From the Navy to Wall Street: Lessons in Investment Wisdom

Speaker A: We still strongly believe in asset allocation or risk tolerance. Right. I wasn't concerned about my mother's portfolio because if you include her annuity, she's only 10% in stocks, so not a big concern. My other clients who are 100% in stocks, they have 20, 30, 40 years before we can use that money. So not a concern there either.

Speaker B: Right.

Speaker A: The problem is when you don't allocate to your risk tolerance and when you start trying to predict and time the market. If you're listening today, it must mean you're a strategic cfo. Tune in regularly for tips, best practices and eye opening stories that will help you optimize your CFO experience. And don't forget to leave a review and subscribe.

Speaker B: Hello and welcome to FEI Silicon Valley's Strategic CFO Podcast, a series of conversations with business and government leaders that impact our professional lives here in Silicon Valley. My name is Jan Robertson, your host, past president and current board member of FEI Silicon Valley. And I'm pleased today that our guest is Dan Beck, who is a financial professional with Equitable Advisors. So welcome, Dan.

Speaker A: Thanks for having me, Jan.

Speaker B: Pleasure. So, Dan, you've had a very interesting background. You, uh, served for some time in the U.S. uh, Navy as a lieutenant, and then, um, you've got some fascinating education and then worked as portfolio manager and now Equitable Advisors. So tell us a little bit about your journey.

Speaker A: Sure. Well, I'll start from the beginning. I had a very uneventful childhood. Grew up in Greenwich, Connecticut. Uh, my father was a corporate lawyer, my mother was a homemaker and then became a travel agent. But I decided from an early age that I wanted some meaning and some adventure and some challenge in my life. So probably from when I was eight years old, I decided I was going to go be an officer in the Navy and that I wanted to go to the Naval Academy. And, uh, that was my goal. That kind of got me through high school and all those years. And I applied, got in, and When I was 17, on June 30, 1995, I showed up at the United States Naval Academy and had my head shaved as part of induction day. And I spent four years there. I majored in history. And everybody says, what's your degree from there? Well, it's actually a Bachelor of Science in History.

Speaker B: Interesting.

Speaker A: Um, and, uh, I, you know, I did very well there. I was top 10% of my class. I was actually number 77, I think, out of 900 graduating students. I also did honors, uh, in history. I did a thesis. Um, and then after Coming graduation, you know, we all get commissions as officers in the United States Navy or the Marine Corps. I decided to go into the Navy, and I was on two ships. First I was on a destroyer, the USS Higgins, which was based out of San Diego. And my first job was communications officer. And everybody asked, well, what did you actually do on the ship? And of course, uh, we actually have two roles. The first job is to learn how to drive and navigate the ship and become an officer of the deck and where the captain gives you permission to drive the ship when he's not there. And so I did that. At the same time, you have a managerial job. As I mentioned, I was communications officer. I had about 15 enlisted sailors who reported to me, and we ran the communications equipment for the ship. And then once you get good at becoming officer the deck, they move you up to operate the weapon systems of the ship and the missiles and guns and all that radars and all that fun stuff. So, uh, then I moved on to my second ship, the USS Princeton, the Taycan Road class cruiser, also based out of San Diego, where I spent a lot of my time in Combat Information Center. And on both the ships, I did deployments to Asia and the Persian Gulf. Uh, pre the Iraq war of 2003, we were actually enforcing UN oil sanctions against Iraq, boarding ships going into and out of Iraq. That was my first deployment on The Higgins, my first ship, and then on my second ship was during the Iraq war in, in 2003. And there, our main mission, there's two Iraqi offshore oil platforms, which are large parts of Iraqi oil infrastructure or large parts of Iraqi infrastructure. And you remember from 2003, that was the summer of the insurgency, when they were blowing up large parts of Iraqi infrastructure on land. And one of the most, uh, critical points of those infrastructure was those offshore oil terminals, because at the time, 80% of Iraq's gross domestic product went through those oil terminals. So we were there protecting them, um, making sure the insurgency didn't send small boats filled with explosives into the oil terminals. So that was a very important mission. And when I was there, I remember being very proud of what I was doing, because I was taking all of my Navy education, experience and training and putting it to a real world mission of, uh, protecting those oil terminals and, you know, protecting Iraq's economic future, uh, right after the invasion. So then I also had a job, you see there, Puerto Belgrano, Argentina. Uh, we shifted shift in the Navy between sea duty serving on ships and what's called shore duty. And my shore duty was an Amazing tour. I spent 15 months in Argentina, uh, in a town called Valle Blanca, about 350 miles south of Buenos Aires. And, um, and then. And they actually sent me to the Defense Language Institute for Spanish before then. So I was as. My Spanish was okay when I got down there, and it was really good after I left 15 months later. But eventually I decided as much fun as being in the Navy and the meeting and all that was I didn't want to spend the rest of my life away at sea. And I didn't want to move up and become a career Navy officer or command a ship. One day, um, I even said to myself, do I want to command a carrier battle group? And I was like, not really. And I was like, that's like the pinnacle of the profession. So I was like, I guess it's time to go. So I had to find something else to do. So I got out in 2006. I didn't really know what to do with myself, so I applied to business school. And I didn't get into Wharton and I didn't get into Stanford, so I had to go to Harvard Business School.

