Yahoo Finance

Geopolitical uncertainty and market volatility has led to significant increase in concern from investors over the last several weeks. What should those who are saving for or living in retirement do with their money? Well, here to talk with me about that is Brian Walsh. He's the head of advice and financial planning at Sofi Brian, Doctor Money, welcome.Thank you so much for having me today. It's a pleasure. So my pet advice during times like this, Brian, is this. If you have an an investment policy statement, stick to it. And if you don't have an investment policy statement, create one now before it's too late. I'm curious what your thoughts are on this topic as we think about how to deal with volatility.

Yeah, I, I, you know, I think it's interesting because early in my career, I would have 100% said yes, everyone should have an investment policy statement and you should stick to it. Um, you know, but then over the last 6 years, 7 years working at SoFi working more and more with younger people, um, who I guess traditionally have not been served by the financial industry, um, a lot of those people don't have investment policy statements, they're just kind of getting to understand and do the basic parts of investing.Um, so we really kind of switched up a little bit. We said like, OK, during volatility, like, number one, let's set some context and help people understand that volatility is a completely normal part of investing, it's going to happen, it's gonna be much shorter than the upside, um, and it's gonna be much smaller than the upside over a long period of time. So, you know, talking through that.And then really kind of diving into some of the common reasons why, like, humans are wired to, I don't know, feel uncomfortable or make bad decisions, uh, when they're experiencing volatility in the market, um, so that way people don't feel like they're alone, um, and they could really kind of relate to it a little bit as they're figuring out how to, you know, ultimate adjust their investments if they need to.

Right. So I often think that, uh, no one would build a house without a blueprint or by and large they ought not to. Um, do you have a recommendation about what kind of guiding principles or blueprints someone might use other than, hey, volatility happens, get used to it.

Yeah, I mean, I, I guess that's always like we talk to other footage planners like yes, it always happens. Um, what's funny is, this is what I do for a living, and there'll be periods of time, quite frankly, where I do not log into my investment accounts because I hate seeing volatility, uh, and if I see it, I'm tempted to make a decision that I know I probably shouldn't make. Um, so I think the blueprint would be, you always need to make sure that you're investing based on your goal and where you're gonna use your money.Uh, for the most part, we break it down, #1 into like simple 3 buckets, like short term bucket, less than 3 years, like that money should not be invested, period. You know, think like, you know, money market funds, short term bonds, high yield savings. That intermediate term bucket, that's typically 3 to 10 years, that's a mix of stocks and bonds.You know, that's long enough where you can actually deal with volatility. It's not gonna be the end of the world. And then that long term bucket 10+ years, like that's mostly equities. So I think we start with that framework, and then we just take it a step further and say, OK, once we figure out when we're going to use the money and what we're gonna use it for, it's really just about diversifying it to make sure we could smooth out that ride, um, which is actually very similar. I, I lead a Robo advisor product.So I, uh, very similar to the underlying methodology behind how we recommend strategies and then ultimately how we, uh, manage those strategies withinthe portfolios.

Yeah, so I'm fond of telling people to focus on their goal and their time horizon. I'm less concerned, especially when people are young, about their risk tolerance. I'm curious for your thoughts about how young people should think about risk tolerance.

Yeah, yeah, I, I think the biggest thing is you're thinking about risk tolerance is risk tolerance is one thing, risk capacity is a completely different thing. Um, and I talked to, you know, talking to young people, you should be able to tolerate risk, but having the ability to actually withstand the ups and downs, um, is very, very important. So we are talking.On a regular basis, um, about emergency funds, about debt management as a part of someone's overall investment strategy and financial plan, because, you know, let's say if you don't have an emergency fund, or you are struggling with debt.Then it's gonna be something that really forces you to dip into your investment accounts to pay the bills, to pay off high interest debt, even if you don't want to. So you need to have the financial ability to weather ups and downs and deal with uncertainty overall, not just the, I guess the emotional ability to say, hey, yep, I'm totally on board um with some volatility and some risk.

Yeah, so I'm, I'mI often think that the more literate you are about investing, the more able you are to handle this volatility. I'm curious. I often talk to people about like, well, what's the standard deviation of your portfolio? And if you knew that, you would know that maybe there's a band of volatility around your portfolio, and then you could say, well, this is normal, what's happening now, at least 2/3 of the time. I'm curious for your thoughts on how deep someone's knowledge needs to be around like things like standard deviation.

