Diversification

Sunday, March 19, 2017 – Wealth Strategy with Bryan Rigg
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Diversifying not only your investments is important, but also diversifying your spending habits or your saving habits is very important, especially when times are good, which right now, quite frankly, times are very good in the United States.

We see that throughout history, practicing diversification is something that people have realized is very important to do. Unfortunately, as we see throughout history, most people do not do it properly, and many people don’t do it at all. Even Shakespeare, in “The Merchant of Venice,” talks about how you should never trust just one investment, no matter how good you think it is.

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SHOW TRANSCRIPT

Host:  RIGG Wealth Management offers securities to Broker Dealer Financial Services, Member SIPC and advisory services through Investment Advisors Corp and SCC registered investment advisor. RIGG Wealth Management is not a subsidy area of Broker Dealer Financial Services. Neither RIGG Wealth Management nor Broker Dealer Financial Services offer legal advice. Client should consult their attorney of choice on all legal matters.

Opinions expressed on this program do not necessarily reflect those of Broker Dealer Financial Services. The topics discussed and opinions given are not intended to address the specific needs of any listener. Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk. Examples mentioned are for illustrative purposes only, individual results may vary. Past performance is no guarantee of future results. Investing involves risk including loss of principle. Rebalancing can entail transaction costs and tax consequences that should be considered when determining a rebalancing strategy.

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Welcome to “Wealth Strategy” with Bryan Rigg for every Sunday at one o’clock on KLIF. Bryan is a celebrated Yale graduate, adding a PhD from Cambridge, a former officer in the Marine Corps, a man of profound integrity and honor, and your wealth professor. Please, welcome your host for the next hour, Mr. Bryan Rigg.

Bryan Rigg:  Welcome to the show, ladies and gentlemen. This is Bryan Rigg with Rigg Wealth Management. I’m here with my two partners, Gary Bilyeu and David Rigg. Today, we’ll be talking about diversification and the importance of doing so, and some of the background on diversification.

Since we live in a Judaic‑Christian environment, I think it’s appropriate to look at some Biblical principles of diversification. A lot of times, people are shocked when I would teach History of the Bible at SMU that one of the most talked about issues in the Bible is not what you would think about ‑‑ heaven, hell, or sexual morality, and so on ‑‑ but it’s actually money.

In Ecclesiastics, around 930 BC, when that book was written, it talks about how important it is to diversify your investments. Also, a lot of people know about the famous story of Joseph, that you have seven years of plenty and seven years of famine.

Diversifying not only your investments is important, but also diversifying your spending habits or your saving habits is very important, especially when times are good, which right now, quite frankly, times are very good in the United States.

Also, we see in other religious texts like the Talmud, the oral Bible for the Jews, it talks about the importance of diversifying your investments. In this particular tract, it talks about how you should put one‑third into buying and selling, or activity that you do in life, one‑third in coins, and one‑third in real estate.

We see that throughout history, practicing diversification is something that people have realized is very important to do. Unfortunately, as we see throughout history, most people do not do it properly, and many people don’t do it at all. Even Shakespeare, in “The Merchant of Venice,” talks about how you should never trust just one investment, no matter how good you think it is.

One can only think back to the debacle of Enron, here in Texas, when that company was encouraging all of its employees to invest just in its holding. Here, it was Skilling and Ken Lay, very dishonorable individuals, they are basically running the company in the ground with dishonest activity. Of course, that stock goes to zero and many people lost their entire retirement. It is very important to look at diversification. It’s something that people have been struggling with and thinking about throughout the centuries. That is one thing that we’ll be discussing in detail today. My partner, David Rigg, has put together a lot of notes to go over this, so I’ll hand it over to him right now to explore those thoughts.

David Rigg:  Thank you, Bryan. We preach diversification quite a bit here at Rigg Wealth Management. I just wanted to examine a little bit of what does that really mean? It can mean many different things on a micro or a macro level, and we can take, for the easiest example, a mutual fund. When you invest in a mutual fund, normally a mutual fund will mirror a particular segment of the market. You can get into a mutual fund that’s a bond fund, or you can get into a mutual fund that’s a real estate fund, or one that mirrors the S&P 500.

That mutual fund, because it’s invested in many different companies, will essentially give you diversification with those companies, from one company failing whilst another one not. But it does not give you diversification outside of that sector, and I want people to understand that. If you’re in a real estate mutual fund, even though you’re invested in many different companies, you’re still invested in the real estate sector. What happened back in 2008 and 2009 will still affect that fund, or chances are it would affect that fund even though it’s invested in many different companies.

Bryan:  The important thing there to take away, ladies and gentlemen, is that diversification within one sector of the market is important, but that’s not true diversification within your portfolio. You want to have many of these holdings throughout your portfolio that focus on different sectors, and that’s where you start to get true diversification.

What we have found is sometimes people feel that if they just get a mutual fund, they’re diversified. Yes, they’re diversified in that one particular area, whether that be large cap, or in this case, what you’re talking about, David, real estate. But that’s something that does not give you true diversification in an overall portfolio, and that’s something important to think about.

