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How to Know if You Have the Right Financial Plan

Published on February 13, 2023

John Hagensen

When it comes to your wealth, it’s not just about having a plan, but having the right plan.  This week, John outlines the questions you should ask to make sure you have a financial plan that meets your needs (1:58). Dr. Dan Pallesen also joins the show to give tips on having conversations with your spouse about money without sparking an argument (16:40). Finally, in a game of Rethink or Reaffirm, John examines the difference between a trusted contact and a power of attorney, and which one is best for your financial life (41:50).

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: Welcome to the Rethink Your Money podcast, presented by Creative Planning. I’m John Hagensen, and ahead on today’s show you’ll learn how you can know whether you have the right financial plan or not, the important role money can play within your marriage, as well as whether now is the time to be investing your excess cash. Now, join me as I help you rethink your money.

How do you know that the financial plan that you have is the right one? Of course, this is assuming that you do have a financial plan. If you don’t, you need one, and that’s the first step. But let’s move past that and assume that you have a financial plan, is it a good one? And how do you know?

It reminds me of this winter sledding with my children. We had some of those plastic dishes. And we were having a good old time cruising down the mountain. And then someone showed up with an inner tube, like one of those old school black inner tubes that was wrapped in a canvas wrap, kind of looked like in the summer what you’d pull behind a boat, had a bottom on it, and they were cruising. They were going twice as fast as us and getting twice as far down the mountain.

I don’t bring this up to draw the parallel that we shouldn’t be comparing ourselves to one another and the comparison trap, although that’s absolutely true, comparison’s the thief of joy. But I didn’t even realize how sucky our sledding equipment was until I got exposure to these legit inner tubes. And in case you’re concerned for our children, don’t worry, we did what any good American consumer would do, we went to Amazon, we bought the tube. You’ll be happy to know it was on Prime with free shipping.

But this is true so often in our lives. We don’t know what we don’t know. And as a wealth manager, I people who have worked hard to save what they have. They’ve been diligent to put together a plan, hire a financial advisor even possibly to help them with that plan. But unfortunately, it’s not the right plan. They’re sliding towards retirement on a plastic dish instead of an inner tube. I don’t want that for you. I want you to have confidence in peace that you do, in fact, have the right plan. I’ll do so by asking seven questions for you to assess for yourself and your situation. Does your plan account for life changes that have occurred? Changes like a new job, buying a home, getting married, expanding your family, transitioning to retirement, as well as countless others, these events change the landscape of your plan.

Whenever I build out a financial plan for a new client and they’re really excited and they’re leaving the office and smiling, “And this is so great, John, I feel so much better and assured that I have this financial plan,” and I stop them and say, “Well, that’s great, but it’s all wrong. The whole thing, it’s wrong.” To which they look at me confused like, “Wait, what are you talking about? We just went through this. I’m feeling great about it.” And of course, what I’m alluding to is that their life isn’t going to look like the projections in that plan. But the value in a financial plan is not in building the financial plan, it’s in changing the financial plan.

My wife, Brittany, and I had a financial plan. We had ideas about what our future would look like and then all of a sudden we were pregnant. Surprise. Of course, one of my friends was like, “Why are you surprised? Do you not know how you’re getting pregnant? This is your seventh child.” All right, yep, good point. But life is unpredictable, isn’t it? Filled with uncertainty. And as the saying goes, “We make plans, and God laughs.”

Number two, is your investment allocation up to date with your situation and your goals? That allocation should not be based on your age, it should not be based upon a 10-minute risk tolerance questionnaire. I’m not vehemently opposed to those, but let’s not let the tail wag the dog. They certainly aren’t the driver for how to invest your money. One of the primary reasons for that is that those questionnaires are more of an indication of what has recently happened in your life than any foundational plumb line for your long-term financial plan. If I ask you to sit in my office and fill out a risk tolerance questionnaire and we’re in year five of a five-year bull market and you just got a raise and it’s sunny and 75 degrees outside, you will answer those questions with a much higher appetite for risk than if I give you that exact same questionnaire in the exact same office in March of 2009 when the market was down over 50%. You’ll likely be very risk averse and your answers won’t even resemble what they would’ve been in that previous scenario. Creative Planning president, Peter Mallouk, spoke recently about investment allocations on his podcast. Have a listen.

Peter: I’ve never been a big fan of just the automatic 60/40 portfolio, which is the portfolio that a lot of people just automatically go into it traditionally, historically. I remember maybe five years ago or so I was on a Jeremy Siegel podcast and I suggested that this was a really bad idea and the 60/40 portfolio was dead. That’s become a very common comment over the last few years. The reason I had said that is bond yields were below 2%, right? So dividends from stocks were around 2%. And of course, stocks come with volatility, but I mean, if you hold stocks for five to 10 years, your odds of having a positive return are overwhelming, way over 90%. And if you’re getting a yield equal or sometimes even better than high quality bonds and you get the capital appreciation over time, of course stocks are the better investment.

