PODCASTS

5 Money Lessons From 2022

Peter Mallouk Portrait

John Hagensen

Managing Director
PUBLISHED
January 02, 2023

As we say goodbye to 2022, John breaks down five money lessons he learned during the year. Plus, John gives an overview of the SECURE 2.0 Act (which was just passed by Congress) and examines how this piece of legislation will play a role in your retirement.

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 this abbreviated New Year’s show, my five money lessons from 2022 as well as how the recently passed $1.7 trillion omnibus spending bill impacts you. Now, join me as I help you rethink your money.

I want to start by putting a bow on 2022. It has been a wild year, and it all starts with an epiphany that I had standing in line at our local Barnes & Noble. Yup. I was buying my wife some stocking stuffers walking around the mall and wanted to get her a few magazines to read. And as I’m holding her natural health and home decoration magazines in my arms, in the midst of the backup from everyone doing last-minute Christmas shopping, I glanced at the four magazine covers that were right next to the register, and I had two observations.

First, Harry Styles was on three of the four covers, and it kind of made me feel old because I only sort of know who he is, but apparently he’s all the rage right now. My second takeaway came from the fourth cover that didn’t have Mr. Styles on it. It was a well-known financial publication that you would be very familiar with, and the cover said, “Our Forecasts and Predictions for 2023.” I couldn’t help but be reminded of how incredibly unashamed the financial media is. On this cover, it was saying, “Our stock picks. Our economic forecasts. Everything you need to know.”

Now, that should have been written in really small print, and then on the cover, in giant font, there should have been a disclosure that says, “The markets aren’t just unknown. They’re unknowable. So no matter how intelligent you think we are or we think we are, absolutely no one, including us, has any clue what is going to happen in 2023. This magazine is purely for entertainment purposes.” If it said that, I’d be okay, but they pushed this as if you should buy the magazine so that you can understand what’s going to happen in 2023.

I mean, think about this for a moment. The Federal Reserve has over 400 PhD economists, and they were telling us, up until recently, that inflation was transitory. They were still pumping money into the system long after they should have, and these are some of the smartest, brightest, most intelligent people in the world. And these people, on top of all of that, literally have the ability to manipulate the markets, and they were wrong. How many magazine covers on January 1st of 2020 were predicting the pandemic? Invest in light of the fact that we are going to have a global pandemic. Of course not, because it was unpredictable. No one knew that it would occur.

And so, as it’s famously been said, insanity is doing the same thing over and over again expecting different results. We can’t invest with the delusion that we know what’s going to happen in the future, but we certainly can learn a lot of lessons coming out of 2022 that will in fact help us make better money moves. So that’s my first bonus lesson from 2022, which is ignore all forecasts. Anything that starts with “I think, I believe, I suspect, I’ve read,” my research tells me, just ignore it. And if you don’t believe me, let me cite a Forbes article from January of 2022 that was titled Ten Predictions for 2022.

How about these three misses? “The consumer price index decelerates during the first half of the year.” Why don’t you say we try that one again? We saw 40-year-high inflation. They also predicted cryptocurrency and blockchain investments and applications continue to grow. The final sentence of that prediction, “Bitcoin exits the year with a price above 50,000.” And lastly, “Republicans will win back control of the Senate and Congress,” which of course we know now did not happen. So as you can see, forecasting is dangerous. Betting on someone to know the future is a risky proposition for your life savings.

Now, let’s move on to my five lessons from 2022. Number one, diversification still matters. Energy is up 50%. Utilities are basically flat. Consumer staples were basically flat. Healthcare is basically flat. Industrials were down about 6%. Basic materials, down about 12%. Financials, about 15%. Real estate, down about 30%. Technology, down about 30%. Consumer discretionaries, with Amazon being that sector’s largest constituent, down almost 40%, and communications, down about 40%. Intermediate-term bonds, down about 15%. Long bonds, down over 20.

And the reason that this year reminded us of diversification is because it wasn’t that long ago, just a year ago. If you were not in growth stocks, it seemed that you were content with subpar returns, and it’s difficult to remain disciplined to a diversified portfolio when it seems so obvious which asset categories and sectors are going to perform best. And so, when you’re diversifying, the key is know your time horizons. You ever seen in the Summer Olympics where they’re running the marathon? But two miles into this marathon, you’ve got some random person who’s not even on the radar of the top runners way out in front.