David:  We want to focus on diversification, and we try to do it on a more macro level, across many different sectors. But also, we will manage that as wealth management to move and allocate assets into sectors that we think provide an opportunity. We don’t necessarily reduce our diversification, but we may concentrate in certain sectors to help our customers out.

Gary Bilyeu:  You guys can probably attest to this. How many times have you had a client say that they’re diversified? They have four, five, six mutual funds, and when you look a little closer, they may all be in the same asset class.

They may have ‑‑ we used real estate ‑‑ five real estate mutual funds, and feel like they’re diversified, but there’s a lot of overlap in those funds, overlap meaning several of the same companies are in each one of those funds. When we take a closer look and show that, they realize that maybe they’re not as diversified as they really need to be.

Bryan:  On that point, there are a lot of mutual funds out there that they have different semantics. One will say large growth. A lot of them will say large cap. Some will say S&P 500 tracking. Basically, when you look at it, they’re all dealing in the same pool of the same companies, and that’s where that overlap comes.

What we encourage clients to look at is, instead of looking at mutual funds, we usually like to go down the road of ETFs, index funds, and that basically will take a sector like the S&P 500, and it will focus on buying a share that represents all of those companies in that sector. Quite often, mutual funds are playing a sector, but they’re trying to bet 300 companies against all 500 companies, that if you just focus on those 300 companies, they’re going to do better.

But if you start looking at these mutual funds, and look at the companies they’re using, like Gary said, there’s a lot of crossover, so you want to make sure you get educated about the semantics of how American Funds, how iShares, Barclay’s, and these other, Vanguard, how they name their funds, because quite often, they’re all different.

They’re using different words to name these funds, but they’re actually dipping in the same pool of stocks to build them out, and that’s important to note.

David:  We try very hard not to give up a diversified position in order to focus, so that we do use diversification to manage the risk in someone’s portfolio. We don’t put all our eggs in one basket. A lot of other people will. A lot of people will do that thinking that they are diversified. Gary had a fantastic example the other day of talking with someone who had five different investments in their portfolio, but it turned out all of them were annuities.

Gary:  You’re exactly right. As you guys know, our listening audience might know, but I do a lot of work with school teachers and school districts. When we sit down and look at what they’re doing for their retirement, and we look at their portfolio, the first question is, “Let’s see how diversified you are.”

Oftentimes, you get that, “Well, I have three different investments,” or, “five different investments.” “Well, there are three different names, or five different names, but when you look at them, they may all be fixed annuities.

In reality, 100 percent of their portfolio is in one type of holding, and we have to explain that. It’s no fault of their own. They have different people come in and talk to them at different times, but it’s the same product.

When we start explaining diversification, and talk about asset classes and other industries, then the light bulb comes on, and people respond to that. They understand it now, but people don’t take the time to explain some simple concepts, and they take for granted, or they just don’t take the time to visit with them and try to educate their clients.

I think that’s what we do a very good job of here at Rigg Wealth Management is not assuming that people are born with a high financial IQ. If we start talking, and they get it, then we can accelerate that, and we can go to the 201 level, or the 301, or the graduate level. But we start out to build a foundation with the terminology, and make sure they understand it, and then we go at their pace.

Bryan:  We encourage you to get educated. Quite often, our clients, they have so many other pressures in life, with family and kids, jobs, and so on, health, that a lot of times, they don’t want to mess with it. That’s where we, at Rigg Wealth Management, we’re happy to take that off your plate and help you.

We think we do a unique job compared to other places of really trying to educate you and kind of push you down that road to be more in tune with your investments so you can help be a good team mate with us in devising a good strategy for your portfolio.

Please stay tuned with us. We’re going to continue on exploring the idea of diversification and what that means for you with portfolios and with investing. We encourage you to visit our website at riggwealthmanagement.com. That’s Rigg with two Gs, riggwealthmanagement.com. Also, we want to hear what you’re thinking, and if you have questions for us.

We love having feedback, so please feel free to email us through the web page, or call us at 972‑383‑1210. Again, that’s 972‑383‑1210. Call and give us your questions, or come in and talk to us, and we’ll be happy to review your portfolio.

Please stay tuned. We’ll be right back with you with Rigg Wealth Management.

Bryan Rigg:  Welcome back to the show, ladies and gentlemen. My name is Bryan Rigg, with Rigg Wealth Management, and I’m here with my partners, Gary Bilyeu and David Rigg. We’ve been discussing diversification today and the importance of it, the history of it, to some degree. David has more to go over, so I’ll hand it over to him to explore these ideas.

David Rigg:  Thank you, Bryan. Our mission statement at Rigg Wealth Management is, we are here to protect and grow your investments. We don’t put it all on black or red and spin the wheel and see what happens. That’s not what we do. We use diversification as a way to help manage risk, and to help protect your investments. It’s a very valuable tool to do that.

I also want people to understand that we practice this in our own personal lives, as well. All three of us have portfolios. All three of us practice diversification. We’re invested in different sectors, we’re invested in different funds. We utilize diversification as a tool in our own lives as well, so this is not something where we’re, “Do as I say, not as I do,” type of thing. This is something that we all practice.

