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How Successful Investors Outwit the “September Slump”

Published on September 11, 2023

John Hagensen

Historically speaking, September is the weakest month for investing returns. Does that mean you need to change your portfolio strategy? (3:45) Plus, an analysis of the current state of the housing market and your comprehensive guide to Medicare enrollment to help ensure you make the right choices for your healthcare needs. (12:50)

Episode Notes

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

John Hagensen: Welcome to the Rethink Your Money podcast presented by Creative Planning. I’m John Hagensen and ahead on today’s show, the importance when investing of understanding the difference between causation and correlation, home unaffordability at record levels, as well as when the right time is to reduce risk. Now, join me as I help you rethink your money.

The NFL is here. Oh, yes it is. My wife lamented, “Wow. It’s already football season, huh?” As someone who is a sports junkie, used to watch a lot of sports, as we had more and more kids, I’m pretty proud of myself. I’ve backed it off a lot, but man, I love me some NFL, especially early in the season, but did you know there is a Super Bowl indicator? That’s right.

This affects your money. If the NFC wins the Super Bowl, Bull market, if like last year the Chiefs won it from the AFC, Bear market time. Yeah, that’s right. You heard me correctly. As of the end of 2022, the indicator has been correct, 41 out of 56 times as measured by the S&P 500 index. That’s a hit rate of around 73% and if you looked at this through 2015, it was accurate 90% of the time.

Now it’s been wrong, six of the last seven and of course, don’t time the market based on who wins the Super Bowl because while the conference of the Super Bowl champion has correlated to market returns, there’s no causation and anybody with half a brain understands that causation refers to a relationship between two or more variables in which one, the cause, brings about a change in the other, the effect.

Correlation causation’s cousin, it’s close, but the devil’s in the details. It’s very different. It refers to when changes of one variable tend to be accompanied by changes in the other variable, but it doesn’t mean that just because there is that correlation, one is causing the other. A silly example of correlation without causation would be the major league player who continues to wear his unwashed socks over and over during the winning streak.

No, your socks that wreak and are standing straight up in your locker are not responsible for your cleanup hitter mashing 450 foot home runs or a more meaningful example would be the flu season as it pertains to cold weather.

People often associate cold weather with the flu, assuming that the cold weather itself is causing flu transmission. No, there is no causal effect of temperatures. Instead, there’s a correlation because cold weather keeps people indoors in poorly ventilated spaces with direct contact to others. You’re not outside in the fresh air.

I grew up in Seattle. If it’s going to rain, you carry an umbrella around, which you do often because again, it’s the Pacific Northwest, but you carrying an umbrella isn’t what’s causing the rain. You have an iPhone and you saw that it was likely to rain, so therefore you brought an umbrella. Yeah, there’s a correlation. You hold an umbrella when it’s going to rain, it’s not causing the rain.

And when we mistake correlation for causation, it leads to a lot of misunderstandings and misguided decisions. And if you have questions about anything pertaining to your investments, your personal finances, you can request to speak with one of our 300 certified financial planners just like myself at creativeplanning.com/radio.

But let’s begin by answering the question, why do we even look for causation where it doesn’t exist? Well, ultimately it’s because we like finding patterns even when they don’t exist. A few examples where I see this play out, the first is the September effect.

Now this refers to the historically weak stock market returns observed during the month of September. In fact, September’s been the single worst performing month on average, going back nearly a century, but the September effect is the case of a calendar-based anomaly. To add additional context, if you look at September just over the last 40 years, three individual events have massively contributed to this lower performance.

Number one, Black Friday. Number two, the terrorist events of 9/11 and number three, Lehman Brothers failing. No one in their right mind thinks “Well, the Twin Towers were hit because it was September. Black Friday, I mean, that happened because it was the ninth month of the year. It was bound to happen. Lehman Brothers, they waited until September to fail.”

No correlation, not causation. So the September effect, while it’s a fun seasonal quirk, it’s an example of volatility in the market. Volatility is expected, it’s unavoidable and it’s recurring. Another example of mistaking correlation for causation are lucky investments. Suppose someone invested in a particular stock and it happened to perform exceptionally well.

Often their conclusion, “Man, I’m smart, my investment strategy rocks, look at what I just put together.” And it’s one of the most dangerous correlated events. In many cases, it’s akin to someone hitting on a 16 in blackjack, getting a five and saying, “I’m a genius.” No. It’s not repeatable. How about budgeting and wealth? Have you ever thought to yourself, “Man, those people that keep real tight budgets, they’re meticulous about it, it probably leads to more wealth.”

Maybe. In reality, budgeting is a tool for managing finances, but wealth accumulation involves more complex factors like income, investments, savings habits. I have interacted with very, very wealthy people who are disorganized and have really no idea where their money is going on a monthly basis, but they are fantastic at creating wealth.

Credit card use and debt is another. People who carry a large credit card balance may assume credit card use causes debt. Someone who pays off their credit card every single month accumulates 2% cash back or air miles and other perks, doesn’t need to cut up their credit card. While excessive credit card spending absolutely can lead to debt, correlation alone doesn’t prove causation.

