Divorce Rich with Jacki Roessler, CDFA
Welcome to the Divorce Rich Podcast! Join your host, highly sought-after speaker and experienced Certified Divorce Financial Analyst, Jacki Roessler, CDFA in this engaging and down to earth show. Along with her guests, Jacki offers clear and detailed advice to improve your financial decisions before, during and after divorce so you can survive divorce rich! New episodes are posted every other Thursday! You can reach Jacki through her Michigan-based firm, Roessler Divorce Consulting, located at 600 S. Adams, Suite 300, Birmingham, MI 48009 or by email at jacqueline@roesslerdivorce.com.
Divorce Rich with Jacki Roessler, CDFA
Investment Literacy 101 (and why it matters in divorce)
Have you ever said, "I'm bad with money"? How about "My spouse understands finances and I just don't-it's a weak area for me"? If you answered yes to either of the above, this episode is a must-listen! Financial and investment literacy has nothing to do with intelligence and everything to do with exposure and education.
Divorcing individuals need a basic understanding of finances to make good decisions about which investments to take in a divorce settlement as well as how to manage them effectively for their future financial security.
Resources:
- For women who find themselves saying “I’m bad with money” click here to purchase GIRLS THAT INVEST by Simran Kaur; a fantastic primer on building investment competence and confidence.
- To shore up on basic investment literacy, it’s hard to go wrong with the The Motley Fool website where you can find the information you need in a welcoming and encouraging format
- Listen in to CNBC's Fast Money Podcast to learn the latest in investment news and information
Visit us at https://www.roesslerdivorce.com/ to learn more about Jacki's practice and to find valuable resources for your case.
Welcome to the Divorce Rich Podcast. I'm your host, jackie Ressler. I've been a certified divorce financial analyst for 28 years, helping clients and their attorneys navigate the often complex and confusing financial issues in divorce. If you're in the process of, or considering, divorce, now is the time for you to take a deep breath and give yourself permission to find clarity on the financial issues you're facing. Rich means many things to many people. I believe the best definition of being rich is someone who has access to many resources. Along with my guests on this podcast, I will be bringing you a wide variety of information so that you can make sound and informed financial decisions for your financial future. Hi and welcome to the Divorce Rich Podcast. Today's episode is one that I'm really excited about.
Speaker 1:I've been giving this a lot of thought lately. I've been looking through my case load for the past year or so in 2024 and trying to learn some lessons from myself on how I can advise people better in 2025. I like to do that at the end of the year, and when I look back at 2024 and I can visualize all of the clients that I've been lucky enough to have the opportunity to work with, I can pinpoint what I think is maybe the biggest mistake that I have seen many people sitting across the desk from me make in 2024. And I want to try to help fix that for 2025. The biggest mistake that I see people make and it's mostly women, but it can be men too is the person that sits in front of me and says I'm bad with money. I'm bad with money and I don't understand investments, and my spouse is really good at investments. My spouse is a banker. My spouse is an executive at a company that deals with money all day long. My spouse is really good at this. My spouse is an executive at a company that deals with money all day long. My spouse is really good at this. My spouse is an engineer and I am not good at money, and I don't understand. That is the most common mistake that I see people make.
Speaker 1:The most common mistake that holds people back is not just saying that they're not good with money, but really and truly believing it that they're not good with money, but really and truly believing it that they're not good with money. And one thing that's really important to keep in mind is that financial literacy whether we're talking about dealing with personal finances in terms of budgeting and handling your cash flow to investing all the aspects of your finances. That's what we would define as financial literacy. None of those things are defined by someone's intelligence. Financial literacy and intelligence do not go hand in hand.
Speaker 1:Financial literacy is based on exposure and what you've been exposed to and what your education has been on these topics. It is not related in any way. In my opinion, after many years working with people who sit in front of me and say I'm bad with money, my experience is that is definitely not true. Anyone that says to me that they're bad with money. What they really mean is that they haven't been exposed to the basic concepts of finance, budgeting, investing, and they don't have the education or the information. Well, that's a fixable problem, and so today's episode, I am going to be giving what I would call investment 101 basics for people that are going through divorce. Now you can be considering divorce, in the process of divorce, newly divorced, divorced for quite some time, or just happily married, and get some benefit out of this episode, because I believe that most of the people that I sit down with I end up going through something similar to this in terms of this explanation, which is a very simplified, entry-level way to look at investing, but it's information that I find most people don't have. So, if you have the time to sit down, grab a cup of coffee and really listen to this episode, maybe take out a pen and paper so that you can write down some notes. I'm also gonna be providing some resources for you at the end to continue the learning process, but this is the episode for you, so stay tuned. Learning process, but this is the episode for you, so stay tuned. Okay, let's get started.