Bryan:  That’s one thing I wanted to emphasize to a lot of the listeners out there. If you do us the honor of becoming a client, what I have always enjoyed doing, and what all of us have proof of doing is that quite often, we’re shoulder‑to‑shoulder with our clients. What I invest in, I quite often will do so first before I have a lot of my clients invest in, so we’re, hopefully, practicing what we preach.

Also, diversification of having different streams of income, different activities that we have, I think is very important, and I think you were going to be exploring that more in depth, right, David?

David:  We’ll get into a little bit more of that. All three of us are probably good examples of how to diversify your own lives. We all do different things to try to bring in income streams. Security is not necessarily confined to your portfolio, and I want people to understand that. As we develop a relationship with a client, we will also explore some of the different ways they have of bringing in income, and what we can do with that.

For example, I’m a pilot, I’m an investor, I work here at Rigg Wealth Management, I have rental property, my wife’s a school teacher, and we do this radio show. Gary’s still a reserve lieutenant colonel in the Marine Corps. He’s still an investor, he works at Rigg Wealth Management, he’s still in the insurance business, and he’s doing the radio show.

Of course, Bryan, you are a published author, a public speaker, you’re an investor, you have this company, and you’re doing the radio show. There’s an example of how we diversify our own lives, and try to bring in other streams of income.

Bryan:  There’s research out there. There’s a book called “Multiple Streams of Income,” and the premise is basically those who do very well in life usually have multiple streams of income, so that’s one thing we encourage our clients to look at, of the ways that they can monetize their activity.

There’s quite often the case where people have come to me and said, “I have this real estate deal. What do you think?” and I look at it, and I said, “You know what? This real estate deal’s a lot better than what I could do with a REIT or do with a ETF real estate fund. If you really believe in these people, and you think you’re going to have a good reward, then I would do so.”

Not always are we going to be the best place for the risk appetite that clients have, and that’s one example that they can use a portfolio with us, but they can also go out there and do a private placement and diversify their income.

Also, they can take money and put it into a business. I enjoy helping clients look at ways to become a self‑starter. Multiple Streams of Income premise also says, “Those who can go out there and work for themselves is usually very important.

Gary Bilyeu:  Can I jump in here real quick?

David:  You bet.

Gary:  That’s a very important point. I’ll sum it up a little bit differently. I think we do a very good job here at Rigg Wealth Management giving honest assessments. You said it may not be assets that are placed with us, but I think we give our clients a very…It’s our opinion, but it’s that fiduciary responsibility of putting our clients’ needs ahead of ours or any company.

Oftentimes, it may not be us managing their money. If they’re comfortable, and it’s an appropriate investment, we will tell them that. If it’s not, we will tell them that, too. Basically, it’s the good, the bad, and the ugly.

Bryan:  You bring up a very good point that I want to emphasize here, that you’re very nuanced with it, Gary, and I want to highlight it, and that is we are diversified with what type of companies that we can go out and utilize. Here at Rigg Wealth Management, we are fully independent. I don’t have a firm like Merrill‑Lynch or Sanford Bernstein, or a Met Life, that I’m working there, and I only can use their products.

I’m a firm that can go out and look at what they’re doing, and other firms, and then find a suitable asset for the clients that we have. We can pit firms against each other to find a good investment, so we have diversification as an independent firm to go out to many different firms to find a good solution.

There’s double diversification, if you will, here, working with our clients. One is, practicing what David has been talking about, building out a portfolio that’s diversified and helping people understand the different sectors in the market, and the diversification within each sector.

Also, there’s the diversification of being able to go out there and look at several different companies, and help our clients. Gary has over 15 years of experience in insurance, and so when we look at life insurance possibilities, or if people want to do annuities, we can go out to multiple firms and find some of the best life insurance policies and annuities for them, from fee structure and rates of coupons and the dividends that they can payThis is something I wanted to emphasize to people out there, that we have a lot of flexibility here to practice what we’re preaching right now, which is diversification.

David:  People need to understand that multiple income streams mean multiple opportunities, and not having to rely on one source of support makes our job at Rigg Wealth Management so much easier.

Just like you used your von Clausewitz comment a few shows ago, how are people able to retire? It’s very easy in concept, but it’s very difficult to implement. You have to turn income streams, liquidity events, and salary into assets. That’s it. That’s how you’re going to be able to retire. It’s not that difficult in concept, but it is difficult to implement and execute.

Bryan:  On that note, von Clausewitz was a famous military historian. He wrote ‑‑ a lot of people have heard, “War is politics by other means.” I also like that phrase of his, “War, and everything in war is very simple, just hard to do.”

What David is practicing, and a lot of the things we’re talking about with diversification and investing is very simple, but it’s very hard to do. Here again, something I always say on these shows is that 50 percent of all people who retire today have 50 percent less than what they need.