In fact, poor financial habits and a lack of financial literacy, people just not knowing what they’re doing can contribute to both credit card debt and credit card use.

My last one is home ownership and wealth. Have you ever thought to yourself to have wealth, you need to own a home? Well, many people believe that owning a home directly causes an increase in wealth, and while it can be certainly a part of the wealth building strategy, the real estate market fluctuates.

There’s maintenance costs, mortgage terms, those also play a significant role. If someone were likely to move in three years, then home ownership would be an ill-advised way to build wealth. And home ownership certainly is not the sole cause of wealth.

Well, speaking of home ownership, home affordability is the worst it’s been since 1984, due to rising home prices and a 22-year high on 30 year fixed rate mortgages that are right now around seven and a quarter percent. Buying a median priced home with a 20% down payment now requires a monthly payment on average of $2,440 for principal and interest.

That, by the way, reflects a 92% increase from two years ago. Currently, almost 40% of a median household income is needed for the average home purchase. So affordability is going to require a combination of factors like a decline in home prices, reduced mortgage rates or higher median household incomes to return to the 25-year average and will likely get some combination of the three over the long haul.

And frankly, low housing inventory along with historically high mortgage rates are leading to a shift in demand. People just are refusing to move from their current home and likely three or 4% fixed rate mortgage or are electing to continue renting while they wait for lower cost housing options to emerge.

And this unaffordability in the housing market has led to a few clients asking how they can help their kids or grandkids get into a home. Now, obviously one of the simple options would be for them to provide a gift for the down payment assuming that that beneficiary is capable of covering the ongoing expenses once in the home.

Christian Majerus, who’s a certified financial planner here at Creative Planning wrote a fantastic article that I’ll post to the radio page of our website if you’d like to reference it, regarding tips for leaving your house to an heir. This concept is gaining popularity due to this unaffordability.

Here are a few tips to consider when determining how to effectively pass down your home. Number one, start planning early. It’s a significant life event, should you choose to pass your residence to a child, to a sibling, to a grandchild, it will require careful consideration and planning.

Also understand the potential tax consequences. Transferring property to an heir comes with tax implications including estate taxes, gift taxes and or capital gains taxes. To minimize that tax burden on both yourself and potentially a future recipient, work with an estate planning attorney, work with a CPA. Once you’ve done that, explore different transfer options.

There are several different ways to pass down property to an heir. The first is through joint ownership. I’ll start by saying I don’t recommend this, but this option would ensure that the joint owner receives full ownership rights to the home without any restrictions after one’s passing. That sounds pretty good, right? Why am I not a fan?

One, the value transfer is considered a gift and you have to report it for gift tax purposes, meaning it counts toward your lifetime exemption amount. Also, lifetime gifts to a non-spouse are subject to the carryover of cost basis. So instead of your beneficiaries at death getting a step-up in basis, they may be subject to higher taxes on a future sale of the property because they don’t receive that step up at the time of your death. Also, as a co-owner of the home, they are just that, a co-owner of a portion of the home’s value.

So should your child, let’s say for example, experience financial difficulties, they’ve got creditors coming after them, they need to file bankruptcy, maybe they get divorced. This could put your home at risk of a lien or other legal action.

Further, you’re going to need the permission of your co-owner to take out a new mortgage, refinance the existing mortgage or sell your home in the future. So not a fan of joint ownership, but it is an option. You can also pass it through more of a traditional route via a will. But it’s important to note that having a will alone doesn’t prevent your assets from going through probate, which can take a lot of time and be expensive.

And if you value your privacy, it’s not a great option because a will is a public document. Anyone can see who inherited the assets. Another option for passing down a home would be through the use of a revocable trust. Following your death, the trust enables your home to be quickly and privately transferred to your while bypassing the probate process.

Lastly, I want to share with you a less well-known strategy and that’s a qualified personal residence trust. I know it sounds complicated, right? Sort of is, and that’s why a lot of folks don’t use it, but it can be very beneficial. Using this approach, the home is immediately transferred to a trust, but as the owner, you maintain the right to continue living in the home for the remainder of this qualified personal residence trust duration.

Following the end date of the trust, the house is transferred to your designated beneficiary and you no longer have an official right to live there. That’s why a lot of people don’t do it too. You lose control. But there are two main benefits of this trust. Number one, a reduced gift tax rate because you as the original owner, retain residence’s rights and maintain some of the home’s value.

And secondarily, which is really important if you live somewhere with high expected appreciation on property values, the value of the home is frozen at the time the trust is created, which means your heir’s estate tax liabilities aren’t impacted by future appreciation.

For this strategy though to be most effective, the original owner must outlive the terms of the trust. If you die before the trust ends, the entire value of the home will be included in your taxable estate. And as mentioned, the complexities of using this strategy to pass down a second residence or a mortgaged property may outweigh the benefits.

And again, consult an estate planning attorney. Talk with your CPA, talk with your wealth manager to see if that approach would even be an option given your personal financial situation. And if you’re someone who’d like some help determining how best to pass down your home and you’re not sure where to turn, we help over 60,000 clients in all 50 states in more than 75 countries around the world. Why not give your wealth a second look by visiting creativeplanning.com/radio now for a complimentary second opinion from a credentialed fiduciary that’s independent, not looking to sell you something, no pressure to become a client, but rather providing clarity around what you’ve worked a lifetime to save.