But really my issue with the default bond portfolios is that they don’t really tie back to a human being and their goals. I really like to look at the allocation as being driven by need. I think it’s a mistake when we default to a traditional 60/40 or, for that matter, if we default to a portfolio based on someone’s risk tolerance. “Hey, you’re moderate risk, you should get 60/40.” or “You’re aggressive, you should be 80% stock.” And we should get away from doing it based on age. One of my idols, John Bogle, was a believer in using age. If you’re 70 years old, 70% bonds, right? It just seemed like a little over the top. The way I think it should be is based on your goals. Over the long run, we think stocks are going to do better than bonds. And so, for the part of your portfolio that’s there to serve you for the long run, five years or more, seven years or more, 10 years or more, that should be more in stocks and assets like that where you’re an owner. We’re very, very likely to be rewarded for that.

John: Again, that was Creative Planning president, Peter Mallouk. The third question to ask yourself regarding whether or not you have the right financial plan: what are my fees? Now, let me pull back the curtain a bit here on our profession. I’ve had a lot of people ask me, “John, how do you even make money? How do advisors get paid?” Well, there are two primary ways: either through fees or through commissions. How we do things here at Creative Planning is that we are fiduciaries. We’re not brokers. We’re not dually licensed and registered with broker dealers. When the accounts grow, we make more money. When the accounts go down in value, we make less money, which aligns our interests.

We have no monetary reason to advise our clients to do anything but what we think is absolutely the right thing for them, because we are successful when our clients are successful. Now, let’s transition over to an advisor that’s paid on commissions. There are several inherent conflicts of interests associated with this compensation model. By the way, it doesn’t mean the advisor themselves are terrible or that they’re not trying to do a good job for their clients. They probably are in most cases. But it’s a broken system that opens the door to bad actors. Because instead of helping you continually with financial planning and tax strategies and your estate planning investments and retirement planning and your social security and all the things that a good advisor is helping you with, instead of doing that over years to make my fee, I can just sell you one vehicle and make 7, 8, 9, 10% in a commission upon your purchase. Your success and my success are now decoupled, because that advisor’s already been paid 5 to 10 years’ worth of what other firms would charge in fees all at once.

They’re way better off now trying to find somebody else who they can sell another investment to and make that commission again. The only way they’re making more money off of you after that sale is to convince you, which I see far too often sadly, that you need to make a big change, that you need to get out of what you’re currently in and go get into something else. Because if you stay in that thing they already made the commission on, not making much money. And if that doesn’t work out well for you, they already got paid. Ask your advisor, “Do you earn commissions on anything?” Ask them, “Does your company manufacture proprietary funds?” Ask them if they have any revenue sharing agreements with other companies. And by the way, if they do, you’ll likely see many of those same company names on your investment statement, which is no shock to anyone who understands human behavior and incentives.

Number four, have you had your plan reviewed by an independent third party? Most people that are told they need a life-altering surgery or have a life-threatening diagnosis seek out a second opinion. I would recommend you do the same thing when it comes to your money. If you have worked with the same advisor for three years, five years, 10 years, maybe 20 years, when is the last time you sought out another perspective? If you’re not sure where to turn, we here at Creative Planning provide second opinions for thousands every single year. But why not give your wealth a second look to ensure that you have the right financial plan? Visit us now at creativeplanning.com/radio for that second opinion.

Continuing on with our fifth question to ask regarding whether you have the right plan or not, is your current plan optimizing tax planning during this historically low tax rate environment? I just heard it this last week, President Biden in his State of the Union address talked about tax increases. We know that we’re spending more money than we bring in, and our national debt continues to grow, and it is a top of mind subject right now in Washington and in our consciousness with the current debt ceiling situation sitting as it is. But since the Tax Cuts and Jobs Act was passed, we presently sit in one of the lowest tax environments we’ve seen in the last 50 years. The top tax bracket’s only 37%, and you don’t jump from the 24% bracket into the 32, married filing jointly until $364,200. To put that in perspective, the Bush tax cut years were low from a historical perspective, and in those years, the 25% bracket started for married couples at $76,000. You have unprecedented opportunities from a tax planning standpoint. What have you done about it up to this point, and what do you plan to do about it this year and beyond, because these rates sunset at the end of 2025 if they are not changed beforehand?

Number six, are your estate planning documents and beneficiaries updated to reflect your wishes? The obvious first question, do you have your estate planning documents in place? Forget being updated, do you have these done? Just in the last few months, I’ve personally seen new clients who had to go through probate and spend tens of thousands of dollars to go through a long drawn-out public, I mean really just life-sucking process because documents weren’t in order. I have seen one current spouse upset because an ex-spouse was still listed as a beneficiary on an account, by mistake. And remember, if you have minor children or grandchildren, they can’t open an account and directly inherit money. So do you have the proper plan in place if either primary or contingent beneficiaries are people under 18 years old?

