Feeling stressed about inflation, market volatility or uncertainty about the future? You’re not alone. Financial anxiety is on the rise and wreaking havoc on many investors’ nerves. Fortunately, John is here to provide the strategies you need to gain a sense of control over your finances. (8:46)
Episode Description
Presented by Creative Planning, each week Host and Managing Director John Hagensen cuts through the headlines and loud takes to challenge the advice you may have been given and reaffirm what you know to be true. Plus, don’t miss his weekly interviews with Creative Planning specialists as they cover investing, taxes, estate planning and many other areas that impact your financial life!
John Hagensen: Welcome to the Rethink Your Money Podcast presented by Creative Planning. I’m John Hagensen, and ahead on today’s show, Lessons From the Wealthy, what can we learn from them as well as practical ways to lower your financial anxiety and why financial wellness has very little actually to do with money. Now join me as I help you rethink your money.
Now, this summer I’ve become a bit obsessed with golf. No, I’m unfortunately not a scratch golfer and I don’t get out and play all that much. Sometimes it’s in the evening time with Luna, our one-year-old in a car seat that I’ve strapped onto the golf cart, not joking, actually did that and went in a group with other adults while a one-year-old was with me. But you know, when you have seven kids, you got to do what you got to do and play some evening golf after work. But I’ve been borderline driving my wife, Brittany, crazy because we’ll go to bed and she’s like, “What are you watching over there on your phone? You’re not watching super slow-mode swing videos, are you, like Rory McIlroy or Tiger in his heyday?” I’m like, “No, no, no. Adam Scott. He has the most pure swing of anyone on tour.” Then she sort of rolls her eyes, “Man, I hope you eventually get really good at golf because you’re not binging on Netflix or hanging out. You’re watching slow-mo YouTube videos?”
The reason I’m analyzing the best golfers in the world, their swings, and not the 20 handicapper down at the driving range is because they’ve obviously figured it out. And the exact same is true when we look at how successful people have managed their money. And this is why we should analyze, just like I do these YouTube videos, what the wealthy do with their money. If they’ve got more than us, maybe they’ve figured something out that we can apply.
Some interesting statistics about millionaires. About 1% of the world’s adult population are millionaires, which is about 56 million people around the globe. And they make up 46% of the world’s wealth. You hear discussions around wealth inequality, there you have it: 1% of the world’s population has 46% of the wealth. The nearly 22 million millionaires in the United States account for 8.8% of the country’s adult population and over 39% of millionaires worldwide. We’re not anywhere near 40% of the world’s population, but pretty interesting, we make up 40% of all millionaires.
There’s a reason why. I end every show saying we are the wealthiest society in the history of planet Earth, right? We should be making our money matter. Look at how much we have collectively. The industries that produce the most millionaires and billionaires, by the way, within the United States are finance, technology, manufacturing, fashion and retail, and healthcare. About 33% of the nation’s millionaires are women, and the average millionaire is 57 years old according to Zippia.com. Nearly everyone raises their chance of becoming a millionaire by attending college, with 88% of current millionaires holding college diplomas and 52% earning master’s or doctorate degrees.
Have you ever had the perception that most millionaires came from wealthy families or went to an Ivy League school? If you did, you’re mistaken. While those factors can certainly help, 79% of surveyed millionaires haven’t received an inheritance, and just 8% attended what we would consider prestigious private universities. In total, 88% of American millionaires are considered to be self-made.
And the reason I point that out is because why would we want to learn from the characteristics of rich Americans who only have it because of the family that they were born into? But that’s not the case. And most millionaires aren’t driving flashy cars or making huge bets hoping that they get lucky. Most millionaires are frugal and they’re disciplined.
I think of America’s most celebrated billionaire, Warren Buffet, who still famously lives in Omaha in the house that he bought 1958 for $31,500. And we’re going to go rapid-fire on some lessons we can learn from the wealthiest Americans. Number one, they focus on equity. It’s not all about income. It certainly helps, but ownership is the ultimate path that brings the most wealth. You can get equity obviously by owning a business. You can work at a company that provides you ownership over time and ability to buy in as a partner. And if neither of these are in the cards, the most simple way is to own stocks. You can be an owner of Apple, you can be an owner of Amazon, you can own Microsoft. You can be an owner of utility companies, big companies, small companies, domestic companies, international companies, and you are able to then participate in the profits of that company.
Number two, wealthy people rarely sell investments. They’re not looking to time the market. They understand that it is time in the market. The vast majority of what you hear from the financial media is nothing more than noise; because when you own stocks and you’re a shareholder of the largest companies around the world, you are in it for the long haul. And historically speaking, the short term is highly uncertain, but the market has continued up and to the right over long periods of time, earning about 10% a year for the last century. Do not pay attention and certainly do not act upon today’s headlines.
