Life is about the journey, not the destination. Likewise, investing shouldn’t be merely about the destination. Our money should be seen as a tool that empowers us throughout our life — not just a means to an end. Join John as he takes us through the six most important lessons we can follow when it comes to getting the most out of both our life and our investment journey. (1:06) Plus, Creative Planning’s Chief Market Strategist, Charlie Bilello, is back on the show to talk about what could shock the stock market in 2024. (22:30)
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 Hagensen: Welcome to the Rethink Your Money Podcast, presented by Creative Planning. I’m John Hagensen, and ahead on today’s show, lessons that apply to both life and investing, how to combat lifestyle creep, and with the market making all-time highs, is now the worst time to be investing. Join me as I help you rethink your money.
Life, money. I’m right here beside you on this journey, as well. That’s where I want to start, that overlap of life and money. If you can picture a Venn diagram, with those two circles, one saying life, one labeled money, there’d be that section in the middle where they overlap. Ultimately, that’s the most meaningful part of your finances because that’s the part that isn’t just a number on a page. It impacts your reality, your relationships.
Kiplinger had a really interesting article, titled The Six Life Lessons that Also Apply to Investing, because beyond returns, a good investing experience depends on also how you feel on the journey, just like life. The first life lesson that also applies to investing is that uncertainty creates opportunity. Did you know that people switch their career plans roughly five to seven times on average? In fact, 53% of American college graduates use half or less of their education at work. People are changing careers all the time. Americans between 25 and 34 stay for only 2.8 years at a job on average.
We’re pretty good about taking risks as a society when it comes to looking for a better job opportunity, but how about picking up and moving somewhere far away from where you grew up? Well, this one is a lot tougher for most Americans. The median distance Americans live from their mother, I love that, from their mom, is 18 miles. Of course, the median isn’t the average, because some people live in Singapore and grew up in Dayton, so we’re looking at the median. Only 20% of people live more than a two-hour drive from their parents, according to the New York Times.
But that uncertainty that creates opportunities in life is evidenced throughout investing. There’s a phrase for this. It’s called the risk premium. When you invest money, returns are compensation for taking on uncertainty. Without risk, there would be no reward. But here’s the often overlooked component of risk, the risk that’s found in not investing. That opportunity cost that if your money doesn’t grow over time, it won’t buy you as much in the future, and you will go broke slowly.
Here’s some data that reflects that risk premium. Since 1928 going through the end of 2023, stocks have earned about 10% per year. Bonds, a lot less risk, a lot less volatility, far fewer negative years. You’ve made half. They’ve averaged 5% for the last 95 years. Cash, it even less risky than bonds, yes, and that’s why you’ve earned only 3.3% for nearly a century. Real estate, as measured by the Case-Shiller Index, has made 4.2% per year nationally since 1928. Gold, 4.9, and inflation has run at an average of right around 3%.
Now, to wrap your head around this, because those are just abstract percentages, let’s put some dollars around this. Let’s say you invested $10,000 in your 20s. You planned on retiring 40 years later, in your 60s. According to those historical returns, if you were in stocks, that 10 grand would grow to nearly $550,000 over the 40 years. By contrast, bonds, which earned half of stocks, well, you’d think, oh, I’m probably going to have about $225,000, right John? Because they’ve earned half of stocks, stocks are at 550 grand, I’ll be almost to a quarter of a million dollars, not as good, but I’m getting about half.
No, you’re not. That’s not how exponential compounding growth works. Bonds aren’t at 550 grand. Your 10K only grew to 73,000. Your 10 grand was even worse in gold. For all the volatility that you subjected yourself to, that only grew to 70,000, a little less than even bonds. And cash, ah, that safe cash, where you don’t have to worry about anything except actually living and keeping up with inflation, that $10,000 in cash only grew to $37,000 forty years later.
Second life lesson that also applies to investing: Plan, don’t predict. My auntie and cousin were visiting from Texas a couple of weeks ago. She was asking me about what time she should leave for the airport and get her Uber. I gave her the time, and I said, “You’re going to get there way too early, but whatever. It stinks being rushed and stressed out in the TSA line. Just get in there and grab your latte and relax.”
Well, it’s a good thing I gave her that time, because halfway to the airport, I realized she still had my car keys, that she had been driving around while she was in town, in her purse. She had to have the Uber driver turn around, drive back to our house, then head back to the airport, and she was still there in plenty of time.
In life, over-pack for the trip, apply to multiple colleges, leave for church early. This one hits close to home for me. I leave for a 10:30 service to a church that’s less than 10 minutes from our house at 9:50. I pick up my mom. I get her seated. I check in all of the kids, which for us takes forever, getting all their stickers on and taking them to all their little drop-off classes. I then, of course, need to get a coffee. Sometimes there’s a line for that, but it’s okay, because I have so much extra time. Then I go sit back down and save seats for the whole rest of the family, who are usually there about five to 10 minutes late. Sorry to my beautiful wife and my in-laws, but yes, you’re usually walking in on the second song, but don’t worry. The best seats are saved there for you because this guy’s a planner.
When it comes to your money, you should be making plans that account for a broad range of possible outcomes. If you lose your job, don’t be house-poor or riddled with debt. If you have an unexpected medical event, have an emergency fund in place. If the market returns are atrocious for a few years, they’re going nowhere, have a plan that allows you to still retire on time because your savings rate was good enough, and you lived below your means.
The next life lesson that applies to our money: Optionality adds value. You ever been to a restaurant, you order something, and they’re, “Oh, we’re out of that right now.” You are completely dismayed because you don’t like anything else on the menu, or you’re allergic to everything else. Well, if conversely, you like 20 things on the menu, and they tell you, “Hey, we’re out of that.”
“Oh, cool. No big deal. I was thinking about something else anyways. Let’s go with blackened Cajun mahi-mahi sandwich.” Options in life are a powerful thing, because you don’t have to accept results or situations or aggravation that you might have otherwise just had to. The whole expression, beggars can’t be choosers.
That applies to your money, as well, staying flexible with your portfolio, to be able to bob and weave as life changes, as laws change, as pandemics arise, as a great financial crisis ensues, as an incredibly raging bull market. Let’s say something positive here. Maybe that happens.
But, in particular during the downtimes, having flexibility is key, and if you want to extrapolate this down to one of the bottom layers, this is why I like direct indexing, or at a minimum using ETFs instead of mutual funds. You can’t sell a mutual fund during the day. You’re sharing in your neighbor’s taxes. You receive surprise distributions at the end of the year. You don’t have a lot of options.
Let me pause there for a moment. We’ve talked about uncertainty creating opportunity in both life and with our money; to plan, not predict; and that optionality adds value. If you’re wondering, “Do I have enough risk or not enough risk? Do I have a great plan? Do I have enough flexibility?” and you’d like to sit down with a credentialed fiduciary that’s independent and not looking to sell you anything, we are happy to help here at Creative Planning, as we have been for 40 years with clients in all 50 states and over 75 countries around the world. Why not give your wealth a second look? To speak with one of our wealth managers, just like myself, visit creativeplanning.com/radio now, or call 1-800-CREATIVE.
Our fourth life lesson that applies to money: Harness the power of compounding. I’m going to brag on my mother-in-law here for a moment. I know this is… Normally, when people say, “I’m going to talk about my mother-in-law,” it’s not always positive, but I happened to hit the lottery when it came to my mother-in-law. She is one of those retirees that looks about 15 years younger than she actually is. People are like, “What’s your secret? What’s your skin care regimen? What do you do?”
It sounds a little maybe anticlimactic. She’s made working out a priority since she was in her 20s and still does six to seven days every single week. She gets a lot of sleep. She doesn’t smoke. She drinks about a quarter of one Michelob Ultra with a little lime squeezed in every two years after a hike. “Oh, that Ultra sounds good.” She takes like two drinks and then is done with it. That’s why she looks good. She has compounded healthy habits for decades.
You don’t see that when someone’s 30. That shows up in their health and in their overall appearance as they age. That’s the compound effect. The same is true with our money. It’s one of the most well-known principles of investing. A 10% return on your investment each year, which is what the stock market has historically averaged, as I mentioned earlier, it doubles your money about every seven years.
Number five: Control what you can control. So much of your life and my life is out of our control. I think sometimes that can be hard to admit to ourselves, because it may create anxiety. This might be the weather. We planned a big Friendsgiving event this year in Arizona, where it never rains, and it torrentially down poured, and the entire event was in our backyard. Can’t control it.
When you’re an LA Rams fan and Puka Nacua gets held on a key third down play, it’s pass interference, but the ref doesn’t call it, you in turn do not get into field goal range to win the game against the Lions. You have to punt. You never get the ball back. You lose. That’s heartbreaking as a fan. We’ve all been there. However, you can take charge of how you prepare for and, most probably importantly, how you react to life’s inevitable curve balls.
Same is true when it comes to investing. You can’t control the direction of the markets. You can’t control Black Monday, a bear market, a dotcom bubble bursting, a great financial crisis, but you can control your savings rate, your risk exposure, your behavior in those times of heightened stress and uncertainty. You can control, most importantly, whether you have a financial plan, a written, documented, detailed financial plan. You can control the quality of your advisor. You can control your asset allocation, ensuring that during those times of down markets, you have enough safety in place to weather the storm. That is all determined and adjusted throughout the financial planning process if you’re working with a real, a true, fiduciary financial advisor.
Lastly, in life and with investing: Tune out the noise. If you’re like me, when you’re focused on an important goal, other people’s opinions honestly can be quite distracting. Now, I’m not saying you bury your head in the sand and look for no advice that could be helpful, or you don’t seek outside counsel from wise individuals who have been there before, but be very careful where you consume information, because if it’s the wrong source, it can derail otherwise good plans.
Some of the best decisions of my entire life were unpopular to others around me at the time, and they expressed that. I said, “Thank you so much. I appreciate your perspective, but I have such conviction and clarity on where I’m headed, I am proceeding as planned.”
