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Mastering the Art of Asset Allocation

Published on November 27, 2023

John Hagensen

The wisest investors recognize that your needs should dictate your asset allocation — not your age. But how can you ensure the optimal mix? Join John as he guides us through various options and demonstrates how to seamlessly integrate them into your financial plan. (3:57) Additionally, uncover year-end tax planning secrets to maximize your savings, (17:38) and explore the perplexing money moves that persist despite their lack of logic. (26:04)

Episode Notes

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

John Hagensen: Welcome to the Rethink Your Money Podcast, presented by Creative Planning. I’m John Hagensen. And ahead on today’s show, the importance of asset allocation, how to give sensibly and what you can learn from the biggest stock market bubble in modern history. Now, join me as I help you rethink your money.

I recently had a family member move 2,000 miles across the country to the Dallas-Fort Worth area. They love Texas. They weren’t feeling at peace where they had lived previously for several years. And I asked them, “Well, what took you so long?” To summarize their answer, it was familiar. And certainly, familiarity can create comfort in our lives, but it doesn’t always lead to the best outcomes. In fact, at times it’s a hindrance. If that example doesn’t resonate with you, how about staying in an unfulfilling job for years or decades or an entire career because it was familiar? We’ve all had a friend who is just miserable in their relationship. You know it. They know it. Everyone who’s interacted with them knows it, yet they stay. And by the way, I’m not talking about working through challenging times in a committed marriage. I’m saying they met on Tinder and they’ve been dating for three months and they’re already in counseling. “You know, maybe this just isn’t going to work.

But people often stay in relationships for a lot of reasons. But in part, even if they’re toxic because they’re familiar. And I think one of the best examples that we’ve all seen with familiarity is the elderly relative who’s still sending mail by carrier pigeon like, “I’m not going to get on with that email stuff. It seems complicated. It’s just easier to pay all my bills by writing a check and mailing them off with my forever stamps. And even though I have to write my return address in the top left and then take it to the mailbox. It’s just so much easier than autopay.” No, it’s actually not easier, but it is more familiar.

And new things can be intimidating, can’t they? Well, we do the same thing when it comes to our money. And this may play out at a macro level with the home team bias investing almost entirely in United States stocks, even though if you took the global universe of stocks, United States stocks only make up about 55 to 60% of the world’s market cap. But we’re Americans, and so most Americans have a significantly higher percentage of their stocks invested with the home team. That bias toward investing in your own backyard also applies when it comes to specific regions within the US, which can result in wildly off balance portfolios.

When you look at technology, the western part of the country has 10% more technology stocks than the national average. How about industrials? The western part of the country, 9% less industrials in their portfolio than the national average. When you look at the Midwest? Plus 11%. The South, plus 5%. And the Northeast has 2% less in industrials than the national average. If you move to financials, everywhere in the country is under the national average except for the Northeast. And finally, energy, where the southern parts of the country have 14% more energy stocks in their portfolios than the national average while the northeast, the upper Midwest and the western portion of America, all those investors are underweighted in energy relative to the national average.

Why do you do this? Why do I do this? Why do we all do this? It all comes back to familiarity. You buy what you know, but that can get you into trouble. And a good investor, and what I want to challenge you on, is to recognize this bias to ensure that you in fact do maintain a well-diversified portfolio because it’s very common for certain sectors to outperform or underperform for long periods of time. You don’t need to look any further than the last 24 months.

In 2022, tech was down 28%. In 2023, it’s up 47%. Industrials were down 10% in 22. They’re up 11% in ’23. Financials were down 12%.’ In 22, they’re up 2. Not great. But they’re up a little in 2023. Energy was up 57% in 2022. The big winner of last year has negative returns here in 2023. Being a mature disciplined investor means recognizing some of your blind spots, some of your natural behaviors that if not confronted can lead to overconfidence and an under diversified portfolio, which in practical terms means you’re taking too much risk for a suboptimal rate of return. If you have questions about your asset allocation, your performance, the fees and expenses of your portfolio, why you own exactly what you own, why not give your wealth a second look by speaking with a local advisor just like myself at creativeplanning.com/radio?

