How does a portfolio look, what investments can be used?

Sunday, February 26, 2017 Wealth Strategy with Bryan Rigg Radio Show
Every Sunday 1-2:00 on 520 KLIF

Rigg Wealth Management at KLIF

 

It’s our belief that clients often need the good, the bad, and the ugly, in order to make a well‑informed decision. There’s risk in every single investment you do, and we do our best to explain that risk. We want our clients to understand that, to understand the potential gains, but also the potential risk. They know their situation better than us, we can give them the information to help them make a sound decision.

 

 

 

 

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SHOW TRANSCRIPTS

Show8‑Segment 1

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.”

“Any investments or strategies referenced herein do not take into account the investment objectives, financial situation or particular needs of any specific person. Product suitability must be independently determined for each individual investor. Rigg Wealth Management explicitly disclaims any responsibility for product suitability or suitability determinations related to individual investors.”

“A fixed annuity is intended for retirement or other long-term needs. It is intended for a person who has sufficient cash or other liquid assets for living expenses and other unexpected emergencies, such as medical expenses. A fixed annuity is not a registered security or stock market investment and does not directly participate in any stock or equity investment or index.”

“The creditworthiness of an issuer must be considered when investing in principal protected or non-principal protected notes, as structured notes are not guaranteed by the government, the underwriter or any other entity. A structured product may represent an unsecured obligation of the respective issuer. Guarantees provided are based on the claims paying ability of the issuing company.”

“There is no guarantee that companies that can issue dividends will declare, continue to pay, or increase dividends.”

“Shorting stock, selling stock you do not own, involves increased risks not typically found when buying stock. Shorting stock must be done on margin, borrowed money, and is subject to margin calls at any given moment.”

“A benchmark index is not actively managed, does not have a defined investment objective, and does not incur fees or expenses. Therefore, performance of a fund will generally be less than its benchmark index. You cannot invest directly in a benchmark index. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.”

[background music]

Host:  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:  Good afternoon, ladies and gentlemen. This is Bryan Rigg with Rigg Wealth Management. Thank you so much for listening to us today. I’m here with my two partners, Gary Bilyeu and David Rigg.

This hour, we’re going to be focusing on two things. A lot of people have asked about the actual instruments that we use to help people invest and grow their money. We’ll be talking to you about basic concepts of stocks and bonds, and how they look, how they perform, and how they fit into a portfolio.

Then also, a lot of questions that we’ve gotten focus on, “What is the difference between an insurance company, a wirehouse ‑‑ an insurance company like State Farm, a wirehouse like Merrill‑Lynch or Edward Jones, and a place like you that’s independent, that use custodians. Independent guys usually use custodians like Pershing or Schwabb, or in our case, like Fidelity.

To describe that landscape is something that a lot of people enjoy hearing, so they understand where they can go to invest the way that they feel is best for them.

Without further ado, I think we’ll go into, “How does a portfolio look, and what are the investments that can be used?” David has been doing some research on this, and I’ll hand it over to him to explain the basic categories of investing, especially with stocks and bonds. David, all yours.

David Rigg:  All right. Thank you, Bryan. I appreciate that. I was thinking about what we were going to talk about on the show today. I thought, “There’s some people out there that may have been investing for quite a while that are very familiar with the terms. They’re very familiar with the different products and options. There may be some people that are not.”

There may be some people that, just like last show, we talked about, maybe, they’ve experienced a liquidity event. Maybe, they’ve sold a house. They don’t have any intention of buying another one. Maybe, they’ve inherited some money. Maybe, they’ve done a job change, and they have to roll over a 401(k) or something like that. They really don’t know what is available, or what their options are.

When you talk about investing in securities, people may not even know what a security is, or what a mutual fund actually does, or an ETF, or a unit investment trust. I thought we’d go to the Securities 101 class, basically, just a beginner primer on what is out there.

What is a security? A security basically represents either an ownership stake or a debt stake in a company. If we think of it that way ‑‑ and most of the time, the most common that people would be familiar with is either stocks, or the equity side or the ownership side, or bonds for the debt side.

If we think of stocks and bonds, when people hear those two terms, they’ll understand one is an equity stake, and one is a debt stake.

If you buy stocks, you basically bought a piece of the company. That represents ownership in the company. There’s two main types of stock, predominantly.

