Home > Podcasts > Rethink Your Money > A Blueprint for Maximizing Your Investments


A Blueprint for Maximizing Your Investments

Published on May 1, 2023

John Hagensen

We don’t need to find the next Apple stock to hit it big when it comes to our investments. In fact, studies show the best blueprint for growth is simply diversification. Find out why — and how you can maximize this strategy — on this week’s episode (2:39). Plus, learn how knowing and owning your money story is one of the more liberating things you can do (10:46). Finally, John answers whether a quirk in the payment formula for Social Security will negatively impact recipients born in 1960 (42:14).

Episode Notes:

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

John:     Welcome to the Rethink Your Money Podcast presented by Creative Planning. I’m John Hagensen and ahead on today’s show, the often-surprising benefit of diversification, how your financial past impacts your future, as well as the number one predictor of financial advisor recommendations.

Now, join me as I help you Rethink Your Money.

We’ve all pulled out a piece of paper, made a T-chart, and then wrote those famous big words at the top, pros and cons. And I remember doing this when I was engaged to my wife Britney, and I don’t want this to be misinterpreted. What I’m not saying is I was making a pros and cons list about marrying her. Okay? let’s not be confused here. That was the easiest decision I’ve ever made and still the best decision of my entire life. And the big one for us was where are we going to live? And we ended up settling in Arizona and when we were making that list, it was pretty easy. The pros? 350 days of sunshine. The cons? For three months of the year it feels like you live in an actual real life oven. But what I found with this decision is that if you keep a pros and cons list somewhere in a drawer and you pull it out after you’ve made the decision, you’ll notice a lot of them are wrong.

You either categorized them on the wrong side, you weighted them incorrectly, or you just flat out forgot certain ones that now you realized were pretty important in making that decision. Now you hope that the forgotten ones are on the pro side. Like for us, not realizing that if you got a pool you can cool off. We just put misters in recently. Amazing. At least 20 degrees cooler under the misters. We didn’t realize Northern Arizona was only two and a half hours away, 30 degrees cooler. It’s only a five-hour drive to the beach and we love Arizona. It turned out to be an amazing decision because many of the pros that we now appreciate weren’t even on our radar.

But sometimes you make your pros and cons list and then you determine it’s a good move and you buy the house and then the first night you’re there, the next door neighbor’s dog is barking nonstop for all eight hours you are trying to sleep. Or you walk outside and you’re smelling a water treatment plant. Man, the prevailing winds were not this direction when we did our walkthrough. Dang. That would’ve been nice to know.

And there’s a perfect parallel to this idea of pros and cons when it comes to investing and specifically with diversification. The perceived pro of diversification is that it protects you. That by not having all of your eggs in one basket, not making any big bets in any one spot, you provide yourself a lot better chance of not blowing up your financial plan. And that is absolutely true. There is no better way to reduce risk. I mean, if you’re someone who says, I am risk averse, you diversify. Now, that’s not controversial, but the typical con that accompanies the pro of safety when it comes to diversification is that you’re going to receive vanilla returns. They’re going to just kind of be meh. All right, ho-hum.

And I want to dive a bit deeper into whether in fact diversification will prevent you from achieving optimal returns. Hendrick Besson Binder, a professor at Arizona State University’s WP Carey School of Business did extensive research where he evaluated the lifetime returns to every US common stock traded on the New York and American Stock Exchanges and the NASDAQ since 1926, and here were some of his key findings. The largest returns came from very few stocks overall, just 86 stocks to be exact have accounted for 16 trillion in wealth creation, which is more than half of the stock market total over the past nearly a hundred years, just 86. And to extend this further, all of the wealth creation, not half, not some of it, all of it, can be attributed to the 1000 top performing stocks, while the remaining 96% collectively matched one month T-bills.

To reframe this data, 4% of stocks are responsible for boosting returns. 58% of stocks failed to beat treasury bill returns over their life, and 38% of stocks beat treasury bill returns by just a moderate amount. Look at Apple and Amazon alone. Apple has generated more wealth in the stock market than Exxon, despite being more than 50 years younger. Amazon was one of only 30 stocks that accounted for one third of the cumulative wealth generated by the entire US stock market from 1926 to 2017.

In light of this research, the obvious question is, all right, well, how do I ensure that I own those 4% that are basically going to account for all the growth? Well, I’ll let the late great John Bogle of Vanguard answer that question in his famous quote where he said, “Why look for the needle in the haystack when you could own the whole haystack?”

It’s highly unlikely that you or I will be able to achieve this by individual stock selection. That through research we’re going to identify one of these four percenters before the broad markets know that before it’s priced in… Because at the time, it is that proverbial needle in a haystack. Because for every Google, there’s a Yahoo. For every Facebook, there’s a MySpace, and for every iPhone there’s a Palm and a Blackberry.