The well-known Jonathan Clements, longtime writer for the Wall Street Journal, founder and editor of the HumbleDollar, as well as our director of financial education here at Creative Planning, wrote a fantastic piece on giving sensibly. And as we trade in our pumpkin spice lattes for eggnog, crazy, it’s time to put up Christmas lights. By the way, if you put up Christmas lights before Thanksgiving, you are someone that I do not trust. Get through Thanksgiving, then make the change, all right? But now we’re here. December’s around the corner. Yes, I do have my 30-foot Santa Claus inflatable that I think might be taller than our entire house. Yeah, it’s out front. But pertaining to our finances, it’s a good time to think about year-end financial planning and what steps you may take In this last month.

A very popular strategy is to make charitable gifts, both to support a good cause and also to reap a tax benefit. But before you start writing checks, take a moment to better understand your tax picture. Here are a few questions to ask yourself. Are you itemizing your deductions right now? If you’re not and you’re using the standard deduction, which is far more common when it essentially doubled in 2018 as part of the Trump tax reform, how close are you to the threshold if you’re not currently itemizing? Secondly, what’s your marginal tax bracket for ordinary income? And then third, what’s your marginal tax bracket for long-term capital gains and qualified dividends? And as a side note, if you don’t know those answers and you’d like to, contact us. We’re happy to help you figure that out.

Now, once you’ve answered these three pieces of information, what they’ll provide you is pretty much most of what you want to know. From there, you can answer the question, “What’s the most tax advantaged way to give?” And here are a couple of ideas. Number one is bunching your deductions. If you’re in the neighborhood of the threshold for itemizing, which for reference, the standard deduction in 2023 is 13,850 if you’re single or $27,700 for those married filing jointly, if you’re near that, let’s say you add up all your itemized deductions and you are married and you’re at 24,000, well, in some cases, $5,000 of that 24,000 is what you gave to your church or Habitat for Humanity. But unfortunately, while you’re giving to a great cause, you’re not benefiting in any way from a tax standpoint because you were already going to take the standard deduction and that donation didn’t push you above the standard.

This is where a great strategy to consider is bunching your deductions using a donor-advised fund. What if you took five years worth of your $5,000 a year donation, so you took 25 grand, and you opened a donor-advised fund and you put all 25,000 in there? Well, clearly on top of all the rest of your deductions, it would push you over the 27,700 standard deduction. But here’s the best part. You can invest that money while you can still control the amount that’s given to the organization, and maybe that remains at $5,000 per year over the five years. And in year 2, 3, 4, and five, you now take the standard deduction of the 27,700 because you’re receiving that whether you were at 24 grand, 27,600 or 1,000. You are going to claim that standard deduction.

Another tax advantaged way to give is through family gifts. Now, if this is a priority for you, and if you just spent the last few days with family, you may be feeling the love even more, “Man, we want to help the kids and the grandkids and siblings and parent, they’re so awesome.” Or you just kicked your feet up, you’re slamming down some pumpkin pie, like one of those huge slices, maybe you even have the whole tin, and you’re going, “Well, man, I love my family, but that was crazy. We’re not giving them any money. They’re fine on their own.” But if you are someone that’s thinking, “Yeah, I want to give some money to family members,” the nice thing is the tax consequences are fairly straightforward. There’s an annual exclusion for making gifts.

So here in 2023, you as an individual can give up to 17,000 without any gift or estate tax impact. Now, if you give over the 17 grand, it will start reducing your lifetime exclusion, which as of today is close to about 13 million per person. So still not a massive tax impact, certainly not now in the moment. And maybe not ever if you don’t have a high net worth. But if you want to keep it simple, stay 17,000 or below. And keep in mind, if you are married, you and your spouse can give 17,000 to a child. And if that child’s married, you and your spouse can give 17,000 to your child and your child’s spouse, which means in many cases you can really gift up to 68,000 per year.