Speaker 1:So big question is why do we need to invest our money at all? Why can't we just take our money, put it under the mattress, like maybe our grandparents did, or I have a lot of clients that have pockets of money stashed around their house. Why can't we just leave all of our money under the mattress? Why do we need to worry about investing at all? And the main reason that we are wanting to invest our money is that we're looking for certain things from an investment. We're looking to get something out of the money that we invest. Now, what are the kinds of things that we're looking for?
Speaker 1:If we had the ideal perfect investment, I always tell clients, if you had the ideal perfect investment where you put your money in and you got X out of it. What would you be looking for? The first thing that comes up, probably, is safety. You want to make sure that whatever your money is invested in it's safe. So, just like that movie, it's a Wonderful Life, you don't have to worry about going to the bank and they can't pay you your money. You want to make sure that your money is safe, safe and secure. So that's probably for, especially for people that are conservative with their money or haven't had a lot of experience with their money. They're worried about losing it, so safety is really important.
Speaker 1:What's another thing with the ideal perfect investment, which, by the way spoiler alert does not exist. But the ideal perfect investment would also be liquid. So gold, for example. If I'm keeping all of my money stashed in gold bars in my house and I need a new roof, suddenly my roof is leaking, I can't trade in those gold bars quickly to get the money for the roof. Gold or hard investments like that they're not liquid. The same if I had my money invested in something with a surrender fee to get out, or if I had to sell a bunch of assets and pay taxes to get the money out.
Speaker 1:The ideal perfect investment would be liquid. It would be easy to access, quick and easy. That's probably the second feature. So what about a third feature that people might be looking for? So, if you're heading towards retirement, another feature that the ideal perfect hypothetical investment would have is it might provide me with some income. So I'm retired, I don't have, let's say, my income is just social security. Maybe I've got a pension, but I would love it if my investments would also provide me with some income, whether that be on a monthly basis or an annual basis, but some income would sure be nice.
Speaker 1:Out of the ideal perfect investment, what else? Another really important feature maybe in our minds we're going to think about this as the most important reason why people invest their money is because they want their money to grow. They want to have a high rate of return, or return on capital on their investments. That would be probably the primary reason when we think about well, I wish that I knew how to invest. I would make a lot of money, I would have a lot of growth if I had that perfect investment that I could put my money into and I was positive that it would just grow and grow and grow. That, again, would be we're looking for growth.
Speaker 1:So we've got four main things that most people are looking for in the ideal, perfect investment, which I've already told you does not exist so that would be safety, liquidity, income and growth. Things that I would add into the perfect, ideal investment are maybe some tax advantages. People would like to have their money grow in a tax advantageous way so that they're not paying a lot of taxes on the earnings and their investments. Another reason why people might what people might be looking for from their money is that they might want to have their money be out there doing some good in the world. So, whether that is investing in companies that share the same philosophical beliefs that they do or that are in line with their philosophical ideals, that might be another reason why what people might want to get out of their investments.
Speaker 1:For me, as a financial advisor, my personal opinion and I know this is different from other financial advisors, but my personal opinion is that money should be used for safety, liquidity, income and growth purposes. That's what our investments really should be focused on. Other things would be nice, especially the tax advantageous investing, but in general, those are the things that we're looking for. So I've already broken the bad news to you that there is not any one investment in the investment world, any one investment type, that provides all four of those things Perfect safety, perfect liquidity, perfect amount of income and perfect growth. So that just doesn't exist.
Speaker 1:In order to have all of those things in our investment portfolio that we want, in order to achieve all of those things with our money, we need to have different types of investments, and in the investment world, there are three basic investment types. I would say that we could probably stretch it out to four or five, and I'm going to talk a little bit about the fourth and fifth types of investments, but we're really going to be focusing on in this episode on investment literacy, the three basic types of investments. And the three basic types of investments are cash equivalents, bond investments and stock investments Cash, bonds and stock. Now what are we looking for? What can cash provide us with? So cash would include things like money market accounts, those series, ee bonds that your grandmother probably used to get you for your birthday. That's cash. That's not a bond, really, that's a cash equivalent type investment, savings accounts, certificates of deposit those are all cash equivalent investments. Those are investments that you can open up a bank account. Open up an account, you're probably going to earn some small amount of interest and you're pretty assured that if you go to the bank you can get at your money, that it's safe there and that also it is liquid and you can have the ability to access it quickly if you needed to. So that's what we're looking for in our cash equivalents and everyone needs to have in their portfolio. A healthy investment portfolio has some percentage of cash equivalent assets and again, we're looking to get safety and liquidity. Two of those things that we already said were two out of the four most important things in an investment safety and liquidity. And that's what the cash positions in your portfolio. That's what they're serving there for. That's what they're there for.