When it comes to your exposure to the barrage of investment commentary, from TV pundits shouting stupid, ridiculous, almost wrong predictions, you know, sound really smart, or a friend telling you about the next big investment, to your iPhone pushing out notifications in real-time, the latest news of every single minute, just remember, things that seem too good to be true usually are. Ensuring you don’t yield to FOMO is really important to your lifetime success as an investor.
Here’s the advice, in my opinion, you should be looking for. Find a certified financial planner at a firm that’s been around for decades and verify they’re not charging you anything upfront, that your money isn’t locked up for years, that there’s going to be an in-depth, written, documented, detailed financial plan in place before any recommendation is made regarding a specific strategy or investment, and you should feel zero pressure at all to purchase a specific product of any kind.
Do you remember your first car? I don’t know if you loved it as much as I did mine, but I had a little Toyota truck. I can’t even say it was a Tacoma, because it was before Tacomas were even a thing. The model literally said, “Truck,” on my registration. It was a running joke with my friends in high school, but, ooh, I had some chrome rims on it, a little tonneau cover, nice speaker system with one of those six-disc CD changers. Oh yeah, when I got out of the car, I had a removable faceplate to my stereo. It was pretty cool, manual transmission, zero to 60 in about 20 seconds, little four-cylinder, but I loved that thing because it was my first car.
When comparing it to walking, getting a ride with my parents, or riding a bicycle, it was pretty amazing. I probably wouldn’t like that thing quite as much if I had to go back to it today, but it’s a small example of lifestyle creep. I think the common wisdom is that lifestyle creep is not within your control, like it’s pretty much just due to inflation. Yes, inflation does play a role. If you spend $100,000 per year today, you’re going to need to spend about $200,000 annually to have the exact same lifestyle 20 to 25 years from now.
If you parse out the math a bit more, someone spending $8,000 per month right now will need to spend about $8,200 or $8,300 per month next year. Now, fortunately, the data shows us that, due to a tight labor market, most Americans’ wages have actually been increasing enough to offset inflation so, hopefully, you’re making more proportionally to provide for that $200 to $300 increase per month that I just outlined, but there are plenty of other things, if we’re being honest with ourselves, that cause budgets to increase.
Sometimes it’s not as much about what we’re making. It’s that we spend whatever it is we are making. We figure out a way to fill that up, because our lifestyle tends to grow or creep up to and, in some cases for a lot of Americans, beyond what we’re earning.
Now, since we have a million kids, our house is much bigger than my wife’s and my first one-bedroom apartment, but isn’t it amazing that, no matter how many square feet you have, you seem to fill it all. It’s not like you end up in a larger house and four years later you walk in and go, “Wow. Half of this house is still empty.” You go into your closet. “I need a bigger closet. I don’t have room for all my stuff.” You move into a different house, the closet’s twice as big. A year later, you’re still running donations down to the clothing drop box. You have too many clothes.
How did this happen? It’s so subtle. That’s what makes this something I struggle with, you probably struggle with. It’s just, no one is immune to it, but lifestyle creep is a real thing, and it’s not just related to nonessentials, like your Crumbl Cookie order. It can be on really big things that are even more impactful, like vehicles, houses, the types of clothes you’re buying, where you’re staying on vacation.
If this is something you’d like to examine for yourself, let me provide you with a practical exercise. Go to your online banking and go back a couple of years. Look at what you were spending on average per month over a six-month period. You can go back further, if you’d like, but pick an interval, then compare it to what you spent last month.
You’re like, “John, no, no, no. Last month was December. It was Christmas. We did a bunch of crazy stuff.” All right, choose November or October, all right? Let’s just kind of game the system here, but compare it. Where are you spending more money, and is it necessary, or has it just kind of happened?
It’s not that you shouldn’t enjoy progressing in your career or aspiring for eventually a nicer home than your very first starter home that you bought when you were in your 20s. None of those things are bad. In fact, being aspirational can have a lot of benefits.
Every time you get a raise, take half of the raise and do whatever you want with it. Lifestyle creep the heck out of it. Get a nicer car. Take a nicer vacation. Upgrade your house. Buy nicer clothes. Give more money to causes that you care about. Take the other half and save it.
Think about this. If you used to make 100 grand and now you make 110,000, just pretend you now make 105,000, run your budget on that, and 5,000 extra dollars every year is being saved. Imagine compounding that over a 10-, 20-, 30-, 40-year career, where you’re almost certain to earn more money, a lot more money over time. That’s a great way to automate in a way that systematically increases your lifestyle, as we’re all susceptible to doing anyhow, and massively increasing your savings rate simultaneously.
If you have questions about your financial plan, your current savings rate, is it enough for you to achieve the goals that you have? We can answer that question for you at Creative Planning through a written, documented, detailed financial plan that we’ve been providing now for 40 years for over 60,000 clients across all 50 states and 75 countries around the world. Why not give your wealth a second look by speaking with an independent, credentialed fiduciary just like myself. Book your visit now at creativeplanning.com/radio.
Well, the markets are at all-time highs, Dow Jones, the S&P. Have you thought to yourself, now is a really bad time to invest? I mean, this can’t go much higher, can it? Look at all the growth the last four months.
Yet it can go higher, and no, it’s not a bad time to invest, at least using data and history as our guide rather than emotions. Just in 2023 alone, examples of how things went higher, credit card interest rates broke an all-time high of 21% from just 14.5 in March of ’22. Mortgage rates went to 7.79%, which were the highest since 2000, and up 5% from the all-time low of 2.65, which was just a couple years earlier in January of ’21.
College expenses. In certain areas of the country, prices on real estate hit all-time highs. It may surprise you to know that the market is at all-time highs, historically, just under 8% of the time. It’s not like at an all-time high a half of 1% of the time, or .001. It’s just under 10% of the time, the market is at all-time highs. It’s near all-time highs 30% of the time.
Here’s the wild thing. If you only invested from all-time highs dating all the way back to 1988, you would have actually earned better returns than the average returns you would have achieved just by investing on any other average day, according to Ben Carlson. There isn’t any statistical evidence that demonstrates you should avoid investing when the market’s at all-time highs. I think the reason might be so obvious, that’s why we miss it.
The market moves up and to the right over time. Two out of the three reasons the market grows pertains to inflation and dividends. No one thinks a movie ticket or a candy bar is going to cost less 20 years from now. All of us accept, of course, it’s going to cost more. The same applies to the stock market.
Consider this. On March 1, 2007, the market was really high, right? Back then, the S&P 500 index was at 1,530. Then it tanked. If you were someone who didn’t want to invest in ’07 because you said, “The market’s high. It’s going to go down,” by the way, most of the time you’d be wrong, but you happened to be right this time, and you were bragging about it, because the great financial crisis happened, and the economy was in shambles.
The problem is it eventually recovered, came screaming back, and continued on to new highs. Today, the S&P 500 is approaching 5,000 less than 17 years later; 1,530 doesn’t sound high anymore, does it? See, the risk of being out of the market is often greater than the risk of being in because it will run away and, often, never retreat back to previous all-time highs.
We understand this with real estate. That house that seemed expensive in Los Angeles for $1 million in 1985 doesn’t even buy a quarter of the dirt that the house sits on anymore, when compared with today’s prices. The takeaway is we all fall victim to recency bias, where we think there’s more relevance on what’s happening right now, and we anchor to those prices. We think that things can’t possibly go higher, but then we must remind ourselves, when our grandparent was sitting us on their knee and said, “In my day, Sonny, a candy bar cost a nickel,” and the same will be true when we’re popping our dentures out, talking to our great-grandchildren. “Sonny, the S&P 500 used to be 5,000. I tell you, everybody thought it was high.”
Well, my special guest today is Creative Planning Chief Market Strategist, Charlie Bilello. Charlie, thank you for joining me here on Rethink Your Money.
Charlie Bilello: Great to be back, John. Thank you.
John: Well, it’s well-noted that we had a fantastic end of 2023, which was the polar opposite of the massacre we saw in 2022, whether it be we stocks or bonds. As you look ahead, now that we’re into 2024, what do you see as a potential shock to the market that could derail some of the positive momentum that we have going right now?
Charlie: A few things. It’s strange, because it’s almost the opposite of what would’ve shocked the market heading into 2023.
John: Right.
Charlie: Because of so many things flipped on their head in 2023 versus 2022. I guess the number one thing that would shock people, just because of the dramatic performance, would be if the Magnificent Seven stocks were to underperform or even go down this year. I think that would be such a surprise, because the worst of the Seven was Apple, and it was up 49%. We know Nvidia led all the S&P 500 companies last year, and the AI story was huge, more than tripled on the year. From a stock market perspective, I would think that would be the biggest surprise.
John: Well, when growth is dominating, just like it was in the late ’90s or as it has for the last decade-plus, it does seem inconceivable that emerging markets or small value would change places and become the big winner, but we have seen that cyclical nature of the market time and time again, and it usually does come when sentiment is at its absolute highest, in terms of which companies are going to outperform. Don’t you think, Charlie, too, a lot was made of the performance of the Magnificent Seven during 2023? I’m not certain we can really address that without also looking at their performance in 2022.
Charlie: No question. If you put the two years combined, for many of those stocks, it was almost a flat period, Nvidia obviously being the exception there. But, yes, because in 2022, all of those seven stocks underperformed the market by a large amount, and then in 2023 would go on to outperform. If you put the two together, you’re absolutely right. We just got back to where we were, essentially, which was somewhat of an extreme, in terms of the relationship between growth and value, looking at things like the technology sector versus the S&P 500. The tech sector last year actually had its best year since 1999.
John: Wow.
Charlie: You could add the dramatic negative music after that for market historians that are with us in 2000, 2001, 2002. Of course, technology stocks got hammered. They were down over 80%. Is that going to happen again? Probably not. Every time is different, but the point being, don’t get too excited on the expectation that we’re going to see similar performance this year, in terms of those companies. It’s just very, very unlikely, given how much they went up last year.
