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Yes, There Can Be TOO Conservative! | Series 6.5
Episode 531st January 2022 • Enjoy More 30s: Family Finance • Joseph P. Okaly
00:00:00 00:11:51

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When to be more conservative, when to be more aggressive, and how to do so in a more balanced spread out way.

  • Paying yourself first and separating out your goals is all well and good but if you're using inappropriate types of investments for certain goals, they may take much longer to achieve or even worse, perhaps you may never achieve them at all. (01:41)
  • Sure, we don't want to be reckless in the ocean and sink to the bottom of the sea but at the end of the day, we also have to get to where we're going before we run out of food and supplies. (02:50)
  • Using a bank or cash type savings vehicles for goals that are for 5, 10, 20, 30 years out is almost certainly not appropriate. (03:40)

Quote for the episode: "It's so important to be using the right bucket for the right goal and the right risk tolerance for the right timeline." (06:26)

Securities offered through TFS Securities, Inc., and Advisory Services through TFS Advisory Services, an SEC Registered Investment Advisor Member FINRA/SIPC. TFS Securities, Inc., is located at 437 Newman Springs Road, Lincroft, NJ 07738 (732) 758-9300.

Transcripts

Voiceover Audio:

Welcome to the EnjoyMore30s Family Finance

Voiceover Audio:

podcast. The only podcast dedicated to making life more

Voiceover Audio:

enjoyable for young families by hitting on the financial topics

Voiceover Audio:

that tend to weigh on us, stress us out, and distract our focus

Voiceover Audio:

from simply enjoying life.

Joseph Okaly:

Hello, and welcome once again to the EnjoyMore30s

Joseph Okaly:

Family Finance podcast. Every week I'm here talking to you

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about money because I want you to be able to take steps

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forward, gain some kind of confidence and therefore remove

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that financial anxiety so you can really just focus on making

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your life and the life of your family more enjoyable. This

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series is all about the new year and the new you. So Setting Your

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Compass for the New Year is a great title right? As always, if

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you do like what you're hearing, please I ask always to

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subscribe, follow us on Apple podcasts, wherever you listen.

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When you click those stars, when you leave those reviews, it

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really helps us reach other people out there just like you.

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So far this season, we've covered setting your compass

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with your spouse, so joint goal setting, then we discussed the

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importance of actually paying yourself first, giving some of

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that money that you worked really hard for every day to

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yourself to reach those goals that you've set. And then we

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covered bucketing your goals. So setting separate accounts for

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each goal you you have because we want you to be able to easily

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track easily achieve them. And finally, last week, we cover one

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of my favorite topics money blocking, which is setting funds

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aside ahead of time to make sure you do more of those daily

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things massages, Starbucks, going out to eat, that make you

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happy. So if you've missed any of those episodes yet,

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definitely check them out soon.

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Today's episode is titled Yes, There Can Be TOO Conservative!,

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where we're going to cover how paying yourself first and

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separating out your goals is you know, all well and good but if

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you're using inappropriate types of investments for certain

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goals, they may take much longer to achieve or even worse,

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perhaps you may never achieve them at all. The goal for

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today's episode is to better understand when to be more

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conservative, and when to be more aggressive, and how to do

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so in a more balanced spread out kind of a way.

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Now the word investments isn't exactly soothing to most people.

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If you hook somebody up to an anxiety machine, and you said

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the word investments, I'm guessing that there'd be some

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kind of thing that registered on that anxiety scale. It's not

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exactly a word that's used in a lot of bedtime stories. It makes

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people a little uncomfortable, even scared to some degree. I

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mean, anything that's associated with a potential to lose money,

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and not fully understand perhaps even why it happened, it's

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unsettling. That's completely understandable. So when we built

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this ship that we've been trying to build this whole season, to

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sail out towards our goals, there can be more of a better

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safe than sorry kind of mentality that develops. Sure,

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we don't want to be reckless in the ocean and sink to the bottom

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of the sea but at the end of the day, we also have to get to

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where we're going before we run out of food and supplies. So

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there's a balance that we have to hit. And that's why the

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previous bucketing episode is so important, because you are

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arranging your accounts to where you can invest each more

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appropriately for their individual time horizons. If

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you're saving for retirement, and the car you're buying next

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year, and the second house you want five years from now and the

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daughter's wedding, and you're using one account to do all of

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that it can't possibly be appropriately invested for all

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Money that you need in the next one to three years, yes, that

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should likely be invested in a bank type of account. Almost no

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growth, but no loss of what they call principle, which is a fancy

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way of saying the money you put in yourself already. Outside of

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that, though, using a bank or cash type savings vehicles for

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goals that are for 5, 10, 20, 30 years out is almost certainly

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not appropriate. This is where we've run into people being too

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conservative. We have had multiple clients that have come

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to us when they're about to retire and they say, you know,

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"why do I have so much less saved than my co workers? We

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started at the same time, we put in the same amount and they have

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just 2, 3, 4 times more than I do". And so we look at their

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statement. And what we find is that it's all invested in what

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they call a stable value fund. That sounds great, right? It's

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stable, it's got value, that's a great fit for where I want to

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put my money. But it's really just a fancy way of saying

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sitting in cash earning almost nothing. They use the completely

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wrong vehicle for trying to accumulate assets for retirement

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over that last 30 year period. So let's say to illustrate this

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point, we look at two people that are saving $500 a month

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right now as an example. One person is invested say

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moderately, and let's say that moderate comes out to a 7%

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return and another person is invested basically in a cash

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type account, and they receive just 1% long term. After five

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years, it's a little bit of a difference $5,000. $35,000

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accumulated verse 30. After 10 years, it's now over $20,000

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difference. After 20 years, it's now over $120,000 difference. So

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you see that big jump. Finally, at 30 years, it goes to over a

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$400,000 difference. $610,000 vs $210,000. Stable value vs being

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invested appropriately, I would say, for the last 30 years for

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that long term retirement goal. So too conservative can often

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mean not hitting your goals or certainly hitting them a lot

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more slowly than you otherwise should have.