Speaker B: Oh, that's true.

Speaker A: Oh, well, bummer, right? No, but I think my heart was always at Harvard Business School in terms I just put more energy into the application. I really like the teaching method. It's called the case method, where half your grade is actually class participation. You're supposed to prep for two hours for class. Met a lot of wonderful lifelong friends there that I still stay in touch with. And the professors were very approachable. And of course, you know, there's a larger university and the name and the network that are all very valuable as well. So I had a great experience there.

Speaker B: A question. Um, just about the Harvard hbs. Are you involved in the San Francisco HBS Club that. That meets on occasion or you. Are you not involved in that?

Speaker A: I have been very involved. Right now I'm somewhat involved in that. I attend a lot of events. There's actually two. There's the Harvard Business School association in Northern California, which is just for HBS grads and M. Then there's the Harvard Club of San Francisco, which is for all Harvard schools. For five years. I was a vice president of activities for the Harvard Club of San Francisco between 2018 and 2023.

Speaker B: Uh, okay. Yeah. Just curious. Anyway.

Speaker A: Yeah, no, they have a lot of great events. It's a good network out here.

Speaker B: Yeah.

Speaker A: Um, so, yeah, I went there and then of course, class, um, of 2009, so I was doing full time recruiting, trying to find a job as an investment manager in the fall of 2008, which of course was the beginning of the financial crisis and the worst recession since the Great Depression. So I eventually found a job at State street, which I think is the next thing on there.

Speaker B: Yeah, yeah.

Speaker A: And, um, you know, I went to State street because it was an asset manager and I wanted to be in the investment management business. Uh, what I wound up getting a job doing there was actually more corporate strategy work in terms of how State Street's businesses were going to work and doing business analysis for when different business units wanted to roll out new business lines. It was someone academically interesting. But eventually I realized it wasn't the right fit for me and I didn't see myself as having a career there. So I left and, uh, in December, and I came out to San Francisco where my sister was and still is. And that was early 2011. I did the research analyst intern thing at Parnassus. Thought I wanted to be a. I thought I wanted to be the next Warren Buffett. So I thought I wanted to have a hedge fund and then build it out into a diversified conglomerate.

Speaker B: Is Parnassus a hedge fund or what is.

Speaker A: It's a mutual fund.

Speaker B: Mutual fund. Okay.

Speaker A: Yeah. It's a fundamental analysis mutual fund. It does use Buffett's tenants to invest, but it also has an ESG lens, so environmental, social, governance. So that's how they, uh, have built their business. Now it's a very successful. Then it was like a $6 billion fund, now it's a $30 billion fund. So they've done very well.

Speaker B: And then they're still doing esg.

Speaker A: Uh, they're still doing esg.

Speaker B: Good for them.

Speaker A: Yeah, they're right at one market. But eventually. But you know, they, frankly, they didn't give me a full time offer, so I was like, okay, what I'm going to do now, I'm like, I'm going to do this myself. So. So that's when I launched Beck Investment Partners. The idea being I was going to have my own fund and I was going to. My investment mandate was publicly traded corporate securities or their derivatives. Uh, my unit of analysis was always on the business. What's this business going to do? And how should the stocks or bonds or whatever be priced? Um, and I was looking at generally smaller securities because I wasn't investing a ton of money. So where I would have an edge and there wouldn't be a lot of large institutions looking at those same, uh, securities. Um, it was fun at first. Eventually I realized it Wasn't the right fit for me. I didn't. I'm not meant to read annual reports by myself at the computer all day.

Speaker B: Too insular. Too just analysis focused. As opposed to people focused.

Speaker A: Exactly. Yeah. I am an extreme extrovert, and I've become a lot more extrovert as I've gotten older. And so I. I stopped enjoying the work and also the meeting in a hedge fund. You know, the hedge fund, the whole purpose is just to make money, right. It doesn't really have any other reason to exist. And it's making money for really, really rich people who have, you know, at least five million or more and can give you a hundred thousand or five hundred thousand to play with. And I. I stopped in finding it meaningful and I stopped enjoying it. And that's when it. I decided to become a financial advisor. Because, um. And AXA Advisors is the old name for Equitable Advisors. It's the same company.

Speaker B: Oh, I see. And is Axa, is that a European.

Speaker A: Yeah, it's a French company that used

Speaker B: to be a French company. And they have an insurance arm. Yeah, my husband has done a lot of business with them.

Speaker A: Yeah, they have a property and casualty insurance arm internationally. I think they might own some U.S. companies. But they did own Equitable, which as hard as a life insurance company. Got it. So I started. And yeah, the other point, you know, I was doing the review course instructor thing even before Equitable, and I really enjoyed that. And I was the highlight of my week when I had the hedge fund was like, going to teach in the CFA review course. So I said to myself, uh-huh. Where can I take my knowledge, education, experience in finance and investing, but still have the educational role and talk to people all day? So I was like. It dawned on me in like 2014, 2015, I should be a financial advisor.

Speaker B: But you've also been a professor too, at, um, University of San Francisco.

