PODCASTS

10 Financial Moves to Make Before Ringing in 2023

Peter Mallouk Portrait

John Hagensen

Managing Director
PUBLISHED
December 19, 2022

As 2022 draws to a close, there are still a few financial planning moves you can make to set yourself up for the year ahead. Plus, John examines the concept of getting rich versus staying rich and the mindset change that goes along with it.

See John’s Santa photo by clicking here.

Episode Notes:

Presented by Creative Planning, each week Host and Managing Director John Hagensen cuts through the headlines and loud takes to challenge the advice you may have been given and reaffirm what you know to be true. Plus, don’t miss his weekly interviews with Creative Planning specialists as they cover investing, taxes, estate planning and many other areas that impact your financial life!

John: Welcome to the Rethink Your Money podcast, presented by Creative Planning. I’m John Hagensen, and ahead on today’s show, I’ll be sharing with you the often overlooked and what I think to be maybe the most important priority that you should be focused on when it comes to your money, as well as how to protect yourself against the ever rising IT threats. Now join me as I help you rethink your money.

Well, let’s begin talking about disruptors. You know what I’m talking about. DNA sequencing in the 2000s. GPS systems being downstreamed by Reagan in 1983 to civilians. The first jet engine in 1958. How about in 1947, when Bell Lab researchers invented the first transistor, which was a critical step in the development of microchips? Maybe it’s 1930, refrigeration, when DuPont manufactured Freon. Oh, and an often forgotten one, as someone who grew up in Seattle, how about 1971? That’s when the first Starbucks opened in Pike Place Market.

Now, if you ever are visiting Seattle, you’re going to go watch them throw the salmon across the market. You’re going to buy some fresh cut wildflowers for like $80, some crazy amount. You’ll get some saltwater taffy, maybe go down to Ivar’s, get some chowder. It’s all great. You might even want to stop by that first Starbucks. By the way, the coffee will taste exactly like every other Starbucks, and it looks pretty much like every other Starbucks. As a guy who has seven kids, and therefore, drinks a pot of coffee every single day, I’m going to stand as an army of one and tell you, that was a disruptor.

But we’re always looking, as consumers or inventors, and certainly as investors, for the next disruptor. I mean, because you look at the internet alone, one of the biggest disruptors of the last several hundred years, how much money and efficiency has been bolted onto that disruptor? The majority of the largest companies right now in the world have iterated off of the internet, Apple, Amazon, Google, Facebook, YouTube, Elon’s new controversial purchase of Twitter. So what will be the next disruptor? Is it going to be autonomous vehicles or flying vehicles? Maybe it’s something having to do with the blockchain. I mean, certainly, if you’d asked a year ago, people would be saying cryptocurrencies, and maybe that’ll still be the case.

Well, I bring this up because a new technology called ChatGPT, you may have heard of it, was launched by OpenAI. And many are saying this is the next big disruptor. It’s an artificial intelligence-powered chat bot and a software programmed to simulate human conversation. It was made available to the public on November 30th, and in the first week, had over a million users. And in a recent Forbes article, it outlined the fact that, soon, due to this technology, you’ll be able to have helpful assistance that talk to you. They answer questions for you and they give advice. And eventually, you may even be able to have something with this technology that goes off and discovers new knowledge for you. Most notably, ChatGPT has been able to generate intricate Python code and write college level essays when given a prompt.

And that’s boosting concerns that this technology might replace human workers like journalists or programmers in the future. And Box CEO Aaron Levie tweeted, “Everything is going to be different going forward.” And maybe it will and maybe it won’t, but there’s certainly been, many along the way, that have said this is the next big thing. Sometimes. And other times, not so much.

But all disruptors have a couple of things in common. Don’t they, when you really think about it? They increase our output and our efficiency, and they save us time. And this had me thinking about what Keynes wrote, almost a hundred years ago, in Economic Possibilities for our Grandchildren, as he was seeing the manufacturing advancements. And he stated that a hundred years from now, we could have a 15-hour work week. Because you see, he was just looking at the sheer increase in efficiency and how much time that would save us. What he dramatically underestimated is that we are Americans, and a huge part of our American ethos is to work hard and innovate.

But the challenge is, that so often, while these disruptors offer us the opportunity for more capacity, that maybe could lead to more hobbies, more time with friends and family and relationships or relaxation, we tend to fill every waking moment. We’re not working 15 hours a week, and I’m not even suggesting that that would be a great thing. But in the midst of this great increase inefficiency due to these disruptors, we’re still a nation with extraordinarily high levels of depression. 50% of marriages ending in divorce. Addiction issues. We’re sleep deprived. And the list goes on. And I am as guilty of this as anyone. I think of, when I’m coaching one of our kids’ sports teams, “I’m so busy. I’m so busy. Once the season ends, I’m going to get all this time back.” Then the season ends. I fill up all of that extra capacity immediately with something else.

You know what I’m talking about. If you have two weeks for a deadline at work, how long does the project take you? It takes two weeks. If you were given two days, you’d probably find a way to get it done in two days. And so how do these disruptors play into our financial life? It’s not even as much the increase in efficiency. No, it’s that second part that it can free up time and simplify your life. If there’s one thing I want you to take away from today’s show is that if you can optimize your financial plan in a way, where simplification is the foundation of your plan, you’ll have more peace, you’ll have less stress, and you’ll have more time. Now, what you choose to do with that time, as we’ve been discussing, will be up to you. But the hope and the goal is that it brings you more capacity to do the things that you love with the people whom you love doing them with.