Number three, they focus on the long-term wealth. They’re not looking to get rich quick. They understand that building wealth takes time. I love the famous quote, “It took me 30 years to be an overnight success.” The wealthy understand that.
Number four, they know they are not smarter than the market. The market’s unknowable, so even if you’re Albert Einstein, you can’t forecast things that are inherently unpredictable.
Number five, the wealthy know what they like, and they spend their money and their time there. So for you, that might be travel, that might be helping causes you care about or family members. Ultimately, you’d like to cut out the expenses that really don’t bring you a whole lot of joy and focus in on the things that are most meaningful.
The wealthy also understand that a high-paying job isn’t the greatest factor in wealth accumulation, but rather the gap between your income and your expenses. A lot of people live paycheck to paycheck making really good money. It’s all about your savings rate, which fortunately is entirely within your control.
The wealthy also are not afraid of good debt. Every financial planner would agree that having 27% interest credit card debt is a fantastic way to have anxiety around your money and never get ahead. But good debt is called leverage, and this extends far beyond even the wealthy. Look at the largest corporations in the world. They use debt strategically to grow.
And lastly, the wealthy are the most likely to lean on experts. The higher someone’s net worth, the more likely they are to have a financial advisor. It’s unlikely they’re going to LegalZoom to print documents, no offense, LegalZoom. The wealthy lean on experts and they have a plan in place.
And for you, that’s the number one takeaway. Do you have a team of experts in your corner? Do you have a detailed, written, documented, comprehensive financial plan that accounts for your taxes and your estate planning, and is dynamic and able to be adjusted as your life and as laws inevitably change? Wealthy people create a plan, they review that plan, and they make adjustments to that plan.
If you’re not confident in the plan you have, or you don’t have a legitimate financial plan as I described it, well, why not give your wealth a second look? And if you’re not sure where to turn, you can meet with a local credentialed fiduciary just like myself. I’m a Wealth Manager here at Creative Planning. Meet with myself or one of my colleagues. We have been helping families across the country now for 40 years. Visit creativelanning.com/radio today to get your most important questions answered.
Well, I saw this and I thought it was interesting. A recent study by Fidelity Investments found that 45% of people ages 18 to 35, and I’m quoting here in the study, “don’t see a point in saving until things return to normal.” In that same age group, 55% said they put retirement planning on hold during the pandemic.
What’s disappointing about this is that this age group has the most time of benefiting from compound interest. A couple takeaways that I have is that number one, 18 to 35 year-olds are buyers. Anything that you buy in life: a house, a car, a sweater, “It’s a sweater, it’s a sweater,” love Three Amigos, you prefer to buy on sale at a lower price. It’s only when you begin to sell your investments, oftentimes in retirement, that down markets can hurt, which is absolutely why you reallocate the portfolio for shorter-term needs to safer investments, which of course creates predictability for your sale price. So that’s the first thing. Young people that are accumulators should be rooting for bear markets, should be rooting for corrections.
The second takeaway is that there is no normal, or certainly normal when it comes to investing is not defined by smooth sailing. I think of this as a parent to my seven kids. If I’m waiting to live life and have a great time and not be stressed out, if I’m waiting for everything to be perfect, tranquil, there’s some spa music playing in the background, the light is just right, house perfectly clean, I’m waiting for that, then I’m going to relax. Life’s going to be good when that happens. That’s not reality. The house isn’t going to be perfect, although my wife does a fantastic job. Honey, if you’re listening, the house looks awesome. I appreciate that. You get the essential oils going in the diffusers and stuff. I do smell that eucalyptus from time to time. Normal though, in a large family is defined by controlled chaos.
And the stock market is defined by volatility and uncertainty. That is why it’s earned a 6% return above inflation for the last hundred years, because the normal is risk and volatility, certainly over the short term. And your satisfaction and contentment when it comes to your money and your investment performance will be found far more in your expectations than in the outcomes. And the larger that gap, the more frustration you’ll have.
Let’s unpack the normal of the market a bit more. Market corrections, which is a drop of 10% or more from its last all-time high, are extremely common. The average correction is about 14% and you can expect one almost every year. Think about that. You have a million dollars invested. It’s entirely in stocks let’s assume because it’s longer-term monies. You’re broadly diversified in ETFs or index funds. You’re not trying to time the market. You should expect that at some point during the year you will look at your accounts and that million will be worth about $860,000. If you’d be surprised by that or uncomfortable with that, that’s not a market problem. That’s an unrealistic expectation problem. That’s normal.