I love what Warren Buffett said about his children. And obviously he’s in just a completely different world, having a net worth of something like $100 billion at this point. His famous quote is that when it comes to gifting to his children, he wants them to have enough that they could do anything, but not so much that they could do nothing. And keep in mind when gifting to family members, don’t jeopardize your own financial plan to gift to those around you. Sadly, I have seen fantastic retirement plans destroyed because a child needs money and a child needs money and a child needs money, and a decade later the child still doesn’t work. And because they continued to gift money to that child, the parent’s retirement plan has now imploded. Also with family, be transparent. Let them know your intentions and if they can expect more. That way, they face fewer unknowns when it comes to their own financial planning.

Have you ever thought that financial advice may just be for the uber rich, like the really filthy, ridiculously rich people, like that’s who needs financial advice, but it’s not really that applicable for everyday Americans? Well, let’s rethink this idea together. A common phrase that I think hits home is that the luxuries of one generation will become the necessities of the next. And there is a lot of truth to that. But when it comes to financial advice, your wealth, whatever little amount you have or abundance that you’ve been blessed with, it’s of equal importance to you as it is your neighbor. In fact, in my experience, the person with a $500,000 net worth has far more at stake than the person with 500 million. I mean, there’s certainly far less margin for error. And bad decisions are going to cost the billionaire more in absolute dollar terms, but the practical impact is far greater for the person with the lower net worth.

So if you’re someone who thinks, “Do I really need a financial plan? Do I need financial advice?” Answer a few simple questions, “Do you make money?” By the way, I hope your answer to that is yes. Even if it’s just a little, I hope the answer is yes. Do you spend money? I know that answer is yes because you’re alive. Do you depend on money for important aspects of your life? Then financial advice is important. This is my pipe dream that every single American would have a financial plan.

Now, we all dream about different things, right? I dream about financial plans. My kids, they have nightmares. We have a sofa in our bedroom and it’s just a carousel of kids each night coming up, “I had a bad dream.”

“Oh, that’s interesting. I just prayed with you and left your room four minutes ago. You already fell asleep, went into a rim cycle, woke up, collected four of your favorite stuffed animals, and then walked up from the basement. Man, that must have been a really quick dream. Let’s pray again about your heart because you are a liar.” Where was I going with this though? Oh, dreams. That’s right. But my dream when they come up and tell me they had a nightmare, I’m like, “Oh, that’s interesting. I just had an amazing dream where everybody had a financial plan in America.”

So let me ask you this. Do you have a single location where you have an up-to-date net worth statement? All your retirement planning projections, your estate planning documents, education planning, risk management, and insurance docs, previous tax returns, your investment allocation and investment performance, your bank statements of financial history, periodic look backs? Do you have a place that stores important documents, passwords, real estate deeds? In front of all of that, do you have a list of who your contacts are? “Who’s my CFP? Who’s my attorney? Who’s my CPA? Who’s on my service team that I can contact? A trader, the chief investment officer? If your answer is no, you’re not alone. Most Americans do not have a financial plan. Whether they have a really high net worth or a very small net worth or somewhere in between, most Americans do not have a real financial plan, a comprehensive organized financial plan.

And yeah, if you didn’t catch that, this is what we provide for over 60,000 families. We’ve been helping people for 40 years here at Creative Planning, and we’re not the only solution. There are many great advisors out there, but if you are not sure where to turn and you hear me talking about that financial plan and think, “Man, that’d be helpful,” maybe for yourself, maybe for your spouse, for continuity, for organization, for an integration of taxes and estate planning, really bringing that all together in a coordinated strategy, I want that for you. I really do. I know how hard you’ve worked for your money. And if you’re not sure where to turn, reach out to us at Creative Planning by visiting creativeplanning.com/radio for a complimentary second opinion. The end of the year is almost here. Don’t wait any longer. Visit creativeplanning.com/radio now because we believe your money works harder when it works together.