Furthermore, what makes this so difficult is that even if somehow you were able to identify in advance one of those four percenter stocks, would you actually be able to hold it for 40 or 50 years despite massive volatility and no assurance that it would become the company that it is now today? Apple’s a perfect example. I don’t know a lot of people who are worth 30 or 35 million today because they invested a hundred grand in Apple back in 1983. Do you?

Well, part of the reason is what I just shared, very few knew Apple was Apple as we know it today in 1983. But furthermore, you would’ve had to own it through multiple drawdowns of over 50%, including times where it was down over 70%. And so there is actually a key lesson here, and it’s that diversification is not just a safety story, it’s a growth story. Because to capture market returns, you’ll need to own the handful of stocks that create all the growth of the market. And to ensure you don’t miss out on those, you’ll need to broadly diversify.

Now, in fairness, your potential for massive over-performance is going to only be accomplished through highly concentrated bets, but you’re also far more likely to lose and lose badly by taking that approach. And if you look at history, a diversified portfolio has made about 10% a year for the last century.

It’s doubling your money every seven years. In summary, you can move the word performance from the side of your chart over to the pros when it comes to diversification. If you have questions about your investments, fees, expenses, performance, asset allocation, asset location, whatever is on your mind, speak with one of our local fiduciary advisors here at Creative Planning by visiting our radio page at creativeplanning.com/radio. Why not give your wealth a second look?

Well, the SEC fined Betterment, which is an online investing platform, often you’ll hear them referred to as a robo-advisor, $9 million over tax loss harvesting issues. And I bring this up not to pick on specifically Betterment, but to highlight the broader lesson you can learn as an investor. This robo-advisor cost its clients $4 million in potential tax benefits due to faulty software the SEC found. And Betterment agreed to pay a $9 million financial penalty after the SEC found that the company made a series of material misstatements and omissions related to its tax loss harvesting service.

The commission found that the changes and errors cost roughly 25,000 accounts combined $4 million in potential tax benefits from 2016 through 2019. Here’s the takeaway. There’s value still in 2023 in having an actual human being who knows your situation, who can leverage AI or increase efficiency or planning for you by utilizing fantastic software, but that they’re also engaged with you.

Personal finance is more personal than finance, which is why it’s impossible in my opinion, for an algorithm to build a financial plan that takes into account who you are uniquely as a person, what makes you, you, specifically. Can’t be put on a spreadsheet.

I remember when these robo-advisors were launching and the narrative even within the financial advisor community was, oh man, are we going to have jobs? Is this going to replace advisors? And it became evident very quickly that if you were someone who liked doing your own investing and you wanted a slick platform to manage your own investment accounts, yeah, maybe the robo-advisor was an upgrade, but the drawbacks of lack of flexibility, limited personalization, oftentimes requires you to use them as an all-in-one solution, generally can’t be used within your 401k, unable to really do comprehensive wealth management that a firm like us at Creative Planning is able to do… Looping in CPAs and estate planning attorneys and tax attorneys. It’s difficult to do when it’s an online automated platform.

And so I believe the lesson for you is that there’s value in having a real human being who understands your situation, who knows you at a level beyond the X’s and O’s. Now, if you have questions about your money and you’d like to visit with a fiduciary who’s sitting on the same side of the table as you, an advocate for your success and aren’t sure where to turn, visit us now at creativeplanning.com/radio because we believe your money works harder when it works together.

My special guest today is Dr. Dan Pallesen. He’s a doctor of psychology as well as a certified financial planner. He’s a Wealth Manager here at Creative Planning. Welcome back to the show, Dan.

Dan Pallesen:    Happy to be here, John. Thanks.

John:     Well, Dan, although you’ve been a regular guest here on the show, I don’t think you’ve shared with us what brought you into this field of wealth management, personal finance, after being a psychologist?

Dan:       Well, John, I think I can trace it back to the five years I spent in federal prison.

John:     Okay. All right. You got to tell us more about that.

Dan:       All right, I’ll rephrase the five years I spent working in federal prison, so that makes sense. Right out of graduate school, my first job was working in the Federal Bureau of Prisons as a psychologist. I did a lot of assessments, but my favorite was treatment, a lot of individual and group therapy. And there’s this one individual that really stood out to me and what he remembers is when he was 12 years old, he was responsible for putting food on the table for himself and his three younger siblings. At 12 years old, John.

John:     Wow.

Dan:       Never met his dad. Mom was barely around, but it was his job to get food on the table, and he had a hard time doing that. But every once in a while, the “adults” in his neighborhood, which happened to be gang members, would give them some money or help them out, give them some food.

And he had this loyalty to this group as well as an understanding that to make money you have to do something like selling drugs. And that’s what he was in prison for. And I’m not making an excuse for his behavior and he wouldn’t either. He took a lot of ownership of it. But this environment that he grew up in, all he knew how to make money to survive was through some illegal activity.