Now, of course, they don’t award that person the gold medal two miles in. The race is over 26 miles. It’s who wins in the end. The same thing is true with our money. You can’t judge your stock portfolio after 2022, because stock investments need time. They’re a five-, seven-, 10-year or longer investment. So just like no one really cares who’s leading the marathon two miles in, don’t worry about your stock performance after one bad year.

Another aspect of diversification, rebalance with an expectation of mean reversion. When a quarterback in the NFL throws four touchdown passes each of their first three games, no one actually extrapolates that out and says, “Oh, they’re going to break Peyton Manning’s 55-touchdown year. They’re on pace to throw 68 TDs.” By the way, Brady and Mahomes, tied for second with 50 touchdown passes in a single season, and the reason for that is there’s mean reversion, and the same is true with the stock market.

When we have consecutive years in 2020 and 2021 where everything is going up in value, you shouldn’t suddenly expect the market to deliver consistently 20% returns year after year. Instead, you should say those are outliers. They’re good years. I know that while the market averages about 10% a year historically, very few years actually land on 10%, meaning there are significantly better years and there are other years that are significantly worse. But as I just mentioned, certain sectors did far better than others, and this is why diversification matters.

My second lesson for 2022, understand bond durations. We’ve progressively, for 30 years up until 2022, been in, from a macro level, a decreasing interest rate environment. Well, that all changed with 40-year-high inflation, and we received a great slap-in-the-face reminder that when you cheat out on the yield curve, you buy 30-year bonds, you buy 20-year bonds, even buy 10-year bonds and rates rise, nobody wants those bonds. And there is considerable volatility even in bonds, when you own long bonds and rates rise, as we saw happen this last year.

One suggestion, if you take money out of your stocks, it’s generally to dampen volatility and reduce risk. Make sure the bonds that you own are in fact going to do the job that you have enlisted them to do by creating predictability when everything else seems to be falling. You can consider a laddering approach as well to minimize this risk. Number three, emergencies will not ask for your permission. As Maya Angelou said, “Hoping for the best, prepared for the worst, and unsurprised by anything in between,” is the approach that I recommend.

Maintain a safety net. Have your emergency fund in place. Have a buffer from your stock so that if they’re down in value, you have other places to go, in the event that you lose your job, a serious medical event occurs, or any other major expense that you were not prepared for, because the one thing that is certain is, over the course of your life as an investor, you should expect the unexpected.

Number four, inflation is a real factor in your success, and a reminder from this year is that what you can’t see can still hurt you. It reminds me, as a former airline pilot, of the difference between airspeed and ground speed. Which one do you think matters relative to when you land in Bora Bora? It’s not your airspeed. It’s your airspeed impacted and affected by either a head- or a tailwind, and inflation is a pervasive, consistent headwind and it has to be factored in, and your plan must account for inflation, meaning it’s incredibly punitive to carry a significant amount of cash. We were reminded of that. The past several years, you might have said, “Eh, losing a little bit to inflation, not much.” This year, you thought about it, “I don’t want too much in cash. I’m losing 8% by leaving it here.”

And my fifth and final money lesson from 2022, stay rational. And Morgan Housel outlined in his book, The Psychology of Money, how difficult it is as humans to be rational because we’re not robots. We’re human beings with emotions, but let’s at least be reasonable. And how do we stay rational and be reasonable? Avoid FOMO and envy. I have seen so many investors get into so much trouble because they didn’t want to miss out. And remember, if it’s a get-rich-quick opportunity, it’s also a get-poor-quick risk. Those are two sides of the same coin.

I mean, crypto is a perfect example. As the majority of late bloomers compiling in, many coins go to zero and the others are down 60 or 70%. How about meme and stay-at-home stocks? Those were great examples. “Oh man, I got to have Peloton, Teladoc, Carvana.” But staying rational means avoiding envy and it also means not acting emotionally, because everything you feel emotionally as an investor, it’s already priced in. And the best way that I’ve found to stay rational is have a plan that puts your emotions in check. Right? And one that you understand, one that you feel confident in, not just, “I don’t know. Somebody built me a financial plan,” but one that you fully expect will in fact work, even when, and notice I didn’t say if the unexpected occurs, but when the unexpected occurs. That should be built into that plan.