The seventh question to ask yourself regarding whether or not you have the right financial plan is, if you’re married, and you plan on staying married, by the way, I should add that, are you both involved and engaged in your financial plan? I see often the CFO spouse says, “I got this. You don’t need to worry about this. This is my thing. I know you don’t really like it, you’re not interested. I’ll take care of it,” and a couple of issues can take place when this occurs. The first is that they don’t got it. They’re telling the other spouse, “We’ve handled all of this,” and then something happens to them and it’s a nightmare. But even if we assume that everything’s being handled perfectly, the other spouse who’s uninvolved, their priorities aren’t considered. Even if you or your spouse isn’t interested in what percentage of your investment should be in emerging markets versus small cap value versus US growth, there are goals and concerns and dreams that will require money. And that perspective and that feedback is incredibly valuable to building a plan that actually works for your family.

And so to recap the seven questions so that you can answer whether you’re sledding on a plastic dish or a real nice inner tube, our number one, does your plan account for life changes that have occurred? Number two, is your investment allocation up to date with your situation and goals. Number three, what are your fees? Number four, have you had a second opinion recently? Number five, are you doing tax planning in this low tax environment? Number six, are your estate planning documents done? And if they are, are they up to date for your current wishes and the current laws? And finally, number seven, which I just spoke of, if you’re married, are both spouses engaged in the financial plan?

I know how hard you’ve worked for what you’ve accumulated, and now I want your money to be working just as hard for you. If you have any questions about your investments, your estate planning, your taxes, there’s a reason Barron’s has called us a family office for all. A law firm with over 50 attorneys, a tax practice with nearly 100 CPAs, 300-plus certified financial planners managing or advising on $225 billion for families in all 50 states and 85 countries around the world since 1983. Why not give your wealth a second look by going to creativeplanning.com/radio.

Well, husbands, if you’ve forgotten, let me remind you, this week is Valentine’s Day. And you are being tested, make no mistake about it. If your Valentine tells you they don’t want you to buy them anything, you don’t need to plan anything, no dates necessary, don’t worry about flowers, I don’t even like going out to dinner., They are lying. Okay, this is absolutely a test. I don’t want you to fail as a good friend of mine, and I’m not going to call them out, but their name sounds like Lon Zegenson, who early in marriage on Valentine’s evening on the way home from the office swung by a grocery store, there was a pop-up Valentine’s Day end cap to buy some really bad $8 heart-shaped individual chocolate packet. Yeah, that was bad. Don’t do that.

Here’s the secret, by the way, is when you think about things in advance, even a lot of this show as we look at personal finances comes down to being proactive, thinking ahead, being strategic, having a plan. Actually, I didn’t intend to go this direction with it, but the characteristics of a successful financial plan overlaps a lot with a great Valentine’s Day. You know what I’m talking about though? When you receive a gift, the person that gave it to you says, “Yeah, I remember five months ago you mentioned you wish you had something like this. I just remembered and I wrote it down and then I went and got it for you.” And you’re sitting there going, “Wow, I forgot that I even wanted this, but I do want this. That’s incredible, you actually listened to me. You were thinking about me. You were being intentional.” Yeah, it’s a little different than the heart-shaped box and giving them a Forest Gump line about that life’s like a box of chocolates. It doesn’t go well. It’s not thoughtful.

I’m now joined by a special guest who’s been on the program here before. He is a doctor of psychology as well as one of our wealth managers here at Creative Planning. Dr. Dan Pallesen, thank you so much for joining me again here on Rethink Your Money.

Dan: John, always a pleasure. Thanks for having me back.


We know money’s one of the biggest stressors in a marriage. It’s one of the leading causes of divorce. I think it’s number two, only second to a topic that we won’t be discussing here today because this is a family program and we’re not Howard Stern, but you get the idea, it’s important. And if we don’t learn some of the key building blocks for how to communicate with our partners about these financial matters, it can really be a drag on the relationship. So I’m going to ask you to help us make some progress here with your background in both psychology as well as finance, and I want to start with a foundational question. Why do you think it is so hard to discuss money with a partner or a spouse?

Dan: Whether we like it or not, money is emotional. Our feelings, our thoughts around money evoke emotion in us. Our basic needs are all tied to money. I’m not even talking about capitalism and greed, but just we live in a world where our food, our water, our shelter, our medical care are all determined by do we have money to acquire these things. Unless we’re growing our own food, digging our own wells, building our houses from trees on our land and then heating them, we need money to meet those basic needs. I would even argue it goes beyond just the basic needs, like love and community. Again, not that money buys love, but it’s hard to find someone to fall in love with you if you’re so broke you can’t even take them on a date. I mean, we need money to cultivate these experiences to spend time together. So to have a money conversation deep down in our subconscious can feel like we’re having a life or death conversation.

John: That’s interesting. So when we are having these conversations, once we build up the courage to do so, what do you think we should be careful of when talking with a spouse or a family member about money?