And I remember sitting there thinking, I’m in a position as his therapist, but if I could go back in time and meet him at a younger age, equip him with some financial knowledge to empower him to make different decisions, I mean, that could really alter the direction of his life. And that’s when I really got passionate about some things like financial literacy. It’s when I got interested in financial psychology, so understanding people’s money stories and why they do what they do.

And so I loved my role as a therapist, but I felt like becoming a financial advisor was taking the next step and blending the desire to help people, which I had as a psychologist, as well as more of the practical, how do we move yourselves forward as a financial advisor?

John:     What is a money story, Dan?

Dan:       Yeah, a money story is just like it sounds. It’s what we believe to be true about money, and I use that definition intentionally. It’s not what we tell ourselves about money because that would imply that it’s at a conscious level, but what we believe to be true oftentimes in our subconscious are beliefs about money that inform our actions and our financial behavior. So they play out in how we make decisions around money through our lifetime.

John:     I’ll occasionally ask clients to fill in the blank. Rich people are, and then I would just pause.

Dan:       I love it.

John:     And people would say greedy. Other people would say successful. Some people would say hardworking. Some people would say workaholics. And so much of that answer was more in their subconscious. So I think it’s interesting when you can unlock the know thy self-concept and figure out, how do I feel about money and how is that impacting the way I think about things? So what are the different types of money stories, Dan, that exist?

Dan:       There’s countless types of money stories, but as a field of study, we’ve been trying to understand the different money stories that might stand out from others. We’ve been doing this research for about 45, 50 years since the late 1970s. We being financial psychologists or social psychologists, have been trying to study the idea or the constructs of a money story or a money belief.

And so you see some early money measures that were developed in the late 1980s. Most recently is this money inventory called the Klontz Money Script Inventory. This was developed by Brad and Ted Klontz, these are financial psychologists. It came out of Kansas State, which was the pioneer program in the country for financial therapy and financial psychology.

They studied all of these different ideas around money and tried to see are there some groupings that stand out amongst others, and they really found four different types of, they call them money scripts. I like that. I like the idea of a script. I mean, you think about a script, it’s what an actor uses to inform what they’re going to say, how they’re going to move. It’s how the movie plays out as it follows the script. And it’s same for our lives where what we believe to be true about money oftentimes plays itself out through our lifetime.

John:     And so while we’re all unique, you’re saying there are four broader categories that most people can identify with?

Dan:       Absolutely. I’ll go through them quickly. So number one is money avoidance. So this belief is that there’s something bad either in myself like I am bad, so I do not deserve money, or maybe it’s just money is bad. I love that, I would call it the verbal money roar shock test that you were giving, like that Ink blot test. Open-ended questions. Rich people are fill in the blank.

For someone with money avoidance, they might say, rich people are greedy or rich people are evil or rich people are bad. I mean, it’s this idea that something is inherently bad about money. If you’ve internalized that to be true about money, think about how that plays out in your lifetime. Another money script would be the opposite of that money worship. It’s this belief that if I just have more money, life will be better. Linking money and happiness. We know that once some basic needs are met, when you add more money into the mix, it doesn’t increase our happiness or our wellbeing, and I know that, but when I see the jackpot for Powerball is at a billion dollars, I mean, I still am fantasizing about what I would do with that extra money. So there’s some money worship I think in all of us.

John:     So often what we want is the chase of acquiring the money, and then once we actually have it doesn’t do what we had hoped it would. Then I thought about your money avoidance. That’s the person that says, “Well, money’s the root of all evil.” It’s one of the most misquoted Bible passages. It’s a love of money which leads into that second person who really fantasizes about how great it will be if they have all the money in the world. So what about the third person?

Dan:       The third type of money script identified is this money status. Similar to money worship, where more money might be better, but with this money belief or money story is that money can separate me from others. I’m comparing myself to others. Money can increase my status or just having more money allows me to climb that social ladder, which then brings about more happiness and satisfaction in our minds and our fantasies. And so you can see someone that has grown up seeing that money brings status. I mean, guess how that could play out? Appearing to have more money than you may actually have because you want to be seen as someone with a higher status.

John:     This is the person that’s posting all over the gram. I mean, they don’t even actually enjoy the vacation necessarily that they’re on, but I got to post it to prove it. The point of this whole thing is to show other people what I’m doing, and there’s nothing wrong with having a nice house or car or a designer handbag. It’s just you want to really think about this money script that you’re referencing. Why am I actually doing this? Do I want this for the right reasons?

Dan:       And I think that’s the key. I love that you asked that, John. I know you’re good at having these kinds of conversations with clients, with families that you serve, but I think that’s what it boils down to. It’s not that these money scripts are good or bad or bad. It’s just which ones are playing themselves out in your financial behaviors through your lifetime? Because becoming aware of that can really inform how you navigate these murky waters.