John: It is hard. I mean, everybody talks about rebalancing, but these are the times where it takes a lot of discipline to rebalance, because everything you’re reading and everything you’re hearing, and certainly the way you feel is why do I want to rotate into an underperforming asset class when this feels all too easy? I buy these names that I interact with every single day and that every analyst is bullish on. Why not just buy those seven and lose my log-in?
Charlie: You have them in your portfolio already, so roughly 30% of the market is in those seven stocks, which was actually the highest concentration for any seven stocks in the S&P 500 in the last 40 years, and that’s all we have data on. It’s in there. I’m not saying to take them out or short it or do anything dramatic. You don’t want to root against them. Obviously, if they’re doing well, America’s doing well.
John, what I would say, another big shock to the market, and this may be even bigger than the Magnificent Seven, just given where sentiment is today, is in terms of what the Federal Reserve is going to do. This didn’t seem very likely. You and I were talking a year ago. The Fed was still hiking rates. They ended up hiking rates four times, bringing the Fed Funds rate up to 5.25% to 5.5%, got short-term yields highest since 2000, but the shock to the markets this year will be the opposite.
Last year, once again, if the Fed doesn’t cut interest rates, as they are forecasting, and as the market’s forecasting, so the Fed, in their December meeting, which was an upside surprise and one of the reasons why market got another boost there into year-end, they actually said they were going to cut interest rates three times in 2024. The market said, “You know what? You’re not only going to cut three times. You’re going to cut three more times. You’re going to cut six times.” That’s the expectation, that the Fed Funds rate’s going to go all the way down below 4% by the end of this year.
What would be the shock to markets? Well, they don’t cut as much, and they don’t cut as much because inflation becomes a problem again. It seems crazy, because a year ago, we’re worried about inflation. Now, everyone’s saying, “Inflation’s kicked. We don’t have to worry about it anymore. Let’s start cutting rates. We’ll go back to 0% interest rates and everyone will be happy again.”
John: I’m speaking with Charlie Bilello, Chief Market Strategist at Creative Planning. Let’s talk about all the preppers out there, prepping for the apocalypse, all right? We’ve got our cellar. It’s filled with cans. Gold bars are selling out in minutes. How do you think, if someone says, “Things have been way too good. We went through this pandemic, and we printed all this money. Look at our national debt, spinning out of…” How do I prepare myself against something catastrophic occurring? What’s your response to that person, who’s just kind of living in fear of investing?
Charlie: I would say, you have to get over that, if you want to be an investor. You have to take a long-term, optimistic outlook. You cannot believe that things are going to be worse 20 years from now than they are today. I don’t know if you read the book The Road by Cormac McCarthy, but if you think that that’s the scenario we’re going to be in, in 20 years, that post-apocalyptic scenario, anything you do in the investment world isn’t going to be very good, including those gold bars that are selling out at Costco.
If you think about that, though, John, let’s just break that down. I went down a little bit of a rabbit hole, probably spent too long thinking about it, but I’m on the Reddit threads, which I don’t recommend. People are talking about buying the gold bars. At first, it seems like, yeah, that makes sense, right? You’re not going to be able to get to your bank account. You have the gold. You can exchange that for water, for food, whatever else you might need, but then, real preppers step in. No, no, no. That’s not going to work out very well because, lo and behold, someone’s going to come and steal your gold bar from you with force, and therefore it’s not gold, but guns and ammunition that are going to be the real currency in that type of scenario.
John: Yeah, things that you can actually trade, right? Guns, cigarettes, alcohol.
Charlie: Yes, food, water.
John: Stuff that would be a commodity. Yeah, food and water, exactly.
Charlie: Canned food.
John: Because what are you going to do, go chisel off a little piece of your gold bar at 7-Eleven to get a six-pack. I don’t understand, you’re lugging it around in a backpack, exactly how that’s going to work if the world actually were to end.
It is a difficult posture, as an investor, because I’ve been in first appointments with people that say, “Well, what if all these companies go bankrupt? I don’t want to be in the stock market.” Obviously, it presents a very difficult foundation with which to invest money, because at that point, it’s like, yeah, you probably don’t care about the prospects of Apple’s future profits, if you think that the world’s going to literally be over, and we’re sitting in bunkers shooting at one another to protect our water.
Charlie: Yeah, the iPhone is not going to matter if there’s no power sources in that world, which is why it’s okay to be skeptical as an investor, but you have to think that prosperity is going to increase over the next 20 years. Maybe not today or tomorrow, but 20 years from now, things are going to be better off, and therefore corporate profits will be higher, and therefore, as an investor, you’ll be better off in the future than you are today.
Here’s the last point on this. Here’s the most ironic thing, for the people buying gold bars on Costco. Costco stock has been one of the best performing stocks in the S&P 500 since it went public in 1985. I think it’s up over 100,000%. Gold is up maybe 400% over that period of time. Yeah, a little bit better than inflation, but not as much as most people would think. If you’d just taken that money over the years and, instead of buying those gold bars and buying Costco instead, you’d have been much better off. Just a little bit of funny irony, and that’s often the case, right? A product that’s actually providing value… I don’t know if you’re a Costco guy, but…
John: Oh, yeah. I’m from the Pacific Northwest and grew up in the ’80s, so that was where Costco started. I remember, what’s this Costco company, where people were going and getting 100 paper towels at once, instead of the four that you would get at Safeway, you know?
Charlie: There you go, right? That, ultimately, in the long run, companies like that are going to compound that value, and they’re providing value, whereas gold, it’s not to say that it won’t be worth more in the future. We just don’t know how much. Historically, it’s only been a little bit above inflation, whereas stocks have done 6% to 7% above inflation.
John: It’s just reason number 526 for diversification. My thinking is, if you actually are very concerned about some sort of apocalyptic event or things getting very dire, then own every single company in the world that’s producing goods and services. Literally, the only way that that goes to zero is if all of those companies simultaneously go bankrupt. A great example is look at the restaurants out in your town. You’re in Long Island, right?
Charlie: Yep.
John: Pick a handful of the restaurants that you love, or try to determine which ones are going to be around 30 years from now or 50 years from now. You probably wouldn’t have a ton of confidence, even if you like the restaurant. I don’t know. A lot changes. Restaurants are pretty hit or miss. I don’t know how people are going to be consuming food 50 years from now, but if I just said, “Hey, Charlie, do you think people are going to eat somewhere on Long Island in some capacity 50 years from now?” You’d say, “Well, yeah.” That’s the idea of betting on all of society versus trying to handpick a few select companies that seem like they’re winners in the moment.
Charlie: Absolutely, and Costco, being a great example of that, has had an enormous run. Maybe it’ll continue. Maybe it’s not, but we can’t foresee the future of what competitor will come in, any other number of factors, valuation, things change. By owning the index, you own all of those best performers automatically, and the worst performers fade to nothing.
John: Absolutely.
Charlie: Over time, the companies that are going bankrupt, and it’s just a small number of companies… I think this is the biggest point for investors to understand. A small number of companies drive the overwhelming majority of the gains.
John: Yeah, there’s that ASU study that showed 4% of all publicly traded securities in history have produced 100% of the gains.
Charlie: It’s mind-blowing. There’s two ways you can interpret that: A, I’m going to pick that small percentage of companies, and then I’ll really outperform; or, gosh, it’s so hard to pick those companies, and therefore I need to own everything to make sure I don’t miss out on that small bucket. The more rational thing is obviously not to be overconfident in thinking that you could do it because, as we know, the professional investors who are doing this 80 hours a week can’t do it, so what are the odds that you’ll be able to do it? Not very high.
John: That’s definitely a needle in a haystack, because when Amazon was a bookstore, nobody was thinking it would become Amazon. I don’t know a lot of people that are worth $100 million because they bought Apple in the ’80s. The reason is because it had three or four draw-downs of over 50%. You don’t know if it’s going to be Enron or Bank of America or AOL or Palm or Blackberry. It’s just too hard to know. Even if you find the needle in the haystack, figuring out when it’s the right time to sell can be extremely challenging, as well.
Before I let you go, Charlie, I want to touch on one other thing that I think is a big topic right now. We’ve got $8.8 trillion in money market funds and CDs. What do you see as the opportunity cost right now of cash?
Charlie: It’s hard for investors to think about this because, in the short run, it almost seems like nothing. We say a bird in the hand is worth more than two in the bush. I’ve got 5.5%. Take that bird in the hand. I know I’m going to get it, for sure, at least until the Fed starts cutting rates, that’s what three-month treasury bill, and I’ll just keep doing that. I feel good, and I can sleep at night, and all the rest of it. In the short run, they’re not wrong in thinking that comfort level is there, and that higher level of certainty is there, but that higher level of certainty in the short run, the cost of that, is enormous in the long run.
If you look out, let’s say, 10 years and look at the average performance of cash. This is average. In the last 20 years, cash has done much worse than this. This is the average, looking in the last 100 years. Cash has done about 46% on average over a 10-year period, but stocks have done over 200%. If you put that in terms of dollars, you’re talking about stocks typically double every seven years or so. Cash would take you 20 years to double your money, and that compounding of that difference, John, over the long run, is going to be enormous. That’s almost regardless of where interest rates go from here.
I’m a big believer, by the way, in holding a sizable amount of cash, enough for emergencies and beyond that, so you can sleep at night and never think about panicking during a draw-down like we saw in 2022, in 2020. Those are coming again. You want to have enough cash, regardless of what the interest rate is, so that you can sleep at night and feel good and not be tempted to say, “I’ve got to sell everything.”