Speaker 1:The second type of asset that you can own is a bond. Now, what is a bond? It sounds a little bit confusing. A bond is, for lack of a better way to explain it, a bond is a debt investment. So that seems like an oxymoron a debt investment.
Speaker 1:Let me give you an easy to understand explanation. Let's say that a man named Bill Gates came to you, let's say 30 years ago, and said I have this idea I wanna start a company, maybe 40 years ago. I have this idea I wanna start a company and I'm looking for investors and would you be willing to give me $10,000 and then you could have an ownership interest in my company? Well, you don't know who this Bill Gates is and you don't really want to risk your investments by your money, by giving a stranger or someone that you don't know your money to invest and own part of their company. So he says okay, what about instead, if you give me a loan, you loan me the $10,000 and I promise that I will pay you interest twice a year, you'll get an interest payment from me and then, at the end of 10 years that's going to be the term of this bond investment I promise that I'm going to give you back your entire principal. So you gave me 10,000, I'm going to give you back your entire principal. So you gave me $10,000. I'm going to give you $10,000 at the end of 10 years when this bond comes due, and in the meantime, every year until then, I'm going to pay you interest two times a year. That's basically what a bond investment is, so the bond that you purchase from the government.
Speaker 1:There are different types of bonds. There are government bonds. A government bond is going to pay you less in interest payments during the year than a private corporation bond is going to pay you, because there is a component of rate of return, or investment return, that's correlated with the amount of risk that you're taking on with your investment. So the higher the risk, the higher the anticipated return should be. The government is right now. The government is less likely to default on a bond that they owe than a private corporation is. So if a private corporation wants you to lend them money in a corporate bond, they're going to have to be willing to pay you more in interest because they know it's riskier for you. If you can get the same amount of interest with less risk, you're going to do that. So in order for a corporation to sell you a bond in their company, they're going to have to offer you a higher rate of return or a higher interest rate on that bond.
Speaker 1:So if we take a step back a bond investment, what we're looking for in a bond investment is some income. So that was that third piece that we talked about. As far as, what are we looking for in the ideal, perfect, complete, fantasy, unicorn investment, which would be safety, liquidity, income and growth. So from a bond investment you're going to get some income. You get two times a year. You're going to get income payments from that investment. Now we're also going to be having we want to have bond investments in our portfolio because they also do provide some growth. So more growth than if it was sitting in the bank, certainly more growth than if it was in your the bank, certainly more growth than if it was in your mattress or in a hole in your backyard. So we are going to get some growth out of it. But the hope is that the bond market tends to move in an opposite direction of the stock market, which is our next category of investment types. So, just to recap, so far, we have cash investments as an investment type. We have bond investments.
Speaker 1:The third type of investments in the investment world are stocks, and a stock is different than a bond, and the best way that we can understand, or that I can explain how a stock is different than a bond is let's use the same example. So Bill Gates comes to you 40, 50 years ago and says I have this great idea. I'm going to start this new business. I really need investors. How about if you give me $10,000 and I'm going to give you 20 shares or however many shares that will buy you in my company? Well, it's kind of risky. You don't really know much about it, but what you will get as an owner, you'll be a partial owner of the company, and that's what a stock is. A stock interest is ownership interest in a company and it is riskier than a bond because number one bondholders if the company goes bankrupt, they're going to stand in line to get their money back before shareholders are going to get their money back. So they have that priority on a default. Also, again, it's one of those things it's riskier to own a piece of the company and not get any set dividends, knowing that you have no idea what. There isn't any end term. You don't know when you're going to get your money back.
Speaker 1:The hope is that the money invested in the stock market in any way will grow, and that is the reason that people invest in stocks. So the main reason for stocks some stocks do pay a small dividend. I have a client that has. I have lots of clients that have Microsoft. Microsoft paid a dividend. So there are some stocks that pay a dividend, but that is not the reason that people are investing in the stock market. They are investing in the stock market because they want their money to grow for them.