The last one that I’ll bring up is the opposite of a money status. It’s money vigilance, meaning I’m going to be really close to the vest when it comes to things around money. I’m going to hide money. I don’t want to talk about money. I don’t want to talk about how much I earn or how much I save or even how I invest. And so it’s this idea that money is either impolite and shouldn’t be discussed or on the other end of the spectrum, others might be trying to take your money. So you need to be as secretive as you can be when it comes to money.

A lot of times when I ask clients about their childhoods and what were some of the messages that they received early on about money, because I’m trying to dig into these money beliefs that they have and to understand how I can better work with clients. Sometimes they have some great answers. More often than not, clients will think about it and they’ll go, you know what? Money actually wasn’t really discussed.

John:     Silent generation, greatest generation, those generations didn’t talk about money

Dan:       Yeah. And think about growing up in a household and money was never discussed, but maybe you felt that there was some scarcity and you didn’t know what your parents were doing. Or the opposite, maybe there was some abundance that you felt but it was just never discussed. I mean, what kind of message do you think you grow up with in a household like that? It’s that internalization of money really should not be discussed.

John:     I’m speaking with Creative Planning’s, Dr. Dan Pallesen. I want you to put on your psychologist hat here for a moment and answer this question. I’m curious, can you drift between these different four categories or is your script unchangeable?

Dan:       I would say it’s a little bit of both. When I’m stressed out, I mean I’m just trying to survive the moment, so I’m reverting back to the money stories that I’ve internalized from a young age. But as I do some internal work and explore what my own money beliefs are, I can absolutely drift.

John:     Interesting, because I feel like as you mature and as you have new experiences, you may potentially, like in a lot of areas of life, feel differently than maybe you did 10 years earlier.

Dan:       Absolutely. I mean, I’ll even share a personal example, john. My wife and I have been pretty open about this. My money beliefs really became apparent to me right after we got married. I remember we came back from our honeymoon. We sat down, we had one of our first money discussions as a married couple. We just laid it all out there. We looked at our income, our expenses, our debt, our goals, and we were excited to have this discussion. But pretty soon we started to feel the pinch of being young newlyweds and not having as much, and my inclination when I’m under stress is to spend less and I think, well, I can control spending, so let’s just spend less.

Whereas my wife, her instinct is to figure out ways to earn more. And when we dug into that, I realized I was raised by working class parents. I love my parents. They taught me a really good work ethic when times felt tight, we just made sure to buy things off the clearance rack, and that’s just what we could control. Whereas my wife’s dad was this hard charging entrepreneur. He took a lot of risks, made a lot of money, lost money, and so she had seasons of life where either they had a lot or they didn’t have a lot, but she always saw her dad trying to figure out how to make more. So these money beliefs have been internalized by both of us. Now we’re married and trying to figure out what to do with our household finances. We’re just coming at it from different places.

John:     Wow. Well, I’m really worried about your wife and you actually Dan, because Britney, my wife and I, we have never disagreed about anything around money ever before.

Dan:       I’m sure. I’m sure.

John:     I don’t know, man.

Dan:       Yeah. Yeah. Yeah.

John:     I don’t know man. Yeah. When can money stories be helpful and when do you find them to be hurtful?

Dan:       I think we need to be careful of identifying a money belief as good or bad, and I know that’s not what you’re asking, but it’s quick for us to label these money beliefs. I’ll go back to the research. So we’ve identified these different types of money stories or these money scripts. Someone that has high money status or high money worship, we know that their behaviors are correlated with earning more money than someone who’s more money avoidant. And that makes sense, right? I mean, if you’re intrinsic belief is that money is bad, you’re not going to be striving a lot of your lifetime to be earning money.

And so we do see some correlations between financial behaviors like income and money scripts, but taken to the extreme, I mean back to the person who’s earning more, if they’re earning more, but their belief about money is the more I have, the better I feel or the less problems I have or the better I am socially. They get to that point and they don’t feel that satisfaction, they can be left wanting more. It’s that dangerous lifestyle creep that I think a lot of us can feel as time goes on.

John:     Let’s continue with that money vigilant person as an example. Their financial plan is run and they’ve got way more than they’re ever going to need and they’re going to die with millions and they don’t even like their kids or they don’t really care where it goes. They they’d prefer the check to the mortgage to bounce rather than it going to Mr Deeds somewhere else. But they say, this is my money story. This is my script. I grew up out of a depression era parents who poured the tea water into the ketchup bottle to get the last drop out of it at the dinner table. I watched this, we threw away nothing we splurged on nothing. How do I change this because this is actually a problem that I’ve now recognized, but I don’t know how to change it. How can someone who genuinely, and this applies to all four categories… Who sees some negativity with their current story, wants to evolve, wants to grow. How do they do that?

Dan:       I think it starts with understanding the root of the money story. If you’re willing to be open-minded, look inward and understand what are the roots of my money beliefs? How deeply do they seep into my subconscious, and when you start to uncover some of that, you’re more willing to change or to evolve or to have your money decisions play out a little bit better.