Well, if you’re over 65 or you’re near 65 years old, you are familiar with Medicare. More than 60 million Americans are currently covered by Medicare Health Plans. Around 14% of those are under 65 years of age, but have qualifying health circumstances. Medicare costs the United States around a trillion dollars and is estimated by the year 2031, so in about eight years to cost nearly 1.8 trillion annually.

So it’s a wildly expensive government program that applies to tens of millions of Americans and can be very complicated, which is why I asked my special guest, Jameson Mulder, Creative Planning’s Director of Medicare to join me today here on Rethink Your Money.

Jameson Moulder: Thanks for having me on the show again, John.

John: Well, this is that time of the year where I’m guessing you’re telling your wife, “Honey, I’m not going to be around a whole lot. It’s Medicare enrollment time.” Let’s start with what is the Medicare annual enrollment period, Jameson?

Jameson: So the Medicare enrollment period happens every year during fourth quarter. The date range is October 15th through December 7th. During that timeframe, depending on which Medicare coverages you have, you can make changes for the upcoming January.

John: Obviously, if someone’s approaching 65, they need to get on this. But let’s suppose someone’s listening who’s already on Medicare, does that mean they don’t need to do anything or what do you suggest they review and then potentially change?

Jameson: If someone has Medicare Supplement and prescription drug coverage, there’s no required action items during this time of year. The Supplement, it’s guaranteed renewable, so that means the coverage and benefits, they always stay the same. You can keep the same Supplement plan your entire time on Medicare if you wish, but you do want to keep an eye on the rate increases.

So we usually recommend every four to five years as you’ve experienced some rate increases, it’s worth re-exploring to see if you can maybe save some premium dollars. With the drug coverage, it depends on situation. If you’re someone that takes very few medications or they’re generic, very low cost, it’s typically not necessary to review drug coverage because the differences are minimal.

Now, if you’ve had significant changes to your medications or you take very high tier medications, then it’s definitely a useful exercise to re-review those options for the upcoming year because that’s where the variable cost will lie with that coverage structure.

John: Probably if someone was having a major life event or a big change, that may be a reason to not just let it roll automatically and really look at your options consider what now with your new health situation might dictate a change in your plan, either to a more expensive one because you’re going to need more coverages or to something if you’re still healthy, saying maybe a little overkill and money’s a little bit tighter. Maybe we back this down a little bit.

Jameson: Right. That’s a great point to bring up, John. So I’ll start with the latter. So a lot of times what we’ll run into for the first time when we meet with clients already on Medicare that we haven’t helped is they have a Medicare Advantage Plan because they’re healthy and they want to save the premium, which is very logical. If I’m not needing the coverage, why do I pay the additional premium for it?

But something to think about in long-term planning is if you have a Medicare Advantage Plan and want to revisit Supplement, you have to do it during a fourth quarter during the annual enrollment period, which we are entering, and you have to get approved through underwriting.

So your current health status, you don’t have to be a beacon of health, but you have to be healthy enough to where an insurance carrier will approve you for the coverage. So it’s not something you can be reactive to of, “I have an Advantage Plan, my health has really changed significantly where I have a lot of issues happening.” You’re not going to get approved.

So if you’ve ever been on the fence or in the back of your mind thought, I know this isn’t probably the best coverage available Medicare Advantage, I should probably look at Medicare Supplement, doing it sooner versus later when you can qualify is very advantageous.

John:  I’m speaking with Jameson Moulder, Creative Planning’s Director of Medicare. I’ve had this firsthand with clients. They want to go on an Advantage Plan to start. I discouraged them from doing so, but they like the idea of no premiums and they’re healthy and then they come down with a medical issue or they buy a second property in a different state and they say, “Well, now I need the Supplement.” This makes sense at 70 years old and they can’t qualify.

Now they’re stuck on an Advantage Plan and it’s a nightmare to save relative to their net worth a pretty small premium on a monthly basis. So yeah, if you’re healthy and you’re on an Advantage Plan, it’s worth talking to someone like Jameson and his team here at Creative Planning and you can do so by going to creativeplanning.com/radio at any point to connect with them.

Jameson, what do you see as some of the biggest mistakes or maybe misconceptions, blunders that people make this time of year that you want to help those listening avoid?

Jameson: One would be you’re going to get a lot of solicitations. The insurance companies know that there’s enticement, there’s excitement for people, people to potentially make changes, and you’re going to hear a lot about Medicare Advantage Plans.

Now, when I talk about Medicare Advantage Plans, I am not saying they are bad coverage or they’re going to put you in a horrible position. There’s just unknowns, there’s limitations, and when you’re on Advantage Plan every fourth quarter, you have to remake decisions. Are my doctors in network? Is the plan still available? Why over complicate retirement health insurance when you have the Supplement on the other side?

