like, so what what can people do to I guess not get average market returns, but still get an upside, maybe, you know, because you want to actually you don't

6:58Want the average, I guess. You want to I guess beat the average, but how do you get the upside with without like you're talking about risking the '08 situation? — Sure, yeah, back to unnecessary risk. Well, this is why we call our show not your average financial podcast. It's sort of a play on those words there because I just don't believe anyone that I speak with is an average person. They're all so unique. Plus our portfolios cannot perform an average yield. They're all going to be specific. And I'll just say one more thing that before I answer your question, another piece to this puzzle. I was I was buying a car the other day, and the guy found out I was a financial advisor, you know, in the course of conversation.

7:35He had to I guess know what I did for a living to get the car. And so, anyway, we we started talking about how he's he started showing me his portfolio. Like I'm trying to buy a car here. Why are you but he showed me his portfolio. — Yeah, yeah. And he was talking about it and he was doing fine. He set aside low seven figures, you know, pretty good for him. And felt like he had enough. And I asked him, "Have you ever heard of the phrase sequence of returns risk?" And he said, "What are you talking about?" And I said, "Well, this is where you can get the same average rate of return but end up running out of money twice, three times, four times as fast." And I said, "I could give two different people the same average rate of return but flip the returns upside down for Jim

8:24And Jane. You know, Jane and Jim might have the same portfolio, the same withdrawal rates in retirement, but their order in which they receive their market returns, I just I'll randomize it. They'll have the same average, but the order in which they receive those returns can spell failure or success depending on if they have low returns in the first few years of retirement or great market years the first few years of retirement. That's the that's the danger zone window when you're when you're just about to retire and you have a downturn or right after you retire and you're spending money at the grocery store from your 401k and then the market pulls you down, then we're in trouble.

9:02So, back to your question, what can we do? There's nothing wrong with investing. I have money in the market. It's just money I can afford to lose. I just view it as long-term you know, speculative or or more aggressive plays because I have the foundation of my financial life built on things that cannot lose money. And then I take risks to beat inflation with things like real estate, you know, your your incredible platform that you've built, Kirby. I think everyone, I mean, they're listening to this show, so they must already, you know, trust you somewhat, but everyone should look deeply into what Kirby has prepared here because it's a genius foolproof system and you've eliminated a lot of the unnecessary risks that come with real estate.

9:48That most people get trapped in. You know, the five T's of real estate. Did you teach me this, Kirby? Have you heard this before? — I don't think I was — The five T's? You've not heard We You'll recognize it right away. It's a trash, termites, taxes, termite Let's see. Trash, termites, tenants, taxes, and toilets. So those are the five T's of real estate. And and you've helped find a way to mitigate and then massively increase the cash flow on on real estate.

10:19So, my strategies with working with clients is first of all, listen well. Listen to what they really want. Once we know what the client wants, we're able to really build out a solution that's custom-tailored to them, not just color by number of or whatever I think they should have, you know? — Mhm. — so we are a full financial firm. And we go in any direction that makes the best interest sense for our client. However, we found ourselves as a specialist in a particular corner of the financial universe that I simply can't look away from.

10:55It's a compelling strategy that uses of all things an insurance contract that builds some really interesting features into somebody's overall portfolio. What do I mean? Okay, so there's a form of whole life insurance, of all things, where when you put money into it, it grows guaranteed. And it does reasonably well. I would say it keeps up with the overall inflationary environment that we're in. In fact, as interest rates have risen, dividends on these whole life policies have crept up and will continue to go up to effectively equal the the boats as they're rising and the tide as it's rising, the whole life policy's yield will go up as well.

11:38So, it's a it's a guaranteed cash accumulation and on top of the guarantee, they throw dividends. And most of these insurance companies have shown that guarantee and not failed to pay the guarantee for hundreds of years. Most of these companies are over a century old. So, that's the first. It's a guaranteed to grow for you every year account. Second, it's liquid. Liquid means we can access the money for any reason without delay, without anybody else standing in the way of you and your money.

12:10So, you can use this money if it's designed properly, we can even get access to that money without any taxes, fees, or penalties. You think about how most people have to buy their real estate, they got to go into all sorts of contortions to pull money out of their self-directed IRAs or beg and borrow a bank's money, kiss the ring of that banker, you know, pull up the metaphorical financial skirt, so to speak. I don't want to deal with any of that when I want to buy a piece of real estate. I just want to walk in and be the best buyer at the lowest price possible and and walk away from the deal with property in hand.