Proper diversification, proper investing, is not going on. Looking at different avenues that you can travel down to get income is very important to look at. A personal example to David and I, our great‑grandfather’s in the Cowboy Hall of Fame, Otto Barbie. He was a brilliant rancher, and also had a lot of farmland out in the panhandle of Oklahoma, and toward the end of his life, they found a lot of oil on his land.

He was not very interested in that oil, at all, but he got the mineral rights, he got it up and running before he died, and that has saved a lot of the land in our family, because ranching and farming is now very difficult, but that oil has given them an avenue to go down to have income to preserve their lifestyle.

There was three different streams, and the two that he thought was going to be supporting the homestead has gone away, and that oil has helped. That’s just one example of having multiple income streams as very important to build out your estate.

David:  Absolutely. People need to understand, when we start talking about assets, assets provide for retirement, a paycheck will not. When we say assets, we mean something that provides for either capital growth or an income stream. We’re not talking a new car or a new watch, or a bigger house. Those are not assets that will can provide for retirement.

Bryan:  A lot of people, they look at their house as an asset, or they like to buy stuff. Unfortunately, in America, a lot of people like things, and they amass a lot of stuff. I think a lot of times when people are buying things, they’re not looking to the future. How is this thing going to help me later on when my income starts going down?

David:  Absolutely. When somebody comes to us who’s led a diversified life as well as diversified investments, it just helps us manage it, and it makes it such a doable job.

For example, if we have somebody come to us, and they have social security, they went into the military early, say 18, 19, 20 years old, and they retired, they’ve got a military retirement, then they worked 20 years, 25 years somewhere else, have 401(k) contributions, they’ve got their own personal investments, all this stuff. Maybe they’ve got a spouse that’s retired. All the sudden, our job is easy to accomplish.

Bryan:  Yes. We’ll be continuing exploring this idea of diversification and how that looks in portfolios, how that looks in life. We encourage you to stay tuned. We’ll be back with you here shortly. We also encourage you to look at our Web page, riggwealthmanagement.com That’s Rigg with two Gs, riggwealthmanagement.com.

We encourage you to write us through the Web page, give us your feedback, let us know what you’re thinking, what you’re struggling with, with your own financial lives. We also encourage you to call us at 972‑383‑1210, again, that’s 972‑383‑1210 for a no‑cost appointment, free review of your portfolio.

We appreciate you listening to us, and we’ll be back with you here shortly, talking about diversification and how you can do that with your portfolio.

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Bryan Rigg:  Welcome back to the show, ladies and gentlemen. This is Bryan Rigg, with Rigg Wealth Management. I’m here with my partners, David Rigg and Gary Bilyeu. We’ve been talking about diversification and the importance of it.

If you have not looked at your portfolios recently with the thought of, how diversified am I, we encourage you to start looking at that, we can help you with that. Please, call us at 972‑383‑1210, and come in. We’ll be happy to go over your portfolios and see how diversified you are.

If this is something that you haven’t done a lot of study with your portfolio in mind, we encourage you to do so. It’s incredibly important. A lot of people don’t do a very good job of going over the diversification aspects of their portfolio, many people don’t even understand what true diversification means.

We love to encourage you to explore that, especially with how you build out a very sophisticated and good portfolio to meet your needs and to match up with your risk appetite. I’m going to turn it over here now to Gary Bilyeu, my partner, who has put together a lot of notes about diversification and the important thoughts that you may want to have when looking at that concept.

Gary Bilyeu:  Thanks, Bryan. Our name, Rigg Wealth Management, a lot of people think that it’s only for the wealthy individuals, and that couldn’t be further from the truth. Do we have the capabilities to help the sophisticated, the accredited investors, the high net worth individuals?

Absolutely, but we don’t discriminate based on your check account, or how much money you have in the bank, your total assets. We have, and some of our best clients, are brand new investors, young couples getting started.

They want to know, they’re eager for knowledge, and we take the time to visit with them. I always want to make sure, especially on the air waves that we’re reaching a broad variety of people out there.

Bryan:  Sorry, jumping in Gary. On that note, I always found it very interesting that when I was at Credit Suisse, they encouraged us when we talked to people, that we would only bring on clients that were five million and up. I would meet with people, start talking to them about their portfolios, and then eventually they get comfortable with me and they were willing to start working.

They’d say, “OK, Bryan, I’m willing to start with $500,000 or a million.” If I had come back to them and said, “You know what, when you can come here with $5 million I’ll talk to you.” I’m sure they were going to do that for me.

I told many of them, I took them on anyway, and I’ve been working with them. Many of these people when they had that type of wealth they were in their 40s or 50s, quite often. The one thing I was always thinking is, if I could get somebody in their 20s…

We’re all three here young, we’re going to be in this industry for the next 25‑30 years. We get somebody in their 20s or 30s, then really start focusing on this and we grow with them, we build that loyalty, when they have $5 million they’re not going to leave us.

Starting now is important, especially those of you who are out there right now in your 30s or 40s and you realize you need to start really doing this but you don’t have a lot of money, we are more than happy to sit down with you and help you get a lot of money. That’s what the whole strategy is.