John:     Well, Dan, as we wrap this up, I’m kind of putting you on the spot here, but do you have a moment with a client that you’ve interacted with recently that’s made an impact on you that you’d be willing to share with us?

Dan:       Absolutely. John. I love when the financial plan comes together and people see it for the first time, and I’m thinking of a meeting recently, her husband passed. She did not know where she stood financially and was still working and came in wanting to retire, but thinking she might have to work another 10 years. But through the financial plan, I was able to show her you’re at your financial independence date today. I mean, you can keep working if you want to, but you could also retire today and live the kind of life that you want to in retirement. And seeing even the tears come down in the meeting was really touching. So my favorite is being able to be the bearer of good news of you’ve done a great job. Seeing that come together just gives me goosebumps.

John:     That is a great story. Thanks for sharing that with us, Dan, and for joining me here on Rethink Your Money.

Dan:       Thanks so much, John.

John:     I’ve been speaking with Creative Planning Wealth Manager, Dr. Dan Pallesen.

If you’d like to connect with one of our wealth managers like Dan or myself, we have a local advisor ready to help answer the questions that are on your mind. Visit creativeplanning.com/radio now to schedule your complimentary visit. Why not give your wealth a second look?

John:     Would you rather outperform during bull markets or during bear markets? This was a question Ben Carlson recently posed on his blog of Wealth of Common Sense. It’s worth pondering because it provides you with insight into how you think when it comes to your money.

Investors put forth a lot of energy and effort into trying to beat the market, whether it be hedge funds or active mutual funds or using separately managed accounts, trying to pick individual stocks, buying alternatives, whatever it is. But the vast majority don’t accomplish what they’re trying to do.

We know that from all the recent data, if you look at the over-performance rates from the last decade or 15 years or 20 years, simple indexes beat roughly 90% of all actively managed funds. But if you look at just last year, which was an atypical year where stocks and bonds both performed poorly, actively managed funds did better at beating their benchmarks than they certainly had in recent years.

Now that is not in any way an endorsement that now is the time to pile money into more expensive active mutual funds. It’s merely to point out that last year was a bit better. Would you rather be up 50% when the market’s only and I say only with a grin up 40% or would you rather be down 10% when the market’s down a full 20%? For most people, they’d rather outperform during bear markets, and the reason is intuitive. Losing money hurts really bad and the pain of losses is far greater than the joy of victory.

Think about your favorite sports team’s championship. You were probably very happy. Then think about their most soul crushing last second defeat and how disappointed you were. I bet that emotion of anguish was a lot stronger and you held onto it for far longer than the year you hoisted the trophy.

And so while diversification all but ensures that you’ll underperform the absolute best stock or best sector if you’d gone all in on that in advance, thankfully, you will also outperform the worst asset class or the worst sectors are stocks during bear markets.

This risk management principle is worth building into your financial strategies. Understanding that minimizing your losses will by all accounts leave you far more satisfied certainly in the long run than you would be disappointed in not over-performing in the good times.

And if you have questions about your financial situation, we are here to help answer those as we’ve been doing since 1983 for families in all 50 states and over 75 countries around the world. Why not give your wealth a second look by visiting creativeplanning.com/radio now to speak with a local advisor.

Well, it’s time for Rethink or Reaffirm where together we will break down common financial wisdom and decide if we should rethink it or reaffirm it.

Our first piece of wisdom to evaluate is that recent volatility represents the new normal. Let’s look at the VIX data. The Chicago Board of Options Exchange Volatility Index is a gauge for stock market volatility and investor sentiment. It measures the expectation of future volatility based on a snapshot of the previous 30 days worth of trading activity. The higher the index level, the choppier the trading environment. For the decade of the 1990s, the measurement was at 19.7. The two thousands, 22.1. The 2010s, 16.8. And right now 2020 through 2022, 24.4.

So this decade thus far has had a higher VIX than any other decade in the last 30 years, even more than the 2000s, which is considered the lost decade for large US stocks where we saw the dot com bubble bursting, we saw the great financial crisis in 2008 and into 2009. But to use this as an indicator that this is the new normal, I think would be foolish because we’re only three years into a 10-year decade and the first year of that decade involved a global pandemic where the world shut down. We saw massive monetary and fiscal stimulus. That period included the fastest bear market we’ve seen in the history of the market. Then an increase by over 70% coming off the bottom toward the end of March of 2020.

The ripple effect of that was in 2022, some of the fastest interest rate increases in the history of our country causing even more volatility. And so I think it makes sense that the first few years of this 10-year period have been more volatile than the average of each of the last three decades. From 2010 through 2019, there were only nine months with a 5% drop or more. This decade in three years we’ve already seen seven. But in answering the question of whether recent market volatility represents the new normal, the verdict is a rethink. This has been a relatively short period of time, outlier circumstances and returns.