One is common stock, and one is preferred stock. They operate a little bit different. Common stock is typically issued by a company to raise capital. It’ll have, normally, it has voting rights with it. You can vote for the board of directors’ seat, or you can vote for mergers or something that might affect the dilution of the stock. You get a chance to vote on that.

Typically, there’s no say in the day‑to‑day operations of the company. Don’t think that if you buy stock in a company, you get to have some sort of directorship ability or anything like that. All you do is get some voting rights when you buy common stock.

Bryan:  I had a client a few years ago say, “Well, if I buy Coca‑Cola stock, can I call them up?” I was like, “Only if it represents about $100 or $200 million. Maybe, they might take your call.”

[laughter]

David:  Exactly.

Bryan:  Other than that…

David:  You’re kind of out.

Bryan:  …you’ve got some equity portion, but really, they’re not going to be listening to you too much. But as a collective group, you do have sway when you vote. It’s important to stay in touch with the stock’s reports that you own.

David:  Stay up on your quarterly reports that they send out and things of that nature.

Another thing people need to understand about common stock. It’s normally at the bottom of the liquidation list in case of a bankruptcy. Top of the heap is going to be wages that are owed, back wages that are owed, then it’s IRS, if there’s any taxes that are owed. Then, it’s going to go to secured debt holders, than non‑secured debt holders.

Then, it goes to preferred stock holders, and then you get down to the common stockholders. In a lot of cases, when there is a bankruptcy, the common stockholder really doesn’t end up getting a whole lot.

Bryan: By way of illustration on that, when GM went bankrupt a few years ago, one thing to really focus on is that all of the senior loan holders actually got all their principle back, because it was one to one leverage with the assets of the company. That’s one asset that we look at for clients, is senior loans. A lot of people don’t know about them, and they can be suitable assets to put into portfolios.

According to Franklin Square, the debt owners that were unsecured debt owners of GM, they got about 15 to 20 percent of their principle back. But all of the equity owners, when GM went bankrupt, got zero back.

David:  Got zero. One thing we need to need to throw out there, too, very quickly, as far as senior loans are concerned. When people think that, they think it’s loans for seniors, or something along that line, and it’s not. If you want to talk about senior loans real quick ‑‑ I don’t want to go down a rabbit hole for a while, but just go ahead and talk about that a bit.

Bryan:  Senior loans are top of the debt structure. One way that they had been described is it’s like being the bank. A lot of times, when you put money into the bank, the bank will take that money and then loan it out to companies. Usually, they’re one‑to‑one leveraged with the assets of that company. If that company goes south, they can recoup the money that they’ve loaned out.

Senior loans, when you get invested in those, they are going out, and they’re helping companies like Toys R Us, Home Depot, Exxon, and so on. They’re one‑to‑one leveraged, so they’re top of the debt structure. You’re kind of bypassing the bank. Some people have described it as like becoming the bank, to some degree.

They can be good with cash flow, and they are more secure than unsecured debt. So that’s a quick explanation of senior loans.

David:  To get back to the stocks now, we’ll talk a little bit about preferred stock. Preferred stock is a little bit different class. It normally pays a fixed dividend. Normally, it doesn’t have any voting rights to it, like common stock would. However, it is above common stock in the case of bankruptcy. The preferred stockholders will get paid before the common stockholders.

Gary:  Dave, one point on that is they also receive their dividend before the common stockholder as well.

David:  Yes, exactly. Another interesting characteristic is while it pays a fixed interest rate, like a bond ‑‑ it’s got some similarities to a bond ‑‑ it has no maturity date. As long as you own that preferred stock, you’ll get that fixed interest rate payment.

Bryan:  One way to distinguish this, if you’re interested in more cash flow but not necessarily long‑term growth, is preferred stocks. They can be a good way to go to increase your cash flow for your portfolio.

David:  Right. Theres some benefits to stock ownership. Theres two positions you can take. I don’t want to get into this too much into the weeds. If you really want to get into it, you need to come in and sit down. We’ll talk, and we’ll discuss it in depth.

You can have a long position, or you can have a short position with stocks. A long position is what most people normally envision when they buy stock. They buy the stock. You want the stock to go up. You own it. You have an ownership, a stake, in the company. You want the company to do well.

You want the company to start paying dividends. You want financial growth. You’re in it for the long term. That is the long position.

The short position, and this is going to be a very basic description of it, because it can get pretty involved. Basically, what you do is you borrow that stock, and then you sell the stock. Let’s say, you’ve borrowed some stock at 50, you sold it at 50. At a future date, you have to pay the stock back. What do you want to happen?