So let’s say someone does have a Supplement and they’re healthy, good spot to be in. I’m paying for coverage that I don’t need right now. You might start listening to a broker or an agent say, “Well, why are you paying a premium for coverage you’re not even using? Let’s get you over to a Medicare Advantage Plan.”

Which once again, if you’re healthy, the Advantage Plan, you’re not going to really experience those limitations. So I would be careful if you have a Supplement to look at just the fixed cost, a monthly premium, look at the long-term certainty and predictability and the ease of coverage that Supplement provides.

John: It’s sort of a one-way door. It’s easy to get into Advantage. It can be difficult sometimes to get out of it, that’s for sure. Yet for some reason, my wife who’s 36 years old, got on some sort of list that they think she’s 65. So I can personally attest to all the junk mail we get trying to sell my wife who’s not even 40 Medicare Supplement Plans and Advantage Plans, and it floods our mailbox and we’re getting a ton of it right now.

You want to make sure you’re also working with someone like Creative Planning where there’s not the incentive and the huge motivation that’s driving everything by how do I make as much money as possible? How do I make the biggest commission? Because there can be a lot of conflicts of interest in this space just like there is with any type of insurance.

And I’ve seen people get really bad advice and I know the commission structure of how it’s paid out, and I think to myself, I don’t want to be cynical, but I kind of think that’s why they were sold this because I know the agent made three times as much money than if they had told them to do this, which now they can’t do anymore because they’ve had a health situation.

Jameson: That’s a good point to bring up. You would not be getting endless amounts of mail if there was not a commission at the end of that transaction. So whenever we meet with clients, we do definitely provide recommendations of Supplement. That’s what we believe in is the better coverage structure, but we’re here to educate and guide clients. We always leave that decision up to the household and we explain the pros and cons of each coverage structure and just trying to make retirement easier.

John: So yeah, my wife, she gets annuity steak dinner workshops sent to her multiple times a week. We have the entire thing flooded with Medicare, as I mentioned, she gets long-term care insurance advertisements and I understand if I’m a 70-year old needing to actually make these decisions, that could be really confusing.

Jameson: Yeah, actually somehow I’ve gotten on a few lists myself, so I’ll get phone calls during this time of year. I’ve already gotten a couple this week of agents or brokers trying to call and ask about Medicare and I might spend a minute or two kind of humoring them, seeing what path they would be potentially trying to take people down and actually made me think of a story about Medicare Advantage Plan.

So a former colleague of mine had met with someone with a pretty big insurance company and they were talking about their old stories of when they used to sell Medicare Advantage, and just to give you an idea of what the Medicare Advantage world looks like, well, let’s think about the demographic that normally gets Medicare Advantage. They don’t want to pay a premium because they can’t pay a premium. So you’re literally getting sold, insurance that has no premium.

So you don’t need banking, you don’t need social security. You just need someone to say yes and fill an application. So what they used to do is they’d go to a community either outside, they’d see a lot of seniors that were living in this community, they’d set up shop on the hood of their car and they would sign and switch people, 30, 40, 50 people at a time, Medicare Advantage Plans. They didn’t need any banking information, social…

John: And they were just like, “Hey, are you paying a premium right now?” Because these people probably had a good Supplement. And they’re like, “Yeah, we are.” They go, “How would you like to pay zero premium?” They’re at some retirement community and they’re just knocking it down one after another, switching them over, and people are walking away going, “Great, I don’t have that premium anymore.”

But obviously, you and I both know they were in for a surprise when they went to their doctor at the beginning of the next year and the doctor’s like, “Ah, yeah, this isn’t going to work anymore.” Or they got bills because they were using the doctor a lot and all of a sudden they paid way more being on Advantage, right?

Jameson: Yes. And a lot of times clients that are on Medicare don’t understand the coverage. It’s been on autopilot, it’s been working. They don’t know the ins and outs, so when someone starts talking about some extra bells and whistles, they don’t know what they’re forfeiting by doing that.

John: You just want to be really careful. There’s some obviously fantastic people in this space, just like in wealth management and tax and estate planning, but there are some bad actors that you want to be really careful, and I don’t think you want to be switching from a Supplement to Advantage on the hood of a car from somebody you don’t know just because you’re thinking you’re going to save a couple bucks each month.

Jameson: Good rule of thumb, for sure.

John: Just in life, just don’t do anything with somebody who’s sitting on the hood of their car having you sign things.

Jameson: It needs to be in an air conditioning office at a desk, not hood.

John: Oh, yeah. Especially here in Arizona. Absolutely. Well, most importantly, which I say every week on the show, your Medicare needs to be coordinated within the context of your financial plan. How much do you have in assets? Where are you getting retirement income? How is that taxed? What are your expenses? Are you going to inherit money or conversely need to pay for an aging parent? What are your children’s situation? What are your legacy goals? Obviously what’s your health situation looking like at the present? And what is your family history?

These types of both quantitative and qualitative aspects of your financial situation and that broader plan drive what you need to do with Medicare. And so to go to someone who has no idea about your tax situation, no idea about your estate planning situation, nothing to do with your financial planning or your income or your retirement projections for guidance around Medicare, that’s a recipe for incomplete advice.