And that is one of the key pillars here at Creative Planning. We believe that by you having a real financial plan, where there are CPAs and attorneys and financial planners and all sorts of other specialists working in coordination to bring you a comprehensive plan that you understand that’s organized, see, that creates more freedom in your life. We offer a complementary complete wealth plan, where we will help ensure that you’re not missing anything. Visit creativeplanning.com/radio right now to request to speak with a local advisor. That’s creativeplanning.com/radio. Why not give your wealth a second look?

Well, we are, of course, coming down the home stretch here in 2022. And in light of that, I want to share with you 10 financial moves to make before this year ends, that if you execute correctly, will make a difference years from now. And as I’m sharing these with you, be making a mental checklist. Yes, I’ve done that. No, I have not. Because there is still time to get a lot of these things done before the ball drops.

Number one, make a plan for year end windfalls. I know what you’re thinking. “John, what year end windfall? Come on. I don’t need to make a plan for it.” Well, if you’re fortunate enough to be getting a big bonus, or you’ve got some rich, great aunt across the country that sends you that check for $16,000 bucks, congratulations. We’re all jealous of you. How about instead of rushing to spend your bonus on some new gadget or clothes, click the transfer money button on your online banking app and send it straight into a savings or investment vehicle? And I know I’m a broken record, but you’re far more likely to direct that to an appropriate place relative to your goals, if you have an actual financial plan, because it will dictate where those dollars should go.

Number two, check your credit. Now is a fantastic time to go check your credit. Each of the major credit bureaus, Equifax, Experian, and TransUnion, allow you to access one free report each year. Double check these reports to make sure there are no unexpected errors. We did this in my family about five years ago and my wife’s credit score was suddenly way lower than it previously was. We discovered through doing that, that there was a $26, and I’m not joking, it was $26 on a medical bill for one of our kids. It was the out-of-pocket portion. While we had moved, the bill had never gotten to us. We never received a call and it had just gone to collections.

And you’d think this really tore my wife up, but we got it corrected soon enough. And what she loved in the meantime is we went to buy a house and of course we owned it together in a community property state, but I was the only one on the mortgage. And she just thought it was hilarious that she owned half the house, but I had all the debt. I tried to explain to her, “Well, not really how it works,” and since we weren’t planning on getting divorced, probably wouldn’t matter. But nevertheless, it brought to light this thing that she wasn’t even aware of.

Number three on the 10 financial moves you can make here before the end of the year, tax-loss harvesting. Stocks and bonds are both down. If you have opportunities to book those losses and buy a similar investment, can’t be identical, you can maintain your risk profile and expected return. None of that changes. But those losses can be used to offset gains in other places of the portfolio. And by the way, at Creative Planning, we take advantage of market volatility by actively tax-loss harvesting automatically for our clients in their portfolios throughout the year. And now is a really good time, if you don’t work with us here at Creative Planning, to check in with your wealth manager and ensure they have also been doing this throughout the year. By the way, if they haven’t, you might want to ask yourself why. Because while it’s been one of the worst stock bond mix years in five decades, it’s also provided for the most obvious tax-loss harvesting opportunities. If your advisor’s missing it this year, in 2022, yikes. What are they looking at?

Number four, consider Roth conversions. Consult with your financial planner and a CPA, if they’re not a CPA themselves, to determine if a Roth IRA conversion is right for you. And as I have been preaching week after week, all year long, the opportunities this year are unique, similar to harvesting, where markets are down in value, and that is converging with historically low tax rates. And if you’re able to get those dollars into a Roth, when that rebound eventually comes, you’ll have more shares that are growing in a tax exempt vehicle.

Number five, max out your contributions, or at least, do the best you can. If you’ve been kicking money into a retirement fund of any kind, you’re on the right track. But the key is to max out your contributions, if at all possible.

Number six, contribute to your HSA. If you’re participating in a high deductible health insurance plan, you may be eligible to contribute up to $3,650 per individual, or $7,300 as a family, to an HSA this year. And remember, if this is done right, triple tax treatment. Goes in pre-tax, grows tax deferred, comes out if used for qualified medical expenses, tax exempt.

Number seven, finalize your charitable donations. Consider maximizing your impact by donating in particular low-cost basis stock. If you bought Apple back in 1983 for a hundred thousand dollars and now it’s worth $30 or $40 million, if that’s you, congrats. Nice call. Good job picking stocks, going through three different drawdowns of over 50% and not selling. Because remember, that’s the hardest part. It’s not just finding the needle in the haystack. It’s then having the foresight to say, “Well, this company’s not going to be General Electric and go down 80% or 90%. It’s going to be Apple and become the largest company in the world.” Good luck figuring that out. But if that’s you, it’d be wise to donate a little bit of that Apple stock rather than cash, because it benefits you by receiving a tax deduction on that full value. And the charity can avoid paying taxes on any of the capital gains, as long as you’ve held it for at least 12 months.

Number eight, give your financial advisor an annual performance review. Just ask yourself basic questions. Are they completely transparent? Do they provide access to tools that help you improve your financial literacy and you’re making better, more informed decisions? And as I mentioned earlier, they’re simplifying your life. They’re comprehensively providing you guidance, taxes, estate planning, all those various facets of your financial picture.