Speaker 1:So there's these three main investments cash, bonds and stock. There's also we could add in a fourth, smaller category of real estate holdings. So real estate could be properties that you own individually. It could be rental properties, it could be your house, it could be a vacation property, it could be that you invest in companies that invest in properties. So those real estate investments could also be another category of investments. And then we have other types of investments that are hard assets like gold, silver, natural resources. Those are another different kind of investment.
Speaker 1:The three main types of investments that we're focusing on again are cash, bonds and stocks, and what is driving every investor's rate of return, in simplified terms, is the allocation that they have between cash, bonds and stock in their portfolio. So that is what is driving your overall rate of return. If I have my investments, if I've got 100% of my investments in the stock market and the stock market is down 20% for the year which thankfully this year is not then I would expect that my portfolio would be down about 20%. If I have 100% of my portfolio invested in the bank in cash, if I have several hundred thousand dollars of all my investable money sitting in a bank account, then I'm going to anticipate that my rate of return at the end of the year should be equivalent to what the average or the index is of cash type investments. So I can't blame anything other than the allocation decisions that I make between those three classes for how I got my rate of return. Now, that's not to say that certain investors can't be really fantastic at picking the best stock or really great at providing hey, these are the best investments that I think are where you should have your money for 2025. But, in general, as most financial advisors will tell you, it is your asset allocation between those three major classes, and then there are other ways that we could break those down between large companies and small companies, for stocks and bonds for international, global, specific sectors you can invest in. So how you allocate your money amongst those three basic types and then subdivide it into different sectors of those types, that is going to drive your rate of return. So Moving on to my next point, which is how do you know what to invest in, and there are several different ways that you can invest.
Speaker 1:You can invest in individual holdings, so we're basically talking about bonds and stocks. Right now. You could go out and you could pick a portfolio of what you think are the absolute best stock investments. You could also do the same with bonds. If you invest in an individual company and the company goes bust, that's what's going to happen to your investment. So, as a financial advisor or when you're learning about investment literacy, you learn about the concept of diversification.
Speaker 1:You don't wanna have all your eggs in one basket, and one of the best examples that I can think of this is many years ago I'm showing my age now I had a lot of clients that worked for Kmart and they had all of their 401k money. A lot of them invested in Kmart stock. Well, I don't need to tell you if you are around the same age as me or you have some idea where this story is going. Kmart went bankrupt and anybody that had money invested in that stock they lost all their money. So if you were a loyal employee that had all your money in the company stock and then the company goes bankrupt, you are out of luck. So the idea of splitting up your risk in your investments by not putting all your eggs in one basket is a really important basic concept of smart investing. So we already talked a little bit about why we want our investments to work harder for us.
Speaker 1:But one thing that we haven't really talked about is inflation, and every year it costs more money to buy goods than it did the year before. In the last few years we can all see from going to the grocery store that our money doesn't buy as much grocery as it used to. So inflation has been really prominent in the media this year and just in our own pocketbook it's easy to see. But even in years when inflation is not extraordinarily high, inflation tends to average about 2% to 3% on average for every 10-year period. So that is something to keep in mind the money that we have. If we take our money and we bury it in our backyard inside of a safe box, that money is actually losing buying power. So not only is it not growing, but we're already at a deficit. If we have our money just sitting around at home, we're definitely not going to be beating inflation, and that's going to be our basic hurdle.
Speaker 1:To overcome with our investments is we have to be able to at least beat inflation. Now we would like to have our money provide us with an income in retirement and grow a lot larger than inflation. But anything that is growing higher than inflation, we've got to anticipate that we're going to be targeting something over 2% to 3%. So money in a money market and those cash holdings where, over time, we're thinking that we're going to get probably I've seen it as low as zero and I've seen it, all the way up over my career as high as 7%, 8% in money market holdings. Right now, money market holdings are still doing pretty well, higher than the average inflation rate, but that's still a cash position. And again, the reason why we're investing in cash is to have safety and liquidity and that's the reason and also to keep pace with inflation at a bare minimum.
Speaker 1:So when we're talking about picking out individual stocks and bonds, I want to go back to that concept of not keeping all of our eggs in one basket. And again, we want some cash, some bonds and some stocks. But we can find even more ways to diversify and spread out our risk in investing in the categories of bonds and of stocks. And the way that we would do that is, by the use of what's called a mutual fund fund, and you can have mutual funds that are stock mutual funds. You can have your money in bond mutual funds and you can have your money in cash equivalent mutual funds. Of course, you can also buy real estate funds and gold funds and natural gas funds and all different kinds of mutual funds.