Are you someone who likes to build checklists? And I love it. It just makes me all warm and fuzzy inside, having a checklist and completing tasks on that checklist. Maybe you’ve got a Christmas list, maybe you started on that Christmas list on Black Friday. Were you one of the people waiting outside the Apple Store at like 3:00 in the morning? Was that you? We implemented something in our family for Christmas gifts because our lists were getting crazy. So in our family, we get four gifts. As a husband, this makes things a lot easier, a lot easier for me. Something you want, something you need, something you wear and something you read. I did have to remind my wife last year, it’s just four because Santa, Santa came down that chimney and brought a bunch more gifts than these four, which wasn’t the idea since we’re doing our best to not raise entitled little minions.

But I love my checklist. I love my Christmas checklist, I love my shopping checklists. And you know what else I love and maybe not quite as much? I love a checklist when it comes to financial planning. That also makes me warm and fuzzy inside when we’re going down a list and bam, bam, did that, did that, knocked that off, took care of that.

And I want to give you that great feeling of confidence as well by providing you with the 11 things to do before year-end. I’ll post an article to the Radio page of our website written by Creative Planning’s own Rachel Seiler, certified financial planner on your end of year financial planning checklist. Number one, review your financial plan. Number two, maximize your retirement contributions. Number three, take steps to lower your tax liability. Number four, rebalance your portfolio. Number five, finalize year-end charitable donations. Number six, review your existing insurance coverage and risk management needs. Number seven, reevaluate your healthcare coverage. Number eight, check in on your emergency fund. Number nine, review your estate planning documents. Number 10, review your beneficiary designations. And number 11, check your credit report.

Well, to continue on this conversation about year-end, and in particular, how to ensure that you’re not overpaying on your taxes this year or going into 2024 unprepared from a planning standpoint, I am joined by Noelle Caldwell, tax director here at Creative Planning, CPA. Noelle, thank you so much for being here on Rethink Your Money.

Noelle Caldwell: Yeah. It’s my pleasure. I’m happy to be here.

John: I think we’d all agree no one likes paying more in taxes than legally required, but sometimes it can be challenging to figure out even, “Where do I start? What’s the first step?” So Noelle, where is the first place for someone to begin as we approach the end of the year?

Noelle:  At a basic level, before the year-ends, take a look at your last year’s tax return. Try and determine what those amounts are going to be for the current year. That’s where we start with our clients at year-end, just to make sure that there’s nothing surprising or out of the ordinary that we can’t catch and mitigate before the end of the year.

John: That makes sense. Try to be proactive. Maybe use the previous year’s return as a barometer. When we look at year-end tax planning, for those that want to be proactive, what does that look like?

Noelle:  There are different types of taxpayers. One might be a W-2 employee, the other might be a retiree, a third might be a business owner. So each of those have a different strategy.

John: Yeah, it’s going to look a little different for each of those people.

Noelle:  Right. So for the W-2 employee, what we typically do is we take the most recent pay stub and then we project that pay stub, which means multiply those same figures out through the remaining pay periods for the year so we can see how much withholding there is. We can determine if they have not maximized their 401(k), so we can suggest increasing 401(k) withholding. If it looks like they’ve withheld too much, we can suggest bringing some of that withholding down, which puts the money in their pocket now as opposed to waiting for April 15th.

Another opportunity that might be beneficial to most taxpayers who itemize is considered bunching itemized deductions. If they have a particular item out of the ordinary this year, let’s say they inherited some money or perhaps a significant capital gain, something that might benefit them is to bunch multiple years of charitable contributions that they typically do into one year. A great tool for that is the donor-advised fund. If they happen to have appreciated stock, this is a great tool that we often discuss with clients and our wealth managers at year-end to see if the clients have appreciated stock that might benefit them to move to a donor-advised fund and bring a charitable donation to offset any large out of the ordinary income item before year-end.