Dan: We need to be careful of being right. I think we need to be careful of proving that we’re on the right side of an argument.

John: I’m just laughing because you’re talking to a man right now, and my wife always says, “Women are better at wanting to get it right and men like to be right.” I don’t know how true that is, but I just thought that was a funny start to this.

Dan: Believe me, I’m speaking as a man who’s had these difficult conversations with my wife too. I mean, I want to be right. I think that’s what gets in the way of a healthy conversation is this desire to be right or to win an argument. A money conversation with a partner or a spouse, it really shouldn’t be about winning, it shouldn’t be about getting the other person to submit. This isn’t like a business negotiation where there’s winners and losers. I mean, at the end of the day, if you’re pulling out a spreadsheet or a financial calculator to show the time value of money lost, you’ve already lost, you’ve both lost. What we need to be careful of when having money conversations with our spouses or with our partners is that innate desire to be right.

John: Well, and don’t you think too, because money is a very personal thing that it’s okay if you feel differently about things?

Dan: Yeah, yeah.

John: Again, it doesn’t mean one person’s right or wrong, it just might mean we’re approaching this from different backgrounds and with a different perspective, and so we might feel differently about wanting to save more or spend more or use our money for certain things that the other person thinks isn’t worth it. Join the club, you’re married, if that’s the case, right?

Dan: Yeah. I mean, the most common money argument that I have witnessed both as a therapist and now as a financial advisor is around the idea of spending or saving. It’s often one wants to save, one wants to spend. My question for you, John, think of this example because this has come up in a lot of different ways, extra, let’s say, 10,000 lying around. One spouse wants to put it into their IRAs, they want to save for their future in retirement. The other spouse is like, “Well, our kids are in middle school. They’re about to go off to high school. Let’s go to Disneyland. Let’s use this to have a vacation together as a family.” Which one is right? Which spouse is right or wrong?

John: Well, I would absolutely say the spouse that’s wrong is the one that chose Disney because that’s going to be miserable waiting in lines paying $15 for a turkey leg, but I get the example. Yeah.

Dan: Yeah. Well, and that comes up over and over again in different forms. Working with different couples around money is they’re just not on the same page. They desire different things around money. So back to your question about what to be careful of. Again, it’s that money conversation with a spouse. If your goal is to convince the other person that you are right, you’ve already lost.

John: And that’s why I think it’s so important to build and establish the foundation of your financial plan regarding what you need for your future to be secure and to be okay, because then I think it allows you freedom to have those conversations because it becomes more discretionary. We could save more and that would obviously boost our situation. If you see money as a safety net, it could never be too big or too strong, obviously, so you could save more. But it’s not like our whole plan’s going to unravel or we have to work until 90 years old. So what are some tips that you have for us to have more productive conversations?

Dan: I’ve got three tips. I think number one is know thyself. Know what some of us would call money scripts, which are the early experiences we had around money that have burned their way into our brain. You can’t have a productive money conversation if you don’t know what your own triggers or thoughts or feelings around money are. So number one is know thyself. Number two, have a desire to know your spouse or your partner, so to truly understand them. A therapist would call this empathy. Sympathy, John, is feeling sorry for someone. “I can understand you feel that way. I’m sorry that you feel that way.” But true empathy is an experiential knowledge and feeling of that other person. If you can get into the head and the heart of your spouse or your partner, you’re going to have a much more fruitful conversation around money. So knowing their triggers, knowing their emotions, knowing their early experiences around money and their relationship with money is going to be key.

And then finally number three is just identifying a common goal. So back to the example of the husband and the wife with saving versus vacation, neither one of them are wrong. One spouse wants to feel more security when they envision their retirement. The other spouse wants to create memories with their kids while they have the time. I think both of them can get on the same page if they realize, “No, we together have a goal just to feel peace or to feel abundance.”

John: Well, these are great tips, so let me see if I’ve got these down. Know thyself, know your spouse, and find common ground so that compromises can be reached. I love it. I’m going to try to apply these in my marriage as well, so I appreciate you sharing these with us today here, Dan. Thank you, as always, for joining me today on Rethink Your Money.

Dan: Thanks, John. Always a pleasure.

John: That was Dr. Dan Pallesen, Creative Planning wealth manager. I absolutely love the energy that I see coming out of visits where two spouses are feeling peace, I mean, maybe for the first time ever when it comes to their finances because they know that they’re on the same page, that they’re in it together and they know where they’re at today and where they’re going. If you’d like to chat with one of our wealth managers like Dr. Dan or myself, we have local advisors ready to help you gain clarity around your money. To request a visit, go to creativeplanning.com/radio.

We’ll jump into rethink or reaffirm here in a moment. But have you ever notice that sometimes we’re far better off trying to avoid the strikeout than attempting to swing out of our shoes for a grand slam? This is true in both life and when it comes to our money. I mean, consider your health. You can get incredibly detailed on a nutrition and a workout plan, but if you’re unable to avoid smoking a pack of cigarettes a or pouring a bowl of cereal at 10 o’clock at night most evenings while you’re binging on Netflix and going to bed late, you’re not going to get the results that you’re trying to achieve whether you’re at the gym or taking your vitamins. One of those key drivers to avoid as an investor is an inability to get off the sidelines and deploy excess cash, especially in the midst of a down market.

