With the new year upon us, what financial resolutions should you be making? From lump sum investing to charitable giving, Peter and Jonathan share several actionable tips for the year ahead. Plus, learn why it’s important to keep good records of any money spent on home improvements.
Hosted by Creative Planning’s Director of Financial Education, Jonathan Clements, and President, Peter Mallouk, this podcast takes a closer look into topics that affect investors. Included are in-depth discussions on financial planning issues, the economy and the markets. Plus, you won’t want to miss each of their monthly tips!
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Transcript:
Jonathan Clements: This is Jonathan Clements, Director of Financial Education for Creative Planning. With me is Peter Mallouk, President of the firm, and we are Down the Middle. It’s that time of the year when folks make New Year’s resolutions, but forget losing weight or exercising more. Instead, what New Year’s financial resolutions should we be making? Let’s say you receive a year-end bonus or a large tax refund or an inheritance. Many folks opt to gradually move this money into the financial markets. What do you think of that approach, Peter?
Peter Mallouk: So, we hear a lot about dollar cost averaging. So a lot of people say, “Oh, I’ve got this money and I just got this big bonus. I’m going to dollar cost average into the market a little bit every week or a little bit every month for the next six months.” Or people look at the environment and say, “Well, things are a little shaky. The Fed lowered rates or raised rates, or a Republican became president, or a Democrat became president, or war, whatever.” And so they go, “I’m just going to wait for things to settle down.”
But the data answers this question, and what the answer is that’s not the right approach. The right approach is you get that bonus, you get that inheritance, you get a raise, you’ve got more money to invest — the time to invest is now. Odds are overwhelming that you will end up with more money down the road if every time you have funds to invest, you just immediately invest those funds instead of waiting or doing it over a period of time.
There are times where people dollar cost average, it’s not really statistically the right decision, but let’s say you have a massive windfall, it’s life changing. You might say, “Look, I’m willing to have a higher chance of underperforming over the long run just because it would feel so horrible if I put the money in and a correction or bear market happens to start the next day.” But generally speaking, one good resolution would be, hey, you’ve got money. It’s investible. Don’t even have an internal dialogue about when to do it. The time is now.
Jonathan: Good advice, Peter. When I think about this, really it’s not about making or losing money, it’s really about our aversion to regret. We just loathe the idea that we’re going to take this chunk of money, throw it to the financial markets and see the stock market drop the next day. And it’s the pain of regret rather than the pain of the actual financial loss that really deters us from acting right away. But as you say, the stats say just get that money into the market.
For many people, the fun part of investing is picking stocks and mutual funds. So that’s what they focus on while ignoring the goals that these investments will fund. That brings us to another New Year’s financial resolution: ask why before you buy. Why is that so important, Peter?
Peter: You know, a lot of people, Jonathan, when they’re looking at their investments, they’re saying, “Oh, well my risk tolerance is this, so I’m going to own this much stocks, this much bonds,” or “I’m nervous about the markets so I’m going to own more bonds.” You’ve really got to stop thinking about the markets and your risk tolerance and ignore your age. A lot of people say, “I’m 70, I’m going to be 70% bonds.” All of these investment decisions should be around your personal objectives and the distance between where you are and those goals.
So if at a certain point of time you need a certain amount of money to do certain things you want to do, like if you want by the time you are 58 to be able to spend a certain amount of money per year so you can travel and do other things, that we can then reverse engineer the type of investments you should own to get there.
And the idea is to be an owner over a lender wherever possible. So you have enough money in bonds where you’re a lender to cover the short run. But for those long-term goals, we want to be in things that stay ahead of inflation, that keep up with the expanding economy. That’s being an owner. That’s the main way to be an owner is through publicly traded stocks. For wealthier people that can look at things like private equity, private real estate, and so on. But tilting towards ownership, once you’ve got the short term covered, is the right approach and you can tie that very easily to outcomes.
So for example, the odds the stock market’s going to be positive over three years is about 93%, but we know over 10 years it’s 96% to 98% depending on how far back we want to go. Well, that tells us that long-term money, that money that is for our long-term goals, we can lean into the equity side of the portfolio. This usually results in people having more aggressive portfolios than they might otherwise get to by using their risk tolerance or age or just picking.
Jonathan: The rule for investors here is before you go out and start buying investments, think about why you’re investing, how far off those goals lie, how much risk you can afford to take. And if you ask those questions, you’re much more likely to end up with the right portfolio.
On this podcast, Peter, we often talk about the importance of contributing enough to a 401(k) to get the full matching employer contribution. That should obviously be on the financial resolutions list for almost everybody. Are there any other similar financial layups that folks should be sure to take advantage of in 2025?
Peter: I mean, we talk about that 401(k) match all the time because it’s so many people miss this opportunity and it’s an instant a 100% rate of return. If you’re listening to this podcast, you have a job where the employer has a match, not everybody does, but if you’ve got a 401(k) and you’re fortunate enough to have a match, please start off your new year right. Do the best you can — go into HR, finance and say, “Hey, I want to put the maximum in the 401(k) so I can get the full match.” This is a hundred percent instant rate of return on your money. There’s nothing you can do in all of investing or financial planning that’s going to have that kind of impact.