Another type of client is the retiree. So their income is probably not as high as it was when they were working. So we also look at end of year to see if a Roth conversion might make sense. If they’re in a lower tax bracket year, that might make sense to start moving any deferred income in a traditional IRA or 401(k) into a Roth and start helping them plan for the future in their retirement years.

John: How about for someone who started a business? How is that going to impact their taxes, their tax planning in particular? What do you think they should be thinking about?

Noelle:  That’s an excellent question, especially if someone switches from being an employee for most of their life or a few years even they’ve become accustomed to a paycheck and they start a business. Something they may not be aware of or not plan for is the income tax that comes on the tax return when you’re self-employed. And not being aware of estimated payments that you need to make or even the fact that you’re subject to self-employment tax will catch the business owner off guard if they haven’t planned for it. And the best way to be able to plan for it is to make sure that their bookkeeping is up-to-date and intact. So being able to determine how much in estimated payments you should make, you need to start with good bookkeeping to know what you’ve earned and what you’ve spent.

For the business owners, they have options to defer income by starting different retirement plans, but those retirement plans have different requirements for start dates. So you should meet with your wealth advisor and determine what amount of income that you are able to defer to determine which type of plan is best for you and find out what formation date is required so that you can take advantage of it in 2023 as opposed to having to wait until 2024.

Also, if you are an S-corporation owner and you just started your business or perhaps have been in business for a long time, but you may only pay yourself once a year in December, don’t forget to pay yourself. Don’t forget to make out that check and that W-2. It’s very important.

John: Yeah, don’t forget that.

Noelle:  Some of the big questions I get at the end of the year, usually the last week of December, is, “Should I go out and buy a car?” Obviously that may be a good tax move. It isn’t always a great cash flow move or business-needs move, and the answer is it depends. For either a car or any particular piece of equipment, it’s important to remember that merely purchasing it doesn’t make it deductible. You have to receive it and have it in place. So if you purchase a car but it’s not being delivered ’till April, it’s not going to be deductible this year. It has to be purchased and in place. And this would even go for solar panels on your home. If you purchase those and want to deduct them this year, they have to be in place and operating in order to be deductible.

John: The key word that you said there is “if you need to buy a piece of equipment.” I see people buy things they don’t even need because it’s deductible and it’s not a great exchange to pay a dollar and get 30 cents back from the government. Well, Noelle, thank you so much for joining me here on Rethink Your Money and happy Thanksgiving.

Noelle:  Thanks for having me.

John: The holidays, I’ve always found them funny because you spend a lot of time with family, which is fantastic. I love being around my family. But family’s quirky, isn’t it? I mean, every family has its dynamics and I’m part of that dynamic. I’m part of the weirdness. And I made a note of a few of these, just puzzling things that frankly I just don’t understand that went on this last week. I got a son who is a teenager and he wears what I like to call the teenie weenie beanie. Now, if you don’t know what I’m talking about, Google Jimmy Fallon teenie weenie beanie skit. It is hilarious. Sort of like the Mar from home alone, beanie that just sits on their head, doesn’t go over their ears, really doesn’t serve a purpose. My son looks like one of the wet bandits from home alone, and it is about that time of year with Christmas coming, one of the great holiday movies of all time, but I don’t understand that. Never will. Doesn’t serve a purpose, doesn’t even look cool.

How about the relative that laughs at all of their own jokes and stories, but it gets worse, before they even finish telling them? You know what I’m talking about? They start telling the story and you’re just waiting for it and it ends up usually not even being that funny. They’re crying, they’re wheezing halfway through the first sentence. They can’t even get it out.

Now, this one unfortunately pertains to me. I was walking around looking for my phone, holding onto my phone. I wish I were joking. And I know by the way, any clients who work directly with me at Creative Planning that are listening, you’re like, “Can we work with one of the other 600 financial advisors? We’re a little worried about you, John.” I get it. Kind of worried about myself too.