You want that stock to go down, because if you borrowed x number of shares at 50, and you cashed out of that, then you want the stock to go down, to say, 40. You can buy that stock at 40, replace the stock at 40, and you keep the difference between 40 and 10. That’s a short position.

You’ve got to kind of shift gears from what people normally think when they buy stock.

Bryan:  If you’re curious to know more about that, Michael Lewis wrote a wonderful book about the debacle of 2008 and 2009, called “The Big Short.” He has a chapter in there that describes this process that you can do with stocks, that you can short them, or you can go long.

Gary:  Can I just add one thing, Dave?

David:  You bet.

Gary:  I think it’s very important for clients, they may hear all these concepts, but not all of them are appropriate for every investor.

David:  Absolutely.

Gary:  That’s why we encourage you to sit down with a financial advisor or come see us at Rigg Wealth Management, so we can see if those types of investments are suitable and appropriate for you.

Bryan:  Absolutely, Gary. These are the issues we’ll be talking about today, plus the landscape of the financial world, where you can go to invest, and what the differences are at different firms and so on, and different instruments to invest in.

Please stay tuned as we continue on down that road in exploring these concepts. Please feel free, also to visit our website at riggwealthmanagement.com. That’s Rigg with two Gs, riggwealthmanagement.com.

Also, please feel free to call us at 972‑383‑1210. Again, that’s 972‑383‑1210, and come in for a no‑charge consultation. We’ll sit down and go over these instruments that we can use to build out your portfolio.

We thank you again for listening today, and we’ll be right back with you here in a few minutes.

Show8‑Segment 2 

Bryan Rigg:  Welcome back, ladies and gentlemen. This is Bryan Rigg with Rigg Wealth Management. The first segment, if you did not hear it ‑‑ and thank you for joining us now ‑‑ we’ve been discussing securities and what type of securities are out there that we can put into a portfolio. We will soon go into and discuss about debt.

Usually, securities are equities ‑‑ stocks, ETF, and so on, mutual funds. Bonds are usually what people understand as debt. David, one of my partners, is here, and my other partner, Gary, is here as well, Gary Bilyeu, David Rigg. David was exploring these concepts, and he has several more concepts to explore. I’ll hand it over to you.

David Rigg:  Thank you, Bryan. To wrap up stock ownership, real quick. We didn’t get to the actual risk of owning stocks. This will take just a second, and then we’ll get into the bonds. Number one is going to be market value. Stocks go down, stocks go up.

If it goes down, and you’re in a long position, that’s bad. If it gains value in a short position, that’s bad, OK? You have that risk involved whenever you purchase stock. If the company has reduced earnings, or it has some expenses it wasn’t expecting, it can reduce dividends. Your dividend payments can reduce.

Then of course, there’s the low‑priority at a bankruptcy dissolution. It’s something, actually, if the company really goes, and you have a bankruptcy issue, you’re at the bottom of the heap as far as getting some money paid out.

Bryan:  On this note, at Rigg Wealth Management, we preach continually to diversify. We don’t ever encourage you to go just into one equity position. We practice, usually, going into indices ‑‑ looking at indexes and how they track different market sectors so you have exposure to the thousands of these.

If you go into just one, or if you like a couple of different stocks, usually, according to Markowitz, with modern portfolio theory, you want to usually have 25‑30 stocks in that area, whether it be large cap or small cap, or utilities or energy.

You diversify, so if one company does go south, you won’t have this horrible event that could happen, and the risk that you’re describing is a reality. That’s one thing I want to encourage people, that to minimize that risk, you want to do diversification.

David:  Absolutely.

Bryan:  Back to you, David.

Gary:  Can I add something real quick, David?

David:  Absolutely.

Gary:  I’m sorry for interrupting.

Bryan:  Yeah, go. Go, Gary.

Gary: You mentioned risk, and I think that’s what we do a very good job at here at Rigg Wealth Management. Because so many times, and it doesn’t matter where you are, you only get the “good” from people.

It’s our belief that clients often need the good, the bad, and the ugly, in order to make a well‑informed decision. There’s risk in every single investment you do, and we do our best to explain that risk. We want our clients to understand that, to understand the potential gains, but also the potential risk. They know their situation better than us, we can give them the information to help them make a sound decision.