Just take 2018. There was a market correction of more than 10% and then again in quarter four, another correction. Then in 2019 quarter one, market rebounds by 13%, runs up a bit more. We have 2020, fastest bear market ever, only lasts two months during the pandemic. The market ends up over 18% in a year where the world shut down. By the way, if you thought you were a market timer, you could figure things out. 2020 broke basically every model from that perspective, and then it continued to gain a total of more than 100% over the next two years. That was followed by 2022. We all know what happened last year, terrible year. Now 2023, great first six months of the year.
And so, to summarize what’s normal if you are invested in the stock market, complete short-term unpredictability, a massive variance in your outcome potentials over even 1, 2, 3, 4 years. But the longer you stay invested, the more compressed and predictable that range of returns become. If you’re 18 to 35 years old, the sooner you start investing, the better. No one’s shooting flares up in the air to let you know that the coast is clear. If you’re a parent or a grandparent to someone in that age range, do your best to help them learn these principles so that they can take advantage of that Eighth Wonder of the World known as compound interest.
Well, according to the Mind Over Money study that was conducted by Capital One and The Decision Lab, 77% of Americans report feeling anxious about their financial situation. 58% feel that finances control their lives and 52% have difficulty controlling their money-related worries.
What are we most worried about as Americans? Not having enough to retire always at the top of the list, and right along with it, which wouldn’t have been the case probably a couple of years ago, is keeping up with the cost of living, as well as managing debt levels.
So as a society, we have as much stress as ever. We feel anxious about our money, yet when you look historically, we live far better than kings and the wealthiest of all society did 60 years ago, yet we still have this anxiety. And to help me unpack this topic today, my special guest is Dr. Dan Pallesen. Dan is a Doctor of Psychology, a Certified Financial Planner, as well as a Certified Financial Therapist. He’s a Wealth Manager here at Creative Planning, a regular guest of the show, and he specializes in financial wellness, helping clients find peace and contentment with their money. Dan, you’re one of our favorite guests. Welcome back to Rethink Your Money.
Dan Pallesen: Always happy to be here. Thanks, John.
John: We’re talking about financial stress, something that applies to everyone. My question for you is, as a society, are we improving on lowering our money stress?
Dan: Well, we certainly have more information and we have more people devoted to the cause of reducing anxiety and financial anxiety, so I think there’s been a really positive movement there. But sadly, no, we’re seeing a rise in anxiety as it’s related to money. Every year there’s studies that come out and they measure the relationship between money and stress, or they just study stress and they ask people what is causing stress? And money is always at the top of the list.
John: Yeah.
Dan: Money, physical health, relationships. But it seems like this year in 2023, money is even higher. There’s significantly more people that are reporting that money is a source of their anxiety.
John: Why do you think that? What’s unique about 2023?
Dan: 2022 was a tough year. 2022 was a tough year in the markets. We’ve seen the bear market, we’ve seen rapid rise in interest rates, so there’s a lot going on. But these studies, what they dig into is they’re like, “What specific about money is causing stress for folks?” And for the first time in a long time, inflation is what is being identified as the cause of money stress for people.
John: We weren’t even thinking about inflation for decades, right? And it came upon us pretty quickly, so that’s maybe not that surprising. That’s interesting.
Dan: Inflation has kind of been that silent killer. We know it’s there cognitively. We know that we should be accounting for it. When you look back 30 years, for those of us that can remember what our first car was or how much milk was 20 years ago compared to now, so we can see the difference, but it still doesn’t feel like that big of a difference year to year. But with the rising inflation rates recently, it’s very real. It’s very in your face.
One of the reasons inflation is causing anxiety for people is taking away a coping mechanism that a lot of us have. It’s not the best coping mechanism, but this idea of action bias. So when the markets are volatile, especially when there’s downward volatility and we pull money out of our investments and we go to cash on the sidelines, it feels like we did something. Financial planners like you and I would warn that that’s not the best thing to do, but it feels good in the moment like we did something. But now when you have money in cash on the sidelines, you’re faced with losing purchasing power pretty rapidly year-to-year because of inflation. We remember what things cost a year or two ago, not 20 years ago. So inflation is a lot more in our face in 2023 than it has been for a really long time.
John: Yeah. It’s kind of that boiling frog syndrome. But it doesn’t surprise me that you point out the data that shows inflation is absolutely top of mind. And that’s because it wasn’t just a financial planning topic in 2022, it was leading the evening news. What other observations, Dan, have you seen with feelings toward inflation?
Dan: It was this thing that we knew about, but we didn’t really feel.
John: Yeah.
Dan: We remember what our first car cost 20, 30, 40, 50 years ago, depending on your age. But right now, I remember what cars cost two years ago, and I remember what eggs cost a year or two ago. And it feels a lot different today. And so-
John: Dan, you need chickens like we have. You need chickens.
Dan: I do need chickens like you guys.
John: We get about five eggs every day. Perfect. I’ll bring you some.
Dan: I think we call that a humble brag, John. That’s a humble brag.