Your answer to short-term volatility should be a shrug and a who cares because if the money that you have exposed to the stock market is meant for long-term goals, you don’t need it for 5 years or 7 years or 10 years or 30 years, then what the VIX Index shows for the first 3 years of one decade is completely irrelevant other than it’s kind of interesting because over time the market has shown to work back to its averages.

Our next piece of common wisdom, the incentives of my advisor are the biggest indicator of the type of advice I will get. We are humans and our behavior follows the incentives that are in front of us, and we do this from the time we are very small. As a parent to seven kids, we do a sticker chart in our house and the incentive is after they get five stickers, we pull down this treasure box and they get really excited. They open up this half broken on the hinges treasure box and they’ve got things like gum and PEZ, $1 bills. We have little bites in there which are these kind of muffin cookie things that obviously are just filled completely with sugar because they love them. But we got away from doing the sticker chart for a while and at one point when they were being a bunch of knuckleheads, my wife said, .””Why did I stop doing the sticker chart? It’s so motivating for them. I’m going back to the sticker chart and it was amazing. Within a week they were making their beds in the morning, they were cleaning their rooms. Our dog and cat were finally able to eat again.

And this is why when you are hiring a financial advisor, you should be far more focused on the inherent conflicts of interest, the way that they are paid, whether they’re held to a fiduciary standard or not, than whether you like them or you think that they’re really smart. I mean, that’s fantastic. I would say those are table stakes. You should like and feel comfortable with the person you’re working with and they should be competent, they should be credentialed. They should have the designations that you’re looking for and the level of professional expertise to get the job done. But far more important to your outcomes will be their incentives.

You hear a lot of the word fiduciary. I even talk about it on this show, someone who’s legally required to put your interests ahead of their own, but put more simply. It’s really advice versus sales. But what I think is really important for you to be aware of with something as impactful as your life savings is that when that advisor is selling insurance, selling investment products on behalf of their broker dealer, their standard is that what they sell you is suitable. It doesn’t need to be optimal. It basically just needs to not be crazy. If you put 80% of a 90-year old’s money in penny stocks, clearly that’s not suitable, and whether they are a fiduciary or not, they’re going to have some consequences.

But if you’re 35 and you’re looking for growth and I choose to sell you an expensive fund that’s manufactured by my company where I receive a big bonus and a fancy vacation, if I sell enough of that. Verse something significantly lower cost that would also accomplish growth, that shockingly is allowed by non-fiduciary financial advisors.

My question for you is who are you working with?

Here at Creative Planning we are one of the largest registered investment advisory firms in the country, but we’re unique in that we don’t receive third party kickbacks from fund companies to peddle their products. We don’t manufacture our own mutual funds or ETFs so that we can make the expense ratios and increase our revenue, because we want to sit on the same side of the table as our clients objectively providing advice in your best interests. Looking at the entire landscape alongside you. Because if we’re paid the same whether you go into fund A, B, C or investment X, Y, Z, then we are able to offer an objective recommendation.

Let me provide a practical example. Recently, a prospective client came into my office and wanted an evaluation on their investments. They told me the company that they were currently working with, I said, “Thank you for bringing your statements in, but I already know what you own.” And I listed three or four different fund companies, one insurance company, and they looked at me like I was a fortune-teller like, “Did you get a copy of this beforehand?” I said, no, I know how that advisor is paid and how they make way more money so I know exactly what they’re going to sell you.

And so understanding how do you make money off of me? Where do your bonuses come from? Why are you getting sent on these vacations? Who’s paying for those? Ultimately you are of course. Knowing the answers to those questions will be paramount in you maximizing your opportunities for objective advice in your best interests.

And so the incentives of your advisor and those being the biggest indicator or the type of advice you’ll ultimately get that verdict is a reaffirm. If you have any questions about this or you haven’t met with an independent credentialed fiduciary like us at Creative Planning, that’s not looking to sell you something, but rather give you a clear, understandable breakdown of exactly where you stand with your money. Why not give your wealth a second look right now by going to creativeplanning.com/radio to meet with a local advisor.

And our last piece of common wisdom to evaluate, you should own very little stocks once near or in retirement. You may have heard that before. When I’m older, I should be more conservative. When I’m 60, I should have 60% of my portfolio in bonds, and when I’m 80, I should have 80% of my portfolio in bonds, while decreasing or getting out entirely of the stock market to buy more conservative income generating investments, CDs, bonds. Having money in cash may reduce your overall volatility, you’re robbing Peter to pay Paul. It creates another risk which is outliving your money.

The key here is to think about longevity. A hundred years ago, we were dying at the ages now that are younger than when we typically even retire. Now very few pensions, social security is underfunded and we’re living longer than ever before. And it’s why financial planning is critical because if you’re retiring at 60 or 65 years old and you live to 90 or 95, your money’s going to need to last you once you stop receiving a paycheck for 30 years.