David:  Absolutely. I guess, to continue, we’ll talk about bonds a little bit. Like I said, once again, this is a 101‑level introduction. This is very basic on this, and there’s many different types of bonds out there.

If you think of stocks as an equity or an ownership position, you need to think of a bond as a debt position. You have purchased part of the debt of that company. They have to pay you the debt.

Bryan:  Everybody’s dealing with debt, whether it’s your house or cars. You should understand debt in this respect.

David:  Yes, absolutely. [laughs] Exactly.

Gary:  Yeah, I’m sure.

David:  Normally, it’s a set interest rate, kind of like preferred stock is. There’s a little bit of similarities there between the two. The largest bond provider in the country is the federal government. You can think of the Treasuries, bills have a maturity of less than one year. Notes are between 2 and 10 years, and then Treasury bonds are over 10 years.

One thing people need to understand ‑‑ and I didn’t understand this for many years. It’s only been the last several years that I’ve gotten really educated about investing, and gotten licensed and things. There’s an inverse relationship between interest rates and bonds.

Just to go into it on the surface a little bit, interest rates go up, bond prices typically go down ‑‑ typically. The reason for that is if you have, say, a four percent bond, and you want to sell that bond, but interest rates have gone up to five percent, nobody’s going to buy your bond at four percent, because they can go out in the market and get a five percent bond.

If your bond has a face value of $1,000, it’s going to have to decrease in value in order to give you a five percent return. Conversely, if interest rates go down, the exact opposite happens with that. That’s how they’re tied together, and people need to understand that.

The good thing is, we’ve had rumors of interest rates going up. That does create volatility in the bond market, and that can create some opportunity. Not necessarily is that always a bad thing.

Bryan:  We’ve seen that recently with the election of Trump. The bond market got slammed, and so there was opportunity in the bond market. The equity market, conversely, has gotten really strong. We’re at the highs of the stock market, historically.

There’s opportunity here, when you look at the valuations of bonds, although quite often, I would encourage people, if you’re going to buy bonds, you usually want to hold them to maturity. You don’t really want to think about buying and selling bonds all the time, because that can be very risky.

David:  Exactly. We also have to understand, there’s not just government bonds. There could be corporate bonds. There can be municipal bonds. There’s school bonds. There’s tons of these things out there. You’ve also got unsecured and secured bonds, and people need to understand the difference between the two.

Secured bonds will have some form of collateral, something to back them up. That could be anything from a company’s issuing bonds, but they have ownership in another company, and they’re putting that ownership up for collateral, for the bond that they’re issued.

Bryan:  To support that concept, one thing people don’t know about in Texas, muni bonds are historically, most of them, are always tax‑free, and they are for a local endeavor to support ‑‑ toll roads, sanitation, and so on.

In Texas, we have muni bonds that are called permanent school funds, PSF funds, and what this is, is that the state has said that if this municipality goes bankrupt, for whatever reason, the mineral rights of Texas will come in and support that bond to what it was originally supposed to do. That’s an example of having…

[crosstalk]

David:  Exactly. A secured bond, yes. Exactly. The other thing, mainly you see this from corporate side, but you can have equipment trust certificates. You’ll see this with railroads, airlines, oil companies, trucking companies, where they go out and buy an airplane.

That actually backs up the bond that they were selling. The equipment that they purchased with the money the raised backs that up. Unsecured bonds, exactly what it sounds like. There’s nothing backing up the bonds as far as physical equipment, or other bonds or securities, or anything like that.

Then, of course, we get into ‑‑ and we can really get into the weeds on what kind of bonds are available. We’ll talk about a couple of them real quick, and if somebody’s interested and wants to talk more, please give us a call, and we’ll be happy to sit down with you.

We’ve got things like zero‑coupon bonds. These are kind of an interesting instrument in that they don’t pay any interest. What they did is they heavily discounted the initial purchase price of the bond. You don’t get anything until the bond matures, and then you get the value of the bond back.

The problem is, you pay taxes on all that increase over the life of the bond. It’s kind of an interesting instrument. You need to be really sure that’s what you want and that it’s applicable and suitable for you before you’d use one of those.

Another one is convertible bonds, which I find kind of interesting, because if you’ve bought a bond of a company, you like the company. It’s paid you all along, as opposed to getting to the end of that bond’s maturity and losing your investment, basically, in that company, you can convert those bonds into common stock, and then continue on with your investment of the company.

That can be kind of an interesting thing, too. But there’s scads, tons of these things out there, that you can take a look at.

