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The Actions We Take That Crush Our Investments, and Why We Keep Doing Them

Published on April 17, 2023

John Hagensen

All of us — even those who practice wealth management for a living — are prone to the pitfalls of human emotion when it comes to investing. This week, we explore the four biggest culprits that can derail our financial success and how to combat them (1:56). Plus, Chief Valuation Officer Gary Pittsford joins the show to discuss the fear and anxiety around selling a business and the steps you can take to maximize your payout (11:09). Plus, John answers a handful of listener questions, entering the age-old debate on whether we should be happy or upset with a tax refund (46:22).

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 Higginson, and ahead on today’s show, the one constant that remains for investors in the midst of an ever-changing environment, whether old-fashioned financial wisdom is still applicable for us today. And finally, whether or not you should be making extra principle payments on your mortgage. Now join me as I help you rethink your money.

Think about how different the United States was even 100 years ago. Life expectancy was at 54, now it’s 78 years old. We were just coming out of one of the greatest pandemics of all time, and, no, I’m not talking about COVID-19, but rather the Spanish flu, which had infected about 27% of the world’s population and had killed an estimated 50 million people. The automobile industry was born, which led to a multitude of manufacturing jobs that were created as a result, and the assembly line work was also introduced at that time. Alcohol was prohibited. Most historians equate that as a catalyst for increased organized crime. Now you can wear skinny jeans and curl your mustache and be kind of a cool trendy hipster and show up at one of your city’s new speakeasies. No, those were actually a real thing during prohibition. Women could finally vote, and radios were the main source of entertainment.

We’re still listening to the radio today. Now, of course, got Spotify and we’ve got our podcasts, but radios actually hung on. I was thinking about this when my grandmother recently passed away at 95 years old. She was born in 1927, and my wife and I were discussing as we reflected back on our life, how much must have changed during her lifetime. And when it comes to our money, we spend a lot of time focused on what’s changing in part because that’s what’s right in front of us. That’s what we’re seeing, reading and hearing about. Sure, there’s value in understanding why an exchange traded fund might be more tax efficient than an antiquated high turnover retail mutual fund, or how lower cost trading and expense ratios can minimize your fees. But while the economy and the financial landscape is constantly changing, I find it interesting that one thing has basically been the same for centuries, and that’s human behavior.

That is the one constant, and it’s relevant and important to note because our behavior actually will have a far greater impact on our successor failure than the ever-changing environment around us, which seems to do a great job at grabbing our attention. A recent study showed that while the S&P 500 has earned nearly 10% a year for the last 30 years, the average American has earned half, about 5% per year. During the past three decades, half of our potential returns gone. And because we are people with emotions, fear and greed have been worthy adversaries since the beginning of time. And hopefully in knowing that you’ll be able to have self-awareness, adapt and make better money moves. Let’s start with the emotion of fear. I mean, think about COVID. What happened? Well, we saw the fastest bear market in the history of the stock market, which bottomed quicker than most anyone expected on March 23rd, 2020, and then proceeded to bounce up 70% for the remainder of the year.

But if you look back further into history, you’ll see that while this pandemic was unique, investors’ behavior was as predictable as ever. In previous bear markets and certainly crashes we run in masses for the sidelines. And to show us a little grace and have a better understanding of why we may behave this way, it’s because these downtrends in the market never happen in a vacuum. If you’re sipping a Mai Tai on the beach and I ask you theoretically, how would you react in a down market with your investments? You’d almost certainly tell me I’d rebalance, I’d buy more while everything’s on sale, I’d look to invest more money. I mean, if this is real estate, I’m going to pick up some rental properties, and that sounds great in Bora Bora on the beach. But when the market actually drops 30% in the blink of an eye as it did during the pandemic, you’re forced to make financial decisions while witnessing people dying, no one working, your neighbor losing their job. Maybe worse, you’ve lost your job.

You’re seeing headlines that everything is horrible. If it’s 2008, 2009, you start seeing foreclosures all up and down your street. The media narrative is even more and more negative. How can the media get more negative? I don’t know. They can. They do it during these times. And as a sidebar here for a moment, I find the media in these permabears constantly talking about how the market’s going to drop. Totally bizarre. I mean, I know why they do it. It gets ratings and it gets attention. Saying the market’s going to drop or everything’s terrible is ultimately fighting the prevailing trends. The stock market is up 70% of calendar years. It’s averaged about 10% per year since 1926. And two thirds of the market growth comes from inflation and dividends. And so these pessimists when it comes to the market, are basically playing the worst odds of any game in any casino.