John: You never want to get into a situation where you have to sell equities at the worst possible time. While you were talking, Charlie, I ran 10 grand at 5%, which is generous in terms of long-term yield on cash. You end up with $44,000. At 10%, you’re at $200,000. It doesn’t feel like much in the short-term but, to your point, just compounded out over 30 years on a $10,000 investment, you’re at under 50 grand or at 200,000 is the difference.
Charlie: Yeah, and here’s the crazy thing. I just read an article the other day, that younger investors are embracing cash more than Baby Boomers. People in their 20s had a higher percentage of their account in cash, maybe because they were scarred by 2020, 2022, any number of reasons, than Baby Boomers who, presumably, would be thinking about retirement and taking less risk. They were embracing stocks more, which doesn’t make any sense. There’s never been a 25- or 30-year period where cash has outperformed the stock market. That includes the Great Depression. Even if we have another Great Depression, you should expect we’ll come out of it, and the stock market will likely still beat cash.
John: Yeah, I love it. Nothing gets me more hyped up than meeting with a 30-year-old prospective client, and we’re looking through their stuff. It’s like, “Oh, we have 70% of my 401(k) in cash or bonds.” It’s like, “Wait a second. You’re going to be penalized if you take this within the next 30 years. You have a 30-year runway here.”
“Yeah, I don’t know how the market’s going to do. I’m not real confident in the economy.”
“Wait a second. You’re 30. This is a retirement account. Put the money in stocks and lose your log-in if you have to, but do not be in these bonds or cash that’ll drag down, almost certainly, your return over a three-decade period.”
Charlie: I’ll do you one better. They should be hoping that it does go down, because they’re adding to their account, so root for a crash like we got in 2020.
John: Yeah, you’re a buyer, so you want to buy on sale, absolutely.
Charlie: Then you accelerate your contributions, no question. The only time this… No one ever thinks about it. The only time when you want a 1990s bubble is right before you’re going to withdraw the money.
John: Exactly, right.
Charlie: The other times, you want stocks to stay low, low, low, low, low until the very end, until you’re actually going to withdraw it. Then they should go up.
John: Yeah, if you’re that 30-year-old, you would love 29 years of flat markets, and then a 1,000% return in year 30.
Charlie: Yeah. How great would that be?
John: Well, if you can make that happen for all of us, Charlie, we would really appreciate it.
Charlie: Yes, I’ll do my best.
John: Hey, thanks so much again for joining me here on Rethink Your Money.
Charlie: Thanks, John.
John: Well, it’s time for listener questions, and one of my producers, Lauren, is here to read those for us. Hey, Lauren, how’s it going? Who do we have up first?
Lauren: Hi, John. Nick in Chandler, Arizona, asks, “What are the new emergency expense distributions through SECURE 2.0 that began in 2024?
John: The SECURE 2.0 was passed into law in December of ’22. What began just a few weeks ago here in January is this emergency expense distribution, where employers can add a provision to their plan that allows non-highly compensated employees to save for emergencies, up to $2,500 per year. Those savings, it’s worth noting, they’re not counted as part of the regular contribution amounts in the retirement plan and can be used by the employee at their discretion.
Additionally, you can withdraw up to $1,000 from your plan each year for unforeseeable emergency needs. These distributions will not be liable to the 10% penalty, if applicable. You’re able to take one of those distributions per year, and the money can be repaid within three years.
Employers are now able to also add a provision to their plan that allows withdrawals without the 10% penalty for terminally ill employees or victims of domestic abuse. Lastly, those taking distributions due to natural disasters will not be subject to the 10% penalty for early withdrawals, as long as they do not withdraw more than $22,000 and that their principal residence is in the federally defined disaster area and they suffer economic loss as a result from that disaster, so trying to provide a little bit more flexibility for these types of situations where I think, logically, everyone would say, “Well, why would they be penalized? They need this for a very good reason.”
Of course, the incentive, at a high level, is to encourage Americans to save for retirement. That’s why the penalties are in place, so that every time someone needs money, they’re not pulling out of a retirement account designed to help not only that individual, but also support our government programs that are stressed when we under-save as a society.
Of course, as always, there are 401(k) loans, as well, not to be confused with the withdrawal options that I outlined. The maximum allowed by the IRS that you can loan yourself is either 50% of the vested value of your account or $50,000, whichever is less. All right, Lauren. Who do we have for the last question?
Lauren Newman: Kelly from Fort Worth, Texas, wrote, “My daughter and her new husband are looking to purchase a home, and we would like to help them with the down payment. Would you advise using a loan from my 401(k)? I have around $400,000 saved and do not plan on retiring for another 10 to 15 years.”
John: Well, Kelly, I don’t know if you’re going to like my answer, but this is where personal finance is a lot more personal than it is finance. If this is a massive priority to you, and you’ve promised that you would do this, and this is the only place you can get the money from, and it’s more important than you needing to work longer to retire, then who am I to tell you not to do it?
But objectively, purely from a financial standpoint, I would advise against this. Now, you wouldn’t be alone in taking this loan. In fact, Fidelity had recent data out that showed 2.8% of all plan participants took a loan in 2023, which was up from 2.4% in 2022. The average loan amount also increased, according to Fidelity, from about $10,000 from 2018 through 2021 to $15,000 in 2022, and the average outstanding balance is $8,500.
According to the same study, the reason 401(k) loans are popular is the fact that 70% of retirement plan participants report that they don’t have enough in emergency savings to cover six months of expenses, so a lot of folks are taking 401(k) loans not for a one-off, as you’re referencing, but just, in some cases, because they have high interest credit card debt, and the 401(k) interest rate looks pretty attractive to consolidate some of that debt.
Again, it’s not ideal, but let me unpack briefly why I would try to avoid taking the 401(k) loan if there’s any other solution to help them get into this house and also post an article to the radio page of our website, written by Ryan Folster, on why 401(k) loans are growing in popularity, if you’d like to read that in detail. The reason I advise clients avoid borrowing from employer-sponsored plans is the long-term savings impact. You’re just going to have less for retirement. That’s kind of the obvious one. Number two, is the opportunity cost. There are significant advantages to contributing to a retirement account, tax deferred growth, compound interest. You obviously interrupt compound interest unnecessarily, per the late, great Charlie Munger, when you remove assets from a tax-deferred retirement account. Even a small loan can significantly impact your long-term savings when you account for the missed growth opportunity.
There’s also a double taxation component because, assuming that you’re not making Roth contributions, and this is a traditional, deferred 401(k), you’re making those contributions with pretax dollars. You’re then taxed on the assets when you withdraw them in retirement. However, when you take a 401(k) loan, repayments are made with your after-tax money, meaning you need to earn more than you actually borrowed to repay the loan, not even counting the interest.
For example, suppose you fall into the 24% tax bracket, and you take a loan. That means each dollar is worth only about 76 cents, not the full dollar, when thinking about how much you’ll need to repay it. Again, this is not including interest.
Number four, many retirement plans do not provide a match or even allow you to continue making deferrals while you have an outstanding balance. Obviously, the 100% return on your money through an employer match is the golden goose of all investing. You want to avoid missing out on that, at all costs.
Then, number five, the repayment requirements. If you leave your job, for any reason, you’re going to have 60 days to pay off the entire balance in full. If you fail to do so, your outstanding loan balance becomes a taxable distribution, and you said you’re not going to retire for 10 or 15 more years, so you’re probably under 59-1/2, meaning you’ll be subject to the 10% penalty on the remaining balance.
If you’d like to dive into this a bit more, Kelly, pertaining to your specific situation and how it fits into your plan and what other options you may have, we have an office there in the Dallas area. I know, Fort Worth and Dallas, they’re not the same. People in Fort Worth tell me that all the time. “We’re not the same. Don’t lump us together. I know the airport did with DFW, but that’s not us.” I get it, but we do have an office there in Dallas, if you’re willing to go from Fort Worth over to Dallas and meet with one of our wealth managers, just like myself, you can request that by visiting creativeplanning.com/radio. Remember, if you have questions, submit those, just as our listeners did today, by emailing radio@creativeplanning.com.
Well, New York Times financial sketch artist, Carl Richards, one of my favorites, he distills complicated financial topics into these visual masterpieces that are so simple that it makes them profound because of their simplicity, had a recent tweet that showed one circle with an arrow pointing in that says, “Scarcity,” and an adjacent circle, slightly open on the end with the arrow pointing out and up that says, “Abundance.” Richards made a great point. No matter how much you have, two things will always be simultaneously true. Number one, you don’t have enough, and number two, you have more than enough.
Now, this doesn’t matter specifically what we’re talking about, time, money, love, energy, resources. When you come to that realization, it could be either/or, then it becomes clear that the answer is found in perspective. I want you to ponder this. Are you someone who has an abundance mindset or a scarcity one? Which circle are you?
Do you live life feeling like the proverbial pie is fixed, like it’s only so big, and every slice taken means that less remains? If someone else wants to eat a piece of your pie, oh, that’s terrible, because now there’s less for you. The problem is, if that’s your mindset, you will grip everything in life with a clenched fist. You’ll protect everything around you, because it feels limited.
On the flip side, if you see abundance and a pie that can continue to grow, and maybe even grow exponentially, you’ll hold things in your life loosely, with an open hand. You find extreme generosity. You find patience. You find acceptance of others.
I want to encourage you to be grateful for the blessings in your life and pay attention to even the smallest of those because, just maybe, when you least expect it, with a fresh perspective, you’ll discover even more that have been there all along. Remember, we are the wealthiest society in the history of planet earth. Let’s make our money matter.
Announcer: Thank you for listening to Rethink Your Money presented by Creative Planning. To hear past episodes or learn more about the topics and articles discussed on this show, go to creativeplanning.com/radio, and to make sure you never miss an episode, you can subscribe to Rethink Your Money wherever you get your podcasts.
Disclaimer: The preceding program is furnished by Creative Planning, an SEC-registered investment advisory firm that manages or advises on a combined $245 billion in assets as of July 1, 2023. 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 or this station. This commentary is provided for general information purposes only; should not be construed as investment, tax, or legal advice; and does not constitute an attorney-client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable, but is not guaranteed. 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.