Yeah, I would say like stuff like standard deviation is probably not a huge focus when we're talking with our our members one on one. instead, what we prefer to do is as we're really setting context with things that they actually experienced. So we'll do, you know, like bear market scenarios for, let's say the COVID crash in in 2020, or the Great Recession, and really kind of setting the expectation on the front end and saying like, hey, if you're gonna be aggressive.Which aligns with your goal, your time horizon, your comfort with risk. Like, if 2008 happened all over again, or if 2020 happened all over again, here's the type of drop that you could expect. Now, on the flip side, it's gonna come with higher returns. And I think understanding it using historical examples, from what we've seen.Helps people stick with it a little bit more. Um, so whether you're using standard deviation, some people like that, or you're using more like historical scenario tasks, um, either way, setting context is extremely important, right?

So, Brian, uh, the name of our show is decoding retirement. You, you have your PhD in financial planning. I said the words standard of deviation, but I didn't define them. Would you mind defining it, decoding it for us?

Yeah, I mean the standard deviation is essentially like how much volatility there's gonna be um compared to like the long term, you know, historical averages. um, so it's how much it's gonna move, um, and that that's the, you know, the funny thing like when we're going through talking about like standard deviation, you know, beta, correlation, all this other stuff that like I think about like I think is pretty interesting, um.For the most part, whenever I use those terms and I'm talking to someone one on one, or even if I'm giving like a webinar, uh, I'm like, oh man, I kind of messed up because I'll look at I'll do a Zoom meeting with someone and I'll see their kind of eyes blaze over. They just don't tend to understand those types of terms.Um, so we really look to like say, OK, how do we make this as relatable as possible?

Yeah, I'm a, I'm a fan of the storytelling principles. So Brian, um, here at Decoding Retirement, we have a keen interest in behavioral finance. We've had Doctor Charles, uh, Chafin on, formerly with the CFP board, and, uh, you, uh, I'm interested in how your interest in behavioral finance began.

Yeah, so I mean, first of all, Doctor Chafin is absolutely amazing, um, huge fan of his, uh, since I saw him present at a class of mine first year of my PhD program. Um, you know, really my interest began going back to like a couple of years out of graduating undergrad. I was a finance major, and like I looked up and I'm like,Holy crap. I have credit card debt. I'm not doing a great job savings, like, basically all the things that you could make, you know, do wrong in your finances. I made those decisions, and I'm like, man, I really should know better. Like, as a finance major, I understand how this all works.And through that journey, I realized that so much of it comes from your relationship with money, and ultimately the underlying money habits and beliefs that you have, not necessarily just what you know. Um, that led me into, you know, really understanding like, hey, how do people make decisions? How can people overcome some natural biases that they have, because if it affected me, and I'm should have known everything to do right, um, like, how does itaffect everyone else?

Yeah. So how does behavioral sciences, behavioral finance affect someone's decision making? Is it, is it because of the biases that they may have?

Yeah, I think, you know, part of it is yet, yes, people we talked about investing in volatility, you know, a minute ago. People naturally are gonna have different biases that affect their decision making with investing. So, for example, loss aversion.Naturally, um, it's gonna be more painful to lose the same amount of money as it is to gain the same amount of money, you know, people also have hindsight bias where when something happens, even though it was completely unpredictable, um, they'll feel like they should have known, like COVID, for example, oh, I should have after the first case in China or whatever, I should have sold out before it came to the US and I would have, you know, made, you know, profited a ton of money.Um, or even confirmation bias, like people are naturally looking to have a good story to tell, whether it's the right story or the wrong story, they want a story that is consistent. So when they go online, they see things that, you know, they believe, then it just reinforces those beliefs. Yeah. So we're wired to just kind of make decisions a certain way, um, which is really interesting and how we kind ofCome to grips with that, and how do we overcome that? Whether it be through kind of taking a step back and thinking through things or leveraging technology and automation, like there's different ways to do it, but I think it's just fascinating to think about how we're wired just naturally impacts ourdecision making.

Yeah, so speaking of how you're wired, have you done some work around personal financial personality traits and types? Is there things that people need to know about how they think about money?

