Does it sound familiar to assume everything will go as planned, only to find yourself in a risky situation without a safety net? The pain of not preparing for potential risks can lead to devastating outcomes, leaving you feeling unprepared and vulnerable.

In this episode:

• Examine how Chiefs overtime scenario preparation fueled the big win.
• Prepare for risks and gain insights on the importance of planning for financial security.
• Understand the volatility of cryptocurrency and the risk of an unbalanced portfolio.
• Consider the NBA draft deadline and the parallels between building a team roster and building a diversified investment portfolio.

Cryptocurrency and IPO volatility

The volatility of cryptocurrency and IPOs takes center stage in this episode. The hosts elaborate on the inherent risks and the need for careful consideration before investing, emphasizing the importance of diversification. Drawing parallels with risk management, unpredictable outcomes in such high-stakes games underscore the necessity of well-rounded preparation and strategy, mirroring the approach needed in investing.

Relevant Resources:

https://www.nasdaq.com/articles/what-happens-to-ipos-over-the-long-run-2021-04-15

https://theathletic.com/5272695/2024/02/13/super-bowl-gambling-nevada-record/

Important Disclosures

*Morton Brown is neither a law firm nor a certified public accounting firm. No presentation, post, or portion of any podcast content should be construed as legal or accounting advice.

Connect with Your Hosts:

Cody Demmel on LinkedIn

Sean Roth on LinkedIn

Jon Kerstetter on LinkedIn

Welcome to coachable wealth, where we blend the worlds of sports and finance to bring you strategies as you navigate your wealth building journey. John, Cody and Sean are here to help you elevate your financial advisor relationship to meet your long term goals. Now let's get to it. Speaking the Super bowl, the halftime performance I thought was pretty good. I think it's amazing how Usher is so generational.

It's more of our generation. People currently in their. Beyond that, they're well aware who usher is, but anybody who has children, their children have no idea who usher is. So I thought that was kind of interesting just to show that little gap between ages there and kind of who's popular now, obviously, Tara Swift versus Usher, who was 20 years ago. Yeah, no, that's a good point.

I know Courtney was hoping that he was going to bring out Justin Bieber. That's right, John. I was actually a proud owner of probably about 1314 years old of the confessions part two album back in the day. That's funny. But I guess both of you picked the Chiefs last week and I'll be the one to eat my words.

And I really thought the Niners were going to almost, I was almost assuming a blowout. I thought all the Chiefs hype was going to come crashing down. But maybe you can blame it on the NFL script or the 49 ers just having a bad day and some costly mistakes. The Chiefs more so Patrick Mahomes almost looks like the next Michael Jordan. Tiger woods of another sport.

Yeah, no, it was definitely an interesting game. I mean, the 49 ers obviously had good control of the game in the first half and then kind of the same thing that happened to the Eagles last year. The Chiefs came back and won it in the second half. I don't ever remember an overtime game prior to this in the Super Bowl. I think they said there was one other one, Cody.

I don't know the exact year, but I believe they said this was the second all time. Okay. Yeah, I saw that. There was some news that the Chiefs players knew what the new overtime rules were in the Super bowl, but the 49 ers players didn't, which is obviously always interesting. A great point there, of just being prepared for any situation.

Obviously you're in the Super bowl. You don't automatically assume it's going to go to overtime as a player or any game. You have no idea where the game can go. But how do you not go over those rules and plan for every scenario? You may never make it back to another Super bowl.

You may never have another chance it's so hard. And to think, wow, we could have just spent a half an hour, an hour going over the overtime rules. That would leave a lot on the table for me as a player and as a coach because it's so hard to get back. Yeah, no, that's a really good point. Is being prepared because obviously there's going to be uncertainty with everything, but especially a huge game or moment like that, making sure that you understand all the potential, different changes is always important.

So I heard Mahomes and Andy Reid both say it post game. Now, I don't know how accurate this is, but they both said that they practiced overtime situations in otas back in the spring and in the offseason they actually went through like simulations of, hey, what could happen if we got to this point? And I guess any game just kind of how to handle those pressure.