12:43So, when I have liquid access to contingency cash for anything, I could use it to send my kid to college or to Disneyland, I could use it for real estate or stocks if I find a really enticing stock I want to purchase or precious metals or whatever, then I'll be able to access that cash in the policy. And here's where things get really interesting. When I access the money, I can do it through what's called a policy loan and that loan against my cash value continues to pay me well, the cash value continues to grow as if I had not touched the money in the first place.

13:23Kirby, I can't find anything else in the financial universe that lets my money do two things at once. It It continues to build and grow inside the cash value as if I hadn't touched the money. And I'm I'm leveraging against it or I'm collateralizing that asset to go buy that property down the street or to pay off my student loans, which is what I did first with my policies to get rid of old Sally Mae and all of her crooks and cronies. And that's been the game-changing feature or strategy, you might say, that's helped myself, my wife, but then hundreds and even thousands of our clients as well.

13:58— Interesting. Wow, yeah. And I've heard that there's different forms of whole life policies or different obviously different companies out there that offer these. And there's pros and cons to to some of them. I guess what what it is it that that you do that's different or that you know, what what makes a whole life policy good compared to some that, you know, you sometimes you hear negative things about? — Oh, yeah. Yeah, there's a certain radio host and you know, his last name rhymes rhymes with Samsy.

14:29— Yeah. — that really does not like whole life insurance. And I would agree that the old-fashioned whole life insurance that he's talking about, Dave Ramsey's talking about, has a lot of problems with it as far as an a living benefit, as far as a cash asset, a current asset. Old-fashioned whole life insurance grows very slowly on the cash value side. Imagine a mortgage, a 30-year mortgage. Imagine how much after year one and two and three, how much equity or how much principal have you purchased in your in your house after 3 years on a traditional mortgage?

15:07— Yeah. — Not much. — Yeah. — That's the whole life that Dave Ramsey's talking about and some of the other financial advisors are talking about. I would agree with them that that's a very inefficient way to build wealth. Now, let's set aside that metaphor it, let's think about this one. Let's say in set instead of just having a traditional mortgage, you shrink down your your footprint on your house size to a much smaller number, you know, from 5,000 sq ft house to maybe a 1,000 sq ft house, but then you take all that money you freed up from your mortgage payment, and you start adding bedrooms and bathrooms, and finish the basement, and you build out a giant back deck, and you've got a a helipad in the backyard, and you've got all this awesome stuff that you're adding to your house.

15:50It's an addition onto your house that you've paid for with cash. There's no mortgage on those extra bedrooms and bathrooms. This is what we do when we construct the policy with a paid-up additions rider. That's what that's called. It's a paid-up addition. It's like having a paid-up addition on your house. And instantly you're building equity. If you did this with a house, and you threw all these bedrooms and bathrooms, how much equity would you have after 3 or 4 years? — Yeah, a lot. — A lot. And if we design the policy properly, and that's just one of maybe 30 different levers and and pulleys we need to incorporate when we design these policies properly, then it's an incredible cash accumulating machine.

16:33If it's designed properly. One more metaphor, and then I'll be done, but think about it like this. An airplane is is supposed to be well, it is a very complex machine. If it's not engineered down to the last screw and nut, it could all fall apart when you need it to last. — Yeah. — when you need it the most. Secondly, a pilot is necessary to fly that plane properly. Even a well-engineered airplane will fall apart if if just little old me is a non-educated pilot gets up there and tries to fly it.

17:09But if you have a certified technician pilot up front, you're going to be just fine. The the client or the the customer of the airplane should just be able to sit down in that seat and fly, you know, let him go. And that's how it feels when you've got these policies properly designed and the pilot, that'd be me and my in my situation as the financial planner, taking you where you you've asked me to take you. So, I have seen enough people on YouTube. I've seen enough people on the interwebs. All it takes to build one of these is a life insurance license, which you can get in maybe two or three weekend classes, you know.

17:47That's dangerous. If you're if you're wanting to design these things properly and have them managed properly. So, long story short, work with someone who's been certified. The only certification program out there that I'm familiar with Kirby is the Bank on Yourself Professionals certification. And that's the the authorization program that looks over my shoulder when I'm building and and managing these accounts for my clients to make sure I'm doing it right and I'm not running off and leaving my clients high and dry.