So, again, my five money lessons, diversification still matters, understand bond durations, emergencies will not ask for your permission, inflation is a real factor in your success, and above all else, stay rational. If you have questions or it’s on your New Year’s resolution list that you desire clarity and a true, real, detailed financial plan, not from someone looking to sell you something, but from a firm like us here at Creative Planning that has all the expertise, all the advice you need, all in-house, helping families just like you since 1983, managing or advising on $225 billion, why not give your wealth a second look by visiting us now at creativeplanning.com/radio to meet with a local fiduciary advisor? Again, that’s creativeplanning.com/radio.

Announcer: There are many components to a solid retirement plan, but the most important may be accounting for taxes. When’s the last time your financial advisor reviewed your tax return? Do your advisor and CPA ever meet to discuss your plan? At Creative Planning, that’s standard practice. We have attorneys, CPAs, and financial planners ready to work together to make sure you have proactive tax strategies built for your financial plan. Visit creativeplanning.com/radio to find out more. Proper tax planning isn’t just for the wealthy, it’s for everyone. Don’t risk losing thousands of dollars in retirement. Visit creativeplanning.com/radio to get started on your tax efficient retirement plan. That’s creativeplanning.com/radio.

Well, I want to transition over to this huge $1.7 trillion omnibus spending bill that has considerable implications for your personal finances, and you’ll hear this referred to SECURE 2.0 because it follows up on the original SECURE Act that was passed in 2019. Here’s a look at seven of the provisions in the package. Number one, it’s going to require auto-enrollment in 401(k) plans. Now, this doesn’t mean employees have to save in their plan, but they would have to actively opt out if they don’t wish to participate, and there are countless studies showing that this simple adjustment will improve the health of many Americans’ retirement plans.

Number two, it’ll allow employer contributions for student loan payments. So maybe you’re someone who says, “Well, I want to save for my retirement, but I think for my personal situation, it makes more sense to pay down student loan debt first.” Well, now you miss out on the potential for a match. That would change, and that provision would take effect after December 31st, 2023. Number three, increase the age for required minimum distribution. So if you are in your 60s right now or your young 70s, this will impact you in short order, because it used to be when you turned 70 and a half, you had to start withdrawing a required minimum distribution, you’ll hear it referred to as an RMD, from your 401(k) or IRA every year, then that moved to age 72, and under this new package, it’ll move up to 73 starting here in 2023 and then to 75 a decade later. And by the way, this makes sense because of how much longer we’re living and how much longer people are working.

Number four, the bill will help employees build and access emergency savings. Normally, if you tap your 401(k) before age 59 and a half, you must not only pay taxes on that money, but you also have a 10% early withdrawal penalty. Well, the impact of this is that many employees are essentially dissuaded from saving money in their retirement plan because they’re worried about how complicated and costly it’ll be to access for emergencies. Well, in this new act, it’ll let employees make a penalty-free withdrawal of up to $1,000 a year for emergencies.

Number five, raised catch-up contribution limits for older workers. Instead of 6,500 for your catch-up provision that currently exists, those aged 60, 61, 62, and 63 would be allowed to contribute 10,000 or 50% more than that regular catch-up amount. And the sixth personal finance impact of the $1.7 trillion spending bill is that it will enhance and simplify the Saver’s Credit, and I won’t spend much time talking about this because the provision doesn’t go into effect until after December 31st, 2026.

Number seven, it’ll make it easier for part-time workers to save. Part-time workers currently must be allowed to participate in their workplace retirement plan if they have three years of service or work, at least 500 hours per year. The new package will reduce that service time to only two years. And if you have other questions about SECURE 2.0 and how it affects your financial plan, get those answered by a local advisor by going to creativeplanning.com/radio right now, or again, that’s creativeplanning.com/radio.

And as I say every week, we are the wealthiest society in the history of planet Earth. Let’s make our money matter. Have a happy New Year, and I look forward to a fantastic upcoming year together in 2023. If you enjoy the podcast, please subscribe, share, and leave us a rating.

Disclaimer: 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.

Important Legal Disclosure: 
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