John: Yeah, not to brag.
Dan: Well, unless you have a chicken coop and the wiring and all the maintenance and the kids to keep up the chickens, you’re feeling the cost of eggs. So my point is this thing that when we look back and see, and it’s almost like nostalgia of, “Oh, I remember what that cost back in the day” and it reminds us maybe of a simpler time. But now you don’t have to look back that far to see the rapid increase in costs. And I think when people are running their month-to-month budgets, they’re finding that it’s feeling tighter and tighter in a way that they haven’t for many years.
John: I’m speaking with Licensed Clinical Psychologist, Dr. Dan Pallesen. What you say is true, Dan. Using historical norms every 23 years, our money has to double just to keep pace with inflation. It’s pervasive, it’s subtle, and we often don’t notice what’s happening in the moment until… It’s kind of like aging. I looked in the mirror the other day, I’m like, “Wow. I’m a little bit older. I don’t look as young as I once was.” I guess that’s what’s been happening slowly over the last 20 years. So rather than depressing ourselves and going, “Well, inflation’s high. Everybody’s more stressed out about it.” What can we do, Dan? What are some practical things that someone can do to hopefully alleviate or at least reduce some of this financial stress?
Dan: It starts with focusing on what we can control. If any of my clients are listening, they’re probably rolling their eyes because they hear me talk about this all the time, but really putting your focus on what you can control and what you can impact. So first, what can we not impact? Market conditions and the market in general, we can’t control. Inflation, we can’t control, interest rates. So there’s these things that are out of our control that we think about a lot, but when our mind is consumed with them, it’s just bringing up anxiety. When we’re feeling anxious, we don’t make the best financial decisions. So to get yourself out of a place of anxiety, it’s focusing on what you can control.
So back to your household monthly budget, maybe reevaluating that budget. What truly is the difference between a fixed cost and a discretionary cost? If you get paid every other Friday, but the paycheck is running out every other Thursday or Wednesday now, this is a good time to be reevaluating your budget.
And I want to be clear. A lot of times when we focus on reevaluating our budget, we look at how can we cut costs. A family budget is pretty simple. It’s basically inflows and outflows. So yes, evaluate what you’re spending on, but you might also reevaluate your opportunity for income. Where might you be able to earn a little bit more? What are some of those opportunities? So it’s not just about cutting costs, but getting back into where are you spending your time, your money? How can you impact that and how can you change that to have a favorable outcome for your family I think is really important.
I think secondly, John, and you talk about this a lot on your show, is have a plan. Have a written plan that you can go back to. I can’t tell you how many clients that I’ve had over the past year that come in with concerns about inflation, but when we pull up their financial plan, their plan works and we can make adjustments. We can increase their expenses through retirement. We can increase the assumption we have on inflation in the software that we use, so we can make these changes in these tweaks and really stress test the plan. And at the end of the day, you can run the numbers and see your plan still works. Even with inflation, your plan still works. And the peace of mind that you get when you see that is unrivaled.
And if your plan doesn’t work because of inflation, at the very least, you can start to see, “Where can I make some changes? Maybe I do need to cut costs. Maybe I need to invest a little bit more aggressively and be more growth-seeking in my investments.” We can start to identify practical things that we can do, and it all comes back to putting your focus where you can control.
John: Those are fantastic tips. I’m going to piggyback on one of those, Dan. If you want to have less stress, whether it’s with your money or in life, give yourself some margin. If you’re stressed out about a traffic jam on your way to an important meeting, well, if you’d left 10 minutes earlier and given yourself a bit more margin, it’s not as stressful because you can’t control the traffic jam.
And it’s the same thing, if you have that emergency fund built up and you have a cushion for the unexpected, which is going to be built into any great financial plan as you were mentioning, you’re not sweating as many of the small things that are out of your control. Then if you recognize, “Man, I don’t have a great plan and my margin for error is really thin,” that is very stressful. Have a good budget. Know where you’re spending money. Control your savings rate. Have a good financial plan and a way to evaluate it and change it along the way. So if you’re looking for money to do something for you, there’s probably not a whole lot that it can do that’s more impactful than providing you with more mental clarity and freedom and less stress.
Dan: Yes. Yeah.
John: So I think these are fantastic tips.
Dan: Couldn’t agree more with you, John. And yeah, we see that. And study after study after study shows that money doesn’t necessarily increase happiness, but what money does a good job as it pertains to our mental health, is providing peace of mind, is alleviating stress when you have a plan, when your financial behaviors are in alignment with your values, and you have some intentionality around what you’re doing with your money.
John: That’s great. Thank you so much again for joining me here on Rethink Your Money, Dan.
Dan: Hey, thanks for having me, John.