And I’ve seen this over the years. Loyalty bias is one of the hardest things to overcome. But there are two fairly objective ways to evaluate your financial advisor. The first is, if you came into money somehow, I don’t know, you won the lottery or inherited 10 times what you currently have, would you confidently go to your current advisor with all of that money and feel certain that they were up for the task, that they were the best advisor to help you with that money? Or would you pause and hesitate? Would you say, “Well, I don’t know. I’m kind of in a different setup now. I don’t know if my advisor’s right for me.” If that’s the case, they’re not right for you right now. If you wouldn’t trust them with more money, then you sure as heck shouldn’t trust them when you have less. Because you probably need it that much more.

The second question to ask yourself when it comes to providing your advisor a scorecard here at the end of the year is to just imagine that you did not have a financial advisor. You haven’t hired one. And all your money is just sitting piled up on your dining room table. Huge stacks of Benjamins, right? Like World Series of Poker final table on ESPN, just hundred dollar bills fallen all over the place. With all the options that you have with wealth management firms, would you go in that scenario and hire your current advisor? Or would you interview a couple of others? Or would you for sure not hire that advisor? That’s a really good way to say, “Is inertia taking over? Do I have some sunk cost and loyalty bias here? Or is my advisor actually great?”

And by the way, a year like 2022 is a much better year to evaluate your advisor because this is when the rubber meets the road. What did they do for you in 2022? Were they Roth converting? Were they tax-loss harvesting? Were they reviewing and updating your financial plan and offering timely, practical suggestions? Because when we’re in the pandemic and the market goes straight up, and you’re just throwing darts at stocks like Teladoc and Peloton and Carvana and you’re doubling your money, it’s pretty easy to feel good about your advisor. But what about when we’re in a bear market? What about when uncertainty and pessimism is at its highest? Well, that’s when it’s a lot more obvious whether your advisor’s doing the job that you’re paying them for or not.

And the best part about it, if you are having second thoughts or just wanting a second opinion, we make it really easy here at Creative Planning, by offering a complementary review of your situation. Learn from our perspective, and hopefully reaffirm a lot of the things you’re doing well, and rethink a few of the things that maybe you hadn’t thought of.

All right. Number nine, plan for New Year’s contributions. Now, once you’re done playing catch up with this year’s tax-advantaged accounts, plan for how you’ll build up savings starting in January, so you don’t find yourself in the same exact position in 2023.

And the tenth and final financial move to make before 2022 ends that’ll make a difference years from now is to start fresh, set goals, and make a plan. Because again, that complete wealth plan is what will answer so many of the other questions that you presently have.

Well, I hope that you’re able to check off most of those 10 things. If not and you’ve got questions, go to creativeplanning.com/radio to speak with a local advisor. Up next on the show, I’ll be speaking with Creative Planning Director of Technology Services, Adam Jones, as he’ll share exactly what you can be doing to protect your financial health against IT threats and common scams. That and more, ahead on the show.

Announcer: Are you only thinking about your taxes around April 15th? If so, you might be leaving a lot of your hard-earned money on the table. From tax-loss harvesting to making tax mark charitable contributions, there are many ways to save on taxes and boost your wealth. At Creative Planning, our wealth managers work with in-house CPAs and attorneys to proactively look for tax efficiencies in every element of your financial plan, helping ensure your money is working as hard as it can for you, day in and day out. To see where you could be saving more on taxes, go to creativeplanning.com/radio to set up a visit with one of our wealth managers. We’ll review your plan and identify opportunities to save you a bundle on taxes. If you’ve never had a financial advisor review your tax return, now is the time to go to creativeplanning.com/radio to set up a free introductory visit. Find out now what you could be doing to minimize your tax burden and maximize your wealth. Because it’s what you keep that matters. That’s creativeplanning.com/radio.

Now, back to Rethink Your Money, presented by Creative Planning, with your host, John Hagensen.

John: Well, I’m being joined today by a special guest, Adam Jones, who is the Director of Technology Services here at Creative Planning. And I asked Adam to come on today and share with us exactly what we need to be thinking about when it comes to protecting ourselves against the ever increasing threat of cybersecurity. So with that said, thank you for joining us today on Rethink Your Money, Adam.

Adam Jones: Thank you. Glad to be here.

John: We are covering a unique topic. It’s not often one that’s thought of when people think of personal finance. But while it’s maybe not wealth or investment management, nor tax or estate planning, those more common disciplines, cybersecurity is critical to our financial well-being. And so let’s start there. How do you feel good technology and cyber standards can help protect our wealth?

Adam: Unfortunately, being in the industry we are in, we have seen what happens when you don’t. I think a lot of people have these stories now, and hopefully, some of these stories scare people into effectively compliance. But we’ve personally witnessed some businesses interacting with emails that weren’t legitimate, the end result being wiring, in one case, millions of dollars to the wrong place, and not discovering that mistake until it was too late to have any recourse to revert those funds. There’s a number of things you can do as a user of cybersecurity products.

There’s the simple things like turning on multi-factor authentication, being one of the big ones, to make sure that your accounts aren’t just protected with a password. But without some of those basic steps, I would say that basically everyone is now a sitting duck for this. I think there’s been this opinion that if you didn’t have a high profile publicly, you’re not a publicly-traded company or you don’t do a lot of public facing business so that your business kind of flies under the radar, that you’re somehow not a target. If you’re connected in any way, if you have software as a service, Office 365, Google Suite, you’re a target, full stop.

John: Well, I think so often we think of business owners, but this has an impact on all individuals. Outside of that multi-factor authentication, what else can we be doing from an IT standpoint?