Imagine going to a baseball game. It’s a midday game. You’re in the bleacher seats at Wrigley, you’re hanging out with a friend and your friend says, “Hey, I’m going to make you a bet. I’m going to bet every batter that comes up is going to get a base hit. And if they don’t get a base hit, you win.” Well, if you know anything about baseball, you understand that even a good hitter only gets a base hit about three out of every 10 at bats. But these permabears aren’t basically your friend with all the odds against them. But remember, it’s a tails they win, heads you lose scenario. When the market’s going straight up and everything’s great, their entire narrative is that things are overpriced and a drop is imminent. So it’s time to get defensive. Look at how high the market is. I mean, I can’t tell you how many headlines market at all time high as if it’s noteworthy. The market’s near or at all time highs fairly frequently because it goes up and to the right and grows over time.

I’m not surprised when I pull out the measuring tape and a Sharpie to mark in the pantry how tall Cruz my 11 year old is when he’s taller than he was at eight. Yes, of course he’s older and growing, and so is the market over long periods of time. But when the market’s down, things are horrible. Do you see what’s going on out there? You shouldn’t be investing right now, it isn’t the time. And this reminds me this week my wife bought a new clock for a wall in our breakfast nook, and she is notorious for not putting batteries in clocks. She’ll buy a clock, she’ll hang it on the wall, she’ll level it out. It looks great, but it doesn’t tell time. So I look up at this clock, and it’s showing 10:12, and I look at my iPhone, it’s 10:12 a.m. I was like, wow, who stole my wife Brittany and replaced her with an imposter?

I cannot believe that she set the clock and put batteries in it. Well, I came back downstairs about three hours later. That clock was still showing 10:12. The lesson for us here on permabear’s prognosticators and my wife is that even a broken clock tells the right time twice per day. Yeah, they’ll be right occasionally, but they’ll be wrong more often. And when they’re wrong, they’re often so wrong that it can derail your financial plan. And if you’re feeling anxiety or fear around your financial plan, maybe fear is too strong a word, but you’re uncertain. You lack confidence and conviction that every aspect of your financial plan including your taxes and your estate plan and your risk management, your investments, retirement plan, whatever it might be, you think it may be able to be improved or you could be missing something, do it thousands of others just like you have done. Go to creativeplanning.com/radio to speak with one of our local advisors. We are fiduciaries who have been helping families since 1983. Why not give your wealth a second look? Again, that’s creativeplanning.com/radio.

Well, we can’t talk about fear without also acknowledging the other side of the coin, and that is greed. Greed’s just as timeless as fear. Think about the dot com bubble bursting. People were blinded by the startup hype that drove prices. As in many upmarket cycles, FOMO was running rampant. And what happened? It peaked the 23rd of March of 2000, and then the NASDAQ proceeded to drop almost 77%. Two years later, it was still down 40% off of its highs with many companies fully wiped off the map. And envy is often an emotion that accompanies greed. I saw this during the crypto crisis, many jumped in toward the end just in time to see Bitcoin drop nearly 90%.

So while the current story is the banking crisis. Oh, this is a new thing. No. There was actually a panic of 1884, 150 years ago. The dollars devaluing. This has been a concern for decades by many. High inflation. Go look at the Volcker years. A slowing economy. Economies expand and contract. They’re cyclical. And so while oftentimes it feels as if you are experiencing something that’s never happened before, remind yourself that while history doesn’t repeat itself, it often rhymes. And when it comes to your success with your money, controlling your fear and greed will be far more impactful than tomorrow’s headline.

Here are three simple lessons in 2023 that you can apply to tune out the noise. Number one, have a financial plan that is built when you are not emotional. Design that plan when you are thinking clearly, when you’re in a good state of mind focused on long-term outcomes.

Number two, have accountability so that you actually stick to that plan. Walking around with an iPhone that has a Macros app to track your diet and then eating donuts all day long doesn’t help. But the point is it’s not in the knowing, it’s in the doing where you actually achieve results. And number three, stop comparing yourself to someone else. To overcome fear and greed, it will require you to be secure in your situation and in your unique individual plan. The grass is not always greener. Sometimes ours just needs to be watered. So focus less on what you cannot control that is changing and more on what’s never changed and is fortunately within your control, your human behavior.

Did you know that it’s not large businesses, but rather small businesses here in America that are the lifeblood of the US economy? They create two thirds of net jobs, and a new report shows that they account for 44% of all US economic activity. So in summary, without small businesses, the economy won’t grow. The vast majority of US companies are actually very small businesses. In fact, 96% of all businesses in the country have 50 or fewer employees. That’s 5.8 million businesses out of the six million total companies have 50 or fewer employees. Yet, those small businesses employ approximately 34 million workers. I was fortunate to grow up in a home with a father that was a business owner. I’ve had entrepreneurs around me throughout my life. My father-in-law was also a business owner. My mother-in-law was a business owner. I was a business owner prior to joining Creative Planning, my wife was a business owner, and by the way, she was easily the most talented of that entire group.