Speaker A: So that was in 2018. I decided I wanted. Once I started teaching in CFA review, I said, I want to do more teaching. So that opportunity came up through some networking. And I really enjoy teaching behavioral finance a lot more when it was in person than over zoom. But, um, unfortunately, we had to. We had a little zoom break in there because it was 2018-2023. Um, but I really liked having an impact on the students. I really like knowing the material so much, so well. And I love. Occasionally I'll get an email from a student saying, hey, you know, you're my professor five years ago. Sometimes I don't even remember them. But you know, they're like, I'm using the stuff I learned in your course in my career and it's helped in my own investing and it's really helping me. So that's very meaningful.

Speaker B: So tell me if I could ask. Tell me a little bit more about behavioral finance, because I'm thinking of a book that I read a while ago. I think two Israeli guys won the Nobel Prize.

Speaker A: Yeah, well, one did because the other passed away. Daniel Kahneman. Amos Tversky.

Speaker B: Yeah.

Speaker A: So Daniel Kahneman's book is called Thinking Fast and Slow.

Speaker B: That's it. Yes.

Speaker A: And that's the first book we used in my course.

Speaker B: Okay, fascinating.

Speaker A: So the behavioral finance says, let's look at the brain and how the brain makes decisions and how that impacts people's financial decisions and how that can even affect the whole macroecon economic decision and the economy and asset bubbles. So we start with Daniel Kahneman's Thinking Fast and Slow, which doesn't talk a lot about finance a little bit. And then we move on to a book by Mere Statman called Finance for Normal People, where he's a real old school academic, he teaches at Santa Clara, and he contrasts behavioral finance versus traditional finance. Traditional finance assumes humans make all decisions based on economic utility function. In other words, rational decisions, rational decision making. What's going to give me the most money in the future? Right. And one of Stman's points is. No. They also have emotional reasons for making decisions and they have expressive reasons for making expressive being. What does it say to my friends? Emotional, of course. How does it make me feel? So the behavioral finance people took all this into account in terms of how people actually make decisions, and that's the basis of behavioral finance. So I could obviously teach the whole class right now, but, uh, you know,

Speaker B: I think so our audience is mostly CFOs, controllers, you know, senior financial professionals who belong nationwide, plus others who are interested. And I am. I, um, could imagine that for CFOs, making decisions, it should all be rational. It should all be, you know, completely, uh, without emotion and, you know, completely scientific. Uh, I dare say, but I have a feeling it's not. All the decisions are not. Because once they start talking, you know, with the CEO, the board, they get into strategy, they get into what's happening in the market. How are customers feeling? There are many other factors that, that are going to impact how a CFO does their work. And I bet behavioral finance, you know, sort of enters into that equation.

Speaker A: Yeah, for sure. Uh, the, A lot of the stuff that Kahneman and Tversky talk about can be applied to lots of different things. And so the behavioral finance people are applying it to finance specifically, but it can be, you know, it can affect all kinds of decisions.

Speaker B: So tell us, um, so then Equitable Advisors, uh, tell us, you know, as a financial professional there, along with your business partner, tell us what kinds of individuals or you know, small companies, groups, who you work with and how you apply, what you've learned, especially in the behavioral finance area. But CFA, etc. In advising them. Sure.

Speaker A: Well, generally it's people who are under 10 million in net worth. So we don't typically compete in the 10 million and up space. Uh, most of our clients are young couples. They maybe have a few hundred thousand, they own a home, they have, they maybe make 250 to 500,000 each. Um, and they have one or two young kids or have kids on the way or planning on kids. So their needs are different than the 10 million up crowd.

Speaker B: Right. And some of them may be early stage entrepreneurs, like the kind of Silicon Valley companies that are, you know, at least our FEI, Silicon Valley, um, members, FEI members, CFOs would work with too, for sure.

Speaker A: Yeah, of course it's so, yeah, it's a wide variety, but it's generally people who. One of the things that Equitable is really good at, you know, equitable at heart is a life insurance company.

Speaker B: Mhm.

Speaker A: And it's really good at risk management for individuals. Right. So risk management for a young high earner who has young kids and maybe a spouse that may or may not work or have a different earnings ability is life insurance. Right. What happens if you die? Is your family going to have enough money? They don't have enough money to self insure because they don't have the 5 or 10 million and up. But maybe they have a few hundred thousand. So life insurance is really important.

Speaker B: Mhm. And disability, I bet too.

Speaker A: Disability is important too. Yeah. And the other thing they can start planning, if they want to start planning really early, is for long term care insurance because you want to get that when you're young, not when you have problems. Right. And then for people in retirement, and I always use the example of my mother who's 82, we have these wonderful products that make sure you're never going to run out of money. Well, at least an additional check besides Social Security is going to come every day until you die called annuities. Um, and so you know, we have my mom, half her money's in a variable annuity and uh, and I'VE sold some other annuities to people in retirement too. So to me those. One of the things I really like about being an equitable is we're so good at the risk management at the life insurance and annuities that that's really what makes a difference in somebody's life. You know, like. And it's somewhat differentiated investment management.

Speaker B: Mhm.