Adam: I think a lot of people, myself included, until the last few years, mistakenly assumed that somehow that applied to their business accounts and not to their personal accounts. So to reiterate, that’s not true. It needs to be on every account you can. It’s been an increasingly frustrating situation that a lot of financial services, really specifically banks, don’t actually have robust multi-factor authentication. The plus side in those situations is, generally, an account compromised to their services would be taken care of by them. So I guess that’s sort of the balance of it. But it is still kind of a frustrating situation to say, “This is what you should do,” and then you go to your bank and they’re like, “Oh, we don’t have that.” It’s just kind of a crazy scenario.

But beyond that, the number one thing is that you need to be skeptical. And that applies to basically any request to do anything with your digital life, whether it comes via an email. I’ve been to my grandparents’ house a number of times in the past few years, and their phone rings off the wall all day with people purporting to be technical support people that want to log into their computer because they’ve sensed malicious activity. You need to be skeptical of a hundred percent of that stuff until there’s a proven reason to believe it. So if it’s somebody purporting to be connected to one of your financial institutions, don’t believe them. Hang up the phone. Call your financial institution or the person that you have a relationship with on that account. Tell them what happened, and they’ll help you understand if it’s legitimate. I would say, in almost every case, it’s not.

Most of these companies are very forthright about the fact that they would not proactively contact you in that manner if there was an issue. Or if they did, if there was an issue with their account, they’re likely going to go through, if there’s somebody that stands in between you and that holding company or whatever it might be as an investment vehicle, they’re going to use those relationships to make sure that you know it’s legitimate. When it’s online or it’s somebody that’s not across from you, the trust factor needs to be erased.

John: Well, these scams have certainly become a lot more sophisticated than the email that… There’s a prince in Zimbabwe who happens to be your second cousin and needs you to wire all your money to them tomorrow.

Adam: Yes, absolutely. They’ve kind of used the mail merge technology that’s been around forever to scrape up lists from previous compromised websites, that’s commonly referred to as dark web type things. So they’ll get a lot of data, first names, last names, account names. I literally just yesterday had a client who’s in the process of moving offices, but this could have just as easily applied to somebody that’s an individual. They’re moving offices, so they have a lot of financial transactions going on surrounding that. They took out some loans and whatnot. I think that because they had taken out those loans, malicious actors, just like other mortgage companies, when you first apply for that first mortgage and all of a sudden you get 25 phone calls from auto callers, these malicious actors are using that same technology against people.

So in their case, he was genuinely not certain if this loan email he got was legitimate or not legitimate because of all the legitimate activity that’s occurring. As we looked at it, it was definitely illegitimate. But it had his name on it. It had his company name on it. It had his old office address, had his new office address. So they’re scraping the internet for these types of transactions, and then using the fact that they’re usually stressful and include a lot of moving parts, a lot of emails, a lot of instructions, to really try to bamboozle people.

John: Well, large accounting firms have been offering these types of services to their clients for many years. And I think it’s fantastic that we’re building out this service for our clients here at Creative Planning to support their IT and cybersecurity needs. Certainly thankful to have you and your team’s expertise in this ever evolving and an important aspect of wealth management. So thanks so much for joining us today, Adam, on Rethink Your Money.

Adam: Absolutely. Thanks for having me.

John: That was Adam Jones, Director of Technology Services here at Creative Planning. If you have any questions specifically about your plan, maybe it involves cybersecurity, maybe it’s about something unrelated, taxes, estate planning, investments, visit us now at creativeplanning.com/radio to speak with a local fiduciary advisor. It’s complementary and comes with no obligation to become a client. Again, that’s creativeplanning.com/radio to get your questions answered.

Well, let’s continue on with this really happy, joyous topic of financial fraud. But in all seriousness, we really do need to keep our accounts safe. And I’ll share nine tips for you and also post this to the radio page of our website at creativeplanning.com/radio if you would like to reference this.

Number one, monitor your accounts. Just don’t bury your head in the sand. And by the way, consolidate accounts. If you’ve opened 17 different bank accounts because they were offering an iPad or a promotional toaster or whatever, I’ve seen all this stuff, don’t do that. Close accounts that you don’t need so that you can monitor the ones that you do have more closely.

Number two, use strong passwords. Don’t do password as your password, okay? “John, I capitalized the P. My numeric ones aren’t 1, 2, 3, 4. I do 2, 4, 6, 8.” Who do we appreciate?

Number three, and we just heard this from Adam, use multi-factor authentication.

Number four, don’t use public wifi. Use a password-protected wifi network, or just use your cell data if you need to check your email or log into banking or financial apps certainly.

Number five, and this is one I shared in my end of your tips, access your credit reports.

Number six, shred all documents. Don’t put full bank statements in your recycling bin, and then take it to the road two days early because you’re going on vacation. If you’ve ever seen the movie Kiss the Girls. By the way, that movie freaked me out when I saw it. It was an Ashley Judd Morgan Freeman, the dude from Princess Bride who was the man in black, I don’t know his name, I just know him as Wesley. Well, he was a serial killer. And he basically said in the climax scene of this where she realizes that he was the masked man who had kidnapped her, “Don’t put your trash out early.” And so yes, shred all documents before putting it in the trash. And ideally, just skip paper statements. Sign up for e-statements.

Number seven, be cautious with emails. Be very careful what you click on.

Number eight, maintain anti-virus software.

And number nine, keep all of your software up to date.

Well, coming up next, we’re going to have some fun and play a game of Rethink or Reaffirm. And I’ll also share with you why I have about 50 people every single day in the front of my house taking selfies. That and more, up next.