In fact, when I started my business, first year revenue over the initial 12 months, less than 20 grand. And so there were certainly many nights early on in my journey as a business owner where I was wondering what I had done, whether it was going to work. Should I have remained an airline pilot because this risk certainly didn’t seem to be one that was paying off? And all the while my wife’s business was the only thing keeping she and I and however many kids we had at the time from living in a van down by the river. Shout out to the late Chris Farley. And I think maybe when we had our fourth or fifth of the seven kids, I don’t know, I lost track around that time, my wife finally said, “I can’t run a business with all these munchkins running around.” But the point is, I have seen through interactions with hundreds of my clients in my own life, all the mountains and valleys of business ownership. And if you’re a business owner, I’m sure you can relate.

I pulled some data from the SBE Council and the Minneapolis Fed on business owners, and here are what I think to be some interesting stats. In 2021, 51% of business owners were 55 years old or older. Think about that. That’s half of all business owners 55 or over. An October survey showed that 80% of small business owners didn’t have an exit plan the year before they put their business on the market. And while 86% of leaders believe leadership succession planning is of the utmost importance, only 14% think their organizations do it well. Why does any of this matter? Because 90% of business owners’ net worth is tied up in the value of their business, which is why I asked my special guest Gary Pittsford to join me today.

Gary’s the Chief Valuations Officer here at Creative Planning. He has nearly five decades of industry experience. He speaks all across the country at conferences regarding succession planning, mergers and acquisition and business valuations. And if you are a business owner, Gary and his team are an incredible resource to get connected to get your questions answered, visit creativeplanning.com/radio right now to speak with Gary and his team. So without further delay, thank you so much for joining me here on Rethink Your Money, Gary.

Gary Pittsford:

Glad to be with you. Thanks, John.


Business owners understand that there is a lot of emotional energy sunk into their businesses. Often energy and emotion that spans decades. The vast majority of their net worth is often in their businesses as I just mentioned. And so it’s not surprising that figuring out how to exit their business and leave it in good hands for their staff and for their customers as well as hopefully to achieve the desired financial outcomes for the owner themselves and their family can create stress and a lot of anxiety. I’ve seen this firsthand as a wealth manager. And as a result, people kick this can down the curb and procrastinate as a result. So Gary, can you speak to some of the initial considerations business owners should have at least where to start when developing a succession plan?


That’s a great starting point. I’ve been doing this for 50 years with thousands of business owners all over the country, and the one question that I get asked all the time is, “Gary, where do I start? What do I do?” Because business owners know how to run their company, whether they’re selling hardware or floor covering or plumbing or electrical or whatever they’re doing. They know how to run that company, but all this other financial stuff they’ve never been through before. So let’s break it into steps. Step one, whether they’re selling a year from now or three years from now or five years from now. Step one is to pick three people to be on your team. You’ve got a whole bunch of employees that you’ve trained to help run your company. Now I need you to hire three more people to help you with the exit or succession plan.

And those three people would be a good corporate attorney who has bought and sold lots of family businesses. They need to know how to deal with corporations or LLCs. Number two, the second person you need is probably your accountant or an excellent accounting firm that knows your corporate taxes, your personal taxes, your basis, all of your add backs. They need to know everything about how the sale is going to impact your taxes. And the third, probably the most versatile you need a great CFP who knows how to work with business owners. That financial advisor will work with the attorney and the accountant, and the three of them will be a team. So you got to have three great people to help you put this together.


Is there a magic number in terms of five years before you sell or six months before you sell? You mentioned one year, three year. I mean, is there an amount of time in advance that you recommend pursuing those three relationships?


In a perfect world, I would say three years at least. Five years is better because if I’m the buyer and I’m looking at your company, I want to see the last three years tax returns, profit and loss statements and balance sheets. And what you want as the seller is that you want those last three years to look real pretty. Okay?


Yes, you do.


And that’s part of the plan is work with your accountants and your financial advisors on the P&L statement, make it perfect. The balance sheet, make it perfect. Look at all of your expenses and all of what we call add-backs, John. The companies can pay for the owner’s cell phone or gasoline or travel, key man life insurance, health insurance. Whatever those expenses are, I need to know what all of that is in order to come up with a valuation.


Yeah, that makes a lot of sense. And as a wealth manager here at Creative Planning myself, I can attest to the fact that having a planner involved in assessing where you’re going to receive income from, should your income cease at the conclusion of a sale, is your lifestyle going to be able to remain intact, are all really important things to ensure before, well, I should say long before you actually pursue selling the business to make sure that it fits your goals and your needs. And then obviously aligning the investment strategies, tax strategies, as you mentioned with that big shift in seasons of life can be a big one. Is there a difference if you are looking to sell to a family member versus an outside party?