Speaker A: I obviously have my individual views on how it should be done but you know, there's a lot of products out there and it's not in my opinion it's not that difficult to do. In fact most people, even really young people can do it on their own. But the risk management, the life insurance, disability, long term care and annuities, that really takes. That's going to make a difference in someone's life.

Speaker B: Annuities. There's been some controversy about annuities and uh, certainly uh. I've never really looked into it much but I have read different articles where there have been some controversy and I'm not sure whether unsuitable annuities have been sold to some people. I just don't know. But I wonder if you could just address that for us.

Speaker A: Sure. Some people are very. There's a whole industry that's very anti annuity. Why are they anti annuity? Because they don't sell annuities. They don't work for life insurance companies, they don't know anything about annuities and they don't want their clients taking their money that they could Otherwise get a 1% fee on and putting it into an annuity.

Speaker B: I see, interesting.

Speaker A: So there's a whole people who can't and don't know anything about it, can't sell and don't know anything about annuities will badmouth them. I'm sure there's been practices in the past that haven't been the best for the client in terms of selling people annuities who didn't know what they were getting into. But I put my half, my 82 year old's mom money into an annuity because I'm very comfortable with it. And by the way, I mean if I told you the numbers that she put in, what she take out versus what she still has now, it's like amazing. And there's a guarantee. So anyway, I don't want to get too complicated with the details of annuities, but the main point there's. There's basically five risks that an annuity can help out with. The biggest one is longevity risk. Right. So even if that account value goes to zero, there's still going to be a check coming. The insurance company will make sure of it. Even if the client lives to 150, no other product can do that. Other investment manager will say, oh well, we recreate your paycheck in retirement. We well that's great. You can't make sure that there's going to be another check once that money goes to zero.

Speaker B: Mhm.

Speaker A: Especially because what's called sequence of returns risk. Right. So if you retire at let's say 65 and have 30 years until your expected death, you m have a 30 year retirement window. If you have up years in the beginning in the market and you're investing your money, you're golden. Right. You're going to retire with a lot of, you're going to die with a lot of money. If you have down years in the beginning, even if you get the same average return over time time, you can run out of money at like 82.

Speaker B: Interesting.

Speaker A: The annuity makes sure that that's not going to happen. Right now you don't put, you don't necessarily put all your money in annuity, but if you put you know, half and even in the behavioral finance book that I was referencing earlier, Meir Statman's, he talks about annuities and he talks about how you know, you go from like maybe a ah, 80% chance running out to um, money to like a 20% chance if you annuitize half the portfolio. It's some statistic like that. Interesting. So I think, and especially because my like if, sure if you're 10 million and up, you're not going to run out of money. I mean unless you're like ridiculous spender. But if you're 2 million and under or I'm um, 1 million and under and you're retiring, there's a reasonable chance you could run out of money and then all you're left with is Social Security. Most people don't get a pension these days. I mean if you have a separate pension then that's great, but most people don't have it. So the annuity is a self made pension.

Speaker B: Mhm. What? I'm actually very curious. I didn't know our conversation would take this direction, but I am quite curious about annuities. I've only heard about them. What are the minimum amounts of money like say somebody puts in. Oh, I don't know, pick a number. $100,000 into an annuity. M. How long would they get the annuity for? Say they're 65. And as your 30 year example, what would the returns be just an example. Some sort of quick math on $100,000.

Speaker A: Sure. So you can get a guarantee of about 6,500 a year, about 6 1/2 percent. It might be up to 7% on our variable annuities now.

Speaker B: Yeah.

Speaker A: Um, you know, with the interest rates being a little higher. The really nice thing is, if you want me to explain annuities, there's these two components of an annuity. There's the account value, that's the money you put in which gets invested. And that's actually has a value based on the securities. But there's this other thing. It's called a benefit base. Right. It's called like a phantom or shadow account. It's a number. But the significance of that number is that's what the income is calculated off of.

Speaker B: Okay.

Speaker A: So even if that account value gets invested and goes down to zero, your benefit base is still there paying you money. And the benefit base can never go down. And it's guaranteed to go up by a certain amount every year. Wow.

Speaker B: And um, can one do this within retirement funds? So within say a 401 or SEP IRA or whatever?

Speaker A: An IRA, they can not a 401 if it's in a 401k with a company, they would have to. If they're working for the company, they cannot put the 401 money into an annuity. But if they leave the company and they transfer it to an ira, then they can put that money into an

Speaker B: account and including SEP Iris for self employed people.

Speaker A: Yeah. Fei, Silicon Valley is Silicon Valley's leading professional organization for corporate financial professionals and tax executives. It's one of over 50 chapters of financial Executives International, the uh, leading financial network for CFOs, advisors, planners and more. FBI gives over 9,000 executives around the world a uh, toolkit of ways to share best practices, opportunities and connections. Boost your professional opportunities by going to www.feisv.org.

Speaker B: in these times of market turmoil, I mean we've seen a wild ride, uh, since uh, the current administration, uh, took hold. I call it the current regime. And the bond market has been spooked at various times with the tariff wars. And you know more about this than I do. As a financial profess, what are you advising your clients? I mean everyone from your 82 year old mother to these Henry's young people who have high income but they're not really wealthy yet, and everyone in between, what are you advising? I mean the old tenets of a diversified stock portfolio, does that still hold?