Announcer: At Creative Planning, we provide custom tailored solutions for all your money management needs, as our team is structured to cover all areas of your financial life. Why not give your wealth a second look? Visit creativeplanning.com.

Now, back to Rethink Your Money, presented by Creative Planning, with your host, John Hagensen.

John: And as we prepare to play another game of Rethink or Reaffirm, I think it’s important that we recognize just how valuable it is to be able to deconstruct the things that we believe to be true and give them a real fresh evaluation. Now of course, I say this, but I’m a guy, so I struggle often with wanting to be right instead of wanting to get it right, especially in these funny, kind of petty, little situations in marriage, as my wife Brittany and I just recently had.

So it all started with one of our really good friends talking with my wife on the phone. She was on speaker and I was listening to this. And our friend, a couple of streets over, by the way, we live in a neighborhood that is epic for Christmas lights, like cars backed up onto the main highway because cars are trying to get into our neighborhood to look at lights. We have multiple hot cocoa stands, legit stands run by kids making hundreds of dollars on weekend nights. It’s unreal how much they’re raking in. We’ve got popcorn stands. We have a you pick candy cane farm. It’s pretty cute. It says organically grown. We have a rice crispy treat stand. Basically, if you want to just gain a ton of weight, come to our neighborhood and go look at lights.

Okay, so there’s the backstory. Now you know. That when my friend, a couple of streets over, was ripping on our decorations, “Yeah. You guys don’t have that many lights up. You didn’t even do as many as last year. I don’t know what’s going on with your street. It’s like the lamest street in the entire neighborhood of all the streets.” I was like, “Oh, no. No, that’s not happening.” And so I went on my phone, hopped on Amazon, and typed in “giant inflatable Santa”. Yep, I did it. I bought the largest Santa that you have likely ever seen in your entire life. And it is amazing. We’ve got people all day long, and especially in the evenings, taking photographs in front of our house with this Santa. And it was pretty funny. Our friend that was giving me grief said, “All right. I give up. You win. You got me. You’ve got more Christmas cheer than I do. All right.”

But here’s the part where I probably should have listened to my wife, or at least kind of truly rethought this thing a bit. I had a location that I intended to put this Santa. And my wife’s telling me, “John, it’s not even close. What are you thinking? There’s no way the Santa can go there.” So when he first comes, I take him right to that location, and I hook him up. And air starts coming in. And I kid you not, you would’ve been crying, you’d be laughing so hard if you had seen this. As Santa’s blowing up, he’s blocking the entire neighborhood street. He’s across the entire street. That’s how big this thing is. When he finally gets inflated, he’s taking up multiple driveways in front of our house, like multiple driveways, like people can’t actually go in and park. We ended up putting it in a different location.

It required us to cut down part of the branches of a tree. For him to even get over it, we’ve got our neighbor who’s an ER doc dangerously on a ladder, cutting down branches. At one point, I’m going, “Hey, if that heavy branch falls on you, who’s helping you out? You’re the doc. Shouldn’t I be up on the ladder?” But of course, he just told me he wanted to use his power tools, gave him an excuse, so I don’t want to steal his joy. But so yes, this Santa is enormous, and I’m going to post a photo. This has nothing to do, by the way, with your personal finances. It’s just a really long lead-in to a game of Rethink or Reaffirm, where I promise we will talk about some finances. But you want to see how big this Santa is, go to creativeplanning.com/radio. I’m posting a picture of my wife and I in front of this Santa, when we succeeded and he was finally up in the yard.

But now let’s transition and break down some common wisdom or a hot take from the financial headlines, and decide if we should rethink or reaffirm it. The first one I have for you today is, if I have a fund that lost money, I won’t have to pay any taxes. Now, this seems logical, doesn’t it? I mean, imagine putting a hundred thousand dollars into a mutual fund. Not touching it for the entire year. Market gets clobbered. That fund is no different. Your hundred grand is worth $90,000 on December 31st. You’d probably be pretty surprised in the spring if you received a tax form saying that you owed taxes, wouldn’t you? That absolutely happens.

In fact, Richard Connor at the HumbleDollar wrote a great piece on this just about a week ago and outlined how mutual funds send out these dubious holiday gifts in a package called capital gains distributions. And they occur usually mid-December, right around now, and they represent a taxable event if you hold these mutual funds in a taxable account. And so in a year like this, it’s really pouring salt in the wound. You’re already not happy looking at your statements due to poor performance in both the broad stock and bond markets. Then you get hit with the tax bill on top of it. So let’s talk about how this can happen, and I’ll use a stock fund as an example.

So throughout the year, this fund will trade stocks. And its stock sales will result in either a gain or a loss within the fund. That’s pretty intuitive. Well, they accumulate that net gain, if there is one, and then pass it on to the fund shareholders. And the fund share price will drop by an amount equal to that distribution. So if you’re a shareholder, you’re not any better off before factoring in taxes. But the problem is, if you hold the fund in a taxable account, you’ll be responsible for paying taxes on your share of the fund’s net capital game. And here’s practically where this comes into play.

For this year, and it’s not unlike other similar years, investors have sold a lot of their active mutual funds. And so, when you put in a redemption, for example, saying, “Hey, I want some of my money back,” and a lot of people do this because we know from all the studies that we chase performance, we tend to sell low and buy high. So if something’s not doing well, we often don’t want it anymore, and so we get rid of it. Well, when a lot of people do that all at once, the mutual fund manager has to sell stocks to generate cash to get everyone that’s bolting their money. Well, that creates a tax issue, because oftentimes, a lot of the funds hold stocks that, yeah, they might be down in 2022, but they had significant gains in 2020 and in 2021. And in some cases, those positions have been held 10, 15, 20 years and have a lot of unrealized gain.