Well, there’s different planning, different paths. If I’m going to sell to my children, I got a little bit more time in order to make it work, and I can maybe gift some stock and make it easy for them to buy, but maybe I’ll be a consultant or I’ll be chairman of the board for the next four or five years. If they move the company to them at a reasonable price, I can still get paid for several more years for doing all kinds of stuff. If you’re selling it to key employees, it takes two or three years to try and put it together. If you’re selling it to another person in your industry, it’s normally one big check. They’ll write a check and buy you out. A lot of owners like that idea. If the kids don’t want it, they’re probably better off selling it to somebody within their industry for one big check.


I’m speaking with Gary Pittsford, creative Planning’s Chief Valuations Officer, and yes, Gary, I’d agree with that as well. I’ve seen that in my experience of helping clients, there tends to be more wiggle room from a deal structure standpoint if the sale is occurring inside the family.


The thing you touched upon a minute ago about will you have enough net worth after the sale to retire comfortably, and I want every owner to figure that out before they sign the papers.


Totally agree. And it shouldn’t be napkin math, it shouldn’t be a sort of round estimate. You need a dynamic, detailed, full financial plan that shows some various hypotheticals if you’re going to sell in three to five years of what that valuation might look like, what the tax implications would be, how much would you net. You do not want to sell your company. It’s sort of like that whole idea that you can’t put the genie back in the bottle. So if you sell the company, and five years later you think to yourself, well, I shouldn’t have done that because now our lifestyle is not what it is, and I maybe should have waited a few more years to sell. It’s over. You’ve already sold the company.


That’s right. And I want the owners to sit down with a business financial advisor and their accountant and work through all the cash flow and all the taxes. You may sell your company for a million dollars, and some owners out of that million dollars, they’ll pay 500,000 in taxes. And then there’s other people that may only say $200,000 to $300,000 in taxes. Well, you need to know that before the sale, not after. You’ve got to know what’s left. You got to know what you’re working with. I want everybody to be well informed.


Yeah, you don’t want surprises when you’re selling a company that in many cases has been the lifeblood for your family and a big part of your life and probably to some extent one of your children in terms of how much time and energy you put into it. You don’t want to relinquish that when it’s an irrevocable decision unless you’re a hundred percent certain that it’s the right move. So let’s suppose that a business owner’s listening, and they realize I need to start this transition plan, I’m sort of within that three to five year window that Gary’s talking about. What are some of the things that you advise they start doing at that three to five year mark?


Depends on what kind of company it is, but for most companies, what we look at, we do about 450 valuations every year. I see thousands of tax returns and profit and loss statements and balance sheets. If I look at the balance sheet, it says 500,000 of inventory. Well, really it’s 800,000, but over the years, they let it slip away into a lower number, so I got to fix the inventory. So start working on your balance sheet, get the inventory, accounts receivable, all the assets, get it all figured out properly. And then probably the most important thing is the profit and loss statement. If your industry, and you need to know this, if the gross margin in your industry is 40%, then you should be at least at 39 or 40 or 41%. I talked with somebody a couple hours ago and they were at 43%.

That’s great. Most people, their gross margin is low because they don’t like raising prices for their customers. But now that you’re going to sell the company, get that gross margin up. In the last three years, increase your gross margin if at all possible 1% a year, and decrease your expenses one or 2% per year for the last three years. So what you’ve done at the end of 36 months, your cash flow is up, your expenses are either flat or down, which means we have more cash flow or profit, which makes your company more valuable. Work on the margins, work on expenses, make that P&L statement look really good, and then it’ll make the buyer more interested.


Good point. It reminds me of high school when I would get my little Toyota pickup truck all washed up before a first date because you want to look your best, right? You don’t show up to these buyers and kind of go, well, yeah, I’ve showered a few days ago. You want the company to look as good as it possibly can be. I think that’s great advice. I appreciate you sharing this with us. Obviously it’s a little bit self-serving because here at Creative Planning, we have nearly a 100 CPAs and 50 attorneys and a business valuations team that you head up that are providing, as you mentioned, 400 or 500 of these valuations on an annual basis as well as 300 plus certified financial planners. But that is, whether it’s here at creative planning or with another firm like us, that professional guidance is absolutely critical for business owners once they get inside of that three to five year window as you mentioned, and then all the way through to the conclusion of that sale.

So appreciate you sharing your wisdom with us. As always, Gary, look forward to having you back on here real soon.


Thank you, John. Take care everybody.