Yeah, so, um, realistically though, the ones that I've really kind of looked at, um, is, um, gosh, I forgot what book it's in. It's in a great book where it talks about how there's basically at a high level there's 4 money personalities.Um, where if you look at there's like money status, money worship, money vigilance, um, and it kind of looks at it and says, OK, our beliefs and our relationship with money are developed by the time we're 678 years old, and they're going to carry forward with us and really kind of be the collection of our biases and our views of the world. And none of these are good or bad, it's just how we are gonna naturally um approach things.And just being aware of it, um, for example,I took a money personality assessment um in my mid-twenties, in the late twenties, and I have a money avoidance personality type. Now, I'm a financial planner, I have a PhD in financial planning, like, you would think that would not be a personality type for someone in the personal finance industry, but when I looked at it, it made sense because growing up, the only time my family talked about money was like when there wasn't any, or there was an argument.So I just had a very negative relationship thinking or talking about money, that carried on in my twenties where essentially, you know, I would get bills, I would ignore them cause I didn't want to think about it, um, and just different things like that and really overcoming it, I put my wife in charge of our day to day finances, like, big plans we do together, she's in charge of the finances day to day, and we automate everything to kind of overcome.My natural inclination to say, hey, I don't want to think about this stuff.

Yeah. Brian, we have to take a short break, but when we come back, I want to talk about technology's role in financial planning, so don't go away, we'll be right back.Welcome back to Decoding Retirement. I'm speaking with Brian Walsh. He's the head of advice and financial planning at SOFI. Brian, before we left for the break, uh, I said that I wanted to talk more about technology's role in personal finance. You mentioned the word automation at one point before we took our break, and I'm curious about how folks might use AI and technology to automate good financial habits. But before you answer that,I just want to let you know that every now and then I go on Kits.com, where he has a uh a PDF of all the fintech that's available for financial advisors to use and it's overwhelming how much is out there that can help at least the advisor community help their clients with um, with their money. But curious about what we can do to help average people who may not have access to an advisor.

Yeah, and I, I, I love that you threw that out there cause that's actually one of my, my favorite tools just to stay up to date on all the new companies and everything. Um, you know, I think the way companies are integrating technology into the overall experience is really going to provide an unprecedented opportunity, um, for everyday people to just make better financial decisions, um.You know, when I think about digital money management tools, whether it be related to budgeting or debt management, or investing, or, you know, saving for specific goals, it essentially allows people to understand their next best action.Exactly how to implement that action, and then ultimately, in a, in a perfect world, automate that action so that way they can make a decision once, and then reap the rewards on an ongoing basis. And I think once that's fully incorporated into major financial institutions, um, I think it'll have an extremely positive impact on people's finances becauseTakes the decision making out of a lot of this. It takes the buried entry of having a certain amount of money or being willing to pay a certain amount per month or per year to meet with a financial planner, takes it out of the equation and just opens the doors, um, for, you know, everyday people to have access tothis.

Right? Uh, you mentioned Robovice in our first segment, Brian.And, uh, um, in many ways, to me, Robo advice is the precursor to AI. I'm, I'm curious, what role does AI play in the future of people's building better money habits?

Yeah, I think, you know, a lot of times Robo advisors, I, I almost kind of like, I cringe a little bit, the fact that robo advisors were called robo advisors to begin with, because it really is like robo investment management, like an advisor is going to provide insights on way more than just investments. So Roe advisors, yes, it's a simple and easy way to say, here's what I'm saving for, answer some other questions.And then you get a recommendation on how the money should be managed and it's managed on an ongoing basis. It's essentially gonna be, OK, an investment manager for the masses and it's cheaper and it's delivered through technology. I think we're getting to the point now where we can start doing the same thing and actually have robofinancial planning.Um, where we can uncover opportunities related to people's debt, to their spending, to their saving, to their, I don't know, protection for their insurance planning, surface those insights, make them aware of the opportunity, weigh the pros and the cons of making a decision, and then show them exactly how to make that decision. Um, I think some things that we're doing so far right now.We're able to surface insights based on underlying data and say, OK, this could benefit you, related to your finances, and here's how, um, just has a profound effect on people rather than expecting them to, I don't know, read articles or go online and figure it out completely for themselves, um, how to make that decision.

Yeah.Uh, we shouldn't rule out that they should watch podcasts like this to help them at least get from a street level or curbside perhaps just uh job security here, right? Uh,

a higherlike, I think that's, you know, financial literacy still is important, and understanding having that knowledge is very, very important because ultimately what happens is when something gets put in front of you, whether it's a recommendation in an app, whether it's something you see on social media or you hear.The ability to understand and process that is all based on your financial knowledge. So the greater your financial knowledge, the better you're gonna be able to say, OK, is this the right thing for me, or is the right thing for someone else? and how do I actually get take and apply this?

Yeah. So I, I want you to address some of the pitfalls of digital financial tools, but before you do, I want to give you this example. I have a friend that used AI toHelp them figure out how to do Roth IRA conversions and it spit out a table that said you should do this amount in this year and this amount in the following year and this amount in the year after that and so on and so forth. I have no idea whether I AI told him the right amounts in the right years, etc. but it certainly was an interesting exercise to think I might be able to use AI to help me figure out my Roth IRA conversion timetable.