And sure, the fund will try to tax-loss harvest and sell off some of their stocks that are at a loss. But as more and more people bail out of a fund, the manager just ends up oftentimes running out of losses to realize and they just have to start selling winners instead to generate cash. If you’re an investor in that fund and you didn’t sell anything, remember in my example at the beginning, you just bought it with a hundred grand, did nothing for the year, and now it’s at $90,000, you don’t have an individual tax lot, meaning you’re just paying your neighbor’s taxes for, in some cases, stocks that appreciated over 10 years long before you ever even own the mutual fund. You didn’t even get to experience or enjoy any of those gains, but you’re paying tax on them.

So there’s a few things you can do. The first thing is do your research prior to owning a fund. What’s the turnover of that fund? Meaning, how much trading is actually occurring inside of that mutual fund? Are they planning to make a big capital gains distribution? Do they have current embedded unrealized capital gains inside of the fund? Because you’re effectively picking up that low cost basis when you buy it. Another consideration, look at comparable exchange traded funds. This tax inefficiency is one of the primary drivers that has led to ETF’s rise and prominence and massive inflows. Because in an ETF, you do get your own individual tax basis, which for taxable accounts, can be very important. It’s why we use more ETFs in our brokerage accounts at Creative Planning than we do inside of retirement accounts.

So to recap the question, if I have a fund that loses money, I won’t have to pay taxes, the verdict? Rethink. And are there aspects of your personal situation of your plan that you want to rethink or reaffirm? You want a credentialed fiduciary who’s not looking to sell you something, to provide you with a fresh perspective and a second opinion on what you’ve worked a lifetime to save? Here at Creative Planning, we’ve been doing that for families since 1983. If you’d like to talk with a local advisor here before the year ends, there is still time. Visit us at creativeplanning.com/radio, just as thousands before you have done. That’s creativeplanning.com/radio.

Common wisdom number two, income and happiness are correlated. What do you think? If you had to guess, you think that’s a rethink or a reaffirm? Well, let’s unpack it. Happiness is not the same as joy or contentment or satisfaction. And I think there’s a lot of clear evidence that higher income can bring a bit more satisfaction. And what I mean is, has a dentist that retires at 65 been walking around for the last 30 years with just this infinite level of happiness beyond maybe their neighbor who’s making less money and not as fulfilled in their job? The answer from the studies is no. But, is there a level of satisfaction when that dentist reflects back on their accomplishments, earning good grades in undergrad, passing all the required tests, getting through dental school, having a career that’s respected? Yeah. It’s likely that that person feels a level of satisfaction that may be greater than those that didn’t make as much money.

But as I just said, happiness and satisfaction aren’t the same thing. Money is much more a vaccine than it is a performance enhancing drug. It has a greater shot of minimizing your despair and your sadness than it does in making you happy. And there’s a famous poll study that shows this, and the Cliff Notes are essentially, people found proportional levels of happiness as their income rose to about $85,000 because that covered their basic needs. And I think this is intuitive. If you’re stressed out about paying a medical bill, or can never take a vacation ever with your family, or take any time off work because you need to pick up extra shifts because you’re just barely getting by, I think an increase from that would be pretty substantial toward your happiness, right?

I mean, put another way, if you had to take a bus to work because you couldn’t afford a car, and then you started making enough money where you could buy even just an inexpensive used car, that would make you really happy. But what the poll study shows is, once you have that car and it’s reliable and it gets you to and from work, driving to and from work in a way nicer, more expensive car doesn’t actually move the needle on your happiness. And that’s why the threshold’s somewhere around that $85,000 to $100,000. And I think even for our ultra affluent group that we work with here at Creative Planning, those clients that have over $30 million, in my experience, they’re not considerably more happy than our clients that are kind of the typical millionaire next door.

And so to recap, this common wisdom, income and happiness are correlated, the verdict is, yeah, up to a certain amount. And then once you’re above about that $85,000 threshold, rethink it. Coming up next, listener questions and answers, so that you can gain in your knowledge and understanding through the experiences of others. That and more, ahead on the show.

Announcer: You’ve worked hard for decades to build your wealth. But if you’re like many of us, it’s not enough to simply grow your assets. You also want to ensure that when you leave this world, your money goes to your loved ones and the causes most important to you. That’s why estate planning is a vital part of any financial plan. At Creative Planning, our wealth managers work with in-house attorneys to integrate your long-term wishes with your financial plan, maximizing your legacy through tax smart investing and distribution strategies. If you don’t have an estate plan or haven’t had yours reviewed in the last year, go to creativeplanning.com/radio now to schedule a free review meeting. With a team of credentialed specialists on your side, you can help ensure your wishes are carried out swiftly and privately without the messiness of a probate process that could cause undue burden on your loved ones. Don’t leave your legacy to chance. Go to creativeplanning.com/radio now to meet with our team. That’s creativeplanning.com/radio.

Now, back to Rethink Your Money, presented by Creative Planning, with your host, John Hagensen.

John: Well, it’s time for listener questions and answers. Remember, you can email your questions to radio@creativeplanning.com. I will personally respond to those, and in some cases, share them on the air, as I am doing today. Again, email your questions to radio@creativeplanning.com.