Bryan:  These debt instruments that David is describing, they’re all designed for a certain way that you, quite often psychologically, are viewing your investments.

Do you want regular cash flow? Then you want a bond that’s paying you every quarter or semi‑annually, and you’ve got that money coming into the bank, and you know exactly what it is, and you can support your lifestyle.

You may have a particular goal, like the zero‑coupon bond. You may know in 10 years, you want to definitely pay off your house, and you know what that number is. Let’s say you wanted to have $100,000, and let’s say you could buy a bond for $65,000, but you know in 10 years, it will be $100,000, to pay off that house.

That’s one way of doing planning for your estate, and finding instruments to help you achieve your goals.

David:  Education would work

Bryan:  Education as well, yes. There are different instruments that we can use at Rigg Wealth Management. We have a lot of flexibility in where we go to analyze equities and debt to help our clients pursue their financial goals.

Please stay tuned, we’ll be returning here in a few minutes. Please feel free to also visit us at our Web page at riggwealthmanagement.com, that’s Rigg Wealth Management with two Gs, R‑I‑G‑G.

Also, please feel free to call us at 972‑383‑1210. Again, that’s 972‑383‑1210 and set up an appointment to come in for a no‑charge consultation. We’ll go over all the instruments out there, and see how we can be of help to build out your portfolio and pursue your financial goals.

Show8 ‑ Segment 3

Bryan Rigg:  Welcome back, 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 talking about basic concepts of what equities are and what bonds ‑‑ debt instruments ‑‑ are.

There is several other investment opportunities that are out there, and I’ll let Gary explore some of them. Here at Rigg Wealth Management, we are an independent firm. We can go out and look at several different opportunities that are out there.

We are not just specializing in one area. Gary and I both have insurance licenses, that we can do insurance products. All three of us can do securities. We have full flexibility. Gary’s going to talk about a few of the other opportunities that we have here at Rigg Wealth Management to help you with your portfolios.

Gary Bilyeu:  Thanks, Bryan. When I ask my clients about different types of investments that they’ve heard of or know of. The big three I get are stocks, bonds, and annuities. They’ve heard of those, but they really don’t have a firm understanding of what those are. I think Dave did a great job talking about stocks and bonds, just giving an overview, the wave tops of those.

I’d like to take the third one ‑‑ annuity.

David Rigg:  Sure.

Gary:  A lot of people believe that annuities are from insurance companies, and they always associate annuities with insurance companies. That can be true, but annuities are offered through financial institutions, and it may or may not be an insurance company.

What they’re designed to do is they accept money, or sums of money, from individuals, and the intent is to take possession of that and grow it, and provide a stream of income at a later date, a later point in time. For many people, that is retirement. They want to have a set stream of income they can rely on for the rest of their lives.

Two examples of that, pensions and Social Security. We’ve talked about pensions in the past that define benefit. All that is, is an annuity, and if you have a pension, your retirement plan with your employer now is a pension, it really is an annuity.

There’s two types. There’s a fixed annuity and a variable annuity. I won’t get down in the weeds, but it’s just like the name implies. Your money can grow at a fixed rate, or there could be a variable rate of growth.

The main thing about annuities is to remember, you take money now, or a predetermined amount of money in the future. That’s where we sit down and talk to our clients, and see if an annuity is appropriate for them, is it suitable for them.

What are they trying to achieve in retirement? We discuss these very simple concepts first, and if it appears that that is appropriate for the client, then we can really delve into those and get down in the weeds, talk about those, and explore them.

We said this earlier, with any investment, there is risk associated, and so you’ll hear us say this many times. We talk about efficiency with investments as well. When we’re talking about efficiency, we take into account not just the potential gain that may be there in that holding, but we also take in account two very important aspects.

One of them is taxes. Are you going to pay taxes on that growth or that investment? The other thing would be fees. We’re talking about fees that the client would pay in order to own that holding.

When we look at some of the different instruments that we use ‑‑ and we’ll take a couple of these. I’m going to get ahead for just a second, because we’re going to talk about mutual funds and exchange traded funds, or ETFs.

Annuities ‑‑ our good friend, Art, says that there are some things that sound too good to be true. That’s not the case with annuities, but they are too good to be free. Some of these guarantees that you can get with annuities, they’re real. They’re legit, but you’re going to pay for those guarantees.