John: Dr. Dan and I just spoke of a plan. I have a simple question for you. Do you have one? Do you have a written, documented, detailed, measurable financial plan? Can you grab that and look through it right now? Not just a pie chart of your asset allocation, not just a basic Monte Carlo simulation, do you have taxes, estate planning, risk management, investments, retirement planning, all accounted for in a comprehensive and organized financial plan? Nothing else matters if the answer to that is no.
And if you don’t have that or you don’t have confidence in the one you have and you’d like one, we’ve been offering financial planning here at Creative Planning for thousands of families in all 50 states and over 75 countries around the world. Why not give your wealth a second look by meeting with a local advisor just like myself? Visit creativeplanning.com/radio now to take the first step in lowering your financial anxiety.
Well, before I jump into a few pieces of common wisdom that we’ll be rethinking, we have some exciting news here at Creative Planning. We recently acquired a professional services firm out of Bloomington, Minnesota by the name of BerganKDV. Through this partnership, we are adding 600 employees and another $2.5 billion in client assets. More importantly though, we’re adding multiple business lines.
Hopefully we’re all looking to improve in our lives, whether it be personally, to be a better spouse or a better parent or grandparent or maybe grandchild, sibling, cousin. Maybe it’s from a career standpoint professionally, you want to advance and improve and grow in your knowledge and experience. We here at Creative Planning have always been committed to that very thing as well. We’re not looking to grow for the sake of being larger, but are looking for strategic partners to continually add value for our clients.
Anything in your life that starts with a dollar sign, we want to help take that off your plate and execute at the highest possible level, and Bergan helps us do exactly that, specifically for business owners. Bergan has been delivering comprehensive business, financial, and technology solutions including tax and audit, account, business advisory, wealth management, NetSuite, and technology. Their mission has always been to be capable of caring for their clients through their entire business, organizational, and personal life cycles.
And I don’t think I’ve ever listed the bulk of our core services here at Creative Planning, so you may not be aware of all the ways that we help clients in all 50 states a over 75 countries around the world. So I want to share that briefly with you in case you need help in these areas or your current advisor doesn’t offer these services that would be of value to you.
On the personal wealth side, wealth management, investment management, strategic tax planning, estate planning and trust, we’re a law firm with over 75 attorneys. We provide financial planning, retirement planning, insurance and risk management, as well as international services. So if you’re thinking of moving to Portugal, we have an entire team dedicated to helping international clients manage their money and all the complexities around that.
Regarding retirement and foundations, we manage or advise on over $100 billion of retirement plan assets. In the 401k space, we also assist employees with financial wellness programs, and we have an institutional team that can help with family foundations and endowments. And as I just alluded to, from a business services standpoint, we not only do tax, but we also do audit, outsourced accounting and bill pay, payroll services, legal technology, insurance for business owners, business valuations, as well as mergers and acquisition consulting. We also are a trust company, and can assist clients as their fiduciary to administer their estate upon their passing.
We’re really excited about Bergan joining forces with us. There are going to be some new additions, but for the most part, this is a coming together of a lot of offerings we’ve already had for business owners, but that we expect to even deepen the value proposition. If you are a business owner, and the idea of having all of your specialists working together for your business and you’re not getting that right now, why not give your wealth a second look by visiting creativeplanning.com/radio.
A piece of common wisdom that I often hear is that financial wellness is about the size of your net worth. Let’s rethink this, because financial wellness is absolutely not just about money. And in fact, I contend that the size of your bank account isn’t even one of the first couple of most important aspects of financial wellness.
The first and most important piece of financial wellness is your health. The primary thing you need to enjoy your retirement is your health. A group of researchers led by Stanford University economist Raj Chetty, analyzed income data for the US population from 1.4 billion tax records between 1999 and 2014, so this was a 15-year extensive study. And they found that men who were among the top 1% of income earners, get this, no, not had a nicer car or a larger home. They lived 15 years longer than men at the bottom 1%. For women at the extremes of the income distribution, life expectancy differed by 10 years.
So while the wealthier Americans likely had much better access to medical care and the best medical care, a larger safety net from a social network standpoint, but beyond those, let’s focus on a major contributor, low stress. If your money can lower your stress, because you’re financially secure and you’re not worried about an unexpected expense or whether you’ll have enough to retire or the mountains of debt that’s piling up, which creates tremendous stress, you’re likely to be in better health, which will provide you more time on this earth to have an impact and make memories with those that you care about.
No 25-year old that’s poor would rather be a billionaire who’s 98 years old. What would be the point? And as my wife likes to point out, because she’s really into health, lives a very healthy lifestyle, eats right, gets a lot of sleep, exercises, does all the things that we know you’re supposed to do to be healthy, she pulls it off. And her priority isn’t necessarily in trying to live longer, although that’s a likely byproduct. It’s to have a better quality of life while you’re alive. And so, health is absolutely more important than wealth, but your wealth can contribute in very impactful ways to good health.