David Rigg:  We also need to look at it, if you approach this job from we’re actually here to be observers, we’re actually here to help people. Who needs the help? It’s the people starting now, it’s the people that don’t know how to invest.

It’s the people that maybe they have a little bit on the side and then they’ve got a company sponsored plan. Just like Gary alluded to earlier, a lot of times the company sponsored plan you may have a growth part of the 401(k), then you may have a large cap with a 401(k).

To get back to our diversification talk earlier, a lot of that’s overlap. How do we help and guide those people? If we’re here to be of service, it doesn’t matter what your actual bank account is, it matters, how we can help you and how we can get you to your goals.

Bryan:  David brings up a really good point. A lot of people have 401(k)s. They put it in one or two funds that the 401(k) offers, and they think they’re diversified. Within that sector they are, but they’re not diversified overall in their portfolio.

That’s one thing we also enjoy doing here at Rigg Wealth Management, is helping people have 401(k)s, they don’t know much about their 401(k)s, have had the burden of making the investment decisions put on themselves, helping sit down with them and going over their 401(k) options and building out a diversified portfolio.

We manage 401(k)s ourselves and we find that a lot of people just don’t understand how they can diversify their 401(k)s.

Gary:  Back to diversification 101, [laughs] if you will. What is diversification? For the first time, the novice investor, or somebody that hasn’t been doing it very long and they want to establish the terminology…

Because it helps, if we can throw out these terms and then define them, and then when those potential clients actually come in they’re better prepared, they’re more comfortable. Then we can get right down to business, and not have to spend a lot of time defining these terms.

Question was, what is diversification? I pulled up one of many different definitions. This one says, “Diversification is a technique that reduces risk by allocating investments among various financial instruments, industries, and other categories.” We know this, the market goes up and down constantly in flux, it’s moving all the time.

If we’re only in one company or one industry, what is that one company or that one industry going to do? It’s going to react, is it going to go up, go down, either one of those could be appropriate, and a decision needs to be made, but it’s constantly moving.

When you are diversified and you are in multiple industries you’re just trying to minimize the risk that impact the sensitivity that that movement has on that one company or that one industry. I think we do a very good job of understanding the client’s goals, what their intent is, and then carrying the investments appropriately.

Bryan:  On that note, just to give an example, I had a client come to me several years ago, and his main goal for retirement was to get between five and six rent homes and have about five or six percent cash flow on those rent homes.

I sat down with him, I said, “OK, you’re going to go on one sector geographically, you’re going to be primarily in Garland,” in Richardson is where he was looking, “and you’re going to be just looking at homes.” I said, “And you want six percentage return. And when you put the money into those homes you don’t have control over that money unless you sell the homes later.”

I looked at several different REITs and several different real estate funds, and I said, “If you want to just stay in the real estate sector, this fund and this fund and this fund together will give you five to six percent return. You can put money into it. You are diversified over many sectors in the real estate, I feel.

“Not only home building, but you got commercial real estate and so on that you can go into and you have full liquidity of your assets. There is no guarantee that when you would want to sell that it would be up, it could be down.

The hope is, on the long run, that it would go up and you have hundreds here, and you are getting the same return. What makes more sense?” He never had thought about it that way before.

He decided actually to build out a portfolio, but he could have decided to go and buy those homes, but at least we have been helping him make an educated choice. That’s also part of the diversification process.

David:  Let me jump in here for just a second, Bryan, too. Also, when we have clients come in and they start talking about real estate, or they start asking about rental property, or they start talking about business or something like that, it’s really getting away from the passive income idea.

These guys are normally involved with the process, they are running the rent, they are doing some of the repairs…

Bryan:  They are the landlords.

David:  They are the landlords.

Gary:  Yeah, they’re taking the late night calls.

David:  They’re take late…my pipes broke. All of those sorts of things. You are getting outside of the passive income fund. You’re more of a proprietor, so to speak. They are two different things.

Obviously you can make a better return or potential for better return if you’re involved in the business, but you’re a business owner. Let’s get that out there. You are not necessarily an investor, you have invested in your own business. A rent house is a business.

Bryan:  Yeah, you can’t walk away, you don’t have flexibility of time a lot of times.

Gary:  There is equity.

David:  We have the rental property, we have ’em.

Gary:  What I ask is, it takes equity to get in there, hard dollars. How much sweat equity you want to put in there? That’s my determination. If I have a rental property that is taking a great deal of sweat equity I need to reevaluate that, and say, “Do I want just to put that time and effort into it, what’s the return?” I do that on a personal level.

We sit down and ask those questions of the clients to get them think in those terms. Your example, Bryan, do you want to put a lot of sweat equity in it? If you do, great. If you don’t, and like to get a return that’s comparable without all the sweat equity, that maybe a great alternative.

Bryan:  Yeah, you bring up a very good point. It brings back the memory of the discussion with this gentleman. I said, “Hey, when you are 70 years old, do you want to be messing with this? Do you want to be getting the repair guy, the electricians and so on out there taking the phone calls, having a bad tenant, and having to redo the home when you are 70?”