Our first question comes from Sydney D, not sure where this is coming from. It might even be from Antarctica. You’re going, “John, your radio show isn’t in Antarctica. Why?” No, iHeartRadio, Listen on Demand or to the podcast wherever you listen to podcast, maybe she is down in Antarctica. And so, Sydney, I guess it’s your summer down there. The ice isn’t quite as cold as normal. Her question is, “I asked my advisor about further diversification of my investments, by adding a second fund to the investment portfolio. Is it a good strategy to invest in two separate funds rather than only one?”

So this is a great question, Sydney. Diversification is one of those buzzwords, almost obnoxiously used within finance. You have to be diversified. Must be diversified. And yet, we often don’t define what diversification really entails. What does it mean? And so I would start by saying, a lot of this depends upon what one fund you own. Let’s suppose you owned like an index fund that was the total stock market. That one fund, believe it or not, is pretty diversified. But it’s still not fully diversified because it would mostly be large US stocks. You’re not going to have a lot of small cap. You’re certainly not going to have any micro cap. You’re not going to have any international, in most cases. You’re not going to have any bonds. And so you’d be fairly diversified from the standpoint that you weren’t concentrated in one stock. I mean, you’re not worried about Carvana going down 98% like it has. And so, yes, it’s highly likely that you want to invest in a couple of different funds.

But here’s the key, not just any funds. Diversification isn’t found in just owning a lot of stuff. Like, “Look at my statement. It’s 42 pages long. Look at all of my holdings. I’m so diversified.” I’ve had that before. When you actually break down the holdings, you say you’re all in tech and it’s all US stocks. So, yes, they’ll move slightly different from one another. But as a group, these are highly correlated to one another. What you’re looking for with diversification is owning things that have dissimilar price movement to one another. When one thing zigs, another thing zags, or at least maybe doesn’t zig nearly as far.

And so here’s an example that I’ve used with our clients in the past to help understand this concept of diversification. Imagine you’re in Seattle. And it’s just raining, like it tends to do in Seattle. And you have this great idea. You’re like, “I got it. I should start selling umbrellas. Because if I sell umbrellas, I am going to make so much money.” And for a while, you are making a bunch of money. And then August rolls around and Mount Rainier in all its glory is just staring you in the face, and the sun’s sparkling off of Elliot Bay and Puget Sound. The Olympic Mountains are over there. You get the idea. It’s beautiful. It’s sunny. You’re not selling any umbrellas. Nobody wants your umbrellas. You’re going broke. You thought you were a genius entrepreneur. And so rather than going bankrupt, you’re like, “I’m going to innovate here. I’m going to figure something out. I think I know why no one’s buying my umbrellas. It’s because they’re all black umbrellas. I bet if I sold blue and red and green umbrellas, I would have way more success.”

Of course, that’s stupid. No, you aren’t selling umbrellas because it’s not raining. It didn’t matter what color the umbrellas were. “Well, I’m really diversified though. I’ve got all these different colored umbrellas. Look at how…” No, they all accomplish the same thing. Start selling sunscreen. Start selling baseball hats. Because those things benefit from the same factors that make umbrella sales really bad. They zig when the other zags. That’s what you’re looking for with your investments.

And so effectively, you want your portfolio to look like one of those stands down in Mission Beach in San Diego, the ones on the beach that have been there forever, where you walk in and they’re selling 1 million things in a 10 by 10 box. How are the heck are they packing all this stuff in there? They’re like, “We don’t even know what you’re going to want. I just want to have every single thing that any tourist might want in this stand.”

But of course, when it comes to your portfolio, you want to be more thoughtful than that. And in fact, without getting way too nerdy on you, there’s something called the efficient frontier curve. And all that is to say is that there is an actual process for determining your highest likelihood of success, with risk and return, by how you are diversified. There’s an actual recipe to put those together for your risk tolerance, that provides you with the most optimal, and in this case, like the name says, which the Nobel Prize was won for, efficient portfolio.

Furthermore, you’re going to hit a lot of doubles. With a diversified portfolio, you’re never going to have all your money in the asset class that’s doing the best. But in my opinion, there is no better way to manage risk, there is no higher probability to protecting you against a catastrophic loss that derails your entire plan, than being properly diversified. So, yeah, I’d look at more than one fund in almost all situations.

And again, if you have questions like Sydney, ask them by emailing radio@creativeplanning.com. Let’s go over to Jim’s question. He’s in Arizona. “Stocks and bonds have done poorly. Why have bonds not held up as well as they normally do?” It’s a great question, Jim. Most people, if we’re continuing on from the previous question on diversification, would say, “Well, John, is diversification dead because that’s what I thought I was doing with bonds? They’d zag when stocks zigged and they didn’t.” And by the way, it is rare when stocks and bonds are both down, but it’s not unprecedented. But let’s start by going a layer deeper on bonds.

You see, all bonds are not created equal. The bond market is significantly larger than the stock market, which it’s just not exciting. It’s not talked about much. But short-term bonds are basically flat this year. I mean, they haven’t done great. You’re not running around bragging about them to your friends. “I got bonds. They’re flat.” But they haven’t gotten hammered. Intermediate and certainly longer term bonds have done very poorly because we’ve seen rapidly increasing interest rates. The Fed just said they’re raising rates another 50 basis points. And so as rates rise, bond prices fall. It’s like kids on a seesaw. The further out away from the axis you are, the more dramatic the ups and downs are. A short term bond is basically on the axis of that seesaw. The price isn’t moving a whole lot.