Consider this: in the four weeks through January 18th, there was $135 billion of flows into global money markets, which is the most since May of 2020, when people were freaking out about the pandemic. At that time, 175 billion flowed into money markets. I’m always perplexed when I see flows out of stocks and into cash once the market is already essentially on sale. It would be like living in South Florida, a hurricane just hit, you’re doing your cleanup, taking down the boards that are covering your windows during the hurricane and your neighbors putting up boards over their windows. Yo dude, too late. What are you doing, the hurricane already passed? But sitting on the sidelines guessing in cash or having your advisor tell you what they think is going to happen so you should de-risk your portfolio is speculating and gambling, because they don’t know either.

This leads me to another round of rethink or reaffirm where I will take a financial headline or a hot take and we’ll decide together whether we should rethink it or reaffirm it. Today’s common wisdom: I should wait for the right time to invest my cash. Creative Planning’s Charlie Bilello wrote a fantastic article that I will post to the radio page of our website at creativeplanning.com/radio entitled The Ultimate Guide to Investing Cash on the Sidelines. And I’ll provide the cliff notes of his seven questions that need to be answered when sitting on the sidelines with your money.

IF you are in this situation, just know that you’re not alone. You may be sitting on cash because you just had a liquidity event, you sold a business, you inherited some money. Maybe you just have positive cash flow and that surplus over time has built up and you’re in a fortunate situation where you’re looking down saying, “Well, I probably have too much cash, but it’s now the right time?” Let’s all agree, we’re mature enough investors to understand that cash is likely to significantly underperform any sort of diversified investment portfolio over the next 20 years. And you may even know that, but you’re still saying, “I don’t know if this is the time to enter. I just can’t pull the trigger.” It might be because you’re thinking about things like, “I’m waiting for a bigger correction to get in. I think the market’s going to drop more.” or “Valuations are too high.” or “What if we enter a recession? Interest rates have been rising, isn’t that bad for stocks?”

By the way, these are all reasonable considerations as to why you may not want to deploy your money, but let’s look at the data. Because our emotions ebb and flow, we know that. We can’t make money moves based upon how we’re feeling. It’s one of the most destructive actions that we can take. So first off, what’s the opportunity cost of sitting in cash? The average yield on cash since 1928 has been 3.3%, and that’s using treasury bills as our proxy, but yields have fluctuated considerably over time obviously, from 0% all the way up to even 14% on the high end. But if you go back to 1928, here’s what your odds are of beating the S&P 500 while you’re sitting in cash. Over a one-year period, 31%.

But here’s the most important factor when looking at the opportunity cost. The longer you remain in cash, the lower your chances of beating the market are. Over a five-year period, your chance of overperforming the market drops down to 22%, and after 10 years, your odds of winning are 16%. And don’t miss this, in every 25-year period, including, by the way, those who bought at the very peak in 1929, an investment in the S&P 500 has beaten cash. So even if you are someone who is 60 years old, between now and when you are 85, historically speaking, you have basically no chance of outperforming the market while sitting in cash.

If we want to look at how much sitting in cash actually costs you, because it’s not just, “Oh, I normally lose,” it’s, by how much do lose? Over those 25-year periods, your average loss is more than 1200% by staying in cash. So I think we can all agree that cash isn’t a good long-term hold. But the second question you may be pondering if you have some cash on the sidelines is, what are the odds that I’m going to have a chance to get in at a lower price than today? Because that’s often what’s driving people in cash, they know they don’t want to be there long term, but they’re wondering, “Will I have a better entry point?”

Well, historically stocks have had about a 75% probability of closing lower at some point in the future. “That’s what I’m doing, John. I’m waiting for that. Those are great odds.” Right, if you look all the way back to 1928. But what it means is that 25% of the time stocks will just keep on running up and then you may never get the opportunity to buy in at a lower price than today. A great example of this occurred in 1995. Stocks ran higher out of the gate, and by the end of February, the S&P 500 was already up more than 6% on the year. And going back to our mid-nineties example, you would’ve had to wait until July of 1996 before that pullback would come, and when it did, the S&P 500 was still more than 25% higher than where it closed in February in 1995.

You see, the markets can run away from you to the upside and never come back, which is why the risk of being out of the market is often greater than the risk of being in. If you have cash on the sidelines you might be asking yourself, “What are the odds of waiting for a bear market to allow me to buy at a better price than today? So not just maybe a correction or a pullback, but can I wait for one of those bear markets which are a minimum drawdown of 20% or more?” And if you go all the way back to 1928, those occur only 21% of the time. That means that 79% of the time it will still be at a higher level than today. This principle is the other side of the same coin as to what I was just speaking about. Even if the 2022 decline that we just saw were to drop another 50% like we saw during the great financial crisis, it would only take stocks back to 2017 levels, which by the way are still 185% higher than at the end of 2009.