I encourage you, if it’s not us here at Creative Planning, find a firm like us who’s looking at the entire picture because you are making a decision that in many cases is difficult or impossible to change. Certainly if you’re going with an Advantage Plan to start.

Well, Jameson, I’ll let you get back to what I know is certainly a busy fourth quarter for you and your team. Appreciate you enlightening myself and the listeners with some of your wisdom here on Rethink Your Money.

Jameson: Thanks, John.

John: We were recently on a road trip and we’re stuck in stop and go traffic due to construction, and then there was some semi carrying a bunch of vehicles, one of which had caught on fire, nightmare. Now, my disdain for traffic may be in part the result of having a million kids and the youngest in the car is still in a rear facing car seat.

So because of this, I will routinely take a route that’s considerably further just to avoid sitting in traffic, even if the ETA is the same or even slightly longer, oh, I feel way better because I’m moving the entire time. Now, is this rational to reach your destination at a later time but feel better about it? Of course not. It’s idiotic, it makes no sense. But you know what? It does in my mind, and my guess is you’re irrational sometimes too because you’re a human being.

Dan Ariely wrote a book, Predictably Irrational: The Hidden Forces That Shape Our Decisions, and it’s a great read if you’re looking for a new book. He said, and I quote, “With everything you do, in fact, you should train yourself to question your repeated behaviors.”

How often do we actually consider where we could make more prudent logical decisions? I have some other silly examples of ways that we behave irrationally. How about driving a few miles out of the way just to get to that gas station where unleaded is a couple cents less? You just used more gas.

How about paying 13 bucks for a beer at a baseball game? It’s robbery. Yet when you’re sitting at a restaurant three days later and your drink is five bucks, you think, “Ah, that’s pricey. Too much. Not going to do it.” How about spending money on things within your business that you don’t even want or have a need for because it gives you a write-off?

I see this all the time. “It’s December. We’ve had a great year in the company, John, I need to find some things to spend money on.” No, it doesn’t make sense. In fact, Candace Varner Created Planning’s Director of Tax, spoke about this a few weeks ago here on Rethink Your Money.

Candace Varner: Think of a tax deduction as a discount. It’s not free. It’s like buying something on sale, if you weren’t going to buy it anyway, you are worse off. If they said, “Okay, well I was going to buy this next year, but I’m going to buy it this year instead so that I get the deduction earlier.”

Great, makes perfect sense. I want to keep more of my tax dollars earlier, but if I’m going to buy a car for 20 grand and I otherwise wasn’t going to buy one at all, I’ve just spent 20 grand and got a tax deduction for part of it.

John: So the lesson for business owners is to seek legitimate write-offs that you may be missing, but spending a dollar to get 30 cents back is an irrational exchange. I was on an airplane this week for Creative Planning’s annual conference in Overland Park, Kansas, and you know what happened? The flight attendant got on the intercom, talked about how amazing the airlines credit card program was.

If you only spend a billion dollars in the first month, you’ll get one free round trip. But plenty of people on that plane would be way better off not adding another credit card to their wallet and just buying their own flight. I’ve got two more humorous ways that we tend to be irrational. How about Amazon? When you add an item to your cart and they say, “Would you like it today?” “Well, yeah, that’d be great. Bring it over in a couple hours.”

They say, “Well, only on $25 or more on qualifying purchases.” So then if you’re like me, you click on the link and you find things that you don’t even want to get the cart over $25 so that you can receive your light bulbs eight hours earlier. Yeah, that makes a lot of sense, doesn’t it?

And the final one, this applies to my mother-in-law and my wife. When you return an item that you already purchased, you’re not making money. “Oh, I just took that back, man. We just saved all that.” No, that was money that you already spent. You’re just giving your own money back. It doesn’t save you anything and you certainly aren’t making money by doing this. But the reason that I spend time each week on the show for us to rethink common wisdom is because if we are not careful, we can be really illogical, forget to question why we believe the things that we do.

If you have questions that you’d like answered by a certified financial planner like myself, visit creativeplanning.com/radionow to speak with a local advisor. Our first piece of common wisdom today is that no one cares about your money as much as you do.

This is one at a surface level, completely agree with. As much as I love my clients, as much as I know my colleagues here at Creative Planning, the hundred plus CPAs and the 70 plus attorneys and over 300 certified financial planners and everyone else involved in every facet of helping our clients achieve better financial outcomes, care deeply, we want our clients to succeed.

It’s our professional mission, but we don’t care about your money as much as you do. It’s impossible. And it’s important for you to remember that ultimately your financial progress isn’t something that anyone else, no matter how great they are, can do for you.

And this brings me to a point that relates to the causation and correlation conversation from earlier in the show. Basically, if that’s true and you care about your money more than anyone else, then you shouldn’t hire an advisor because they won’t care as much as you. Now, that’s not necessarily true because while you care a lot, which is great, you should, that doesn’t mean that you have all three of these essential pieces that you need to manage your own money.