Fortune had an article along these lines that discussed mental wellbeing, personal growth, and fulfillment to be the attributes reprioritized ahead of financial gain in a recent study. 73% of Gen Zers would rather have a better quality of life than extra money in the bank, and 66% are only interested in finances as a way to support their other interests in life.
This younger generation that’s coming up doesn’t seem to be, at least at this point, focused on some of the same things that the Silent Generation and even the Boomers have historically focused on. In fact, the traditional markers of financial success, from owning a home to snagging the corner office at work, getting that promotion, they’re becoming not only less attainable for a lot of Gen Zers, but also less valuable in their opinion.
The idea of financial wellness is dynamic. It’s been adjusting. And I think that key that trips us up in a lot of other areas of life as well is that financial wellness is going to look different for you than your neighbor. You want different things in life. You prioritize things differently. You look at the world through a different lens. You have different experiences that all factor into the game you’re playing when it comes to your money. And so, I look at financial health as just one of the pieces of overall wellness. And it can help improve your life and lower some of the hardships and stress when we’re living within a healthy balanced state when it comes to our money.
Our next piece of common wisdom is that there are blanket investing rules that apply to everyone. I had a prospective client recently come in and they told me that their neighbor had a lot more stock exposure than they did. They allocated way more to stocks. But of course, this prospective client didn’t know what their neighbor’s net worth was, what their objectives were, when they wanted to retire. Were they going to be inheriting money, or would they need to care for an aging parent? What would their Social Security benefits be? Do they plan to want to leave a legacy? Do they want to retire early? Do they want to retire later in life? Do they want the check to the morgue to bounce? Do they want to buy a second home? Do they love traveling? If so, is it international? Do they like to take expensive trips or do they prefer to stay at home? Do they currently have any debt? Do they plan to help kids or grandkids with education expenses? And that’s just off the top of my head throwing a few things out there. That’s certainly not a comprehensive list.
Investing is extremely personal. And personal finance is far more personal than it is finance, and not in the generalized sort of way that most financial advisors use customization or personalization based on your age or your risk tolerance or your income level, though that is relevant. Those are factors to be considered.
Investing is much more unique than that, and I’d argue it is tied to your core personality. My plan is not going to look the same as an 84-year old single person’s plan. Heck, my plan won’t even look the same as another 40-year old who maybe even has seven children, because we don’t have the same objectives. We’re not the same people. We’re playing a different game. And your plan shouldn’t look the same as your neighbors’.
While there are some core set of general rules such as spend less than you make, coordinate your taxes, have an estate plan that is dynamic and current and incorporated with your financial plan, lower cost is better than higher cost, sure, those are blanket rules that are helpful. But in terms of how those rules are applied should be incredibly unique and tailored to you.
By the way, one blanket rule that should apply to everyone is to trade less. Have you ever thought, “If I could just be a little more involved with my investments, take a little more of an active approach, I’d be able to increase my returns”? Or maybe, “If my advisor was trading a little bit more,” maybe in your mind being more proactive, “I’d get better returns.”
Well, that’s a piece of common wisdom that we absolutely need to rethink, because there is a direct correlation to a higher volume of trading equaling lower returns. This is why women are better investors than men. As men, we rank higher in two notable ways, and they both lead to lower performance when it comes to our investments.
Number one, we have an issue with overconfidence. Wives right now, you’re nodding, you’re nodding. Yes, men, we have egos. This gets in the way of good investing, because we fool ourselves into thinking that we can outsmart the market, we can time the market, we can do enough research, we can find the right trades. And honestly, one of the worst things that I’ve seen happen to people is that they are right, of course, for a while or a couple of times before they’re not right. And only one bad trade or one really wrong move can negate decades worth of victories, and that is why trading is so difficult. So overconfidence, first problem that we have is male investors.
The second one is overactivity in our accounts. We know from the data that men trade more frequently than women, and by trading more, men hurt their performance. To put some numbers behind this, trading reduces men’s net returns by 2.65 percentage points per year as opposed to 1.72 percentage points for women according to Forbes.
Kiplinger had a piece on this conducted by the Journal of Finance, where they found that of the 66,000 customers they reviewed, the people who traded the most averaged 30% lower returns than those of the average customer and 36% lower than the broad stock market itself. Why? The cost of trading, but more importantly, the fact that the market is efficient. Today’s prices are the sum of everything known and suspected by tens of millions of investors about every stock. And tomorrow, the market will respond to new information, which by definition is unknowable today and yet to be priced in.