Speaker A: It does, but I'LL tell you all the tenants that I, uh, please. So, so basically after that one day when the market was down 10% in April, I thought long and hard about what I wanted to tell my clients. And I typed up an email and I sent it to about 50 different households individually. And I had four main points. Um, the first point is that we still strongly believe in asset allocation or risk tolerance. Right. I wasn't concerned about my mother's portfolio because if you include her annuity, she's only 10% in stocks, so not a big concern. My other clients, who are 100% in stocks, they have 20, 30, 40 years before we can use that money. So not a concern there either. Right. The problem is when you don't allocate to your risk tolerance and when you start trying to predict and time the market. So allocating the risk tolerance is much better than market predictions.

Speaker B: Uh-huh.

Speaker A: That's the fundamental belief that we have. And sometimes I make the joke that all of my thousand hours of CFA studying and years of Harvard Business School and time at the hedge fund, I could boil that all down into five words. Asset allocate to risk tolerance, because that's all. Uh, that's if you can get that down. Like you don't really even need me. But I'm there to remind my clients of this, and that's one of the things they pay me for. Now, additionally, it's. We strongly believe in international diversification. So what we saw in the first quarter of the year was that while the US Markets were down double digits, the developed non US Markets were up double digits. So the client, uh. And how much should you put? Well, you should put based on world market capitalization, which is only 65% in the United States and the rest overseas.

Speaker B: Okay.

Speaker A: So all our clients were diversified that way. So we had one client, he was like, he thought he was going to be down like 12%. When he looked at his portfolio, he was only down like 3 or 4%. He was like. I was pleasantly surprised. We were like, hey, that's our job. That's what we do here. We protect you from doing the dumb thing of dumping all your money in the S&P 500. The way there's some proponents out there who suggest that, and there's better ways to invest. So another point is that there's been there. If you look at the 15 worst market days since 1950, the average one year return after those days is plus 24%. So you get paid to hold through volatility, right?

Speaker B: Yeah. Yep. Don't sell it. Yep.

Speaker A: Mhm. You don't want to sell at the bottom. I mean, there's only three reasons to sell. That's a separate conversation, but of when you actually sell. But uh, it doesn't have anything to do with what the market's actually doing. And then the third thing I pointed out, or the fourth thing is that for most of our clients, with the exception of my mom, they're going to have so much more money they're putting in in the future than they've already put in. So if you're going to be buying stocks, do you want prices to be high or low? You want prices to be low? You know, hopefully at the end they'll be higher. Right, right. Um, obviously if you're selling stocks, you want to be higher. But almost all our clients are like mid-30s to mid-40s. Uh, they're investing for the long term. So this was a steal that it's really an opportunity to buy. And Ben Graham, um, Warren Buffett's first investment teacher, like to say he thought people should buy their stocks like they buy their groceries, not like they buy their perfume. You know, looking for deals as opposed to, you know, buying what you think is hot or going to be, you know, buying based on the smell or whatever. Yeah, well, value stocks is what Ben Graham's thing was.

Speaker B: Yeah, value stocks. Some of the worst mistakes I've personally made in the market, everybody talks about their successes. Some of the stupidest things I've done are buying when I think either an industry is hot or a stock is hot. And you know, in the pharma industry, and this is unfortunately a recent experience, um, you know, Eli Lilly and Novo Nordisk thinking, oh yeah, they've got this new weight loss drug and it's going to be, well, you know what, it was already factored into the market and then, you know, my investment plummeted by half. And I mean, everybody talks about how smart they are and how they make lots of great successes. Some of the worst mistakes I've, I mean I've done well by buying funds and holding long term and asset, you know, all the smart things you're saying. I think individuals should probably avoid buying individual stocks because you just can't get it right. I mean, rarely, unless you're watching things like a hawk and unless you do what you're mentioning, Ben Graham's theory of buying value, but then you don't know if value is really going to turn out to be a performer or just a worse dog. Um, anyway, maybe you can address that sort of mistake.

Speaker A: Sure. Yeah. Nobody except the Warren Buffett should be buying individual stocks. And he's stopped doing it as well because, you know, he's 94 and he's stepping down. But. Right. No, I mean, we actually had a 28 year old who was a son of a Provisors member. Uh, we had a. First, we had two calls with them. Um, and he had some money, you know, less than 100k, but he had said he was buying individual stocks with some of it. And one of our. And he said he wanted to, to be able to continue to do that. And we're like, okay, set aside $2,000 and do what you want with it, you know, because it's fun. But the, but all of your money that's going to go towards your goals of a home purchase and for your future retirement should be invested in a world market cap diversified portfolio. Right. So nobody should. I'm a former active manager. I wasn't the best. Occasionally I come up with a good idea. But I know how hard it is to buy individual stocks. One of the reasons it's so hard to buy individual stocks is because markets are so efficient. Most, almost everything is already priced into that stock by the actions of thousands of market participants and billions of dollars of volume already, you know, buying and selling those stocks they call, you know, the Price is Right essentially is the efficient market theory. And so in order to make money by your own stock picks, you have to, one, you have to know what the market's thinking. Two, you have to have a different view than the market. And three, you got to be right about that consistently.