Life is about the journey, not the destination. Likewise, investing shouldn’t be merely about the destination. Our money should be seen as a tool that empowers us throughout our life — not just a means to an end. Join John as he takes us through the six most important lessons we can follow when it comes to getting the most out of both our life and our investment journey. (1:06) Plus, Creative Planning’s Chief Market Strategist, Charlie Bilello, is back on the show to talk about what could shock the stock market in 2024. (22:30)
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
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John Hagensen: Welcome to the Rethink Your Money Podcast, presented by Creative Planning. I’m John Hagensen, and ahead on today’s show, lessons that apply to both life and investing, how to combat lifestyle creep, and with the market making all-time highs, is now the worst time to be investing. Join me as I help you rethink your money.
Life, money. I’m right here beside you on this journey, as well. That’s where I want to start, that overlap of life and money. If you can picture a Venn diagram, with those two circles, one saying life, one labeled money, there’d be that section in the middle where they overlap. Ultimately, that’s the most meaningful part of your finances because that’s the part that isn’t just a number on a page. It impacts your reality, your relationships.
Kiplinger had a really interesting article, titled The Six Life Lessons that Also Apply to Investing, because beyond returns, a good investing experience depends on also how you feel on the journey, just like life. The first life lesson that also applies to investing is that uncertainty creates opportunity. Did you know that people switch their career plans roughly five to seven times on average? In fact, 53% of American college graduates use half or less of their education at work. People are changing careers all the time. Americans between 25 and 34 stay for only 2.8 years at a job on average.
We’re pretty good about taking risks as a society when it comes to looking for a better job opportunity, but how about picking up and moving somewhere far away from where you grew up? Well, this one is a lot tougher for most Americans. The median distance Americans live from their mother, I love that, from their mom, is 18 miles. Of course, the median isn’t the average, because some people live in Singapore and grew up in Dayton, so we’re looking at the median. Only 20% of people live more than a two-hour drive from their parents, according to the New York Times.
But that uncertainty that creates opportunities in life is evidenced throughout investing. There’s a phrase for this. It’s called the risk premium. When you invest money, returns are compensation for taking on uncertainty. Without risk, there would be no reward. But here’s the often overlooked component of risk, the risk that’s found in not investing. That opportunity cost that if your money doesn’t grow over time, it won’t buy you as much in the future, and you will go broke slowly.
Here’s some data that reflects that risk premium. Since 1928 going through the end of 2023, stocks have earned about 10% per year. Bonds, a lot less risk, a lot less volatility, far fewer negative years. You’ve made half. They’ve averaged 5% for the last 95 years. Cash, it even less risky than bonds, yes, and that’s why you’ve earned only 3.3% for nearly a century. Real estate, as measured by the Case-Shiller Index, has made 4.2% per year nationally since 1928. Gold, 4.9, and inflation has run at an average of right around 3%.
Now, to wrap your head around this, because those are just abstract percentages, let’s put some dollars around this. Let’s say you invested $10,000 in your 20s. You planned on retiring 40 years later, in your 60s. According to those historical returns, if you were in stocks, that 10 grand would grow to nearly $550,000 over the 40 years. By contrast, bonds, which earned half of stocks, well, you’d think, oh, I’m probably going to have about $225,000, right John? Because they’ve earned half of stocks, stocks are at 550 grand, I’ll be almost to a quarter of a million dollars, not as good, but I’m getting about half.
No, you’re not. That’s not how exponential compounding growth works. Bonds aren’t at 550 grand. Your 10K only grew to 73,000. Your 10 grand was even worse in gold. For all the volatility that you subjected yourself to, that only grew to 70,000, a little less than even bonds. And cash, ah, that safe cash, where you don’t have to worry about anything except actually living and keeping up with inflation, that $10,000 in cash only grew to $37,000 forty years later.
Second life lesson that also applies to investing: Plan, don’t predict. My auntie and cousin were visiting from Texas a couple of weeks ago. She was asking me about what time she should leave for the airport and get her Uber. I gave her the time, and I said, “You’re going to get there way too early, but whatever. It stinks being rushed and stressed out in the TSA line. Just get in there and grab your latte and relax.”
Well, it’s a good thing I gave her that time, because halfway to the airport, I realized she still had my car keys, that she had been driving around while she was in town, in her purse. She had to have the Uber driver turn around, drive back to our house, then head back to the airport, and she was still there in plenty of time.
In life, over-pack for the trip, apply to multiple colleges, leave for church early. This one hits close to home for me. I leave for a 10:30 service to a church that’s less than 10 minutes from our house at 9:50. I pick up my mom. I get her seated. I check in all of the kids, which for us takes forever, getting all their stickers on and taking them to all their little drop-off classes. I then, of course, need to get a coffee. Sometimes there’s a line for that, but it’s okay, because I have so much extra time. Then I go sit back down and save seats for the whole rest of the family, who are usually there about five to 10 minutes late. Sorry to my beautiful wife and my in-laws, but yes, you’re usually walking in on the second song, but don’t worry. The best seats are saved there for you because this guy’s a planner.
When it comes to your money, you should be making plans that account for a broad range of possible outcomes. If you lose your job, don’t be house-poor or riddled with debt. If you have an unexpected medical event, have an emergency fund in place. If the market returns are atrocious for a few years, they’re going nowhere, have a plan that allows you to still retire on time because your savings rate was good enough, and you lived below your means.
The next life lesson that applies to our money: Optionality adds value. You ever been to a restaurant, you order something, and they’re, “Oh, we’re out of that right now.” You are completely dismayed because you don’t like anything else on the menu, or you’re allergic to everything else. Well, if conversely, you like 20 things on the menu, and they tell you, “Hey, we’re out of that.”
“Oh, cool. No big deal. I was thinking about something else anyways. Let’s go with blackened Cajun mahi-mahi sandwich.” Options in life are a powerful thing, because you don’t have to accept results or situations or aggravation that you might have otherwise just had to. The whole expression, beggars can’t be choosers.
That applies to your money, as well, staying flexible with your portfolio, to be able to bob and weave as life changes, as laws change, as pandemics arise, as a great financial crisis ensues, as an incredibly raging bull market. Let’s say something positive here. Maybe that happens.
But, in particular during the downtimes, having flexibility is key, and if you want to extrapolate this down to one of the bottom layers, this is why I like direct indexing, or at a minimum using ETFs instead of mutual funds. You can’t sell a mutual fund during the day. You’re sharing in your neighbor’s taxes. You receive surprise distributions at the end of the year. You don’t have a lot of options.
Let me pause there for a moment. We’ve talked about uncertainty creating opportunity in both life and with our money; to plan, not predict; and that optionality adds value. If you’re wondering, “Do I have enough risk or not enough risk? Do I have a great plan? Do I have enough flexibility?” and you’d like to sit down with a credentialed fiduciary that’s independent and not looking to sell you anything, we are happy to help here at Creative Planning, as we have been for 40 years with clients in all 50 states and over 75 countries around the world. Why not give your wealth a second look? To speak with one of our wealth managers, just like myself, visit creativeplanning.com/radio now, or call 1-800-CREATIVE.
Our fourth life lesson that applies to money: Harness the power of compounding. I’m going to brag on my mother-in-law here for a moment. I know this is… Normally, when people say, “I’m going to talk about my mother-in-law,” it’s not always positive, but I happened to hit the lottery when it came to my mother-in-law. She is one of those retirees that looks about 15 years younger than she actually is. People are like, “What’s your secret? What’s your skin care regimen? What do you do?”
It sounds a little maybe anticlimactic. She’s made working out a priority since she was in her 20s and still does six to seven days every single week. She gets a lot of sleep. She doesn’t smoke. She drinks about a quarter of one Michelob Ultra with a little lime squeezed in every two years after a hike. “Oh, that Ultra sounds good.” She takes like two drinks and then is done with it. That’s why she looks good. She has compounded healthy habits for decades.
You don’t see that when someone’s 30. That shows up in their health and in their overall appearance as they age. That’s the compound effect. The same is true with our money. It’s one of the most well-known principles of investing. A 10% return on your investment each year, which is what the stock market has historically averaged, as I mentioned earlier, it doubles your money about every seven years.
Number five: Control what you can control. So much of your life and my life is out of our control. I think sometimes that can be hard to admit to ourselves, because it may create anxiety. This might be the weather. We planned a big Friendsgiving event this year in Arizona, where it never rains, and it torrentially down poured, and the entire event was in our backyard. Can’t control it.
When you’re an LA Rams fan and Puka Nacua gets held on a key third down play, it’s pass interference, but the ref doesn’t call it, you in turn do not get into field goal range to win the game against the Lions. You have to punt. You never get the ball back. You lose. That’s heartbreaking as a fan. We’ve all been there. However, you can take charge of how you prepare for and, most probably importantly, how you react to life’s inevitable curve balls.
Same is true when it comes to investing. You can’t control the direction of the markets. You can’t control Black Monday, a bear market, a dotcom bubble bursting, a great financial crisis, but you can control your savings rate, your risk exposure, your behavior in those times of heightened stress and uncertainty. You can control, most importantly, whether you have a financial plan, a written, documented, detailed financial plan. You can control the quality of your advisor. You can control your asset allocation, ensuring that during those times of down markets, you have enough safety in place to weather the storm. That is all determined and adjusted throughout the financial planning process if you’re working with a real, a true, fiduciary financial advisor.
Lastly, in life and with investing: Tune out the noise. If you’re like me, when you’re focused on an important goal, other people’s opinions honestly can be quite distracting. Now, I’m not saying you bury your head in the sand and look for no advice that could be helpful, or you don’t seek outside counsel from wise individuals who have been there before, but be very careful where you consume information, because if it’s the wrong source, it can derail otherwise good plans.
