The Capitalist Investor - Episode 76

What is the importance of time horizon in building out your unique investment strategy? If you’re getting advice from TV, Twitter, and podcasts but your time horizon is different from theirs, you could be getting things all wrong. That’s why you need to incorporate a time horizon into your investment selection process. We talk all about it in this episode of The Capitalist Investor (with COO Tony Zabiegala).

Outline of This Episode

  • [0:49] The importance of time horizon
  • [3:08] What is the definition of a “hobby bucket?”
  • [4:55] Listening to the talking heads on TV
  • [9:12] Time horizons as it relates to financial planning
  • [13:15] The 60/40 portfolio is outdated
  • [15:52] Qualified and non-qualified funds

Play around with a hobby account

Time horizon comes into play in a hobby account or “play” account. A hobby account is where you’re swinging for the stars with more speculative or high-risk stocks (i.e. crypto, NFTs, small-caps, and others). For someone who’s 30 years old, you could put 20–30% of your net worth into a hobby account. When you’re younger, you could even do up to 50% in a hobby account.

If you’re a 60-year-old, you wouldn’t want that kind of money in a hobby account. You’d want to scale it down to 5–10%, on the high side. It makes sense to have a chunk of your portfolio that’s managed in a disciplined and diversified strategy. For many listeners, that means it’s outsourced to a financial advisor.

Listening to the talking heads on TV

I’m one of those “talking heads” on TV. People seem to appreciate my stock takes, which our investment team researches. But I don’t get on TV and talk about EBITDA—I talk about the story of the stock.

When we buy a stock, we intend to hold it for at least a year. If we buy, we are looking for a double-digit return over the course of the year. The risk versus reward has to be promising. We have to like the management team, the growth story, and more. It has to tick all of our checkboxes. ¼ of the stocks I talk about on TV is probably in my speculative bucket. The other ¾ are more of my standard stock picks.

When I share a stock pick—say I want to buy Teladoc at $140 a share—that doesn’t mean that 3 months later it might not hit $120 or $100. Just because I like it doesn’t mean it won’t go lower. That’s important to understand. My time horizon is different from yours. Take what the talking heads say with a grain of salt and then go do your homework. Make sure their advice lines up with your time horizon.

Time horizons as it relates to financial planning

I spoke with a prospective client a couple of weeks ago. He was a retired gentleman with about $1.5 million in investments and other income coming in for the next 4 years. After that, he shared that he needed to start receiving income from his investments (about $100,000 a year). The “Rule of 4” says you can take 4% out of your retirement account a year and you’ll never run out of money. It’s probably closer to 3% now.

So I told this guy that he needed $2.5 million to withdraw $100,000 a year. To get there, he’d have to take on a lot of risk and average over a 14% return for the next four years. It’s a lofty goal that required a lot of risk—which he wasn’t ready for. So we had to think outside the box.

Let’s assume that four years come and go and suddenly we’re in a bear market. The average amount of time it takes a bear market to recover from losses—since 1928—is about 26 months. So we have to plan for a three-year-long bear market. I suggested that we carve out $300,000 as a safety net to get through the bear market. We’d take the $300,000 and throw it in an enhanced savings vehicle, targeting 4–5% returns. That then gives us permission to swing harder on the $1.2 million left and gives us seven years to hit the projection instead of five. This is a time horizon strategy that bought him time.

Is asset allocation dead?

The 60/40 portfolio isn’t very applicable—nor appetizing—anymore. Tony is an advocate for a 50/30/20 portfolio. 50% would be in stocks, 30% in bonds, and 20% would be allocated to alternatives. This could be a great strategy for someone who is 60 or not yet retired. Someone who is 30 may look at something quite different.

I prefer to work backward and figure out how much you need every year in retirement. We can set aside 3–5 years in an enhanced savings option. Then we can take the remaining amount and strategize with what’s left. Maybe that’s the new way to build portfolios to get you attractive returns that are going to give you peace of mind. Maybe asset allocation is dead.

Listen to the whole episode for a discussion about qualified and non-qualified funds!

Connect with Derek Gabrielsen

Connect With Mark Tepper

Send your questions and comments to us at info@SWPConnect.com

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Episode 32:
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Episode 48:
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Episode 64:
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Episode 1:
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Episode 17:
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Episode 33:
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Episode 49:
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