The lesson here is clear: if you’re waiting for a large decline to get invested, you have to be prepared to wait for, in some cases, a very long time, with the understanding that when the decline eventually comes, it could very well leave stocks at a higher level than today. I want to pause there for a moment. If you have cash or maybe just uncertainty around your investment allocation as a whole, “Does it fit with my time horizons? Or am I guessing and trying to predict? Or am I having an advisor who thinks they can get me in and out of the market?” Well, that’s simply not providing yourself with the highest probability for success. I guess you just have to ask yourself, “Do I think that my advisor or myself are capable of consistently identifying when markets will be good and bad?”

Here at Creative Planning, we’ve come to the conclusion even managing or advising on $225 billion that we can’t do it, we don’t think anybody can do it. And so if you’d like a fresh perspective, visit us now as so many other radio listeners have done, by going to creativeplanning.com/radio. Let’s continue on with another question when thinking about deploying cash while sitting on the sidelines. What are the odds that dollar cost averaging into the market will beat a lump sum today? Up until now, I’ve been assuming that we’re investing all the sideline cash at once, which would otherwise be known as a lump sum investment, but there is an alternative approach known as dollar cost averaging. And let me just say, if you are someone who simply from an emotional standpoint cannot bring yourself to investing a lump sum, this is a worthwhile alternative to consider.

Let’s say you have $100,000 of sideline cash to invest. Maybe you’re going to put $8,333.33 cents per month into the market in 12 equal installments. I wouldn’t do it because I know the data and I’m playing the odds, and I don’t think I personally know which way the market’s moving. But again, that’s a lot better than just having failure to launch. Only 32% of the time since 1928 has a dollar cost averaging strategy outperformed a lump sum. The simple reason for this conclusion is that markets rise more often than they fall. And that’s why 68% of the time you’re better off getting as much money into those markets that are more often than not climbing as soon as possible. It’s worth noting: the longer the period over which you dollar cost average, maybe you say, “Well, I’m going to only deploy money from my cash once a quarter, and therefore I’ll be fully invested three years from now rather than one year,” your odds become worse and worse that you’ll outperform the lump sum.

Right now, the CAPE ratio, also known as the Shiller PE, is at 29 for the S&P 500, which is above 92% of historical readings. So even with 2020’s market decline, US large stocks are still pretty expensive. By the way, this is why we suggest broad global diversification because many other asset categories are trading at much lower valuations right now. Let’s come up with a hypothetical system to assess this CAPE ratio’s impact. Going back to 1928, if you moved from stocks to cash, every time stocks moved into the 90th percentile and then you got back into stocks when they dropped below the 90th percentile, that actually wouldn’t have been terrible. You would’ve made 8.7% annualized. But here’s the key, it was still lower than just buying and holding the S&P 500, which returned 9.4%.

Now let’s go to probably the most timely question that I’m getting right now, “What if another recession is coming?” Let’s take a look at the data. Well, first off, is a recession synonymous with a bear market? The short answer is no. While a recession may lead to a steep decline in stocks, it absolutely by no means guarantees it. But the more important question is trying to time when to get in and out of the market based upon a recession. And even if you were the best economist, let’s say, that ever lived… By the way, economists are historically horrible at actually identifying ahead of time what will happen and much better at sounding really smart in explaining why they were wrong time after time. Countless examples of this.

But let’s say you’re not one of those economists. Your crystal ball isn’t foggy, and you know exactly when recessions are going to start and end in advance. I mean, that’d be a huge win for you as an investor, right, because you could allocate to cash during recessions and then stocks only during economic expansions. Well, what would that have looked like since 1928? You being the greatest fortune-teller of all time made you 10.7% per year instead of 9.4% for a buy and hold. You increase your returns by about 1% a year by doing something that is actually impossible to do. It’s not like you doubled your returns or tripled your returns by knowing that.

What if instead of being a magician you just sold one year before the start of a recession, kind of sensed it was coming, and then you bought one year after the coast was clear and the recession had ended? You would’ve made 8.7% per year. If you sold six months after the start of the recession, kind of in it, you’re feeling bad about things and, “I got to get out of the market,” you bail and then you buy one year after the end, you made 7.8% annualized. Again, a buy and hold strategy with no timing made 9.4%.

Well, how can that be? Quite simply, the stock market is not the economy. It often starts going down before the economy turns south and starts coming back up long before the downturn ends. As I say often, the stock market is forward-looking. By the time you have data, it’s long been factored into the price of the stock market. “Well, John, I can’t time the recession, but why would I want to invest new monies during times when the economy’s already in one? Why not just wait until news improves and the downturn ends before adding money to your portfolio?” Well, because the market is forward-looking.