And in some situations it’ll be almost as long as you were working. You see the mistake is thinking, I’m not a long-term investor anymore because I’m in my 60s. Yes, you are a long-term investor. Now you have to balance that with short-term income needs, which is why you’re probably not going to be 100% stocks. And it is on my short list of most common and impactful mistakes that I see retirees make getting far too conservative when their money may be needed for many more decades.

Let’s jump straight into our listener questions and remember, if you have a question you’d like me to answer, submit those by emailing radio@creativeplanning.com.

Joy in Santee, California asked last year we took out a HELOC home equity line of credit to repair our kitchen. It was $32,000. Our interest rate just bumped up to 9.2%. Is it better to pay down our HELOC monthly or take a distribution from our trust to pay it off in a lump sum? Appreciate the question, Joy, and this is common right now. HELOCs are floating rate lines of credit, meaning they were almost free of any interest charges at the very bottom, and now can be as in this situation up near 10%. That feels pretty high. I’ve certainly seen them in the sixes and sevens, but this is almost approaching 10%.

The short answer is you should pay it off in a lump sum because you’re saving yourself the 9.2% interest rate, but there are a couple other things you should consider joy before doing so. The first is, are you entirely in the stock market with your trust account? If you are, those investments might be down and may be down substantially in value due to the bear market. So would taking a $32,000 distribution to pay off the line of credit result in you needing to sell securities that are depressed in value. And assuming you’re broadly diversified, you expect to come back and recover at some point over the coming years? I don’t know if that alone would be a reason not to take the distribution, but it would be a factor.

The second item worth considering is your tax bracket because you use the line of credit on a repair or upgrade to your property, the interest is tax-deductible, meaning you might not be feeling the full effect and impact of the 9.2% when factoring in the tax benefit, but I would say in general, taking a lump sum to avoid paying nearly 10% interest is most of the time going to be the right decision.

Let’s head to Casey in Mapleton, North Dakota. I filed my taxes last week and realized I over contributed into my IRA account by $2,500. What can I do?

You are not alone. This happens more often than you might think, and I will post an article to the radio page of our website at creativeplanning.com/radio that was written by one of our managing directors and partners Scott Schuster, who is a certified financial planner as well as a CPA, but also provide you a quick summary in answer to your question. And so while IRAs are a great way to save for retirement, there are limits on how much you can contribute in any given year, as Casey you just learned. The limits are based on a few things, age, income, and your filing status. If you exceed those contribution limits, you could be subject to a 6% penalty each year on the excess contribution amount for up to six years or until the excess contribution is corrected.

So you have the following four correction options. The first is withdraw the excess contribution and associated earnings. Now you would’ve had to have done this before April 18th though unfortunately. It’s important to note that any of those excess earnings will be taxed at ordinary income and doubly bad if you’re under 59 and a half may be subject to a 10% early withdrawal penalty.

Second thing you can do is file an amended return. So if you discover the excess contribution after filing your taxes, like in this case, you can remove the excess contribution and file an amended return. The amended return must be received no later than the tax extension deadline of October 16th here of this year in 2023.

So here’s our third option. If you miss the deadline for filing an amended return, you can withdraw the excess funds by December 31st of the following year in order to avoid a penalty next year. You’re still going to be assessed a penalty in this current year, but you’ll avoid it for the following year.

And then lastly, number four, you can apply the excess contribution to next year. You’re still going to be assessed a penalty in the current year, but it saves you the work of taking it out and then going and putting it back in.

A few important things to remember here, Casey, is that your last contribution is the excess contribution. So if you made multiple contributions throughout the year, your most recent is what’s deemed to be excess. You also have to correct the specific IRA that was impacted. If you have multiple IRAs, you cannot take it from a different one. And lastly, if you made only one contribution throughout the year and that contribution pushed you over the limit, you can withdraw the entire IRA balance as a correction. Now, to be eligible, the account must have no other transfers, contributions or re-characterization during the applicable tax year.

Now, if instead of an IRA Casey had said he overfunded a 401k, the steps are a bit different. You must let your employer or plan administrator know as soon as possible and then your employer must take action and make changes to your W2 form to show the returned 401k contribution amount as earnings. That’s a lot to unpack.

Casey, we have offices in West Fargo as well as Bismarck there in North Dakota. You can visit creativeplanning.com/radio or call us directly at one of those offices and we would be happy to help you out. Sometimes that can be much easier than trying to navigate these sorts of tax situations on your own.

Our last question comes from Mike in an undisclosed, unknown location. He asked, I’ve heard that people born in 1960 will receive less in social security benefits because of a flaw in the formula. Can you explain that?

Now, let me just say, Mike is thinking next level. These are the types of questions that re-solidify. We’ve got some smart people listening to Rethink Your Money.

So in short, social security will not be affected if you’re born in 1960. Since 2020 earnings actually ended up being 3% higher, unlike all the prognosticators warnings, and I’m going to unpack this here in a moment, but it’s another great example of the damage that financial pornography and clickbait seeking financial influencers can have by disturbing people’s peace of mind.