Speaker 1:But what a mutual fund is is a basket of a group of investments and when you buy a share of the mutual fund, you are buying into all of the investments. That a professional money manager who spends their entire day evaluating companies, looking at their books, analyzing companies from a very technical background. You get to leverage their knowledge and you buy a piece of whatever the money manager has put into that basket. And that is what a mutual fund is. It is a basket of investments. It also widens out the playing field for those of us that don't have, let's say, for a lot of individual stocks, you have to have a minimum dollar amount to be invested in those stocks. With a mutual fund, you can have access to a plethora of stocks and bonds that, as an individual investor, you simply wouldn't be able to get over the hurdle to buy enough different investments with your money to really diversify. Buy enough different investments with your money to really diversify. So having your money in a mutual fund is a way to diversify your risk amongst all of the funds inside of that, all of the assets inside of that basket per se, and a financial advisor can advise you on what are the best funds to get your investments into. A professional financial advisor is going to hopefully be analyzing different mutual funds and using their expertise to guide you towards the best mutual funds to invest your money in.
Speaker 1:Of course, there is always going to be a fee involved with investing your money. No one works for free, and so you always, if you're going to be working with a financial investment advisor, you're going to want to ask really blunt and open questions about how they get paid. Everybody gets paid. So some financial advisors get paid what's called a wrap fee and they might get charged, let's say, 1% of the entire portfolio that they manage every year as a wrap fee in order to watch your portfolio and make changes in your asset allocation on sometimes a monthly basis, a daily basis, and they are picking out those investments for you. Usually they're using mutual funds, but again, those are the basics of what you need to know about investing.
Speaker 1:When we are looking at what kind of rate of return you should expect in investing in bonds, typically we're looking at anywhere between 5% and 7% on average, and when I say on average, I mean I'm talking about 10-year averages. So we can't look at any one point in the stock market and say, well, the market is up by 20%, that's what I should be getting in my portfolio. We have to look at averages over time and so, also averaged out over time, money invested in the stock market should be earning anywhere between, let's say, 7% and maybe even as high as 10%. That's a very high rate of return to assume, even though in the last several years it seems like money invested just grows, grows, grows, grows, grows. Another important tenant of investment literacy is what goes up always comes down, and so where we are in the market cycle doesn't necessarily indicate where we're going to end up. The trend is that, even though the market goes up and down if you think of a roller coaster, the way that a roller coaster has some ups and some downs, but the trend overall is up, forgetting about the way that a roller coaster ends, which is a crash down at the bottom. That doesn't happen with the stock market over time. If we look back, going back to 1920 before the US stock market, there are a lot of bumps up and down, but the trend always is that it ends up higher than it was years ago.
Speaker 1:So, again to recap, for investing 101, you want to make sure that you understand inflation and why you shouldn't have your money under your mattress. Number two you need to have your money working hard for you to provide you with the four things that we're looking for in an ideal investment. Number one is safety. Two, liquidity. Three, income and four, growth. Those are all things that we're looking for in the ideal, perfect investment. And our allocation between cash investments, bond investments and stock investments, our asset allocation between those areas, is going to drive our overall rate of return in our portfolio. And those are the basic building blocks of investing that we can talk about in a very short amount of time.
Speaker 1:And for anyone that says that they are not good at numbers or good at investing, again as a reminder, I can say with 100% sincerity that is not true.
Speaker 1:If you're sitting here listening to this right now and you're saying I'm not good with money, I want you to try to remove that phrase from your mind and instead replace it with I don't know enough about money yet, but I'm learning and again one of those whether you're getting divorced, considering a divorce, post-divorce, single or married or widowed these are concepts that it's important for every person to understand, so thank you for joining us.
Speaker 1:I'm going to be having more episodes in 2025 on investing literacy beyond the basics and, if you like this episode, please go on to Apple Podcasts where there were a review. A written review there really helps change the algorithm and exposes our podcast to many more people. So, wherever you listen to podcasts, if you have a chance to go onto Apple Podcasts and give us a quick review, that really helps to get this information out to more people like you. That could really benefit from it. Thank you for listening and I look forward to talking with you next time. Thank you so much for taking time out of your day to listen to Divorce Rich Podcast. If you like this podcast, please follow us on Apple or anywhere that you download podcasts and share this link with any friends or family that you think might benefit from this information.
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