We want to make sure that our clients know that. With some of these guarantees that you can get with annuities, you’re going to have to pay for those. Generally speaking, annuities are usually the highest when it comes to fees that the client pays, followed by mutual funds, and then at the bottom would be exchange traded funds, or ETFs.

That’s why we like those, because they are efficient, and they give us so much more flexibility. I’m getting ahead of myself, but we’re going to get into there, and I think that we’ll shed some light on that for our listeners.

Bryan:  Very, very quickly, annuities, a lot of times if they’re a fixed, they’ll say, “Hey, you give us $100,000. We’ll hold it for 20 years, and we’ll give you a certain payout, five percent or six percent on that, every year.” A lot of times, your money is locked up. You cannot get to it.

When I was at Credit Suisse, they were very discouraging of us doing any annuities with people, because usually you can find a more efficient way with stocks and bonds to do the same thing as far as what the client wants with less fees.

A lot of times, people sometimes gravitate to annuities, because they feel like they know exactly what they’re going to get, and it’s very predictable. A lot of people will exchange more fees for that predictability.

We mentioned mutual funds and ETFs. I think you’re going to go into that right now, Gary?

Gary:  Sure, I can do that.

I would say that the majority of our listeners, especially if they have a 401(k) with their employer, and contributing, they’re invested in mutual funds. Chances are. They may be entirely in mutual funds.

Think of your retirement plan as a vehicle. What’s inside that vehicle? That’s where we talk about, “Is it all equity? Is it bonds? Is it in mutual fund holdings?” This is what’s under the hood, if there’s any car guys and gals out there. Your 401(k) is a vehicle. Now let’s talk about what’s under the hood.

If you have the mutual funds ‑‑ and once again, we’re going to keep this very simple, just the wave tops.

In a way a mutual fund is an investment vehicle made up of a pool of funds collected from many investors for the purpose of investing. It can be stocks. It can be bonds. It can be money markets. It can be any number of instruments.

The main advantage is, is that in mutual funds, they give small investors access to professionally managed funds. It’s a diversified portfolio of equities, bonds, and any of those other securities.

I remember back in the late ’80s, early ’90s, when we saw the entry level, or the initial investment amount really drop down. If you did a bank draft, you could get into some of these mutual funds for $50 a month, some of them even $25 a month.

We saw the flow, the amount of money coming into the market, skyrocketed. Early on, the minimum investment was $1,000, or $2,500, or even $5,000. In some of the bigger funds, it was more than that. You limited the amount of people that could get involved.

When you drop that down to an initial investment of $25 or $50, everyone can participate, and so mutual funds gained a tremendous amount of popularity, and they’re good vehicles.

One of the things, if you traded or sold into your positions, or purchased ‑‑ bought into positions ‑‑ you know that when you go to make a transaction in a mutual fund, you could call early in the morning, make that transaction, but it doesn’t actually take place until the end of the day.

The price may be where you want to buy in or sell, but you have to wait until the end of the day for that transaction to close, and as we know…

[crosstalk]

Gary:  …the price goes up and down. When the actual net asset value is calculated at the end of the day, it may not be where you want it to be, where ‑‑ once again, I’m leaning into this a little bit ‑‑ exchange traded funds, they’re traded in real time.

If we see the price that we either need to get in or get out, we can make that transaction immediately.

Bryan:  Burton Malkiel, a Princeton economist, in his book “A Random Walk Down Wall Street” ‑‑ many consider him the father of indexing ‑‑ shows with his academic research that ETFs, index funds ‑‑ which is what we primarily use ‑‑ are historically more efficient than mutual funds.

Mutual funds you have A shares and C shares. You’ve got front end loads with A shares, you’ve got back end loads with C shares. Sometimes you have to pay five percent to get into them. You also have 12b‑1 fees, or trailing fees, sometimes the company can put their new advancements at their headquarters, like their computers and so‑on, onto the fund and charge you one of those fees.

With index funds, you don’t have those added fees. You don’t have the front loads, they tend to be much more efficient with the fee structure.

Also, Burton Malkiel, once again, showed that over 80 percent of all mutual funds don’t hit their benchmarks. You’ll have a mutual fund that will focus on large cap. Maybe they’ll focus on the S&P 500, and 80 percent of the time, this professionally‑managed group is not beating that index, especially when you bring the fees into play.

The index funds we find are much more efficient in investing people’s assets and in getting that diversification.

Mutual funds, historically, they were the first, basically, grouping to give people, like Gary was saying, exposure to the market, giving them that diversification. They played a very valuable role in the ’70s and ’80s of giving people that exposure.