When he started thinking about that, he was like, “No, I’d rather go deep sea fishing.” I was like, “Well then, if you have a portfolio it’s always going to be working for you, you’re not get phone calls from the managers, and you can go do that.”

That really lit up a light bulb when you start putting it in the context, once you get involved with this investment, how does it look in 5 years, how does it look in 10 years? That’s something else that we enjoy doing, educating our clients about

David:  There’s another point too. Of course everybody has to start somewhere, whether it’s investing or owning a rent house or running a small business.

That’s one thing that needs to be brought up, have you ever had a rent house before? Have you ever experienced these phone calls? If you want to get involved yourself, have you ever done any dry wall repair? “No, but I read a book.” “OK, well, we’ll see how long that lasts.” That’s exactly what we’re talking about here. How involved do you want to be?

Bryan:  I work for this client, I did some research and I talked to some people at Credit Suisse who dealt with home building and managing residential real estate. Then I talked to some people at Century 21.

What they told me is that a lot of the research that they saw is that, if you can’t get a critical mass of about 10 homes that you are managing, a lot of times it is not as economically viable and contrast to going into a REIT or building out a portfolio.

These are the type of concepts and ideas we like to explore here at Rigg Wealth Management. We encourage you to stay tuned. We’re going to be exploring diversification even more in the next segment.

We encourage you to visit us at our website at riggwealthmanagement.com, that’s Rigg with two Gs, riggwealthmanagement.com. We encourage you to give us your feedback on this show and questions that hopefully this show is generating. We love hearing from our listeners. Also, we encourage you to give us a call at 972‑383‑1210, again, that’s 972‑383‑1210.

We’re here in North Dallas, we’d love to meet with you, go over your portfolio, and explore ideas of how we might be able to help you build out diversification within your portfolio and also your life, and multiple streams of income hopefully that you are generating through your life.

Bryan: Welcome back to the show ladies and gentlemen, this is Bryan Rigg with Rigg Wealth Management. I’m here with my two partners, Gary Bilyeu and David Rigg. We’re discussing diversification, and the importance of that, and how that looks in a portfolio, and how diversification helps you manage volatility in the stock market.

Hopefully diversification will be a more realistic strategy for you to practice in order to help achieve the goals you need to get the income that you want off your portfolios. David had a couple of ideas he wanted to explore, so I’ll just hand it over to him now.

David Rigg:  Bryan, we were talking the other day about the periodic table of investing. This is basically a visual depiction of what the stock market did in any set year, and you can go back many years and take a look at what actually was up, and what was down, and what worked, and what didn’t.

What’s interesting, is if you look at what the companies, investment companies were recommended, or what experts were predicting, very rarely does it marry up. That is the perfect argument for having a diversified portfolio.

Bryan:  When I was at training at Credit Suisse we had a speaker come in, this was in 2006, and he said that when you look at the experts out there, Goldman Sachs, and Bloomberg, and the other groups that were looking at the last nine major pullbacks in the stock market, the experts only got it right three times.

Not only a coin flip, were they good at this doing, not even 50 percent success rate, if you will. You want to be very, very leery of people who are out there saying they know what the stock market is going to do.

Like what you brought up with the periodic table of investing, if you look at that, ladies and gentlemen, on the Internet, you will see that sectors go all over the place.

The important thing, I believe as a contrarian, is you look at the sectors that are down, and you really start investing heavily there in any given year, and you don’t follow performance, you don’t chase success, because that’s eventually going to fall off, and that’s where diversification can really help you in a major way.

Gary, you had some other ideas you wanted to explore on this as well.

Gary Bilyeu:  You guys, once again, how many times have you heard a potential client say, “All right, give it to you in a nut shell. I’m 25 years old, and I have X number of dollars, where do I need to put it?” There’s a little bit more to it than that.

We go through our suitability standard, and we try to determine, information flows two ways, they either push it, or we have to pull it. We ask a lot of questions to try to extract or pull that information from our potential clients. There’s so many factors involved.

My theory has always been, if you told me you’re 25 and you had $10,000 to invest, where should I put it? If someone says put it here, here, and here, without asking you about a half dozen questions, then in my opinion, they’re selling you a product.

Is that in your best interest? Who is that really serving? With us and our fiduciary responsibility to the client, meaning we put the client ahead of our own interest, and any of our company’s interest, we need to ask those questions.

It’s not just simple, oh, 25 and I open the book and it says you put all your money right here. It’s not the way it works. We spend, in my opinion, an enormous amount of time getting to know the clients, understanding what their goals are, what they have, how much they have to invest, what they’re trying to accomplish, what their time horizon is, and their risk tolerance. All of those are very important factors in determining where those assets are actually going to be placed.

Bryan:  I have fond this last decade, dealing with clients, that the more you get engaged, the more your strategies are going to change, because as you get better educated and you get more familiar with these concepts, especially diversification that we’re talking here, all of a sudden, the light bulb goes off, so to speak.