Let’s look at the most recent six recessions. The S&P had gained an average, I don’t want you to miss this, of 61% from its low by the time the official end of the recession was declared. Over 60% off the lows. By the time flares are getting shot up in the air and you’re seeing on the news that things are great, too late. As Warren Buffet so famously said in October of 2008 when encouraging investors to buy during the worst bear market since the Great Depression, he said that if you wait for robins, spring will be over. How true that is?

And my final question to answer regarding whether you should get off the sidelines and be invested is whether or not interest rates should play a role in timing the market. In 2022, the 10-year treasury bond saw its largest annual increase since 1980. At the same time the S&P suffered its largest decline since 2008. And while it might seem obvious that there is a direct correlation between interest rates and stock prices, going back to 1928, the average one-year returns for the S&P 500 are almost exactly the same during periods of rising or falling 10-year treasury yields, 11.6% and 11.5% respectively. So that’s not to say that higher rates can’t act as an impediment to economic growth or stock market returns over time as they did in 2022, but yields are just one of 1,000 variables into a highly complex system that accounts for which direction the stock market goes.

We’ve covered a lot and this has been a deep dive, for sure, on getting money deployed, so let me summarize. Investing is simply a game of odds. If you succumb to the fact that you cannot predict the future, then what you have to go on is historical probabilities, which overwhelmingly suggest that there is a massive opportunity cost to sitting in cash and that that cost tends to grow exponentially the longer you wait to invest. And so, the verdict on whether you should wait for the right time to invest your excess cash is a resounding rethink. Reality is we’re not robots, we’re not investing our hard-earned money based upon pragmatic algorithms. We are people, and we are humans with emotions. And so often you can hear all of that data and say, “I just don’t think I can do it.” Well, I would suggest that’s likely because you do not have confidence and clarity around your financial plan. Maybe you don’t have a comprehensive plan looking at taxes, estate planning, your investments, retirement projections. And because of that you feel uncertain and you really want to make sure you avoid that big strikeout.

Speak with a local fiduciary today. Find a registered investment advisory firm that’s not looking to sell you something. And if you’re not sure where to turn and you’d like to speak with us, we’re happy to help. Visit creativeplanning.com/radio to schedule your complimentary, no-obligation second opinion.

Well, our first question comes from Johnny in Nashville, Tennessee, “Is it time to increase my stock exposure now even though the market has already run up?” Well, Johnny, a lot of this question was answered in what I just spoke of, but let me take a different angle at it. The stock market is the only store in the world where people run out the exits when everything goes on sale. And I have absolutely no idea which direction the market will move the next 12 months or the next 24 months or the next 36 months, but the average bear market lasts 9.6 months, not years, months. So believe it or not, we already are in a longer than average bear market currently. 1978, 21 months, 1980, 20 months, 2000, 31 months, 2008, 17 months are some of the more recent longer bear markets.

But yeah you’re right, year to date, the S&P’s up over 5%, NASDAQ’s up near 10, the Dow Jones is in positive territory. I love the quote from John Templeton where he said, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” Summarized in my own words, investment mistakes are born on regret, they grow on the fear of missing out, they mature on market timing, and they thrive on capitulation. But I think so often we mistake looking at individual stocks that are noteworthy and top of mind and on the news as what’s happening with the broad markets. These are two totally different animals that you must separate. I mean, look at Facebook, shares are up more than 55% right now year to date, after being one of the worst performing stocks in all of 2022 and having a larger market cap drop, I think, than any traded company ever. They’re still so far below their all-time highs. Had a near 77% drop, peak to trough. They’re 109% off the bottom, and they’re still down 51%.

As Warren Buffet said, “A market downturn doesn’t bother us. It’s an opportunity to increase our ownership of great companies with great management at good prices.” My suggestion for you Johnny would be don’t mess around with a handful of individual stocks which will increase your risk and create enormous variability in your potential outcomes, but rather broadly diversify, make strategic tax trades. Never guess on which way you think the market’s going to go. Align your investment allocation with your plan in a way that provides you with the highest likelihood of achieving your goals in the midst of an uncertain world that none of us can forecast.

Our next question comes from Devin in Gilbert, Arizona who asked, “Is a trusted contact just as effective as a power of attorney?” This is a great question, and I don’t want you to miss this, because many haven’t heard of a trusted contact. Let’s suppose that you are not in a situation where you’re comfortable providing power of attorney to someone else, because in many cases, even though it can be a limited power of attorney, it may be granting someone more control and visibility over your financial life than you’re ready for. This is where a trusted contact can be very helpful. It’s someone who can confirm your current contact information if, let’s say, your advisor’s unable to get ahold of you or the custodian or your bank. They can confirm your health status. They can confirm the contact information for other authorized parties, where a POA is a legal document that allows to one or more individuals that are known as attorneys in this relationship, I know it’s kind of weird, but to operate fully on your behalf. Unlike a trusted contact, a POA is generally authorized to conduct transactions and even make decisions on your behalf.