Some of the best decisions of my entire life were unpopular to others around me at the time, and they expressed that. I said, “Thank you so much. I appreciate your perspective, but I have such conviction and clarity on where I’m headed, I am proceeding as planned.”
When it comes to your exposure to the barrage of investment commentary, from TV pundits shouting stupid, ridiculous, almost wrong predictions, you know, sound really smart, or a friend telling you about the next big investment, to your iPhone pushing out notifications in real-time, the latest news of every single minute, just remember, things that seem too good to be true usually are. Ensuring you don’t yield to FOMO is really important to your lifetime success as an investor.
Here’s the advice, in my opinion, you should be looking for. Find a certified financial planner at a firm that’s been around for decades and verify they’re not charging you anything upfront, that your money isn’t locked up for years, that there’s going to be an in-depth, written, documented, detailed financial plan in place before any recommendation is made regarding a specific strategy or investment, and you should feel zero pressure at all to purchase a specific product of any kind.
Do you remember your first car? I don’t know if you loved it as much as I did mine, but I had a little Toyota truck. I can’t even say it was a Tacoma, because it was before Tacomas were even a thing. The model literally said, “Truck,” on my registration. It was a running joke with my friends in high school, but, ooh, I had some chrome rims on it, a little tonneau cover, nice speaker system with one of those six-disc CD changers. Oh yeah, when I got out of the car, I had a removable faceplate to my stereo. It was pretty cool, manual transmission, zero to 60 in about 20 seconds, little four-cylinder, but I loved that thing because it was my first car.
When comparing it to walking, getting a ride with my parents, or riding a bicycle, it was pretty amazing. I probably wouldn’t like that thing quite as much if I had to go back to it today, but it’s a small example of lifestyle creep. I think the common wisdom is that lifestyle creep is not within your control, like it’s pretty much just due to inflation. Yes, inflation does play a role. If you spend $100,000 per year today, you’re going to need to spend about $200,000 annually to have the exact same lifestyle 20 to 25 years from now.
If you parse out the math a bit more, someone spending $8,000 per month right now will need to spend about $8,200 or $8,300 per month next year. Now, fortunately, the data shows us that, due to a tight labor market, most Americans’ wages have actually been increasing enough to offset inflation so, hopefully, you’re making more proportionally to provide for that $200 to $300 increase per month that I just outlined, but there are plenty of other things, if we’re being honest with ourselves, that cause budgets to increase.
Sometimes it’s not as much about what we’re making. It’s that we spend whatever it is we are making. We figure out a way to fill that up, because our lifestyle tends to grow or creep up to and, in some cases for a lot of Americans, beyond what we’re earning.
Now, since we have a million kids, our house is much bigger than my wife’s and my first one-bedroom apartment, but isn’t it amazing that, no matter how many square feet you have, you seem to fill it all. It’s not like you end up in a larger house and four years later you walk in and go, “Wow. Half of this house is still empty.” You go into your closet. “I need a bigger closet. I don’t have room for all my stuff.” You move into a different house, the closet’s twice as big. A year later, you’re still running donations down to the clothing drop box. You have too many clothes.
How did this happen? It’s so subtle. That’s what makes this something I struggle with, you probably struggle with. It’s just, no one is immune to it, but lifestyle creep is a real thing, and it’s not just related to nonessentials, like your Crumbl Cookie order. It can be on really big things that are even more impactful, like vehicles, houses, the types of clothes you’re buying, where you’re staying on vacation.
If this is something you’d like to examine for yourself, let me provide you with a practical exercise. Go to your online banking and go back a couple of years. Look at what you were spending on average per month over a six-month period. You can go back further, if you’d like, but pick an interval, then compare it to what you spent last month.
You’re like, “John, no, no, no. Last month was December. It was Christmas. We did a bunch of crazy stuff.” All right, choose November or October, all right? Let’s just kind of game the system here, but compare it. Where are you spending more money, and is it necessary, or has it just kind of happened?
It’s not that you shouldn’t enjoy progressing in your career or aspiring for eventually a nicer home than your very first starter home that you bought when you were in your 20s. None of those things are bad. In fact, being aspirational can have a lot of benefits.
Every time you get a raise, take half of the raise and do whatever you want with it. Lifestyle creep the heck out of it. Get a nicer car. Take a nicer vacation. Upgrade your house. Buy nicer clothes. Give more money to causes that you care about. Take the other half and save it.
Think about this. If you used to make 100 grand and now you make 110,000, just pretend you now make 105,000, run your budget on that, and 5,000 extra dollars every year is being saved. Imagine compounding that over a 10-, 20-, 30-, 40-year career, where you’re almost certain to earn more money, a lot more money over time. That’s a great way to automate in a way that systematically increases your lifestyle, as we’re all susceptible to doing anyhow, and massively increasing your savings rate simultaneously.
If you have questions about your financial plan, your current savings rate, is it enough for you to achieve the goals that you have? We can answer that question for you at Creative Planning through a written, documented, detailed financial plan that we’ve been providing now for 40 years for over 60,000 clients across all 50 states and 75 countries around the world. Why not give your wealth a second look by speaking with an independent, credentialed fiduciary just like myself. Book your visit now at creativeplanning.com/radio.
Well, the markets are at all-time highs, Dow Jones, the S&P. Have you thought to yourself, now is a really bad time to invest? I mean, this can’t go much higher, can it? Look at all the growth the last four months.
Yet it can go higher, and no, it’s not a bad time to invest, at least using data and history as our guide rather than emotions. Just in 2023 alone, examples of how things went higher, credit card interest rates broke an all-time high of 21% from just 14.5 in March of ’22. Mortgage rates went to 7.79%, which were the highest since 2000, and up 5% from the all-time low of 2.65, which was just a couple years earlier in January of ’21.
College expenses. In certain areas of the country, prices on real estate hit all-time highs. It may surprise you to know that the market is at all-time highs, historically, just under 8% of the time. It’s not like at an all-time high a half of 1% of the time, or .001. It’s just under 10% of the time, the market is at all-time highs. It’s near all-time highs 30% of the time.
Here’s the wild thing. If you only invested from all-time highs dating all the way back to 1988, you would have actually earned better returns than the average returns you would have achieved just by investing on any other average day, according to Ben Carlson. There isn’t any statistical evidence that demonstrates you should avoid investing when the market’s at all-time highs. I think the reason might be so obvious, that’s why we miss it.
The market moves up and to the right over time. Two out of the three reasons the market grows pertains to inflation and dividends. No one thinks a movie ticket or a candy bar is going to cost less 20 years from now. All of us accept, of course, it’s going to cost more. The same applies to the stock market.
Consider this. On March 1, 2007, the market was really high, right? Back then, the S&P 500 index was at 1,530. Then it tanked. If you were someone who didn’t want to invest in ’07 because you said, “The market’s high. It’s going to go down,” by the way, most of the time you’d be wrong, but you happened to be right this time, and you were bragging about it, because the great financial crisis happened, and the economy was in shambles.
The problem is it eventually recovered, came screaming back, and continued on to new highs. Today, the S&P 500 is approaching 5,000 less than 17 years later; 1,530 doesn’t sound high anymore, does it? See, the risk of being out of the market is often greater than the risk of being in because it will run away and, often, never retreat back to previous all-time highs.
We understand this with real estate. That house that seemed expensive in Los Angeles for $1 million in 1985 doesn’t even buy a quarter of the dirt that the house sits on anymore, when compared with today’s prices. The takeaway is we all fall victim to recency bias, where we think there’s more relevance on what’s happening right now, and we anchor to those prices. We think that things can’t possibly go higher, but then we must remind ourselves, when our grandparent was sitting us on their knee and said, “In my day, Sonny, a candy bar cost a nickel,” and the same will be true when we’re popping our dentures out, talking to our great-grandchildren. “Sonny, the S&P 500 used to be 5,000. I tell you, everybody thought it was high.”
Well, my special guest today is Creative Planning Chief Market Strategist, Charlie Bilello. Charlie, thank you for joining me here on Rethink Your Money.
Charlie Bilello: Great to be back, John. Thank you.
John: Well, it’s well-noted that we had a fantastic end of 2023, which was the polar opposite of the massacre we saw in 2022, whether it be we stocks or bonds. As you look ahead, now that we’re into 2024, what do you see as a potential shock to the market that could derail some of the positive momentum that we have going right now?
Charlie: A few things. It’s strange, because it’s almost the opposite of what would’ve shocked the market heading into 2023.
John: Right.
Charlie: Because of so many things flipped on their head in 2023 versus 2022. I guess the number one thing that would shock people, just because of the dramatic performance, would be if the Magnificent Seven stocks were to underperform or even go down this year. I think that would be such a surprise, because the worst of the Seven was Apple, and it was up 49%. We know Nvidia led all the S&P 500 companies last year, and the AI story was huge, more than tripled on the year. From a stock market perspective, I would think that would be the biggest surprise.
John: Well, when growth is dominating, just like it was in the late ’90s or as it has for the last decade-plus, it does seem inconceivable that emerging markets or small value would change places and become the big winner, but we have seen that cyclical nature of the market time and time again, and it usually does come when sentiment is at its absolute highest, in terms of which companies are going to outperform. Don’t you think, Charlie, too, a lot was made of the performance of the Magnificent Seven during 2023? I’m not certain we can really address that without also looking at their performance in 2022.
Charlie: No question. If you put the two years combined, for many of those stocks, it was almost a flat period, Nvidia obviously being the exception there. But, yes, because in 2022, all of those seven stocks underperformed the market by a large amount, and then in 2023 would go on to outperform. If you put the two together, you’re absolutely right. We just got back to where we were, essentially, which was somewhat of an extreme, in terms of the relationship between growth and value, looking at things like the technology sector versus the S&P 500. The tech sector last year actually had its best year since 1999.
John: Wow.