Speaker B: Right.

Speaker A: Like it's, I mean, you know, Buffett can do it, but your mortals can't.

Speaker B: Yeah, you know, another, another stock and I, you know, I'm admitting all this publicly. It's sort of cathartic. But, um, Alibaba, back in the day, it was, it was a darling Morgan Stanley, lots of people were recommending it. And, um, and as soon as I bought, started to go down. And then the um, the CEO fell out of favor with Xi Jinping and it went down, down, down. Finally I got so tired I sold it. And then now a couple years later, he's back in favor and the stock started to strengthen. I'm thinking, oh, um, man, you're never going to get this right. Just don't even try this. So, um, you know, we've all made stupid mistakes. I would love to ask you about bond funds. So, you know, everybody focuses on the stock market and I, you know, I Love your ideas of international diversification. One thing, because a lot as Americans, you know, we often are just so provincial here looking at, you know, buying U.S. stocks. So international diversification. But tell me about bond funds, because sometimes it's hard to get it right with buying bond funds. And then how much of bond funds should one have? I mean, unless you just buy individual, uh, Treasuries, how much should you have in bond funds? And does it vary according to your age and stage in life? You know, younger people want to be invested maybe more in stocks, older people more in bond funds. Uh, talk to us about that. Sure.

Speaker A: Yeah. No, you got it exactly right. I mean, your percentage in bond funds is going to be based on your risk tolerance. And so our younger clients who are under 30 and investing for retirement don't have any bonds. There's no reason for them. And we look at, we basically break down asset allocations into five different buckets. And the change in the bucket is the change on the stock bond allocation. So there's 100 stock, 100% stocks, 0% bonds. That's aggressive. There's growth, 80% stocks, 20% bonds. There's growth of income, 60% stocks, 40% bonds. There's income with moderate growth, which is 40% stocks, 60% bonds. And then there's what my mother's in, uh, income with capital preservation, which is only 20% stocks, but 80% bonds. Bonds serve as a diversification. Both diversification, but more ballast to a portfolio. Right. They're not going to go down. In 2008, for example, the U.S. stock market was down 38%. And if you look at the peak to trough of the year, it was actually 50% M. So, you know, you can imagine. You know, I have a. Some people are like, oh, well, the stock market always recovers. I'm just gonna put it all in stocks, even though I'm 70 or whatever. And I'm like, that's true. But, you know, it's your life savings. And are you going to be able to watch it go down 50%, lose half? You know? Right.

Speaker B: What's the time horizon? Yeah. So.

Speaker A: So bond funds prevent volatility, the stock market volatility in a portfolio, depending on how much you have. Like I said, I wasn't concerned about my mom's portfolio when the stock market went down 10% one day because she's only basically 10% in stocks. And out of that, it's only 65% US of that 10%. The other 35% international. You know, if we remember those and we Give every single client a risk tolerance questionnaire and 95% of the time and that'll give them which of those five stock bond allocations it only takes 5, 10 minutes to do. But we see people, when people come to us with their old funds or their old allocations, we see people misallocated all the time. We'll see like a 32 year old with like half his Roth IRA in cash. And we're like, why is your Roth IRA in cash when you can't even access it until you're 59 and a half, you know, or. I mean, a lot of people have big cash positions for some reason, but, uh, some people think they can time the market. They're waiting for the dip. You can wait a long time for the diplomat.

Speaker B: I know, my husband's one of those people. But anyway, that's another subject. Yeah. Um, Roth IRAs versus regular IRAs. Tell us about that.

Speaker A: Sure. So a Roth IRA, you pay taxes before you put the money in, and then you never pay taxes on growth and you never pay taxes on distribution. A traditional IRA or a traditional 401k, you pay taxes. You don't pay taxes when you put it in. So it becomes a tax deduction, then it grows. You don't have to pay any taxes on gross, so any dividends or capital gains or interest. But then when you take the money out, you're paying ordinary income tax.

Speaker B: Right.

Speaker A: So the question is, which do you want? Do you want the tax? Do you want to pay now or do you want to pay later?

Speaker B: Most people want to pay later, and so they put it in a tax deferred, you know, and get the tax deduction. At least that's what I've always done. Um, I'm not sure why anyone would choose a Roth, but.

Speaker A: Because you don't pay taxes in the future. So the question is, if tax rates. If your tax rate is exactly the same today.

Speaker B: Yeah.

Speaker A: And in the future, then it doesn't matter, Right?

Speaker B: Right.

Speaker A: It's a coin flip. But if your tax rate today is higher than your tax rate in the future, then it makes sense to do the traditional ira.

Speaker B: Right.

Speaker A: But if you think your tax rate in the future is going to be higher than your tax rate today, it makes sense to do the Roth.

Speaker B: Yeah.

Speaker A: When we look at Gen now, we don't really know what our own individual tax rate is going to be. I mean, personally, I'm planning on making a lot more money when I'm 65 and 70 than I'm making today. But you know, everybody's got a different story, however.

Speaker B: Mhm.