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Now there's a big difference between 7% and 1%, right? So

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let's look at this another way. Now instead of 7% vs 1%, let's

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look at 7% vs 9%. So much less of a spread. So potentially what

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a moderate account versus let's say a very aggressive account

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may have as a long term difference. Again, after five

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years, not too much of a difference $37,000 vs $35,000.

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After 10 years, up to a $10,000 difference. After 20 years up to

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a $70,000 difference. Now, again, you saw that jump not as

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much, but still a little bit of a jump. And then lastly, after

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30 years, it goes all the way up though now to a $300,000

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difference. $915,000 vs $610,000, just like before. So

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even a few percentage points, long term can add up

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significantly. And that's why it's so important to be using

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the right bucket for the right goal. And the right risk

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tolerance for the right timeline. Too conservative can

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also then mean using say moderate for a 30 year time

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horizon, assuming that they can emotionally handle the

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aggressive portfolio that would have been more appropriate, or

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at least working with someone so they could get educated to be

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comfortable to that point.

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The other point to take away here is why it's important to

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use that bank account for your short term goals. You can see

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after five years, there's not too much of a difference for any

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of these scenarios, or either of those scenarios, I should say

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that we just went through. So again, if it's just a two year

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or three year kind of a thing, it's probably better to have

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that money in cash, because there's not that much of a

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difference in the interest overall and if the market

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happens to drop, you, you don't want to lose, say 20% of what

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you might have, depending on how you're invested, and not have

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that money for the car, have that money for the wedding, or

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have that money for the house, if they're occurring in the

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short term.

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The thing overall with investments is that those that

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are spread out are a diversified, meaning again,

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that's a fancy way to say that they're more balanced, because

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they have a lot of different pieces to them. So let's say

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some smaller companies, some larger companies, maybe some US

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companies, some foreign companies and bonds, which may

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initially sound intimidating, but can actually easily be

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obtained through what they call an allocation fund that I've

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discussed before. So pretty much every major investment company

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out there that you know, that you see has these allocation

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funds now. So if you are using a diversified strategy, maybe

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through an allocation fund, or if you're working with an

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advisor, they might have their own diversified program, then

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the thing with investments is that time is the most important

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factor. So you don't really you don't need to know any of that

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other small company, large company, you don't need to know

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all those things. You just need to remember, hey, I want to be

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spread out, I don't want all my eggs in one basket with how I'm

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invested. And hey, if I'm not using an advisor, I can use an

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allocation fund to help spread that money out. Or I can find an

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advisor that actually does that and they could do it for me.

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So let's get back to the last point in there as well, which is

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time and how that's the most important factor. If we look at

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the S&P 500, which you probably heard that said before the S&P

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500 did this or did that. This is essentially just a blend of

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the 500 largest US companies. So not exactly what I would say is

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overly diversified but what you hear the grumpy guy on TV

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referring to as 'the market'. You can quickly see the

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importance of time when it comes to investments. Over the last 91

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years and the most recent data I could find ended 2018, so almost

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the last 91 years as of today, but you'll still get the same

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point, there was a 73% chance that any one year in there for

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the last 91 years ending 2018 would be positive. So if you go

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out to three years, you get to an 83 chance 83% chance, excuse

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me of being positive. If you go out to five years, it goes all

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the way up to 87%. 10 years is all the way up to 94%. And

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again, this is just for the S&P 500 which is not necessarily

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certainly in my opinion, the most diversified way you can be

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building out a portfolio.

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So there are a couple main takeaways and we covered a lot

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today. So let's circle back to the goal of this episode. The

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goal is to better understand when to be more conservative,

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when to be more aggressive, and how to do so in a more balanced

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spread out way. That's it. So if you look at your different

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goals, you can spread them out into different accounts, those

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different buckets you've hopefully set up, and see when

you're going to use it:

1 year, 5 years, 25 years, and then

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structure how conservative or aggressive again in a

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diversified balanced way, either through maybe an allocation

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fund, or speaking directly with an advisor to help you. The

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investments should be in each one of those accounts.

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So thanks for tuning in today. As always and join us for next

you're going to use it:

week's episode called Insure for Catastrophe, Not Inconvenience!

you're going to use it:

for sure on this one, where we're going to cover the

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mentality that I would recommend when looking at which pieces of

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this trip we're designing are the most important to insure.

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Overall if you're able to implement what we cover today,

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then that is fantastic. As always, you have less to worry

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about them before get focus more on enjoying life. If you are

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wanting help with these things or you have questions, you need

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things to be clarified, just check out the ASK JOE section on

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the show's website, EnjoyMore30s.com. That's

you're going to use it:

EnjoyMore30s.com. Until next week. Thanks for joining me

you're going to use it:

today and I look forward to connecting with you again soon.

Voiceover Audio:

The conversations on this show are

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Joe's opinions and provided for general information purposes

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only. They do not constitute accounting, legal, tax, or other

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professional advice for your specific situation. You should

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always seek appropriate advice from a financial advisor,

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accountant, lawyer, or other professional before acting upon

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any content or information found here first. Joe is affiliated

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with New Horizons Wealth Management LLC, a branch office

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of TFS Securities, Inc., and TFS Advisory Services an SEC

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Registered Investment Advisor Member FINRA/SIPC.

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