Charlie: You could add the dramatic negative music after that for market historians that are with us in 2000, 2001, 2002. Of course, technology stocks got hammered. They were down over 80%. Is that going to happen again? Probably not. Every time is different, but the point being, don’t get too excited on the expectation that we’re going to see similar performance this year, in terms of those companies. It’s just very, very unlikely, given how much they went up last year.
John: It is hard. I mean, everybody talks about rebalancing, but these are the times where it takes a lot of discipline to rebalance, because everything you’re reading and everything you’re hearing, and certainly the way you feel is why do I want to rotate into an underperforming asset class when this feels all too easy? I buy these names that I interact with every single day and that every analyst is bullish on. Why not just buy those seven and lose my log-in?
Charlie: You have them in your portfolio already, so roughly 30% of the market is in those seven stocks, which was actually the highest concentration for any seven stocks in the S&P 500 in the last 40 years, and that’s all we have data on. It’s in there. I’m not saying to take them out or short it or do anything dramatic. You don’t want to root against them. Obviously, if they’re doing well, America’s doing well.
John, what I would say, another big shock to the market, and this may be even bigger than the Magnificent Seven, just given where sentiment is today, is in terms of what the Federal Reserve is going to do. This didn’t seem very likely. You and I were talking a year ago. The Fed was still hiking rates. They ended up hiking rates four times, bringing the Fed Funds rate up to 5.25% to 5.5%, got short-term yields highest since 2000, but the shock to the markets this year will be the opposite.
Last year, once again, if the Fed doesn’t cut interest rates, as they are forecasting, and as the market’s forecasting, so the Fed, in their December meeting, which was an upside surprise and one of the reasons why market got another boost there into year-end, they actually said they were going to cut interest rates three times in 2024. The market said, “You know what? You’re not only going to cut three times. You’re going to cut three more times. You’re going to cut six times.” That’s the expectation, that the Fed Funds rate’s going to go all the way down below 4% by the end of this year.
What would be the shock to markets? Well, they don’t cut as much, and they don’t cut as much because inflation becomes a problem again. It seems crazy, because a year ago, we’re worried about inflation. Now, everyone’s saying, “Inflation’s kicked. We don’t have to worry about it anymore. Let’s start cutting rates. We’ll go back to 0% interest rates and everyone will be happy again.”
John: I’m speaking with Charlie Bilello, Chief Market Strategist at Creative Planning. Let’s talk about all the preppers out there, prepping for the apocalypse, all right? We’ve got our cellar. It’s filled with cans. Gold bars are selling out in minutes. How do you think, if someone says, “Things have been way too good. We went through this pandemic, and we printed all this money. Look at our national debt, spinning out of…” How do I prepare myself against something catastrophic occurring? What’s your response to that person, who’s just kind of living in fear of investing?
Charlie: I would say, you have to get over that, if you want to be an investor. You have to take a long-term, optimistic outlook. You cannot believe that things are going to be worse 20 years from now than they are today. I don’t know if you read the book The Road by Cormac McCarthy, but if you think that that’s the scenario we’re going to be in, in 20 years, that post-apocalyptic scenario, anything you do in the investment world isn’t going to be very good, including those gold bars that are selling out at Costco.
If you think about that, though, John, let’s just break that down. I went down a little bit of a rabbit hole, probably spent too long thinking about it, but I’m on the Reddit threads, which I don’t recommend. People are talking about buying the gold bars. At first, it seems like, yeah, that makes sense, right? You’re not going to be able to get to your bank account. You have the gold. You can exchange that for water, for food, whatever else you might need, but then, real preppers step in. No, no, no. That’s not going to work out very well because, lo and behold, someone’s going to come and steal your gold bar from you with force, and therefore it’s not gold, but guns and ammunition that are going to be the real currency in that type of scenario.
John: Yeah, things that you can actually trade, right? Guns, cigarettes, alcohol.
Charlie: Yes, food, water.
John: Stuff that would be a commodity. Yeah, food and water, exactly.
Charlie: Canned food.
John: Because what are you going to do, go chisel off a little piece of your gold bar at 7-Eleven to get a six-pack. I don’t understand, you’re lugging it around in a backpack, exactly how that’s going to work if the world actually were to end.
It is a difficult posture, as an investor, because I’ve been in first appointments with people that say, “Well, what if all these companies go bankrupt? I don’t want to be in the stock market.” Obviously, it presents a very difficult foundation with which to invest money, because at that point, it’s like, yeah, you probably don’t care about the prospects of Apple’s future profits, if you think that the world’s going to literally be over, and we’re sitting in bunkers shooting at one another to protect our water.
Charlie: Yeah, the iPhone is not going to matter if there’s no power sources in that world, which is why it’s okay to be skeptical as an investor, but you have to think that prosperity is going to increase over the next 20 years. Maybe not today or tomorrow, but 20 years from now, things are going to be better off, and therefore corporate profits will be higher, and therefore, as an investor, you’ll be better off in the future than you are today.
Here’s the last point on this. Here’s the most ironic thing, for the people buying gold bars on Costco. Costco stock has been one of the best performing stocks in the S&P 500 since it went public in 1985. I think it’s up over 100,000%. Gold is up maybe 400% over that period of time. Yeah, a little bit better than inflation, but not as much as most people would think. If you’d just taken that money over the years and, instead of buying those gold bars and buying Costco instead, you’d have been much better off. Just a little bit of funny irony, and that’s often the case, right? A product that’s actually providing value… I don’t know if you’re a Costco guy, but…
John: Oh, yeah. I’m from the Pacific Northwest and grew up in the ’80s, so that was where Costco started. I remember, what’s this Costco company, where people were going and getting 100 paper towels at once, instead of the four that you would get at Safeway, you know?
Charlie: There you go, right? That, ultimately, in the long run, companies like that are going to compound that value, and they’re providing value, whereas gold, it’s not to say that it won’t be worth more in the future. We just don’t know how much. Historically, it’s only been a little bit above inflation, whereas stocks have done 6% to 7% above inflation.
John: It’s just reason number 526 for diversification. My thinking is, if you actually are very concerned about some sort of apocalyptic event or things getting very dire, then own every single company in the world that’s producing goods and services. Literally, the only way that that goes to zero is if all of those companies simultaneously go bankrupt. A great example is look at the restaurants out in your town. You’re in Long Island, right?
Charlie: Yep.
John: Pick a handful of the restaurants that you love, or try to determine which ones are going to be around 30 years from now or 50 years from now. You probably wouldn’t have a ton of confidence, even if you like the restaurant. I don’t know. A lot changes. Restaurants are pretty hit or miss. I don’t know how people are going to be consuming food 50 years from now, but if I just said, “Hey, Charlie, do you think people are going to eat somewhere on Long Island in some capacity 50 years from now?” You’d say, “Well, yeah.” That’s the idea of betting on all of society versus trying to handpick a few select companies that seem like they’re winners in the moment.
Charlie: Absolutely, and Costco, being a great example of that, has had an enormous run. Maybe it’ll continue. Maybe it’s not, but we can’t foresee the future of what competitor will come in, any other number of factors, valuation, things change. By owning the index, you own all of those best performers automatically, and the worst performers fade to nothing.
John: Absolutely.
Charlie: Over time, the companies that are going bankrupt, and it’s just a small number of companies… I think this is the biggest point for investors to understand. A small number of companies drive the overwhelming majority of the gains.
John: Yeah, there’s that ASU study that showed 4% of all publicly traded securities in history have produced 100% of the gains.
Charlie: It’s mind-blowing. There’s two ways you can interpret that: A, I’m going to pick that small percentage of companies, and then I’ll really outperform; or, gosh, it’s so hard to pick those companies, and therefore I need to own everything to make sure I don’t miss out on that small bucket. The more rational thing is obviously not to be overconfident in thinking that you could do it because, as we know, the professional investors who are doing this 80 hours a week can’t do it, so what are the odds that you’ll be able to do it? Not very high.
John: That’s definitely a needle in a haystack, because when Amazon was a bookstore, nobody was thinking it would become Amazon. I don’t know a lot of people that are worth $100 million because they bought Apple in the ’80s. The reason is because it had three or four draw-downs of over 50%. You don’t know if it’s going to be Enron or Bank of America or AOL or Palm or Blackberry. It’s just too hard to know. Even if you find the needle in the haystack, figuring out when it’s the right time to sell can be extremely challenging, as well.
Before I let you go, Charlie, I want to touch on one other thing that I think is a big topic right now. We’ve got $8.8 trillion in money market funds and CDs. What do you see as the opportunity cost right now of cash?
Charlie: It’s hard for investors to think about this because, in the short run, it almost seems like nothing. We say a bird in the hand is worth more than two in the bush. I’ve got 5.5%. Take that bird in the hand. I know I’m going to get it, for sure, at least until the Fed starts cutting rates, that’s what three-month treasury bill, and I’ll just keep doing that. I feel good, and I can sleep at night, and all the rest of it. In the short run, they’re not wrong in thinking that comfort level is there, and that higher level of certainty is there, but that higher level of certainty in the short run, the cost of that, is enormous in the long run.
If you look out, let’s say, 10 years and look at the average performance of cash. This is average. In the last 20 years, cash has done much worse than this. This is the average, looking in the last 100 years. Cash has done about 46% on average over a 10-year period, but stocks have done over 200%. If you put that in terms of dollars, you’re talking about stocks typically double every seven years or so. Cash would take you 20 years to double your money, and that compounding of that difference, John, over the long run, is going to be enormous. That’s almost regardless of where interest rates go from here.
I’m a big believer, by the way, in holding a sizable amount of cash, enough for emergencies and beyond that, so you can sleep at night and never think about panicking during a draw-down like we saw in 2022, in 2020. Those are coming again. You want to have enough cash, regardless of what the interest rate is, so that you can sleep at night and feel good and not be tempted to say, “I’ve got to sell everything.”