People start realizing that what you are talking about in different areas that you can invest in, makes sense in certain areas of your portfolio. Your portfolio starts to change as you get engaged.

That’s one thing I don’t understand why in America, it seems like two things are most critical in our lives, are two things we stud the least in high school and college, and that is, how to have a good marriage, and how to have good financial health.

50 percent of all people get divorced, a lot of people who are married are not happy, and a lot of people, like I mentioned before, 50 percent of all people who retire today have 50 percent less than what they need.

There is a huge need out there to really understand your portfolios, understand the dynamics of diversification, understand volatility, and that’s something here we enjoy doing.

Gary:  All of our clients, all of our clients, their investment strategy has evolved over time. Not a single one of them is doing now what they did 3 years ago, 5 years ago, 10 years ago, it evolves. In life, there are events that happen that will change the way we invest, our goals can change.

Going back to the example, I’m 25 and where should I put my money? What if you’re 45 and all of a sudden you say, I’m getting a divorce. There are situations that throw a monkey wrench in your plan, but we don’t flip to the divorce page and see where you put it.

We have to go through that entire process again and find out, how much time do you have now? Your assets could have been cut in half, now your timeline has been cut in half. How much risk can you tolerate? Then it goes back to streams of income that could take some of the pressure off of your nest egg, or your cash cow, your retirement fund. Go ahead Bryan.

Bryan:  On that note, as you get familiar with the concepts of diversification, it helps you manage your portfolio. An example that I like to give, is I practice a lot of what Burton Malkiel talks about in his book, “Random Walk Down Wall Street,” he’s the father of indexing.

What he found is that when you diversify your portfolio over many indices, that you can capture sectors of the market that are doing well, and you can capture sectors of the market that are doing poorly. What you do is you sell off those ones that are doing well, and you buy in the sectors that are going down.

The dramatic case of that, 2008‑2009 when the stock market went down 50 percent, these portfolios that were diversified, the fixed income portion, the bond portions were fairly stable. A lot of my clients, I was able to liquidate that area and dump it all in equities, especially when equities went down to 1986‑1987 levels in some respects, as far as valuations.

Then when the stock market came back with a vengeance, we could sell some of those profits off and look at other sectors like 2010‑2011 that were down, like real estate. This is one way of managing your diversification within the volatility that once clients start getting comfortable with this, then they start doing this with their portfolios, something they’d never done before. That’s something I think that is critical for clients to look at.

These are the type of concepts that we here at Rigg Wealth Management enjoy exploring, getting our clients educated on. We encourage you that if somebody has not really sat down with you and gone over diversification and how you manage volatility and risk in your portfolio, that you start to do so now. Go to your financial advisor, talk to him or her about this. If you don’t have a financial advisor, please come to us.

Please visit our Web page at RiggWealthManagement.com, that’s Rigg with two Gs, R‑I‑G‑G WealthManagement.com. Please write us an email through the Web page, we love hearing you feedback. Also, please feel free to call us at 972‑383‑1210. Again, that’s 972‑383‑1210, and call us up to set up an appointment for a no‑cost consultation.

We’ll be right back after the break, so please stay tuned with us to go over more concepts of investing and volatility. We appreciate you tuning in today, and we hope that you start taking control, be very active in building out your portfolio, managing your volatility, and learning about diversification.

Bryan Rigg:  Welcome back to the show, ladies and gentlemen. This is Bryan Rigg with Rigg Wealth Management. I’m here with my two partners, David Rigg and Gary Bilyeu. We’ve been exploring the idea of diversification, and how that looks in a person’s life, how that looks in a person’s portfolio, how important it is to diversify.

We have found, especially myself on over a decade on Wall Street, that most people do not understand diversification. Since they don’t understand it, a lot of times, they’re not implementing it in their own lives and with their portfolios.

Gary has done a lot of research, and put together a lot of notes on this. He’s going to continue on exploring some aspects of diversification with us.

Gary Bilyeu:  Bryan, I’m going to wrap up our diversification 101, if you will. We defined diversification in very simplistic terms, but I think terms that everyone in our listening audience can understand. That’s our foundation. That’s a good starting point.

I just wanted to close the loop on this. Why do we do it? Why do we diversify? In our industry, there are two types of risks that we talk about in why diversification is a good concept. There are two things, systematic risk and non‑systematic risk.

In very simple terms, once again, systematic risk, often called market risk, we have no control over that. Diversification does not guarantee a profit, and it doesn’t guarantee against a loss. We know that. I want to make sure our listeners understand these concepts.

One of the things with market risk, here’s a good example. Say tomorrow, war is declared, and our stock market drops in half. Common sense would tell you that every company out there, all your investments will be affected, and they will most likely go down. That’s market risk. There’s nothing we can do about that. We can’t diversify away from that market risk.

But we can on the non‑systematic risk. One particular company, like a business risk. Something that one company ‑‑ we said the market goes up and down constantly ‑‑ if that one company, and that one industry is affected by that, by being diversified, we’ve limited our exposure, and we’ve minimized that impact on that one company.