That was Gary Pittsford, Chief Valuations Officer at Creative Planning. If you are a business owner and you don’t have full confidence in your financial plan, here at Creative Planning, we help thousands of business owners create customized strategies related to tax legal investments or succession planning as we’ve just discussed. To meet with a local advisor visit creative planning.com/radio today.

One thing we know is certain, when you become a parent in the eyes of your kids, you now are old and basically don’t understand anything. And to be clear, I’m not putting down my children in particular. Our kids are pretty respectful and overall great kids. They could be knuckleheads from time to time, but so were all of us when we were kids. What’s interesting is where there tends to be a rub is when they believe that I don’t really understand them or the circumstance, but most of the time it’s simply that I’ve got a broader perspective. I’ve lived more life, and I have some of that old wisdom, as I like to call it, that they haven’t acquired yet. When I was in high school, Seattle Christian High School up in the northwest, and I remember one of my running mates played basketball with him, still one of my best friends today, his parents were very adamant that nothing good happens after midnight. And it used to annoy us.

I remember one time saying, “Well, what if we were out feeding the homeless at 1:00 in the morning? It would still be bad because it’s 1:00 in the morning? And of course, they’re like, “No, you’re at so-and-so’s house doing whatever you guys are doing. You’re not out feeding the homeless.” So stupid hypothetical, John. They were probably right, and let’s be real, most of the bad decisions are things that I did that I shouldn’t have done happened after midnight. They were right. Mark and Ann Collier, you were correct. If you’re listening, I see the light now, your old wisdom, and this is true when it comes to our money as well. I think the perception occasionally can be well, so much has now changed, is any of that previous wisdom even relevant?

And that’s what I’d like to unpack as we play a new game of rethink or reaffirm where I’ll break down common wisdom or a hot take from the financial headlines, and together we’ll decide if we should rethink it or reaffirm it. And we’ll start with that very topic. Are some of the most common pieces of old wisdom still applicable today? Let’s start by examining, is the 60/40 stock bond mix still effective? Once a mainstay, the 60/40 balanced portfolio now has been under a lot of scrutiny. Can it keep up with today’s market environment? Well, from 2000 to 2009, it returned a 2.3% annual return. It isn’t very good, is it? Then from 2011 to 2021, 11% annualized return, 2022 when the criticism really heated up, while interest rates were rising and bond prices were falling, obviously the stock market did poorly as well. It was, in fact, the worst stock bond mix year in decades.

Well, it was down about 15% that year alone. And so if you weren’t in shorter term bonds, it did not provide the dissimilar price movement most expected from a diversified 60/40 mix. But just because a 60/40 portfolio didn’t hold up well in one year, that happened to be an outlier where interest rates were raised at warp speeds, that doesn’t discount the entire strategy, does it? But remember not to be caught up in fear or making long-term investment choices based upon short-term emotions. The results of 2022 are behind us. Asset classes are now lower, meaning you’re buying stocks and bonds at lower prices, at more favorable valuations. In the yield you’re earning on your bonds has now measurably improved due to increased interest rates. So I wouldn’t broadly say the 60/40 mix is a go-to mix, but also let’s not fall victim to recency bias and equate one historically bad year with an indictment of the entire strategy.

How about the old wisdom that bonds are less volatile than stocks? Well, again, you look at 2022 bonds as measured by the Bloomberg US Aggregate bond index were down 13%. Bonds and interest rates move in opposite directions, and the Federal Reserve raised rates more than they had in 40 years. It caused massive losses in bonds, especially if you were not in short term bonds as I just alluded to. But if you look, historically, bonds have far fewer negative years than stocks, their standard deviation is substantially less than stocks. And think about this, in early 2022, a six month bond paid an interest rate of less than a half percent and today over 4%. If you’re a bond investor, higher rates today are great news for a couple of reasons. One, even if rates stay where they are, you’re going to get a nice positive return from the interest that the bonds generate, and if rates drop because the Fed needs to lower them in response to a slowing economy, your bond valuations will increase because you’re holding bonds with more attractive rates than what would then be offered on the open market. And so a practical takeaway for you is don’t have extra money sitting in cash, especially in a high inflationary environment as we are still sitting in. Safer bonds are paying healthy interest rates.

My third and final piece of old wisdom is to always invest in your 401k every pay period, even while the market is down. If you’ve been invested in equities over the last year, your accounts are down in value, but this is not a reason to lower your contribution amounts or to stop investing altogether. In fact, it’s the exact opposite because when you are adding money every two weeks to your 401k, you are not a seller of stocks and bonds, you are a buyer, and as a buyer, you want to pick up assets at the lowest price possible. Think of it this way, in a perfect world where there were no negative peripheral implications to what I’m about to outline, you would desire the stock market to be down 80% for the entire time that you are working.