John: You never want to get into a situation where you have to sell equities at the worst possible time. While you were talking, Charlie, I ran 10 grand at 5%, which is generous in terms of long-term yield on cash. You end up with $44,000. At 10%, you’re at $200,000. It doesn’t feel like much in the short-term but, to your point, just compounded out over 30 years on a $10,000 investment, you’re at under 50 grand or at 200,000 is the difference.
Charlie: Yeah, and here’s the crazy thing. I just read an article the other day, that younger investors are embracing cash more than Baby Boomers. People in their 20s had a higher percentage of their account in cash, maybe because they were scarred by 2020, 2022, any number of reasons, than Baby Boomers who, presumably, would be thinking about retirement and taking less risk. They were embracing stocks more, which doesn’t make any sense. There’s never been a 25- or 30-year period where cash has outperformed the stock market. That includes the Great Depression. Even if we have another Great Depression, you should expect we’ll come out of it, and the stock market will likely still beat cash.
John: Yeah, I love it. Nothing gets me more hyped up than meeting with a 30-year-old prospective client, and we’re looking through their stuff. It’s like, “Oh, we have 70% of my 401(k) in cash or bonds.” It’s like, “Wait a second. You’re going to be penalized if you take this within the next 30 years. You have a 30-year runway here.”
“Yeah, I don’t know how the market’s going to do. I’m not real confident in the economy.”
“Wait a second. You’re 30. This is a retirement account. Put the money in stocks and lose your log-in if you have to, but do not be in these bonds or cash that’ll drag down, almost certainly, your return over a three-decade period.”
Charlie: I’ll do you one better. They should be hoping that it does go down, because they’re adding to their account, so root for a crash like we got in 2020.
John: Yeah, you’re a buyer, so you want to buy on sale, absolutely.
Charlie: Then you accelerate your contributions, no question. The only time this… No one ever thinks about it. The only time when you want a 1990s bubble is right before you’re going to withdraw the money.
John: Exactly, right.
Charlie: The other times, you want stocks to stay low, low, low, low, low until the very end, until you’re actually going to withdraw it. Then they should go up.
John: Yeah, if you’re that 30-year-old, you would love 29 years of flat markets, and then a 1,000% return in year 30.
Charlie: Yeah. How great would that be?
John: Well, if you can make that happen for all of us, Charlie, we would really appreciate it.
Charlie: Yes, I’ll do my best.
John: Hey, thanks so much again for joining me here on Rethink Your Money.
Charlie: Thanks, John.
John: Well, it’s time for listener questions, and one of my producers, Lauren, is here to read those for us. Hey, Lauren, how’s it going? Who do we have up first?
Lauren: Hi, John. Nick in Chandler, Arizona, asks, “What are the new emergency expense distributions through SECURE 2.0 that began in 2024?
John: The SECURE 2.0 was passed into law in December of ’22. What began just a few weeks ago here in January is this emergency expense distribution, where employers can add a provision to their plan that allows non-highly compensated employees to save for emergencies, up to $2,500 per year. Those savings, it’s worth noting, they’re not counted as part of the regular contribution amounts in the retirement plan and can be used by the employee at their discretion.
Additionally, you can withdraw up to $1,000 from your plan each year for unforeseeable emergency needs. These distributions will not be liable to the 10% penalty, if applicable. You’re able to take one of those distributions per year, and the money can be repaid within three years.
Employers are now able to also add a provision to their plan that allows withdrawals without the 10% penalty for terminally ill employees or victims of domestic abuse. Lastly, those taking distributions due to natural disasters will not be subject to the 10% penalty for early withdrawals, as long as they do not withdraw more than $22,000 and that their principal residence is in the federally defined disaster area and they suffer economic loss as a result from that disaster, so trying to provide a little bit more flexibility for these types of situations where I think, logically, everyone would say, “Well, why would they be penalized? They need this for a very good reason.”
Of course, the incentive, at a high level, is to encourage Americans to save for retirement. That’s why the penalties are in place, so that every time someone needs money, they’re not pulling out of a retirement account designed to help not only that individual, but also support our government programs that are stressed when we under-save as a society.
Of course, as always, there are 401(k) loans, as well, not to be confused with the withdrawal options that I outlined. The maximum allowed by the IRS that you can loan yourself is either 50% of the vested value of your account or $50,000, whichever is less. All right, Lauren. Who do we have for the last question?
Lauren Newman: Kelly from Fort Worth, Texas, wrote, “My daughter and her new husband are looking to purchase a home, and we would like to help them with the down payment. Would you advise using a loan from my 401(k)? I have around $400,000 saved and do not plan on retiring for another 10 to 15 years.”
John: Well, Kelly, I don’t know if you’re going to like my answer, but this is where personal finance is a lot more personal than it is finance. If this is a massive priority to you, and you’ve promised that you would do this, and this is the only place you can get the money from, and it’s more important than you needing to work longer to retire, then who am I to tell you not to do it?
But objectively, purely from a financial standpoint, I would advise against this. Now, you wouldn’t be alone in taking this loan. In fact, Fidelity had recent data out that showed 2.8% of all plan participants took a loan in 2023, which was up from 2.4% in 2022. The average loan amount also increased, according to Fidelity, from about $10,000 from 2018 through 2021 to $15,000 in 2022, and the average outstanding balance is $8,500.
According to the same study, the reason 401(k) loans are popular is the fact that 70% of retirement plan participants report that they don’t have enough in emergency savings to cover six months of expenses, so a lot of folks are taking 401(k) loans not for a one-off, as you’re referencing, but just, in some cases, because they have high interest credit card debt, and the 401(k) interest rate looks pretty attractive to consolidate some of that debt.
Again, it’s not ideal, but let me unpack briefly why I would try to avoid taking the 401(k) loan if there’s any other solution to help them get into this house and also post an article to the radio page of our website, written by Ryan Folster, on why 401(k) loans are growing in popularity, if you’d like to read that in detail. The reason I advise clients avoid borrowing from employer-sponsored plans is the long-term savings impact. You’re just going to have less for retirement. That’s kind of the obvious one. Number two, is the opportunity cost. There are significant advantages to contributing to a retirement account, tax deferred growth, compound interest. You obviously interrupt compound interest unnecessarily, per the late, great Charlie Munger, when you remove assets from a tax-deferred retirement account. Even a small loan can significantly impact your long-term savings when you account for the missed growth opportunity.
There’s also a double taxation component because, assuming that you’re not making Roth contributions, and this is a traditional, deferred 401(k), you’re making those contributions with pretax dollars. You’re then taxed on the assets when you withdraw them in retirement. However, when you take a 401(k) loan, repayments are made with your after-tax money, meaning you need to earn more than you actually borrowed to repay the loan, not even counting the interest.
For example, suppose you fall into the 24% tax bracket, and you take a loan. That means each dollar is worth only about 76 cents, not the full dollar, when thinking about how much you’ll need to repay it. Again, this is not including interest.
Number four, many retirement plans do not provide a match or even allow you to continue making deferrals while you have an outstanding balance. Obviously, the 100% return on your money through an employer match is the golden goose of all investing. You want to avoid missing out on that, at all costs.
Then, number five, the repayment requirements. If you leave your job, for any reason, you’re going to have 60 days to pay off the entire balance in full. If you fail to do so, your outstanding loan balance becomes a taxable distribution, and you said you’re not going to retire for 10 or 15 more years, so you’re probably under 59-1/2, meaning you’ll be subject to the 10% penalty on the remaining balance.
If you’d like to dive into this a bit more, Kelly, pertaining to your specific situation and how it fits into your plan and what other options you may have, we have an office there in the Dallas area. I know, Fort Worth and Dallas, they’re not the same. People in Fort Worth tell me that all the time. “We’re not the same. Don’t lump us together. I know the airport did with DFW, but that’s not us.” I get it, but we do have an office there in Dallas, if you’re willing to go from Fort Worth over to Dallas and meet with one of our wealth managers, just like myself, you can request that by visiting creativeplanning.com/radio. Remember, if you have questions, submit those, just as our listeners did today, by emailing radio@creativeplanning.com.
Well, New York Times financial sketch artist, Carl Richards, one of my favorites, he distills complicated financial topics into these visual masterpieces that are so simple that it makes them profound because of their simplicity, had a recent tweet that showed one circle with an arrow pointing in that says, “Scarcity,” and an adjacent circle, slightly open on the end with the arrow pointing out and up that says, “Abundance.” Richards made a great point. No matter how much you have, two things will always be simultaneously true. Number one, you don’t have enough, and number two, you have more than enough.
Now, this doesn’t matter specifically what we’re talking about, time, money, love, energy, resources. When you come to that realization, it could be either/or, then it becomes clear that the answer is found in perspective. I want you to ponder this. Are you someone who has an abundance mindset or a scarcity one? Which circle are you?
Do you live life feeling like the proverbial pie is fixed, like it’s only so big, and every slice taken means that less remains? If someone else wants to eat a piece of your pie, oh, that’s terrible, because now there’s less for you. The problem is, if that’s your mindset, you will grip everything in life with a clenched fist. You’ll protect everything around you, because it feels limited.
On the flip side, if you see abundance and a pie that can continue to grow, and maybe even grow exponentially, you’ll hold things in your life loosely, with an open hand. You find extreme generosity. You find patience. You find acceptance of others.
I want to encourage you to be grateful for the blessings in your life and pay attention to even the smallest of those because, just maybe, when you least expect it, with a fresh perspective, you’ll discover even more that have been there all along. Remember, we are the wealthiest society in the history of planet earth. Let’s make our money matter.
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Disclaimer: The preceding program is furnished by Creative Planning, an SEC-registered investment advisory firm that manages or advises on a combined $245 billion in assets as of July 1, 2023. 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 or this station. This commentary is provided for general information purposes only; should not be construed as investment, tax, or legal advice; and does not constitute an attorney-client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable, but is not guaranteed. 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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