I mean, that's kind of coming from your world. John, the planning side, I mean, I'm sure you see it all the time. Not that we have clients that are playing for the Super bowl, but there's certainly other things going on that if you don't plan for it, you may not get the desired outcome and it simply could have been avoided a couple of years, a couple of months in advance. Just going through some various scenarios of what could happen on the planning side. A lot of it is risk mitigation.

We can kind of plant the seed for different risks in the future or long term events that happen at some point out a couple of years, 510 years. But I feel like if we can kind of potentially plan for those risks a little bit, we can help mitigate that situation in the long run. Yeah, that's a good point. I know this year was, again another record with money bet on the Super bowl, both for, well, this was the first year was in Las Vegas. So I saw the amount bet in Las Vegas was like 186,000,000.

But then obviously sports books are pretty legal across the country where you can just bet from your house. But I think that they were trying to do estimates and I think they said that it's going to come out later this week on how much was bet. But I think they were saying total, probably over a billion dollars was bet on the Super Bowl. I actually saw if you take in all of the wagers with the game, and then if you factor in the prop bets, the ones like, hey, what color Gatorade are they going to dump in Andy Reid if he won the Super bowl or who's going to win the coin toss? Stuff like that I think they said the total was going to be around like 23 billion.

Oh, my gosh. If you factor in everything, it was going to be an all time high. That's crazy. And I guess that's probably like all the square games that people do at different parties and tying all that. Yep.

But I think it goes back to, as you were saying, john, is risk are always going to come up. It's just making sure you have planned for that or at least planned for it a little bit and then talking through, are there ways to potentially reduce the risk for you going forward? And there's smart risk that you can take and there's unnecessary risk that you can take, too. So I think tying it back to football, for an example, smart risk would be going forward on fourth and one, fourth and two, but a dumb risk or unnecessary maybe like going forward on fourth and ten or something like that. Thinking back to that last play in the Super Bowl, I think I saw there was, what, 123,000,000 viewers worldwide watching that game, just that single play, just how comfortable Mahomes was and confident to make that.

And I did hear that that play call was almost identical to the one they beat the Eagles with last year. Perfect. Bring back sore memories. But just talking about a pressure situation and the risk of one play call could be winning at a third Super bowl versus losing. Yeah.

Yeah. And John, there's a couple of things you touched on, know, one from a coaching perspective and the other from an advising perspective, which is as I have more and more years of both under my belt become much more know, not everything needs to be brand new, flashy and fancy. Sometimes going with what you know best and what you do best is always going to work. So a lot of teams, or even, for example, in high school football, a lot of parents, why didn't you draw this up at halftime? Well, let's break it down.

Well, let's draw up a play that we've never practiced, we've never ran, and let's install it in a 15 minutes halftime in a locker room that probably doesn't even have a whiteboard. Right. And if the NFL players are, when the game is on the line, going to things that they do very well, and they've probably run that play or a variation of that play 10,000 times and they've used it to win two Super Bowls back to back without completely going off the reservation. And that's so similar to what we do is as new situations arise, yes, we are often going to adjust, make some changes, but a lot of times we're just running, to paraphrase, we're running the same play out of a different formation or adding some window dressing to it. That's a very good play.

And I mean, tying it back to the investing side, which is a huge portion of what we do as financial advisors in 2021, probably beginning of 2021, we should say very little people talked about cryptocurrency. But then at the end of 2021, when crypto got the all time highs, we had conversations all the time with people wanting to go into cryptocurrency. Well, then we had 2022 come in where crypto completely tanked. And now very little people ever bring up cryptocurrency to us. And I think it's the same when you have, like, ipos in the stock market.