Now, here’s where a trusted contact can be extremely helpful. A single client in their 80s starts having cognitive decline, and they start asking their advisor to wire money over here, buy this individual stock, take an abnormally large withdrawal. Maybe they all of a sudden are showing up with a caregiver at all of their financial appointments and you’re worried because there’s been no diagnosis that would disallow them from handling their financial affairs. I mean, it’s hard for the advisor to go call a doctor, they’re not allowed to legally, to inquire about that client, where a trusted contact, oftentimes it’s a sibling or a child or a grandchild, is able to be contacted and the advisor or the banker, they can ask, “Is your dad doing all right? I’m getting a sense that he’s not remembering things. He’s looking to make some transactions that are just not anything he would’ve ever done. There’s other people around that I’m not familiar with and they’re not family members.” And you’re able to have a conversation for someone who is advocating for that client.

It can sit before any sort of power of attorney would need to be invoked. This trusted contact can be valuable even for married couples. We saw firsthand recently, one spouse passed away and once they passed away, it became very obvious that they had been handling most of everything because the surviving spouse was suffering major cognitive decline. This trusted contact was extremely helpful to be able to bridge some of these conversations to ensure that their wishes were followed and that there were safeguards in place. I mean, we talk all the time about diversification with our money, not having single points of failure. This is a very common and likely occurrence that is unfortunately a single point of failure in most financial plans. Ensure that you have a trusted contact set up on your accounts.

Thank you for that question, Devin. And if you have questions similar to Johnny and Devin’s, contact us by emailing radio@creativeplanning.com. Well, today’s been an investment heavy show. I’ve shared with you a lot of numbers and percentages and statistics and historical data, but I want to conclude talking about why any of this even matters. So you do deploy your cash and you have more money in your account. If we stop there, you’re not improving your life, but merely increasing your net worth. What I believe to be clearly the most valuable aspect of you being financially secure and making these great strategic money moves is that it gives you freedom of your time. How common is it for us to answer in conversation when someone says, “How are you?” What do we say? “Oh, so busy.” In American culture, we’re commended for that, like, “Good for you out hustling and staying busy, being an Uber driver to all your kids, driving them around from sporting event to sporting event, filling every waking moment. That’s great.” Is it?

Research shows that us having less than two hours of free time per day, and by the way, or more than five hours can lead to dissatisfaction. And I’ve seen this for people in the busy season of life as well as that other end of the spectrum, people that just can’t wait to retire and all of a sudden they’re sitting around going, “Wow, I’m not getting a lot of fulfillment here out of retirement.” I like defining work. Not as much around your wages as we traditionally think, but anytime you are using your God-given skills to benefit others, that’s work, and that’s fulfilling. It might mean volunteering at a charity that you care about or helping with your grandkids one day a week or working part-time or continuing to work full-time because you love what you do. I don’t know what it is, but I know that people find the most happiness when they use their money in a way that makes the most of their time.

One of our marketing managers, Lauren Newman, was telling me that she went to a Jack White concert with her husband. What made this concert the best she had ever attended was that they didn’t allow phones. You put this in this pouch that they then locked as you entered and you had to go back to that station to get it unlocked at the end of the concert. Jack White basically said, “Everyone’s at my concert watching on their phone rather than actually being present at the concert.” He said, “That’s crazy. We’re already thinking about posting about a concert or watching the concert later instead of being present for the concert.”

LeBron James just broke Kareem’s all-time scoring record. His kids were their court side, and I thought it was weird when I saw the highlight on ESPN that they were on their phones videoing his final shot, like, “Hey, Brony, Bryce,” I think that’s their names, “you’re going to have a million different views professionally of this shot. Wouldn’t you want to just be there present and watching your dad break the record?” That’s the world we live in. We’re on a vacation spending 30 minutes getting the perfect photo of the sunset instead of watching the sun drop below the horizon.

If we think about it though, regret is all about the past, and anxiety is focusing on the future, which we can’t control. And it’s cliche, but life’s what’s happening while we’re busy making plans. The future is basically just on a loop. It reminds me of that funny sign you’ll see in a bar that says, “Free beer tomorrow.” And of course, every day you show up, you’re waiting for the next day. Let’s not live our lives that way and come to the end, as we all will eventually experience, without having ever truly lived in the moment. And that is the greatest power of financial freedom. Remember, we are the wealthiest society in the history of planet Earth. Let’s make our money matter. If you enjoyed the podcast, please subscribe, share, and leave us a rating.

Disclaimer: The preceding program is furnished by Creative Planning, an SEC registered investment advisory firm that manages or advises on $225 billion in assets. 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. This show is designed to be informational in nature and does not constitute investment advice. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on this show, will be profitable or equal any historical performance levels. Clients of Creative Planning may maintain positions in the securities discussed on this show. For individual guidance, please speak with an attorney, CPA, or financial planner directly for customized legal tax or financial advice that accounts for your personal risk tolerance, objectives, and suitability. 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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