So if more frequent trading will lead to lower returns, should you just throw your hands up in the air and give up? Is it a lost cause? Not at all. The markets have made 8-12% a year for a hundred years, and they don’t require you or I to be right. We don’t have to be fortune tellers. We don’t have to find Apple before it’s Apple back in the 1980s. We simply need to own a highly diversified portfolio that’s in line with our financial plan and our time horizons, make strategic tax trades, control the things that we can control, which certainly isn’t the stock market, but are things like our savings rate, our costs, our tax strategies, our estate planning, have all of those things dialed in. And then, for the lack of a better phrase, get out of your own way. Your biggest threat to your success is failing to stay disciplined over long periods of time.
If you have any questions about your money, we’ve been helping families since 1983. Speak with one of our local advisors just like myself by visiting creativeplanning.com/radio because we believe your money works harder when it works together.
We have some great questions from listeners today. Before one of my producers Lauren reads those questions, I want to remind you that you can submit your questions to [email protected]. All right, Lauren, who’s up first?
Lauren: Hi, John. Our first question comes from Jonathan and he writes, “I unfortunately received news last week that my company will be laying me off. I’ve never been in this position before. My emergency fund is in place, but beyond that, should I adjust my investments?”
John: Jonathan, sorry to hear about your layoff. Here are the steps that I would take. File for unemployment. Figure out your health insurance, make sure that you’re covered. If you’re married, check to see if you can move over to your spouse’s plan. If not, COBRA allows you to continue your current health insurance, but it’s most likely going to be more expensive than what you were previously paying, so be aware of that. You also may want to consider enrolling through the Health Insurance Marketplace. And because of the layoff, you might qualify for subsidies based upon a potential for lower income. So that may be one silver lining in the midst of a difficult situation, but your health insurance will be one of the most important things to figure out.
Also, don’t forget about life insurance. I know you’re thinking about your job, not possibly dying. But it’s important to make sure your family continues to be protected, especially if the life insurance that you were carrying was through your employer.
The next step is something that we could help you with or a firm like us can, which is assess your entire financial situation. Should your investment allocation change? Possibly. But you really want to get a handle on your budget and in particular, what expenses you intend to cut during this period. And if you’re not going to cut expenses, how long your emergency fund will last, and once exhausted, which investment accounts will you begin to draw from to support your lifestyle?
And this is why financial planning must be dynamic. If you had been saving money and intended to have no need of withdrawing from your investments for 20 years, you’re probably pretty growth-focused with almost everything, if not everything that’s invested, within stocks. Well, stocks are volatile in the short term, and if six months from now you’re going to need to start taking $6,000 a month to live on, it’ll likely make sense to at least sleeve off some of that money into more conservative investments, and by the way, being strategic on the taxation and any potential penalties that would accompany those distributions, to make sure that exactly where you are taking money from is as efficient as possible.
You really want to revisit your entire financial plan, including looking at your tax situation, including looking at your estate planning situation, your insurance coverages. This is one of those life events that if handled correctly, may be nothing more than a blip. The labor market is really strong. You may already be back with a new job, heck, it might even be paying better than your old one, before your emergency fund is even exhausted.
If you’d like to sit down with one of our Fiduciary Financial Advisors like myself, together we can build this comprehensive financial plan, get you completely organized for your current situation, and ensure that your money is invested appropriate for your situation. To speak with us, simply go to creativeplanning.com/radio to request that visit. All right, Lauren, what do we have for our final question?
Lauren: Our last listener question is from Steven B. in Mission, Kansas. And he asks, “I have several stocks that were purchased at a good price. I would like to sell but don’t want to pay a lot in taxes. Is there a way to accomplish this?”
John: Well, first off, Steven, congratulations. This is a whole lot better than the alternative of saying, “How many losses can I claim in a current year, and what’s carried forward? And do I ever lose those losses?” Because these were some of the questions I was receiving by quarter three of 2022. So great, like a lot of folks that have held positions for extended periods of time, the market, aside from 2022 and 2018 has been really good since 2009. So you’re not alone in this highly appreciated stock conundrum, if we want to call it that, because again, it’s a good problem to have.
Without knowing the specifics of the rest of your portfolio, but the general things to consider would be your age, your financial goals, your risk tolerance, your investment horizon, the other parts of your portfolio. How diversified are your other assets? How much do you have in stocks verses bonds? What sort of equity do you have in your home? What are your retirement objectives? What’s your family construct look like? How much saturation in individual stocks do you have elsewhere in the portfolio? So all of those would play a huge factor in whether it makes sense to sell them all at once or to slowly divest out of those securities and pay tax over time.
Now, if you’ve held these, which I assume you have, for over 12 months, you’ll be in a long-term capital gains rate environment, which is either 0%, 15%, or can be as high as 20%, and actually 23.8% if you tack on the Obamacare Net Investment Income Tax. But your long-term capital gains rates will be lower than your ordinary income rates.