And then in the final year before you retire, you’d want it to go up a thousand percent. You would love to see that eight to 12% average achieved entirely in the final year that you’re working rather than having it spread out. Now, of course, that’s a crazy theoretical because the world would probably be over if the broad stock market was down 90% for 30 years. But I’m using that example so that you can conceptualize the fact that you want the market down. If you are more than 10 years away from retirement right now, you should be rooting for a down stock market because you’re nowhere near needing to sell the assets and, therefore, as a buyer, discounts just like sales in a store are a positive.

So when evaluating whether a 60/40 balanced stock bond mix is still viable, whether bonds are more stable than stocks and whether you should be investing in your 401k even when the market is down, those are all pieces of common wisdom that absolutely still apply today, and the verdict is a reaffirm. But if you have questions about your investment allocation or what type of bonds you own, whether you’re saving the right places from a tax efficiency standpoint, we’ve been helping families answer those very questions here at Creative Planning since 1983. We’re a law firm with over 50 attorneys, a tax practice with over 100 CPAs and over 300 certified financial planners because we believe your money works harder when it works together. To speak with one of our local advisors, visit creative planning.com/radio now.

Our second piece of common wisdom for today’s rethink or reaffirm is to make extra principle payments when it comes to your mortgage. Creative Planning Director of Financial Education, Jonathan Clements spoke about this very topic earlier in the month on his popular podcast Down the Middle. Have a listen.

Jonathan Clements:

I made huge extra principal payments on my mortgage during the period of declining interest rates. It was a great way to essentially get a high return on your conservative money paying down your mortgage, but that is no longer the case. There are a ton of people out there who either took out mortgages at 3% or less or refinanced at those rates. If you’re making extra principle payments on that mortgage, it’s a losing proposition when you could turn around and buy bonds and cash investments that are yielding 4% or 5%.


And I couldn’t agree more with Jonathan. What he’s alluding to is that when yields on safe money, we’re only paying a half percent and your mortgage was at 4% and you were a conservative investor and not in higher growth potential investments, your money in bonds and cash was earning 3% or 4% less than the interest you were paying on your mortgage. So in that scenario, making extra payments would make sense because practically you’re converting a half percent return into a 4% return. However, and this is the key, that’s no longer the case. Emotionally, it feels really good to make those extra principle payments, but if you have a 3% or a 4% mortgage, in inflation is at over 6%? Your long-term fixed rate mortgage might just be one of the best hedges against high inflation. Furthermore, there’s no prepayment penalty if you change your mind.

And as just mentioned, current bond rates are paying significantly higher than many of Americans’ mortgages. Why not make money off the bank as they’ve been doing by lending out based upon customer deposits for decades? So the verdict on making extra principle payments on your mortgage, that’s a rethink. But all of these sorts of questions can best be answered within the context of a written, a documented, and a dynamic financial plan, one, that guides all of your investing decisions with a rules-based approach so that you don’t have to wonder if you’re missing something, to sit down with one of our local fiduciary financial advisors that is not looking to sell you something maybe for the first time in your life, but rather give you a clear and an understandable breakdown of exactly where you stand with your money.

That’s what we’ve been doing since 1983 here at Creative Planning as we have over 210 billion of combined assets under management and advisement, helping families in all 50 states and more than 75 countries around the world. Why not give your wealth a second look by visiting creative planning.com/radio now to speak with a local advisor? Again, that’s creative planning.com/radio.

If you enjoy Rethink Your Money, you are not going to want to miss out on an upcoming webinar Tuesday, April 18th at noon central time. It’s entitled Invest Like A Pro. You can register on our radio page at createaplanning.com/radio where we’ll share with you how to build a plan so that you can have confidence amid economic uncertainty. Again, sign up at the radio page of our website at creativeplanning.com/radio.

Before I get to listener questions, I want to share with you a question that one of our clients brought to me this past week, and I thought you might benefit from hearing the answer to as well, and it’s regarding rebalancing. What is rebalancing? Well, rebalancing refers to the process of returning the values within your portfolio’s asset allocation to the levels defined by your plan. And those levels are typically determined by your risk tolerance, when you need the money, how much money you’ll need in retirement versus how much you have currently saved.

And so, for example, you might have 75% in stocks and 25% of your portfolio in bonds and cash. And then inside of those broad categories, you may own US large stocks and small stocks and micro cap and value and growth, and you may own some international stocks, emerging markets, developed nations. On the bond side, you may own corporates or munis if you’re in a high tax bracket because those are federally tax free on the interest. Maybe you own some corporate debt, intermediate term debt, shorter term debt, floating rate, debt junk bonds. I don’t know what you own, but that would be your asset allocation. And what happens over time is that because you’re properly diversified, these investments will move dissimilarly to one another. And so if you never touched it five years later, you wouldn’t still be 75/25 stocks and bonds, and certainly those more granular categories will have deviated from the stated percentages that you wanted per your plan.