Number one is the expertise. Quite simply, do you have the knowledge and the experience to manage your own portfolio? A good question to ask yourself is, would anyone else pay you to manage their life savings? Would one of your friends say, “Man, you’re so knowledgeable. I want you to manage all of my money for me. I’ll pay you to do that.” Probably not, but that’s what you’re doing when you hire yourself.

After checking the box on experience, do you have the time? Do you likely have a lot going on if your life looks like mine? Do you have the adequate amount of time to spend strategizing your taxes, your estate planning, your investments, your insurance?

And the third and final question you have to ask yourself is, do you have the desire? Is this something you enjoy? Do you want to spend the time or dedicate to becoming an expert? Is that a priority to you? Or are you like most people where you understand it’s important, but it’s not a passion of yours, it’s not something that you enjoy doing.

And so if any one of those three are a no, you need to hire a financial advisor because while not everyone needs a planner, everyone needs a plan, but the advisor can only do so much because the most important contributors to your success will be how much you earn and how much you save.

Even if you’re working with Warren Buffett, there’s not a lot he can help you with. If you’ve got nothing to invest. Ultimately, and I think this is a great thing, you and you alone have the most control over your financial success.

Our next piece of common wisdom is that alternative investments are a necessary piece of a well-diversified portfolio. When we experience a year like 2022, which was one of the worst in decades for a stock bond portfolio, it’s only natural that investors look around and say, “What other options do I have?”

And as a result, many even younger investors have been looking to alternative investments and as a result of new technology, it’s easier than ever before to purchase alternative investments even if you have a relatively small portfolio or amount to invest. Let’s define alternative investments. It’s a broad category that differ from stocks, bonds, cash, and they’re considered alternative because they often have unique characteristics, structures, and risk return profiles compared to more traditional options.

Alternative investments are typically used by investors to diversify their portfolios and potentially generate returns that are less correlated with the performance of stocks and bonds in particular.

And there are many categories of alternative investments that in many cases share almost nothing alike with one another, aside from the fact that they’re both considered a alternative investments. So you’ve got private equity, which is when you invest in private companies or take direct ownership stakes in businesses.

You have hedge funds. These are professional portfolio managers employing various strategies such as long short equity, arbitrage or macroeconomic analysis to generate returns. The goal of most hedge funds, they aim to provide positive returns regardless of overall market conditions.

You have real estate that’s considered an alternative investment. Purchasing physical properties, residential, commercial, industrial, you can buy them through REITs, all capital, R-E-I-T, Real Estate Investment Trusts, that own and manage the real estate assets for you. Those can provide rental income and potential appreciation of the property values.

You’ve got commodities, physical goods like gold oil, agricultural products and metals. And by the way, we here at Creative Planning do not recommend all of these categories of alternative investments, although we do have exposure in many of our clients’ plans to some of these.

And then there’s venture capital, which involves funding early stage or startup companies with significant growth potential. You can see why it can be problematic to lump alternative investments altogether.

I mean, if you have a rental property that has fantastic renters and very low leverage, that’s a lot different than angel investing, hoping to find the next Uber. So here are the pros and cons of alternative investments. The pros are diversification because they can offer returns that are less correlated with traditional assets, which potentially reduces your overall risk. It has the potential for higher returns depending upon what category of alternative you’re in. Many are great inflation hedges and it provides access to unique opportunities that you can’t find in the public markets.

Now, the cons, which frankly can be disregarded too quickly, I think for people that have an interest in alternatives, there’s a lack of liquidity, higher costs, more complexity, in many cases, higher risk and regulatory and tax considerations. Last week on the show I talked about the must haves within your financial plan, the should haves and then the could haves.

Alternative investments fit into the could have category. All things being equal, there is an opportunity to over perform public markets by maybe a couple of percent, maybe a little better, maybe a little worse, certainly not promissory, but there’s that opportunity. But the reason two smart people could arrive at different conclusions as to whether they’d like alternative investments within their portfolio is what I just mentioned from the cons.

They can, in many cases, be a pain and add complexity and costs and lack of transparency and all sorts of other negatives in an attempt to achieve a non-correlated higher rate of return. And one of the biggest items of note when it comes to alternatives, manager selection is critical.

Unlike the public markets where it’s very difficult for any single manager to outperform the markets, in the alt space, it is fat head, long tail, meaning there are a subset of managers with phenomenal track records and phenomenal histories that have consistently outperformed their peers.

And then the vast majority of managers drastically underperform a much simpler, less expensive, more liquid traditional strategy. Here at Creative Planning, because of our size and our scale, we have access to what we believe are the top managers. And so if you’re interested in a discussion around what type of alternative investments might be right for you, do they fit into your plan when looking at your short and long-term goals?

If you have questions and would like to speak with a local advisor, you don’t need to worry about being sold some high commissionable alternative investment product as it’s still being done by the vast majority of our industry.

Instead, get independent advice from a credentialed fiduciary who is looking at your entire picture taxes, estate planning, risk management, because here at Creative Planning, we believe your money works harder when it works together. Visit creativeplanning.com/radionow to schedule your complimentary visit.

It is time for listener questions and to read those, one of my producers, Lauren, as always, is here. Hey Lauren, who do we have first?