None of us hope, none of us are planning for a war tomorrow, and the stock market to crash, but we try to plan and minimize the impact if something catastrophic happens.

Bryan:  On that note, with diversification, if you had a very strong portfolio in 2006, 2007 as the stock market rose up to its historical highs then of 14,000, and then all of a sudden, you went into 2008 and 2009 with that portfolio, a lot of those portfolios, even if they were diversified, and they were stock portfolios, equity portfolios, a lot of times, they went down 50 percent.

If you continued to reinvest the dividends, you continued to keep diversification, that portfolio, if you’re looking at the S&P 500, just by way of illustration, it would be over double, in some cases triple, of what it was, even with that downturn.

We encourage people with the diversification that sometimes you’re right, Gary. You can’t stay away from some risk. It’s always going to be there, but to stay the course, understand how markets work, is an important aspect of understanding diversification, and benefiting from those downturns, and staying the course.

David Rigg:  I think some people might listen to this argument, or these points right now, and go, “Well, why don’t if I do non‑US investments? That’ll help diversify my earnings.” But that brings in so many other categories of risk. You’ve got currency risk, for example. We have a hard enough time figuring out what our government is going to do, much less a foreign government. It doesn’t necessarily reduce any risk at all.

Bryan:  On that note, if that’s something, though, that does spark your interest, the one thing that I encourage clients to look at is that if you want to go internationally to diversify risk, make sure you go to a place that a good rule of law ‑‑ Japan, Germany, England.

I would not encourage you to look at Turkey, Romania, and these other countries. There might be opportunities there, but you’re going to increase your risk dramatically when you don’t have a tradition of strong law and order.

Gary mentioned about war. A lot of people are worried about what’s going to go on right now with ISIS. Are we going to putting ground troops in? Are we going to be ramping up? Trump is talking about increasing the budget for the military.

A lot of times in America’s history, war actually helps industry, helps America get stronger. Harold Blum, a Yale University professor, wrote a book called “V Was For Victory.” He showed that, actually, during World War II, the stock market just had incredible growth.

A lot of people are worried about that. I hear that a lot. “If we ramp back up, and we get back in the Middle East, is that going to really hurt markets?” Not necessarily. Historically, that hasn’t been the case at all. This is one way of looking at risk. Bring historical information to the table to assess that risk, and help people understand their portfolios in a geopolitical climate that we’re in.

Gary:  I’m going to continue with the 101, because what we’re talking about is volatility in the market, and getting our clients to understand and embrace volatility. If the market stayed flat all the time, there would be no potential for gain or loss.

We’re in there with our clients, shoulder to shoulder, advising them to try to achieve their goals. We don’t have any clients that say, “My goal is to lose money.” Now, there’s the potential, because there’s risk for that.

Most of our clients have a desire to either grow their assets, or protect it, or both. We do a very good job of sitting down and discussing that plan, building that plan, and then paring the appropriate investments to accomplish those goals.

We have a very good relationship with our clients because we take the time to visit with them, to understand that, and to ask questions, and keep things simple. I said it earlier. We can be as simple or as sophisticated as our client.

Bryan:  You bring up an interesting memory, Gary. When I was at Credit Suisse, our CFO was Robert Weissenstein. He was very astute in teaching us during our training program in New York City about helping clients actually look at the difference between risk and volatility.

In fact, he did not like the word risk. It brings up images of the game we played as kids, Risk, is sometimes a zero‑sum game. You go into battle, and you either lose or win. I don’t want people to look at that with their portfolios.

Quite often, I get people asking, “You know what? What if I lose everything? What if we go to hell in a handbasket with this?” If you have proper diversification, a lot of times, that shouldn’t be the discussion.

It should be focusing on how much volatility can you handle? How much up and down should you handle? Even though we’re talking risk and managing risk, it really brings up the wrong type of mindset we want for our clients.

We want them to be looking at volatility, and how much volatility a portfolio can handle. We can, through Monte Carlo simulations, look at portfolios, and tell people how much movement can happen in the portfolio, potentially, to help them understand more of getting the results that they want, but how much volatility they have to take on in order to get those results.

Gary:  Some of those concepts may be foreign to some of our listeners, and that’s fine. Others may understand exactly what you said. Great. I think that’s what we do a very good job at ‑‑ I keep saying that, but ‑‑ here at Rigg Wealth Management, to talk to the more sophisticated and the novice investor.

We believe in diversification. We preach it, and we practice it. We do a very good job of educating our clients on what that means.

Bryan:  We really want to encourage you to reach out to us. Our web page is riggwealthmanagement.com. That’s Rigg with two Gs, riggwealthmanagement.com. We love hearing feedback about the ideas that hopefully this has generated with you.

We encourage you to call us at 972‑383‑1210. Again, that’s 972‑383‑1210 for a no‑cost appointment to go over your portfolio, to look at your strategies, and see if we might be of service to you. I say this quite often in shows. 50 percent of all people who retire today have 50 percent less than what they need, not than what they want.

Working your portfolio, working with diversification is something very important to do, and quite frankly, most people do not do it. Thank you for listening today.