Yeah, and I think, you know, just thinking about like AI being a silver bullet where it's like, OK, someone's gonna type in I I don't know if I'm allowed to name maybe they're gonna type in a question and AI is gonna absolutely nail it and give them the exact right answer. From what I, what I've seen anything that'sI don't know, somewhat complex and not just straightforward and basic. It's not quite there yet. I think AI will be there, and maybe AI combined, um, you know, with, I don't know, maybe a decision tree framework or things like that, will get it there, um, but I think even before that, just being able to surface insights, like you think with budgeting. OK, you're tracking your spending, and it just serves us as, hey.You know what, you have this recurring expense, this subscription service. Are you still using it? Like being able to surface those types of things with technology is something that's around right now. It's very, very effective, and it can be very helpfulfor people.

Oftentimes young adults are faced with work-life balance issues, and uh, oftentimes when you're young, your biggest asset is your human capital, right, your future earnings.And, and yet for people who want to maybe weigh the life versus the work in the balance, they may be giving up some of their human capital. I'm curious how you, uh, teach people, young people about thinking about work-life balance.

Yeah, you know, it's it's I, I have younger siblings, so I, I've had this conversation. Um, in my opinion, like when you're young, it is the time to grind and invest in yourself. It's time to, whether it be education, whether it be promotions, whether it be new skills, whatever it may be, it is the perfect opportunity to develop yourself for the future.Because I can tell you with firsthand experience, I have a 5 and a 7 year old. Once kids come into the picture, your time is much more limited. Um, and honestly, time can either be your best friend or your worst enemy. If you use it wisely, just like if you invest early, compound and returns are your best friend.If you delay, just like with investing, and you just put things off, then time becomes your worst enemy because you gotta squeeze things in so late in such few years. So I think it's, it's really important for people to get after it early on, um, and kind of put the whole enjoyment and and experience type thing, um, to the background a littlebit.

Right, so uh don't sign up for the box lacrosse League perhaps is that your advice? And and maybe go get a.

I think hobbies are important, um, and it's important to have an outlet, like when I was young, I played rugby as my outlet, um, you know, now I build Lego sets because they're a lot more time efficient and easier on my body. Um, but I think it's different having a hobby versus saying like, OK, I want something to where I'm gonna leave the office at 4 o'clock every day, or I'm 22 years old, 23 years old, and I'm gonna work from home to start my career instead of being in the office.Or I want to go on a sabbatical around the world, um, after working for 2 or 3 years. I think those type of things would be what I would, um, I guess encourage not doing, um, so that way you can invest to grow your career and your human capital as early aspossible. All right,

so another trend that's affecting young adults would be some of the current economic trends. Uh, I have children, for instance, who are saving for a house, but, uh, housing prices keep rising, mortgage rates are.Uh, a high as well, and so they're forever trying to save, uh, for a down payment to afford to buy a house. Um, talk about some of these challenges that first time home buyers are facing and what they can do to maybe achieve their dreams of buying and owning a home.

Yeah, I think number one, people should really understand that renting is not a bad thing, quite frankly. Like, for some situations, renting is actually a better financial decision than buying a home or buying a condo or a townhouse, whatever it may be. It's really important to think about, OK, where am I gonna live? How long am I gonna live there?How is this gonna fit in my overall budget? Because working with young professionals over the course of the last 67 years, the two things that really blow up someone's budget and lead to really, really tough circumstances are how much they spend on housing and transportation, and people who generally spendWithin reason and are, you know, more on the frugal side of things, but those two items typically have a ton of flexibility and a ton of optionality to save for their goals, to make changes in their careers, to take risks. People who overspend in those two areas.are typically the people who are one unfortunate event away from being 50 to $75,000 in personal loan or credit card debt. So I think it's very important to understand, hey, here's how I do it responsibly, here's how I work backwards from my budget, to find my purchase price, and then be patient rather than rushing into it and taking on excess risk.

Brian, I'm afraid that we've run out of time. I want to really thank you for sharing all your knowledge and wisdom with us today. It's uh so greatly appreciated. Thank you.

Yeah, thank you so much for having me.

So that's it for this edition of Decoding Retirement. We hope we provided you with some actual advice to help you plan for or live in retirement. And don't forget, for the latest financial news and retirement news, check out yahoo Finance.com.

This content was not intended to be financial advice and should not be used as a substitute for professional financial services.