Lauren Newman: Hi, John. Our first question today comes from Michael in St. Paul, Minnesota and he says, “I’m looking to retire in about five years and want to start scaling back my risk. My question is what is the best way to go about doing this? I currently have around a million in my 401K, about 200,000 in a Roth and another 500,000 in a brokerage account, currently all in stocks. What do you recommend?”

John: Appreciate the question, Michael. Well, the easiest way to evaluate this specifically from a risk standpoint, have six months of an emergency fund in place. And by the way, that doesn’t all need to be in cash in your checking account, earning nothing. Right now, you can earn 5% on that money in a cash equivalent, something like a money market or short-term treasury.

Then figure out within your financial plan how much you’ll need from your portfolio over the next five or 10 years. So that would be the basics in terms of how much risk to dial down, just figure out what you need out of the portfolio over the next seven to 10 years.

Once you arrive at that allocation, your risk then is theoretically aligned with your income needs and your time horizons. But there’s an important next step to consider when selling some of your stocks in favor of bonds. Do you do that within the 401K? Do you do that within the Roth? Do you move to bonds in the brokerage account, that after tax account? And that is called asset location.

So that’s not about what you own, it’s where you own it, and it’s really important from a tax efficiency standpoint. A dead giveaway for me that someone’s plan isn’t considering taxes as it should be, is when all of the accounts have the exact same holdings, like the Roth looks exactly like the traditional IRA or the 401K, the brokerage account, every account literally owns the same things.

Typically, the Roth would be the last spot to add bonds because it’s tax-exempt and therefore you want that account to grow as much as possible because the distributions, assuming you follow a few basic rules, aren’t taxed, and if you die with that account, it passes to beneficiaries tax-exempt as well.

If you chose to add bonds to the non-qualified account, you’d want to consider the types of bonds and their subsequent tax treatment on the interest. If you’re in a high tax bracket, you might go with tax-exempt municipal bonds. If you’re in a lower bracket, you probably wouldn’t because the taxable equivalent yield on a corporate bond would likely be higher.

Certainly if you’re allocating to bonds within the 401K, you wouldn’t buy munis because you’d want the highest yield and none of the interest is taxed, you’re just taxed on distributions Out of the retirement account itself. I think of this strategic aspect of building a portfolio a little bit like what your realtor tells you, location, location, location, and it’s an easy one to miss.

We look at the actual holdings, not where they’re held. I’m going to post an article written by friend of the show, charted financial analyst and investment manager here at Creative Planning, Kenny Gatliff on asset location, and I won’t spoil the entire article, nor do I have enough time, but there’s a chart that shows even if the balances are the same 20 years later, the after-tax difference of putting the growthier assets in the tax-exempt account and the portions of the plan that aren’t going to grow as much and be more stable in the tax deferred account, results in a huge after tax discrepancy.

So think about that. No additional risk, no change in performance whatsoever, but by placing the right types of investments in the most tax efficient type of account, you improve your outcomes significantly. Michael, we’ve got an office there in the cities. If you haven’t had your tax return reviewed recently by your financial advisor, and or if you’re not sure that your asset location is as efficiently designed as it could be, reach out directly at creativeplanning.com/radio to schedule a visit in Minnesota. All right, Lauren, who’s next?

Lauren: Our next question is from Susan in Denver, Colorado. She writes, “My position at work is requiring me to move out of state, which means I will need to buy a new house. With interest rates so high, is it better to put a lot of money down upfront or keep more money in my savings?”

John: Well, Susan, I’d love to see your entire situation. Things like how much you’ll NET in equity from the sale of your home, assuming that you currently own a home that you’re planning to sell on the move, would be one consideration. Also, how far out you are from retirement? Do you have any other debt? Along with a multitude of other considerations. I mean, certainly this answer is not a substitute for designing a comprehensive financial plan, but in short, there isn’t an exact right answer.

This is not a black and white question, but if you purely look at the math, anything you would have in bonds or cash should be put toward the mortgage because mortgage rates are around seven and a quarter right now, and even though interest rates on money markets and treasuries and corporate bonds have increased a lot, you can estimate those to be around 5%.

So that’s a negative arbitrage on your money. Why pay over 7% interest to the bank while you’re only earning around 5% on your money? And if you extend that argument further, it’s why one of the first rules in personal finances never carry credit card balances because if you’re paying 25% interest to a credit card company, you’re not going to beat that in any other investment, you’ll be compounding in the wrong direction.

Now, the reason I said there isn’t a right answer is that I could see someone arguing, “Hey, I locked in a 4.5% interest rate for the next 10 years while I’m paying seven plus percent on my mortgage. That’s only temporary until rates drop, and then I’ll refinance at hopefully less than the four, four and a half percent and I’ll be making money.” But that involves a lot of moving parts, a lot of maybes and hypotheticals, and in the short term, you’re still losing money by doing it that way.

The other reason there’s not a right answer though, is that liquidity means more to certain people than others. If liquidity is extremely important to you, Susan, then losing 2% per year between the interest earned and collected may be worth it simply for the flexibility and access to the funds.