Speaker A: It's almost, I don't want to use the word inevitable, but let's just say we're under the lowest tax rates we've been in American history.

Speaker B: Yeah. And if this big ugly bill gets passed, then, um, it's going to extend the tax, which is great for many of us. Uh, right.

Speaker A: I mean, you know, it's good if you're a taxpayer, but. Right. But the point is, the question is if somebody's really investing for the long term, and I have my 28 year old, who's not going to take the money out for 30 years. The tax rate. Tax rates are probably going to be higher in the future. That's what we're betting on, right?

Speaker B: Yeah, they're going to have to be.

Speaker A: They're going to have to be. Right. So therefore it makes sense to do the Roth. The other really nice thing about the Roth is that what you see is what you get. Right. People have this thing where they look at their traditional IRAs and their 401ks and they think they have $1 million in there. No, no, you don't have a million dollars in there. You have a million dollars minus ordinary income. So that's like 600,000, 500,000, whatever. Huh. Depending on how much you take each year, depending on what your income tax rate is going to be. So it's like this big surprise that, oh, by the way, I have to pay taxes on that versus the Roth. It's like you got a million bucks in there. You can take out a million bucks, right?

Speaker B: Yeah, I guess it depends on what you think your tax rates are going to be versus what they are.

Speaker A: That's what it depends on. Yeah. Um, you know, there's. But the problem is you can, you know, for really high earners, sometimes people. I say you're a higher earner if you can max your 401k at 23:5. Right. Because that means you're probably making, I don't know, 200 or more or something like that. But what uh, happens when you get up to 2 5, 300, 500 and you're maxing at 235 and you're not eligible for a Roth IRA? Maybe you can do a backdoor Roth with your company. But what if you can? Then we have this amazing thing called variable universal life insurance. It's taxed just like a Roth ira, but there's no income limits, no age withdrawal requirements and no contribution limits. So we do a lot of that for tax planning. Put like big Chunks of money in there for the high earners. That's one thing that Equitable products are really good at. And one of the reasons, you know, I like being with Equitable, among other things.

Speaker B: You anticipated one of my next questions, which was going to be for people who earn their income in big chunks. You know, say they're in a business where they get success fees and when a deal closes or, you know, that's the situation that I would talk about. When a deal closes, they may get, you know, big lump sums in any particular year. And then the question always is, well, you know, if you max out your ira, your SEP IRA or whatever contributions, what other tax shelters, you know, what else can one do with that to shelter those big chunks? Um, you know, other than spending it on vacations and fun things. And one can always renovate their house and do all these things. But, you know, um, what sort of would it be one of those variable. One of those products that you just mentioned?

Speaker A: Yeah. I mean, you're not, you're still paying taxes today. You're still paying income tax, right?

Speaker B: Yeah.

Speaker A: And you know, with your step, you can only deduct so much.

Speaker B: So much. Yeah, yeah.

Speaker A: You, you might be able to do if your business sets it up, a cash bat, something called a cash balance plan, where you can, it's like 230,000 that you can deduct. And so, and that's, that's a pre tax deduction today. It's, uh, called a cat, also called a defined benefit plan.

Speaker B: I see. Yeah. So that's.

Speaker A: But the, the life insurance is all after tax money. So you've already paid taxes.

Speaker B: Right.

Speaker A: And you want to put it in, but you're not, not paying it. Again, just like a Roth, the cash balance is pre tax.

Speaker B: Yeah. Okay. Something to think about. Uh, yeah, because those amounts can be significant and then it's really painful at the end of the year paying the tax. And you. So far I've only figured out how to defer so much. Yeah. Such is life. Any final comments? I mean, I've certainly learned a lot in our conversation and uh, you know, think of a million questions, but you know, any sort of final comments, you know, um, particularly for our audience of CFOs, you know, senior financials, VP finance internally at their companies, any advice either for their personal or when they're managing, perhaps setting up funds or, uh, for their employees. Any advice tips?

Speaker A: Sure. So personally, for personal investing, which is really my expertise, I'd say remember those five words that I wish I found on a Fortune Cookie ask to allocate your risk tolerance. Um, and I write that down and you know, be sure that that risk tolerance is based on a goal and mo. The biggest thing it's going to determine is the time horizon. So if you need money next tomorrow, you know, you're not going to put in the stock market. You need money 30 years from now, that's okay to put in the stock market. So that's one. The other thing is don't believe in forecasts. Right. And I think that's true both for personal investing and investing, you know, if you're the CFO of a company. So, you know, forecast there's a great, I don't think it's Wall Street Journal, but it, it's uh, you know, why do economic forecasters still have jobs? Uh, look at all the Wall street predictions for GDP growth and don't base anything on a macroeconomic prediction or what the macro economy is going to do about what the stock market's going to do. Debatable. If it makes sense to base anything off of what an industry is going to do or projections there. I, you know, I don't, I mean I went to Harvard Business School for two years. I don't believe I remember any type of analysis where you're like, okay, they should do this or they shouldn't do this based on this macroeconomic function. Right? Because there's always people who can make money regardless of the macro environment.

Speaker B: Right.