So maybe not in Steven’s situation, but if you’re listening and thinking, “Well, I’ve held a security that’s highly appreciated.” Maybe it’s like an NVIDIA for 11 months and 21 days, of course, you have to balance short-term volatility, but it probably makes sense to wait another couple of weeks and avoid short-term capital gains rates.
So if you’re in a situation, Steven, where it’s highly punitive to realize those gains, you could deploy an options strategy. Now, I want to be very clear with all the disclosures. Options are highly risky. They require a pretty high degree of expertise and understanding of how they work. Look no further than the Robinhood craze. People have completely destroyed their lives by utilizing ineffectively a do-it-yourself options approach. So let me start with that. I would hire a professional team like us at Creative Planning that has an options team in place to help with this.
But here’s a general approach to using options for hedging. You can consider what’s called a protective put, where you purchase a put option on an underlying security. Now, you’ve said you have several stocks, but let’s say there’s one or two in particular that make up the bulk of your portfolio. That protective put will establish a floor price at which you can sell those shares. So not that you’re wanting the stock to decline, because you’re still long in the stock and you haven’t sold it. You’d like it to keep appreciating, but in the event that it goes down in value, your put options value will increase, offsetting some of the potential losses on that concentrated position, classic hedging strategy.
A little different approach to hedging is a collar strategy, where you combine that protective put that I just explained with the sale of a call option. What this strategy will do is establish a price range within which your position’s protected. The protective put acts as that downside protection, as I just explained, while the call option generates income, but it also limits potential upside gains.
You really need a detailed, written, documented financial plan that takes into account your tax strategies, your current income levels, your future income levels, assumed future tax rates as I alluded to earlier in the show, because that plan will leave no ambiguity as to whether those should be sold and diversified, or whether it makes sense to build the portfolio around a few of those concentrated positions. Thanks for that question, Steven. If you have questions like Steven, you can submit those to [email protected].
Well, as I conclude today’s show, I want to speak about an aspect of our wealth that’s more important than the dollars and cents. Really, we should be asking ourselves when it comes to our money, why any of it matters. What’s the meaning behind this? Because money’s not inherently valuable, meaning the number itself isn’t valuable. It’s indirectly valuable because of what it can help us achieve.
When I read this on leaders.com, I thought it was an interesting topic for us to examine. And that is a negative aspect of our wealth, that wealth hurts your capacity for empathy. By the way, I’ll share with you what I think you can do about that, but imagine you walk into a room and you see a jar of your favorite candy. It’s M&Ms. It’s an ideal situation after a tough day at the office. The only problem? The jar label reads “For children only.” Now, if you take from the jar, you’re stealing from little kids. But nobody else is around, you could easily swipe a handful. Would you do it? And you’re probably thinking to yourself, “It depends how hungry I am and how stressed I was and how much I like M&Ms.”
According to UC Berkeley Professor Paul Piff, your level of wealth will directly influence your answer to this dilemma. Piff said regarding his research, “We’ve been finding across dozens of studies and thousands of participants across this country, that as a person’s level of wealth increases, their feelings of compassion and empathy go down, and their feelings of entitlement, of deservingness, and their ideology of self-interest increases.”
Now, does that mean that money is the root of all evil? No. Does it mean that the love of money is the root of all evil? Kind of. When you build wealth and influence, many things in your life can shift. Your routines, where you live, who you interact with, where you work, they’re all likely different than they were before you achieved your success.
Daisy Grewal of Scientific American writes, “Wealth and abundance give us a sense of freedom and independence from others. The less we have to rely on others, the less we care about others’ feelings. This leads us to being more self-focused.” A huge part of our American ethos is individualism, self-sufficiency. I’m not saying that’s all bad, but when we don’t depend collectively on others in our day-to-day life and we spend a lot of time on social media posting our life and our thoughts to everyone else, it creates a little narcissism and removes us from the experiences of those with fewer privileges.
If you’re thinking, “Well, John, that’s great. Now I’m not a wealthy person, so I probably do have a lot of empathy.” Let me challenge that, because whether you actually think of yourself as wealthy, you likely are. From a global perspective, no, you’re filthy rich.
So how can you increase your empathy? Well, it really starts with gratitude. The best way to lower anxiety around your money is to have gratitude for what you have. It’s all a mindset. It will lead you to not only helping others and having empathy for them, but through that, help you achieve peace of mind when it comes to your money. Because the only way you’ll have true, lasting fulfillment when it comes to your finances will be found when you close the gap between what you have and what you desire. 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 preceding program is furnished by Creative Planning, an SEC registered investment advisory firm that manages or advises on a combined $210 billion in assets as of December 31st, 2022. John Hagensen works for Creative Planning, and all opinions expressed by John or his guests are solely their own and do not represent the opinion of Creative Planning or this station.
This commentary is provided for general information purposes only. It 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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