But there are other layups. So another incredible tool is the Roth IRA. So if you have enough money that you’re able to save some, a vehicle for many people that is incredibly powerful is the Roth IRA. You take money, put it into this account, you can then buy whatever you want. For most people it should be stocks, mostly stocks, and it actually grows tax-free and then comes out of the account in retirement tax-free too. This is a pretty incredibly powerful tool. If someone’s gotten past that 100% match, this is the very first place someone should go after that for their dollars. Anything you want to add to that, Jonathan?
Jonathan: Well, two things. I mean, first of all, if you’re talking to your kids, if you have kids who are in their twenties new to the work world, they’re likely to be in a very low tax bracket. So even if you decide that you should be funding tax-deductible accounts because your tax rate is high, your kids, their tax bracket will almost certainly go up over their career. So if there’s any time in their life they should be funding a Roth IRA or a Roth 401(k), their twenties and early thirties are the time when they should be doing that.
And while we’re talking about Roths, the other thing I would think about in 2025 is what is your total income for the year likely to be? And if it’s going to be a low income year, that opens up all kinds of opportunities. And one of them would be to do a Roth conversion. If you have money sitting in a traditional IRA and you’re in a low tax bracket in 2025, you may want to convert some of that money to a Roth IRA. You can do it at a relatively low tax rate. And thereafter, as you mentioned, Peter, the money will grow tax-free. And hey, there’s nothing better than free.
So one final financial resolution. Let’s talk about charitable giving. Are there any New Year’s financial resolutions that listeners should adopt, Peter?
Peter: Well, 91% of charitable giving is done with cash. And the worst thing you can give to a charity financially is cash. Charitable giving, you want it to be things that have appreciated. If you have an investment account — it’s a taxable account — not an IRA, Roth IRA or 401(k) but an account that’s subject to taxes. What you want to do is if you’re giving say, $1,000 or $5,000 to a charity, instead of writing a check, take the stock that has appreciated the most and send that to the charity. You get the same deduction whether you give $1,000 of cash or $1,000 of stock, but you also escape capital gains taxes by giving the appreciated stocks. You get a double tax benefit for making the same gift.
The charity then sells the stock and pays no capital gains taxes because a charity is tax-exempt. And so this is the kind of thing that you want to think about, not just at the end of the year but throughout the year. We don’t all give to our giving in the last week of the year. So these tips we’re talking about, they’re a great way to start the year off and get that mindset heading in the right direction.
Jonathan: And something we’ve also mentioned quite frequently on this podcast is if you want to give appreciated stock, but you want to give maybe more than your travel budget is for 2025 and you’re thinking about giving two or three years’ worth of charitable contributions, you may want to use that appreciated stock to fund a donor advised fund. You can put a big chunk of that stock into the donor advised fund in 2025, and you might use it to fund your charitable contributions for the next three years. All right, Peter, and finally, we’re at that time of the podcast. Time for your tip of the month. What do you have for me, Peter?
Peter: All right, take the bucket list that you have, that long list of things. Some people have five things on their bucket list, some have 25, and a lot of them are pegged to happen in retirement and pull at least one of them up to the next 18 months. Find one of those things that you’ve been putting off, especially if you’ve got a long list of things, and there’s really not a legitimate excuse. If you have the money, if you have the vacation time, pull one of those bucket list items up. This is a very hard thing to think that a decade from now you would regret. How about you, Jonathan?
Jonathan: Well, before I get to it, Peter, I’m going to put you on the spot. So what is the bucket list thing that you are going to do in the next 18 months?
Peter: I woke up here as I got older and realized, my youngest kids just went to college. I’m like, “Oh, I’m going to finish seeing the world.” I feel like I’ve seen the world, and part of that’s because I travel every week for work. So I have seen the whole country. I’ve been to all 50 states, most of them, many, many times. It’s an incredible country, but I have not seen the world, it turns out. No Japan, no China, no Asia, no South America. It really was eye-opening to see how much time I let lapse without really seeing the world. And so I’ve really bumped up to committing to getting a couple places outside of North America a couple of times a year. And I started that this last six months.
Jonathan: That’s great. And finally, my tip of the month. So one of the things that I’ve been doing over the last couple of years is a number of home improvements to the home I have here in Philadelphia. And when you make those home improvements, it’s really important to keep good records of what you spend because you can take those home improvements and add them to the cost basis of your home.
No need to be too persnickety about this. Just keep the receipts, put them in an email folder, whatever it is, just have an ongoing list of the home improvements that you’ve done. And down the road when you sell, and depending on your tax status, whether you’re single or married filing jointly, you may have a gain that’s bigger than the $250,000 or $500,000 that’s allowable. And those receipts may allow you to pay less in capital gains taxes when you sell your home. And that’s going to be a big issue for a lot of people given the housing appreciation we’ve seen in recent years.
So that’s it for us this month. Happy New Year to all listeners. This is Jonathan Clements, Director of Financial Education for Creative Planning. I’ve been talking to Peter Mallouk, the President of the firm, and we are Down the Middle.
Disclosure: This show is designed to be informational in nature and does not constitute investment advice. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on this show, will be profitable or equal any historical performance levels.