Personally, I would put 20% down, invest the rest, which, at my age, mostly in stocks and look to refinance as soon as rates dropped. But again, if you’re a hyper conservative investor who allocates very little to stocks than I’d put down more to save the seven plus percent interest that you do not expect to earn in those more stable investments, should you put them there.

Now all of this, Susan, comes with a qualifier, refinance as soon as rates drop. If at some point mortgage rates are back at 3.5 or 4%, I would not keep significant equity in the home because at that point you should expect to earn more than what you’re paying in interest, especially over a longer period of time.

If you have questions, do what Michael and Susan did. Email those over to radio@creativeplanning.com. All right, Lauren, who’s next?

Lauren: Next, we have Elizabeth from Glendale, Arizona. “Hello. I would love to get your thoughts on the following. I have two children, one a junior in college and the other who graduated last May and just got his first job. I’m realizing now they are or are soon to be on their own financially. What do you think is the best advice I can give them?”

John: I love this question. You’re clearly a loving mom who’s invested in your children’s success. That is fantastic. I hope your kids are grateful. Even if they don’t realize it now, they’ve got a good mom. I would get them two books to start. The Psychology of Money by Morgan Housel and the Five Mistakes Every Investor Makes by Creative Planning President, Peter Mallouk, those will provide different approaches.

One more on the behavioral side of money that I think connects and resonates very well, especially with younger people. With the other focusing on core fundamental building blocks of how to avoid some of the most destructive mindsets and behaviors related to building wealth and having success as an investor. So Christmas is in a few months, that’d be a nice gift or stocking stuffer. A few general key first steps, they need to eliminate and avoid all consumer debt.

So I’d be having a conversation with them about that. No consumer debt. Next, I’d tell them, don’t buy a fancy car. Don’t take on a large car payment, especially right now with interest rates where they’re at. I know it feels cool when you’re in college or just out of college to have a great car. Vehicle purchases and their subsequent payments on those vehicles inhibit young investors opportunity at compounding their wealth, utilizing the most powerful tool they have, time, because too much of it is going to an expensive car payment.

They should take advantage of any match offered by their company. That’s free money, offering a 100% rate of return on their contributions immediately, and then build up that emergency fund around six months. Then if all those boxes are checked and they have more to consider, I would recommend they go see a fiduciary financial advisor and build a plan.

If they want to save maybe for a down payment on a home or pay off potential student loans, plan for a wedding, at some point they’re going to need to move to a different state. All of those are great reasons to build out a financial plan to ensure that they’re aligning their savings and their investments with all of those expenses and life events that are upcoming.

I want to conclude today with a story that has provided incredible inspiration to my wife and I over the years, and it started about 10 years ago when we read a New York Times bestseller titled Kisses From Katie, and the author was a girl named Katie Davis who lives in Uganda.

Now, what was amazing about her story is as an 18-year-old, she traveled to Uganda for what she thought would be a three-week trip. Well, she was immediately captivated by the people and the culture, and she knew she was going to be back. So less than a year later, she returned to Uganda and it’s been her home ever since.

What’s incredible is that shortly thereafter, she founded Amazima Ministries, which means truth and started with a sponsorship program of 40 students. And I can attest regarding our two boys that we adopted at 11 and 10 from Ethiopia, they’re adjacent to Uganda, providing education and access to education is of all things, in my opinion, the biggest challenge to helping these countries and the future generations work their way out of poverty. And Katie saw this as well.

She then started a feeding program that was launched and grew to 1200 children a day receiving meals. Oh, but her story, it gets even more incredible. Over the course of the next couple of years, she adopted 13 girls. This is by the time she was 23 years old. She was a mom to 13.

Since then, she has a scholarship program for 600 students. Medical care annually is being provided for over 4,000 Ugandans. She’s provided measles and polio immunizations for thousands in the region and created a program for locals to learn modernized farming, to grow food for their families. Now, why am I telling you this?

Because in reality, are you or I going to move to Africa, quit everything and adopt 13 kids next year? Honestly, maybe we should, but we probably won’t. But there’s a lesson to be learned for us in Katie’s courageous story, and that is small actions, seemingly insignificant habits, they can lead to huge results.

In our lives the big things that happen often aren’t a result of some singular massive decision. No, it was one foot in front of the other for a long period of time, repeating actions consistently over and over, whether this is in our relationships, with our money, with our charitable endeavors, most of our biggest successes and failures can be traced back to a series of little events or decisions that we repeated.

So if you desire to make an impact on those that you love around you, the path to doing so may be simpler to find than you might think. Remember Katie started out with a three-week trip to Africa. That was it, and the rest is history. And remember, we are the wealthiest society in the history of planet Earth. Let’s make our money matter.

Announcer: Thank you for listening to Rethink Your Money, presented by Creative Planning. To hear past episodes or learn more about the topics and articles discussed on 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 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, should not be construed as investment, tax or legal advice and does not constitute an attorney-client relationship. Past performance of any market results is no assurance of future performance.

The information contained herein has been obtained from sources deemed reliable but is not guaranteed. If you would like our help request to speak to an advisor by going to creativeplanning.com. Creative Planning Tax and Legal are separate entities that must be engaged independently.

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