So when a company goes public, maybe somebody wants to invest inside of that. But I was looking up some numbers this morning out of the ipos over the last 50 years. Three years after they go public, 70% of those are underperforming the market by an average of 10% a year. So as John was saying, just throwing in some flashy thing, most likely over the long term, doesn't make the most sense. But talking with your advisor, whether you want to go inside of the magnificent seven right now, but making sure you talk through some of those over concentrated positions, just sticking with the IPO, I guess risks for a little bit here.

Do you think that three year window, do you think that's just because that initial valuation is just so hard to, I guess, valuate? I know they're basing it on cash flows and assuming them x amount of years out, but it just seems that up front, a lot of them are just valued a little too high. Too low? Yeah, I think it goes back to that. Obviously, some ipos are very successful.

I think the article that I was looking at said like 10% of them vastly outperformed the market, but then the other 90% pretty much underperformed the market. It was an average of 70% of them completely underperform over a three year time frame, but the others were pretty much just in line. So unless you're going to capitalize on the one that has the vast outperformance, most likely it's probably not a good investment. And I think it goes back to right now, everybody talking about the top seven stocks in the S and P 500 or the Nasdaq. So Apple, Amazon, Google, Nvidia, Tesla, I think almost all of them are still not back to all time highs.

Besides Nvidia so in 2022, I think the average return for all of them was negative, like 50%. Last year it was over 100%. But majority of that was because Navidea was up like 200 300% last year. But a lot of them are still not even back to their all time highs. Like Tesla, for an example, is still off almost 50% from its all time highs.

And again, not saying that don't have an investment there, but it's making sure that you have the right investment there because obviously if you're buying SP 500, those are going to be majority of the stocks inside of it. I think it's what, up to like 40% now. So you definitely have an allocation there, but it's just not making sure you're over concentrated in certain positions. It's not just for those either. We were talking a little bit earlier about stock options.

Yeah, that goes back to the old saying, diversification can be your best friend or your worst friend. Right. If you were 100% in Navidea last year, you certainly had a great year, but if you were 100% of something else, you could have had a really bad. Is it all depends on every situation. I know everyone has a different plan.

Yep. Don't you think too, like the magnificent seven? Turn on Fox Business News or CNBC or go in the Wall Street Journal. These are kind of the first names that you hear. And I think it's kind of what the general investor knows.

I think they see the apples, they see the Microsoft, the Amazon, the Tesla, the Navidea. And I think they contribute to their. They just put it into a large cap growth stock and hey, we'll revisit in 20 years and hopefully it goes up. It's kind of that unknown. But the more that we can have those conversations with a client about diversification, about not over concentrating specific holdings, stuff like that, I think it's the better off that the long term goals are going to be met.

Yeah, no, that's a good point. And I think it goes back to taking risks. Over the long term is a good thing. If you're not taking risks, just being invested in the stock market is taking a risk. But if you're just looking at a one year or six month time horizon, making sure that you're allocated correctly is one of the most important things.

But over the long haul, taking some of those more aggressive risks, like if you're looking 1020 years out and if you want to have a higher allocation to some of those growth stocks, it may be perfectly fine. But just making sure you're talking to your financial advisor and making sure you understand the risk to that, that it's very possible you're going to have years like 2022, where you're down 50%, but then you could have other years like last year, 2023, where you're up almost 100% in some of those concentrated positions. I guess the big proponent now is we hit all time highs in the SP. And like Cody said, some of the individual stocks are still not at back to their all time highs. But I guess potentially to hit new highs, I guess in 2024, we need to have the market broaden a little bit, kind of look at some of those other sectors that are currently lagging a little bit, and hopefully they pick up some steam and fill the gap of maybe potential little lesser growth than the magnificent seven.

Yeah, no, that's a good .1 of the major things still, and it's going to be continued for this year, is where the inflation numbers are. And when the Fed actually does cut interest rates, because just a couple of weeks ago, pretty much a lot of the market expected Fed to potentially cut in March. Well, now they pretty much said they're definitely not cutting in March. And there was actually an article yesterday that Citigroup said the Fed may raise rates again. So again, just making sure that you have the allocation that makes sense for you.