Speaker A: Um, so I, you know, those projection projections and sometimes, you know, even in meetings I've been into, they'll bring in the economist and I'm like, why are we listening to this person? Like they don't know anything. Sure. They can tell you what happened, but they can't tell you what's going to happen. Um, so just having that awareness, I think. But yet I think one of the behavioral finance things I've learned is why people want that. There's this desire to know the future and a desire for predictions. It's why every single Wall street bank puts out a prediction every year. And they're always all wrong. So just think about that. And those are the best well trained economists in the world.

Speaker B: And they often self, when they're speaking, they often self admit that they're wrong. I mean, I was at the ACG's big M& A West conference this past week. I was speaking on panel across border M and A. Anyway, big keynote speaker at lunchtime was economist from the, what was it, first cit, the bank that bought Silicon Valley bank, the big bank Back.

Speaker A: First citizens.

Speaker B: Yeah, yeah, first citizens. Oh yeah, the room was packed. There must have been, I don't know, 800 people there and people hanging off his every word. But he self admitted that most, that you know, he's wrong, he's going to be wrong, you know, with the forecast. Um, but he was able to sort of analyze things and ask questions about what's happened and you know, what might happen. And you know, people just take a lot of comfort in having the dialogue and you know, it's like all warm and fuzzy, um, with some very pretty, very professional looking charts.

Speaker A: Yeah, yeah.

Speaker B: Anyway, and the wine was good, so I mean, what's not to like?

Speaker A: It's the most important thing.

Speaker B: Yeah. So behavioral finance. So everyone just wants to get that comfort, that feeling, that warm and fuzzy. That economist is going to look in their crystal ball and we're all going to feel good about the next month, year, whatever.

Speaker A: Yeah, I mean one of the books we used in my behavioral finance class was a book called Fooled by Randomness by Nassim Nicholas Taleb, who also wrote a book called the Black Swan, which is a little more famous.

Speaker B: Yes.

Speaker A: But Fooled by Randomness is. He trashes economists like he's like, oh, he calls them like charlatans and entertainers. You know, they're just there to uh, you know, entertain. They don't actually have any money on the line so they have like PhDs and wear suits but you know, they don't. What they say is of no value to actually investing.

Speaker B: Interesting. I think we're all feeling with the uncertainty and what's Trump going to do next with the tariffs and what's he going to get away with next? And I mean we won't even talk about the rule of law and the Supreme Court and all those things. But for someone who's investing, I think if they stick to your principles, asset allocate to risk tolerance, um, whatever. Exactly. That means for each individual, maybe we'll all be okay. I mean I watch the market like a hawk and think how much money I'm making or losing each day, which is crazy. But we just need to feel some more comfort. And um, maybe that is investing more of one's portfolio in bond related investments. But you can lose money in bond funds too.

Speaker A: Yeah, but it's seemingly less than in the stock market. I mean 2022 was the worst year for bonds in American history at negative 13%. And M. It's really unusual. And people are like, oh, 60, 40 is dead. I'm like, for one year, you know, we're talking about a long term time horizon here. It doesn't matter what happens in one year. So that, and that was really unusual. Right. You know, typically bonds aren't going to do that. They're not going to give you the returns of stocks, the high returns, the plus 10%, but you know, they're not going to be going down 20, 30% again. My oldest client, my mother, has 40% of her portfolio in bonds, 50% in annuity, and only 10% in stocks. I'm very comfortable with that.

Speaker B: Mhm. Mhm. I think the annuity is definitely one class that a lot of people simply ignore because it's not talked about as much by, I don't know, perhaps some of the bigger firms.

Speaker A: Yeah, no, they don't sell it. They just want to take your money and manage it and not put it into an annuity. So.

Speaker B: Well, um, any other final words, words of wisdom?

Speaker A: No, I, you know, I'm always happy to chat if anybody wants to reach out and talk about investing, you know,

Speaker B: get in touch with you. Dan, how do.

Speaker A: My email is Daniel Beck, equitable.com Should I put in the chat or.

Speaker B: Yeah, put it in the chat and this is recorded. And then, um, you know, that'll be at least available for people if they want to get in touch with you.

Speaker A: My phone number down too? Yeah. I mean, I love talking about investing like it's what I've spent, I don't know, since I started business school. The last must have been 18 years m learning about. And, and to me it's really about how to make people improve people's futures. Right. I mean, if, you know, make, maybe they can retire a few years earlier, maybe they can send their kids to a different college or maybe they can buy that extra house they wanted to, uh, or maybe they can just have a feeling of security that they didn't have otherwise. So to me, it's really how I'm adding value to people's lives by getting them on the right path and preventing them from making a lot of the dumb mistakes that people make on their own.

Speaker B: Yeah, well, that's for sure. People do make those mistakes. Okay, well, thank you, thank you again for being our guest today. And um, we look forward to a future conversation. Maybe we'll talk again in six months and uh, you know, we can see if any of the advice has changed.

Speaker A: Unlikely. Well, thanks so much, Jan. Thanks for listening to the Strategic CFO. To learn more about FEI Silicon Valley, go to www.feisv.org. you can find our posts on Jan Robertson's LinkedIn or the Financial Executives International Silicon Valley LinkedIn page. We'll see you next week on the Strategic CFO.