Mike, you’re not the first person that has asked me this question. Let me share with you the payment potential issue that people are talking about. When there’s a severe downturn in the economy, it can negatively impact social security benefits for some recipients that are born in a specific year. While this is very rare, it’s happened once before in 2009, during the Great Recession when wages dropped by 1.5%, it meant that people born at the time in 1949 who were turning 60 in 2009 earned fewer social security benefits than those born in other years, for the rest of their lives.

And the reason this happens is that when a person turns 60, two years before they become eligible for social security benefits, the federal government looks back at all of their annual earnings and the Social Security Administration adjusts each of those years for wage inflation based on the average income growth of all Americans according to the AWI. So this ensures that calculations reflect changes over time in the cost of living. In fact, Mary Johnson, Social Security and Medicare Policy Analyst for the Senior Citizens League wrote in a December 2021 newsletter, and I quote, “The Social Security Administration recently posted the average wage index that applies to 2020 and will be used to calculate the benefits of people born in 1960. The index rose 2.8% from 2019 to 2020. Very good news for those with birthdays in 1960.”

So again, fantastic question there, Mike. You likely brought up something that most people had no idea they even should have been afraid of, and then fortunately I was able to tell them they still don’t need to worry about it now that they’re aware. But if you were listening to that, thinking to yourself, a lot of this is new, John, that you’re talking about around social security. That’s okay, that’s normal. You’ve never gone through having to strategize social security and how that impacts the rest of your retirement plan and how you might want to be evaluating the countless nuances of retirement income.

That’s what a great team of fiduciaries like us here at Creative Planning can help with. Why not give your wealth a second look by going to creativeplanning.com/radio, get your questions answered today. Don’t wait any longer. Let’s not procrastinate. This might be the most valuable thing you do for yourself and for your family all year. That’s creativeplanning.com/radio.

I want to end today’s show as I conclude every week looking more deeply at why any of this matters. If we save diligently and we invest prudently and we utilize every tax minimization strategy that’s possibly at our disposal and our estate plan is perfectly constructed for today’s laws and our wishes, but we never identify why any of this matters, we’ve missed the point. Money’s simply a tool to execute things in our lives that we care for.

And today I want to focus on cost versus value. Warren Buffet said, “Price is what you pay. Value is what you get.” Oftentimes the focus is much more on the price because the price is easy to quantify, but the value is not as easy to measure, but the far more important side of the equation. Think about an example of this relative to our health or wellbeing. There are rules around who receives organ donations because if there weren’t, it would simply be who is the richest person that wants this organ? Because who in their right mind wouldn’t part with whatever amount of money was required to save their own life?

That’s an example of where the price couldn’t be too high relative to the value. The reason we all make such varied choices with our money isn’t as much because we disagree on what the price should be, although I think that’s often the assumption, but rather that a gap and in some cases, a large gap exists in perceived value.

As a practical example, my wife loves these On Cloud shoes. They’re Swiss made. They’re comfortable. I mean, you don’t even need to tie them because the laces are stretchy and come with these fancy knots at the top. Full transparency. I own On Clouds too, but the other day my wife asked if I like her new shoes. Now, husbands, you know that this is a trick question. She has this new pair of shoes on. To me they look identical to other On Clouds she has, and I mentioned that and she said, “What are you talking about? These look nothing like my other ones. These are white and tan and slightly higher. My other ones are white and gray and slightly lower.”

Well, to me, where’s the value there? Really close to looking like her other shoes. Then again, I’m not going to be winning any fashion awards anytime soon, so she may have a point. But on the flip side, I’ll spend a lot of money to sit in prime seats at a sporting event. My wife, Britney, looks at those ticket costs relative to the value of a two-hour game and does not understand why we wouldn’t save the money and sit in the nosebleeds to her not enough value. And so it can be helpful to work first from your values backward and figure out whether the price of something is worth it rather than the traditional approach of starting with price.

And discovering your core values can really increase your confidence and strengthen your decision making skills. I talked about earlier on in this show, personal values are the measuring sticks by which you determine what’s a successful and meaningful life. It might be achievement, caring, charity, dependability, family relationships, friendships, freedom, fun. You could pick any value you feel represents you. The hope you figure out what you want out of your life and then where you should focus your financial efforts. It’ll guide your behavior when it comes to your money. It’ll help you make decisions or not make decisions in some cases, when multiple emotions are playing a role. And identifying your values will increase your confidence in your life and with your money. The more clarity you can have around your core values, the more confidently, joyfully and willingly you pay the asking price. And of course, this is important because 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 the 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 proceeding program is furnished by Creative Planning an SEC registered investment advisory firm that manages or advises on a combined $210 billion in assets as of December 31st, 2022. 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 for 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.

Important Legal Disclosure

Have questions or topic suggestions? 
Email us @ podcasts@creativeplanning.com

Let's Talk

Find out how Creative Planning can help you maximize your wealth.