And by the way, that’s fairly intuitive. You lend money to somebody for three months. Rates rise. New bonds are paying more. You don’t really care because they’re paying you back in 90 days. And then you just go buy the new bonds that are at a higher interest rate. Oh, and if you had to unload them within the 90 days, you don’t have to discount them a whole lot. Because your friends aren’t really that worried about buying it from you either because they know they’ll get all their money back shortly. But if you buy a bond at 3% for 30 years, and three years into the 30 years, you can get a new bond, even shorter term as you’re seeing right now with an inverted yield curve, at 5% or 6%, nobody wants to buy the low interest bearing bond that you’re holding, and then sit there and suffer with that low rate for 27 more years. The only way you’re unloading that is with a heavy discount, which is why you see bond prices fall.

And that’s why I would suggest to focus on staying a bit shorter in the duration of your bonds. They’re much more stable. And generally, when you are diversifying and allocating away from stocks and into bonds, the purpose isn’t to try to beat stock returns. And so if you’re not buying bonds to increase returns, you’re doing it to increase safety and predictability. My opinion is, especially in years like this, let’s make sure that side of the portfolio actually is doing its job and is safer. Right now, what a phenomenal entry point we have. If you’re thinking, “Well, do I want bonds now?”, maybe you haven’t owned bonds. Well, the aggregate bond index has already dropped 15%. So unless you think rates are going way higher than they are right now, that risk of rising rates has diminished significantly, due to the fact that current rising interest rates and expected future rising interest rates are already baked into that discounted price of bonds.

Fantastic questions from both Sydney and Jim. If you have questions like them, email radio@creativeplanning.com to get those answered. Or if you’d like to sit down with a local advisor who’s not looking to sell you something, but rather give you clarity around what you’ve worked a lifetime to save, visit us now at creativeplanning.com/radio to request a complementary visit.

I want to conclude today’s show with a thought around this paradoxical idea that the skill of getting rich and the skill of staying rich, they’re not just different, they’re oppositional to one another. When you think about it, you create wealth by concentration, risk taking, optimism. Oftentimes, a lot of active personal involvement. Probably some luck, especially if you’ve made a lot of money. There’s definitely some of that as well. But when you’re looking to preserve wealth, you don’t want to be concentrated. You want to be diversified, as I just spoke about. You don’t want to take big risks. You want to have low risk. You generally want to have passive involvement and a disciplined investment process.

Well, what’s really hard about that is, if your hard wiring was the very thing that helped you acquire and obtain the money that you currently have, how do you flip a switch and turn that off? And the flip side of this is true as well. What made them successful, and why they have a stable awesome retirement, was because of characteristics like frugality, discipline, not spending money, saving diligently. And for that person, it can often be difficult to get in retirement and spend money. We can run the financial plan for someone who’s way overfunded, tell them they can spend more than $12,000 a year out of the portfolio, like, “Hey, you can spend up to $150,000 a year out of the portfolio,” and they go, “Well, why would we want to do that? Then our accounts might possibly go down a little bit.” It’s like, “Wait, but you have $3 million that you saved for retirement. You are in retirement. Why are you only spending a thousand dollars a month?”

Well, because it’s the same exact principle why the person who’s the risk taker has trouble not taking risks in retirement. They see their money as security, as a safety net. And if you really think about it, can a safety net ever be too big? Can it ever be too strong? Well, no. It could always be maybe a little thicker, a little stronger, a little more secure. Creative Planning President Peter Mallouk was quoted in Forbes on this very topic of just enjoying our wealth. And he said, “Successful people tend to keep score with money. Some were diligent savers, and now it’s hard for them to spend it. And it’s really a tragedy when they have a health event or get too old and time’s gotten away from them.”

And so my advice for you, don’t take an all or nothing approach, where you’re saving every penny or you’re spending every dime. Instead, create a long-term plan, that accounts for your personal and your financial goals, keep all of that in mind, and find a middle ground, where you’re preparing for the future, but you’re also enjoying the present. And I think it’s important to really think through, what actually does bring me pleasure? Some people really value experiences. Some value more material things. And for some, again, not all or nothing, it’s a combination of both. And that pleasure might mean enjoying it on yourself. It might mean giving to charity. It might mean enjoying little things or splurging a little more on a vacation. Again, as long as it’s within the context of your plan.

Because here’s what I can assure you, it’s not going to matter one bit if your heirs get $300,000 instead of $500,000, or $3 million instead of $5 million, or $30,000 instead of $50,000. But what I desire for you is that you have a healthy relationship with your money, that you save what you need to and you enjoy the rest. And by the way, if you’re not there yet, join the club. It is a rare combination and it’s difficult to achieve, but it’s a worthwhile endeavor for us all to pursue. Because we are the wealthiest society in the history of planet Earth. Let’s make our money matter.

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Disclosures: The preceding program is furnished by Creative Planning, an SEC-registered investment advisory firm that manages or advises on $225 billion in assets. John Hagensen works for Creative Planning, and all opinions expressed by John or his guests are solely their own and do not represent the opinion of Creative Planning. This show is designed to be informational in nature and does not constitute investment advice. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on this show, will be profitable or equal any historical performance levels. Clients of Creative Planning may maintain positions in the securities discussed on this show. For individual guidance, please speak with an attorney, CPA or financial planner directly for customized legal tax or financial advice that accounts for your personal risk tolerance, objectives, and suitability. If you would like our help, request to speak to an advisor, by going to creativeplanning.com. Creative Planning Tax and Legal are separate entities that must be engaged independently.

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Have questions or topic suggestions? 
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