Did you guys see, I don't know if it was CNBC who went around and asked the players in the Super bowl what their opinions on the Fed and the interest rates were. I think I saw some of that. There was one guy, a chiefs wide receiver who I believe went to Penn at the Wharton school, and he had a pretty good answer. All the other answers, some of them were good, some of them were funny, but it was interesting. I've never seen that before.

That's funny. I don't think I have either, I guess. What was the other common topic at the super. Oh, shrinkflation. I know there was a commercial about that, but just kind of how higher inflation is kind of keeping prices the same or high, but the product is just becoming smaller.

I know it's specifically going on in the, I guess the food and restaurant side. Have you guys personally seen that at all, going out to eat or grocery store? I'd say. I'd certainly seen that at the grocery store. I mean, things that went up a few years ago and you expect to come down just haven't, whether it be eggs or cheese or bread, they never did come back down.

Yeah, I don't think we'll ever see deflation, where the actual prices go back down. But hopefully the inflation numbers continue to come down even though they are a little higher than the 2% target the fed wants. But still being back down to 3% is a lot better than where we were just 18 months ago when we were up close to 9%. Right. I was just thinking, too, Cody.

You were talking about the ipos and thinking about the crypto side. I think it has kind of cooled off a little bit. I know people are still, the inflows are still pretty high, and I know Fidelity's blackrocks. I think Vanguard, too, they came out with some crypto etfs, so I think there's a lot of flows into those. But just think about the risks.

It's kind of going into the unknown world. There's no regulation, there's no transparency. It's kind of investing in the unknown. Yeah. It's still interesting to see what they're going to categorize the investments as.

Is it a currency or is it an actual physical investment? And I guess maybe it depends on what cryptocurrency you're investing in, but, yeah, that's obviously still a very volatile position to have from the advisor side. Do you guys get a lot of questions about crypto anymore or ipos? No. So, as I said a little earlier, in 2021, I feel like probably got a question, maybe one every four client conversations.

I honestly cannot remember the last time a client brought up cryptocurrency. It's probably been since 2021. Most people weren't interested in investing in it. I think everyone just kind of wanted to know, what is this, and should I be aware of it? I had very few clients who were, oh, I want to dump some money into this.

Yeah. So tying it back into some other unnecessary risk or taking some good risks. The basketball trade deadline for NBA, some of the teams were trying to make some trades, get their teams better for the postseason coming up in a couple of months. They know what their potential end of season is. So if they're going to make the playoffs, maybe they'd be a little more aggressive to try to pick up one piece.

But if they're not, maybe they're shipping players out to pick up more picks for the future. But I think it's the same thing going back to investing. When we have downturns in the market like we did in 2022, that's when you need to be talking to your advisor and making the rebalances and making sure that your overall allocation still makes sense. And same when we have very strong bull markets. Maybe you started the year with the stock portion being 60%, bonds being 40.

Well, now maybe that went to 65%. Stocks, 35% fixed income. So it may be a good time to rebalance and sell some of the stocks at all time highs and put some more into fixed income. Yeah, that's a good point, Cody. I don't think a lot of people realize the fact that you may start.

Let's just say you start the year on. It doesn't always happen this way. But on January 1, and you're in a 60 40 portfolio, and stocks take off, bonds maybe lag behind a little bit, which is pretty similar to how things have been going the past few years. People don't realize that you're not going to end the year at 60 40. People just automatically assume.

And what we see a lot of time is, well, maybe their advisor did a really good job in the beginning, and then communication has lapsed. The portfolio hasn't been reallocated in months, years. Sometimes we see decades, which is horrible. And then people quickly find out that, I haven't heard from my advisor in so many years, why do I have so much risk? And why is nobody calling me?

It's important to stay on top of that. That's great that you mentioned that, because a lot of people don't realize that unless it's actively managed and looked at, you're not going to be in that allocation 60 40 forever, because the market's going to move and change. Yes, that's a good point. Just thinking about the concentrated stock risk, again, tying that back to some of the magnificent seven. I think one of the other items here is, say you have a long term employee who has been at, say, works for Apple for 30 years, who's been receiving stock awards or buying into their employee stock purchase plan.