We just now, in the last 20 years, especially, have had more efficient instruments to get exposure to the market, and we feel the index funds are indeed those instruments.

David:  I’d like to add that ‑‑ and we can go into this a little bit more, too ‑‑ sometimes, not always, but sometimes mutual funds are not the most tax efficient with the way that they sell their shares that they have.

It may or may not be long‑term capital gains. You may say, “You go sell your mutual fund shares,” they go and they sell x amount of shares. The stuff that they have in that mutual fund may or may not have been kept long enough to get you into the long‑term capital gains and stuff. You may be paying short‑term capital gains, which would be passed on to you.

Bryan:  Yeah, whereas with the index funds, you know exactly when you got in, and you know exactly when you need to sell if you want to get long‑term capital gains versus short‑term capital gains.

One way of looking at that is if you buy an ETF, and let’s say it goes up dramatically, and you sell it within 12 months, you’re going to have over 30 percent, your ordinary income, a tax burden on that.

If you wait until after 12 months, it’s usually going to be around 20 percent. That’s why it’s so valuable to hold your holdings if you can to get long‑term capital gains, if you’re going to sell your holdings.

Gary:  We can get into ETFs in the next segment.

Bryan:  Yeah. Please stay tuned. We have one more segment for today. We thank you for listening thus far. Please feel free to visit us at our Web page at riggwealthmanagement.com. That’s Rigg with two Gs, wealthmanagement.com.

Also feel free to call us at 972‑383‑1210. Again, that’s 972‑383‑1210, and set up a meeting, a no‑charge consultation, and come in and explore what you’re doing with your portfolio and how you’re investing. We sure hope to hear from you, and please stay tuned. We’ll be right back to you.

Show8 ‑ Segment 4

Bryan Rigg:  Welcome back, ladies and gentlemen. This is Bryan Rigg with Rigg Wealth Management. I’m here with my two partners, David Rigg and Gary Bilyeu. We’re going to finish up talking about exchange traded funds, index funds, ETFs. Then I’m going to be going over a little bit of the landscape out there that people can utilize to do their investing. Gary?

Gary:  I’d like to wrap this up. We already talked about what a security is, and the stocks, bonds, annuities, and mutual funds. We mentioned ETFs, exchange traded funds. Once again, we’re giving the wave tops of this.

An exchange traded fund is a marketable security. It tracks an index, or a commodity, or bonds, or many assets of an index fund. What we believe makes them more efficient is that they’re traded in real time.

We don’t have to wait until the end of the day like mutual funds that are traded after they calculate the net asset value at the end of the day. We already said that the market is constantly moving, up and down, up and down.

Early in the morning, if you wanted to either buy in or sell a position if you’re in a mutual fund you have to wait and see what that price is calculated. It may not be the price that you wanted to move, in or out. With exchange traded funds, we can do that in real time. We think that’s a huge advantage.

Bryan:  We keep on talking about tracking an index. Just to give you a basic understanding of what one of these ETFs, these index funds, can do the following is quite telling. If you wanted to get exposure to the S&P 500, instead of going out there and buying all stocks of all 500 companies, you can buy an ETF that tracks the S&P 500 for $30, or $40, or $50.

That averages all of those 500 companies together. You get immediate exposure with one share in an ETF of the entire index. That’s why we believe it is a very efficient way to invest people’s funds.

Gary:  Just to double down on that, typically an ETF, exchange traded fund, has lower fees than a mutual fund. We see that as an advantage to our clients.

Bryan:  Here at Rigg Wealth Management, we are an independent firm. We can go out and look at several different options that are out there, whether it be insurance focused, or bonds, equities, stocks, and so on. We do our best, the best we can, to tailor our strategies to the needs of our clients. We have total flexibility.

A lot of people have asked me, “What’s the difference between you and Edward Jones or Merrill Lynch or Allstate?” This is something that I encourage people to do their homework on because there is distinct differences with all these different firms and there’s distinct differences in the culture of each one of these firms.

When I started out on Wall Street 10 years ago, I went and looked at nine different firms. I did over 90 interviews with a lot of these firms. I got to know a lot of the communities that I was looking at possibly working at. Some of these are no longer with us. Lehman Brothers and Bear Stearns, they’re dead. They’re gone.