Part of that’s good. Things are zigging when other things are zagging. And so by rebalancing, you’re selling the over weighting of positions and then using those proceeds to purchase areas where you are under weighted. And my client’s question was actually more specifically, how often are we doing that for their accounts? As a followup, what is in fact most optimal? How frequently should this be done? Well, there’s two different ways, and I’ll first explain how we do not do it, and that is on a calendar, meaning we don’t rebalance once per quarter at the end of every quarter. We don’t rebalance twice per year or once annually. Now, to be fair, that would be better than nothing because most of the rebalancing studies that are out there show that there are slight differences over various time periods as to how frequently would’ve been optimal, but in general, you just need to make sure you are in fact rebalancing.

But how we perform this for our clients at Creative Planning is that we rebalance only when needed, but always when needed, meaning as different asset categories deviate beyond what we deem a reasonable drift, it will trigger a rebalance. One of the best advantages of rebalancing is that it allows you to systematically sell high and buy low because the only conceivable explanation for you having too much of one asset category inside of your allocation is because it performed better than the others. And conversely, the only reason you would be under weighted in one type of asset category is because it has not done as well. Well, we know that the name of the game is selling high and buying low, and so having a process in place that allows you to do that without trying to follow your gut instinct or emotions, which are almost always the opposite, let’s get out of the thing doing the worst, let’s buy more of the thing that’s making me feel really good that’s doing the best that I’m seeing on the magazine covers. That’s the trendy new pick. No, that’s not how you make money.

But I do want to point out two considerations with rebalancing. Number one, if you’re doing this within a taxable account, meaning it’s not a Roth, it’s not an IRA, you do want to understand the tax implications for those trades. What type of capital gains are you realizing? What type of capital losses are offsetting those? Because you may want to hold off on rebalancing for an extra six months if you’re already in a very high income year and your deviation outside of your stated parameters is minimal for example. Another consideration with rebalancing is I would only do this within a broadly diversified portfolio and one that is built within the context of a financial plan because rebalancing back to “neutral” when you don’t even know if neutral is really consistent with your time horizons or your tax strategies probably doesn’t make a lot of sense.

And if you’re under diversified and potentially owning individual stocks, rebalancing is extremely risky because there’s far less predictability of the long term returns of any individual security, meaning if you’re rebalancing on the way down with Enron or Bank of America during the great financial crisis or America Online or General Electric, then you lost a lot of money. But when you have a great financial plan built and you’re well diversified, rebalancing is a key to selling high, buying low and maintaining an investment plan that is consistent with your broader financial plan. If you’re not sure when or how you’re rebalancing or if you are doing so at all, go to creative planning.com/radio to speak with a local fiduciary advisor. The visit’s complimentary. It comes with no obligation to become a client. Visit creative planning.com/radio today to meet with a local advisor.

Bryce in Queen Creek, Arizona asked on last week’s show, “You talked about home appreciation and how it can play a role in retirement. I’m in my late forties and my wife and I have thought about moving to a newer home. Do you think now is a good time to buy a house despite the elevated mortgage rates?” Well, Bryce is asking about buying a newer home, so I’m going to assume that Bryce is currently already a homeowner. And the reason that fact is important is that he and his wife have also benefited from increasing home prices over the last several years. Assuming that Bryce either obtained a loan originally that was a low interest rate or has since refinanced over the last couple of years, he’s probably locked into a pretty low mortgage rate. And the higher rates of today would absolutely be a consideration because if the home is even slightly more expensive, the payment is likely to jump a lot.

Now, remember, a home purchase, especially for a primary residence, is far more personal than it is finance. Does their current home need a lot of maintenance or remodeling that they’d prefer not to do? Is the school district of the newer home potentially going to be better for their children? Does the new home offer a shorter commute so they’d have more time together as a family? These are all important considerations when it comes to whether or not they should move. I would say this, while we don’t know where mortgage rates will go in the future, you’re generally not going to keep your current mortgage rate for the next 30 years. Bryce won’t be married to the new mortgage rate. He’ll be dating it. And so if the priorities of the new home outweigh a higher payment maybe can be refinanced in the next few years. Then maybe it’s still worth increasing the payment and making the move. Otherwise, if you’ve got some flexibility, it might make sense to wait a bit longer and see if rates can come down before moving.