And kind of Sean Cody's point, who really haven't paid attention to the volume of individual stocks they have, they could be way over concentrated in that single position without really even realizing it. Yeah. So not only do you have the risk of owning the individual stock, but your income is also from that employer. So if they do have a bad year, potentially you lose your job. Plus, the stock is down 50%.

That's why it's very important to work with an advisor. Make sure you're not over concentrated in one individual stock. Or especially if you're working for a company and you're getting stock rewards, or you have an ESOP available to you and you're buying into that, which most of the time makes sense just making sure that when those stocks are vested that you have a good game plan. If it makes sense to rebalance that, you talk through that without raising a ton of gains because obviously you don't want to raise a ton of gains when you're making a lot of income, but at the same time, you don't want to be over concentrated either. Yeah, and even reallocating to.

Well, maybe I don't need to save x percent in the EsOP. I'm going to take some of this and put this in to a backdoor roth or something like that just to allow you to have some other investments. We see a lot of people that just so concentrated from their employer stock plan and some employers, when they match the. Maybe a bunch of people don't know that when they match some of them, it's all going into the company stock. It's not going into your current investment allocation inside of your.

That's another thing to make sure you stay on top of. I also think too that there's a little bit of an emotional side to it where they've been at an employer for a long period of time, they really enjoy their job. They believe in what the company is doing. So sometimes it's hard for them to let go of that position. But I think that's kind of when the communication piece kicks in and just kind of talk about the overall risks and the intentions of it.

But that's also another piece that the whole emotional side of it. Yeah, and we're definitely fine with our clients holding individual stocks as long as it's not over concentrated. If they want to hold 5% in a specific company that they work for, maybe their kids work for that, they think that have upsides. As long as we talk through the risk or you talk to your financial advisor with that, it may make perfect sense. But again, it's just making sure that you're talking through that risk, kind of tying it back to making trades in NFL season or the NBA.

They obviously have to know what the potential other side is, whether that trade doesn't work out, what the consequences are. And I think that's why it's important to have an advisor too, is we're sort of on the outside looking in. So we don't necessarily have the emotional attachment that you mentioned, John. It's good to have somebody like that to take the emotion out of it, because sometimes those emotions can get in the way of what's really in your best interest. I know the CPI came out a little bit hot.

I believe it was up, was it four tenths of a percent around there? And that seems to be kind of dictating how the markets are performing, especially in the short term. Do you really think cutting rates by a quarter percent is going to make that big of a difference to just the everyday consumer? No, I don't think it will. I think their main focus is when the Fed does cut interest rates.

Like if you look back at the history, and again, every time could be completely different. This isn't going to say that this is what's going to happen going forward. But normally when the Fed starts cutting interest rates, they do it pretty fast because they saw most likely that inflation is back down to their 2% target and potentially the economy slowing down. And they don't want to put us into recession. That's not where we're at right now.

The economy is still strong, inflation still above their 2% target. But eventually they will cut interest rates. And I know we spoke about it before, but at least now the Fed does have tools. If we do go into a slowdown, they can cut the interest rates, which will most likely spur the economy. And it's good for our clients that are getting closer to retirement now.

They're able to pick up a much higher yield on fixed income or even people that aren't in retirement. Pretty much if you wanted a decent return over the last 15 years, you pretty much had to be very aggressive inside stocks. You got very little returns from fixed income. But now we're in a completely different investment environment. So I think just making sure you have the good conversations with your financial advisor, talking through your investment allocation, talking through the plans when things change, and making sure you have a good game plan.

We hope you enjoyed this episode of Coachable wealth, brought to you by Morton Brown Family wealth, an SEC registered investment advisor. This podcast is designed for educational and informational purposes and not intended as investment advice. More information can be found@www.mortonbrownfw.com.