Where I started out, Credit Suisse, because of a lot of the problems they had with the tax problems they did. They were helping people evade taxes. They had problems with the collateralized mortgage debt obligation. They misled people.

Due to a lot of these reasons, you can read it in the newspaper, they are no longer in the private banking services. They’ve done away with it. Merrill Lynch went bankrupt, but the government helped bail it out. A lot of people, when they are driving down the road, they’ll see Chase Bank. They’ll see Merrill Lynch, Edward Jones.

What are these companies? What do they offer? There’s some companies that the financial advisors are incentivized to gather assets. Then they’re paid a certain percentage on those assets. We at Rigg Wealth Management, that’s called assets under management. We have that model for our fee structure.

As you gain money, we gain money. We’re incentivized with you. A lot of times these firms when they put that modus operandi on their financial advisors for earning their keep, they also put quotas on them to earn money for the office, as well.

A lot of wirehouses will look at their financial advisors as, “What are they earning for the office?” instead of focusing on, “What are they doing for their clients?” This is capitalism. We live in a world where you have to earn profits and keep the lights on.

You might want to ask the financial advisors you’re talking to how much of the fees that they’re generating go to their pocket and then how much go to the firm? How much pressure does the firm put on them to earn certain quotas?

There’s two different branches of Merrill Lynch, for example. There’s the retail market. You see a lot of those offices all over the place. Then they have the private banking division. Those are for high net worth individuals.

Here locally, the Merrill Lynch Private Banking office is in the Crescent. They usually focus on people who only have $10 million in and up. A lot of those retail offices, you see the turnover there is very high. When I was there, they told me that about 90 percent of all people who get trained there are not there two or three years later.

There is a community back then that was not supportive of the financial advisor, per se. It was supportive of how many assets could they bring in? How much money could they generate for the office?

Sometimes this creates very good financial advisors and a very good environment. Sometimes it can be very disheartening and not real supportive of focusing on the needs of the client. That’s one example of many. That’s why a lot of the wirehouses are going by the wayside and you see more and more independents.

If you go to Chase Bank or Bank of America, a lot of times all they’re going to have is CDs or savings accounts, money market accounts. They’re not going to have a broad diversification as far as financial resources.

If you go to Allstate or State Farm or MetLife, a lot of times they’re just going to have insurance products. A lot of these financial institutions that are out there usually are very specialized and quite often they don’t create an environment that is conducive to helping the clients.

When I was at Credit Suisse during 2008/2009 when we had the downturn, we had a lot of pressure from corporate to put clients in a hedge fund. A lot of my fellow brokers did so. I didn’t understand it very well. I wasn’t going to do that for my clients.

A few months later, after people put a lot of money into this hedge fund, millions of dollars, it went down 75 percent. One of the advisors that I was working with got so irritated that he did a firm wide email. He basically said, “If I tried to design a fund to do this poorly, I don’t think I could have done it.”

That’s one example that a lot of pressure from corporate was put on these brokers to perform at a certain level, to earn money for the office instead of looking at what’s best for the client. You want to look at the community that you’re involved.

There are some communities out there. I found that there was a really good team atmosphere at JP Morgan and Allied Bernstein, where they bring in the clients and then several people bear hug them and they take care of them.

There’s institutions out there that have totally different ways of structuring their compensation, structuring how they support the client, and the instruments that they’re going to provide. Here at Rigg Wealth Management we can do cash management and have resources to CDs. We can help people in that area.

We can help people in the advisory section of stocks and bonds. We can also help with insurance. We can go out and look at several different firms and try to find the most appropriate one for our clients. We’re not beholden to one firm.

A lot of times these firms, they will only give you proprietary products. That may not necessarily be the best for you. A lot of times you go to Fidelity or you go to Northern Trust. It’s just their mutual funds. We can look at a lot of those mutual funds and decide whether they are appropriate for you or not.

These are some basic overview of the financial landscape. There’s probably worthy of talking about next week or here in the next couple of months, again, because it is a very colorful environment out there.

Ladies and gentlemen, thank you so much for listening today. Please tune in every Sunday from 1:00 to 2:00 on KLIF 570 AM. Please, also visit our web page at RiggWealthManagement.com. That’s Rigg, R‑I‑G‑G, Wealth Management dot com.

Also, feel free to call us at 972‑383‑1210. Again that’s 972‑383‑1210. Remember to know and not to do is not to know. Knowledge without action is futile and stillborn. If you know you need to do something with your financial future, get busy with it. Please, call us.