Randy in St. Paul, Minnesota asked, “I’m about 15 years away from retirement and trying to focus my efforts on cleaning up my finances. Should building an emergency fund be my first priority or should I pay off my HELOC?” Home equity line of credit is what he’s referring to with the HELOC. The first step in every financial plan is to build up an emergency fund. Some would say, well, what if that HELOC was high interest credit card debt, John? Then shouldn’t he pay off the 24% interest rate before building up an emergency fund? I would say no. And by the way, the math doesn’t justify what I’m saying, but the way it plays out practically, it really does. Build that three to six month emergency fund, then start knocking down debt.

And I think the reason is intuitive even if the math doesn’t work. If you begin paying down debt but have no cushion whatsoever, the moment something else unexpected occurs; your car breaks down, you have an unexpected medical expense, you need a new air conditioning unit. How are you going to pay for that? It’s going back on a credit card or back on a HELOC, and then all the work that you’ve done to pay that down is negated by that new purchase. So the order would be build up your emergency fund, then pay down debt and start funding your retirement plan at least up to the match assuming that you are offered a match. Great questions from Bryce and Randy. You can submit your questions to radio@creativeplanning.com just as Bryce and Randy did.

Let’s go to Shauna in Tampa, Florida. “I’ve heard about a 0% tax rate. Is this true? The lowest IC is 10%.” So, Shauna, there is a 0% tax rate, but it’s not what you’re looking at, which is marginal tax brackets. This 0% tax rate applies to investment income. It’s been in effect since 2008, and nearly 11 million filers, about 7%, qualified for it in 2020, according to the latest Internal Revenue Service data. A crazy sub stat to that is the total included about 34,000 filers who are earning a million or more dollars. So the rate only applies to net capital gains and dividend income from investments in taxable accounts, not tax sheltered retirement accounts such as traditional IRAs or 401ks, TSPs. So if Shauna is single, that 0% rate on investment income is all the way up to $41,675. If married filing jointly, that 0% rate is all the way up to $83,350. So here’s where I practically see this missed.

Let’s suppose you own an index fund of the S&P 500, and it has $25,000 of unrealized gain. Now, maybe this is the long term investment for you and you don’t have any intention to sell it, but if you fell within one of these categories, you could sell the investment realizing that $25,000 of gain. But here’s the key. At 0%, then you can instantly repurchase the security because remember that 30 day wash sale rule where you’ve got to wait 30 days only applies to realizing losses not gains. So for all intents and purposes, you stay fully invested, but you get a step up in basis because what you triggered was taxed at 0%. Now, obviously consult with your CPA prior to initiating this. That’s why it’s so important that your financial advisor and your CPA are discussing these sorts of matters because if you miss it, you can’t go back and realize those gains. You’ve just lost out. And unfortunately, I see that often with prospective clients who come in and I’m asking, “Hey, why didn’t you trigger this?” I don’t know. I wasn’t never told. Don’t miss this one. Great question by Shauna.

My last question comes from Jess in Wichita, Kansas. “Last year, I received a tax refund and I was always taught that was bad. Do you agree that this is considered an overpayment, and we have loaned money to the government for free?” In short, yes, you have by overpaying, but we are not robots, we are humans. And so, Jess, if you’re a really disciplined saver, then you probably don’t want any of your money not allocated to where it’s best working for you, including overpaying the government. But if you’re like the majority of Americans who struggle to save as much as they would like, sometimes getting that check at the end of the year is forced savings, and it allows you to then use that to potentially fund a Roth IRA or other investment accounts, maybe pay off debt that you accumulated a little bit during the year because so many people struggle to stick to their budget.

This can act as an unintentional, inadvertent savings account. But, yes, if we’re taking out the human component and just looking at the math, you would ideally not want to receive a refund due to overpayment. We have offices in the East Valley of Phoenix in the cities. They’re in Minnesota, in the Tampa area of Florida, as well as in Kansas. So Bryce, Randy, Shauna, and Jess, if you’d like more specific answers to your questions by meeting with one of our advisors, you can do so by visiting creativeplanning.com/radio. I want to conclude today with a focus on the meaning of our money because after all, he who dies with the most money still dies. And it’s ultimately how we use our money to our benefit and to more importantly, the benefit of those whom we love, where its power is truly unleashed, and a meaningful aspect that I found money possesses is found in its ability to reveal where our priorities lie.

Show me your calendar and your bank statement, and I’ll tell you what you value. People incorrectly, I believe, state that money changes people. No, instead, money is more of a magnifying glass. It augments who we are. It’s more of a force multiplier making generous people more generous, making greedy people more greedy, making power hungry people more power hungry. And so if you’re looking to maximize your peace and your fulfillment, whether you have a lot or whether you have a little, the way in which you steward that money may be one of the most honest revelations into where your priorities lie. And this consideration is a worthwhile endeavor because we are the wealthiest society in the history of planet Earth. Let’s make our money matter.


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 podcast.


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 Higginson 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 and 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.

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