And lastly, everyone’s saying, “Oh man, that Turkey makes me so tired.” Yeah, I get it. It has the tryptophan in it, which produces serotonin and melatonin. So there’s some truth to that, but do you think it might be the sweet potato pie with crusted brown sugar and four layers of mini marshmallows and then the four helpings of pumpkin pie? Maybe. I don’t know. But there’s a lot of things that confuse me when it comes to the holidays, spending time with family, and there are a lot of things that people do that baffle me when it comes to finance too. I’m going to hit you with three right now. The first rushing to pay off a fixed rate 30-year mortgage at 3% or 3.5% or 2.5 or 3.8, I don’t care. Fill in the blank with what your mortgage currently is. It’s probably low if you are like well over 75% of Americans holding a mortgage below 4%.

In fact, I remember one visit in particular while inflation was at 8.5% and they were paying 4,000 per month extra on their mortgage. Huh? You’re being paid to have that mortgage. Now, let me be clear. If you are someone who says, “John, I fully understand that it’s not financially smart, but I grew up listening to Ramsey and Orman and I don’t like debt, and it’s been a huge goal of mine to be completely out of debt and it stresses me out to have it, even if in this case, it’s a fantastic financial vehicle to be used to your advantage,” you just don’t want to do it. I get it. And if it does not jeopardize your financial plan, go for it. But let’s not pretend that it makes sense to pay off a fixed rate mortgage that’s below the rate of inflation and far below what you can earn in CDs, treasuries and even money markets.

Another financial move I see regularly that I just don’t get, holding cash waiting for, and I’m putting up air quotes, “the right time” to invest. There is no right time to invest because when the market’s high, the person sitting in cash wants to wait until it drops. But when it’s dropping, there’s the great buy-in opportunity, most in cash say, “Oh, I’m going to wait until this sort of turns around before I invest. Nobody wants to jump onto a sinking ship.” Good luck timing bottoms. And the longer you sit in cash, the higher the likelihood is for underperformance.

My third and final move that really perplexes me is having a large percentage of investible assets allocated to the company you work for. Now, I understand it’s very easy to feel like you have an inside track and understanding as to how great the company that you work for is, the growth prospects of that company. But one of the most basic fundamental rules of investing is to diversify, to spread your bets out. When you invest a massive amount of your net worth into your current employer, you are the anti diversifier. This is as concentrated as you can get because if something goes wrong with that stock, it’s highly likely it will impact your employment. Maybe you’ll lose your pension from that company as well. At best, maybe you’re not promoted. At worst, you’re laid off.

If you’d like to speak with myself or one of my colleagues here at Creative Planning, we’ve been helping families for 40 years and offer a complimentary second opinion where we will provide a clear and understandable breakdown of exactly where you stand with your money, taxes, estate planning, retirement planning, investments, risk management. Whatever’s on your mind, we are happy to help as independent fiduciaries who aren’t looking to sell you something. Why not give your wealth a second? Look at creativeplanning.com/radio.

Well, it’s time for our first piece of common wisdom to rethink together. The current price of your bonds matters. Let me put it more precisely, that it matters a lot. But keep in mind, bonds are simply a loan. If you loan $10 and you charge 5% interest on some agreed upon date, you pay me the 10 bucks plus 5% interest per year, for practical purposes, that’s a bond, right? When you own a stock, you’re an owner of the company. When you own a bond, you’re a lender. So when you hear someone talk about a treasury bond, it’s simply a loan to the government. A municipal bond? It’s a loan to a county, a city, a state, or some other government entity. A corporate bond? You’re loaning money to Apple or McDonald’s to a corporation.

And then high yield or junk bonds, as you’ll hear them referred to, is a loan to a corporation who’s just not doing that well. Higher likelihood that they will default, which is one of the three main risks. Default risk, meaning when you go to get your $10 back, the company says, “Sorry, we’re broke. We can’t pay you your money back,” right? That’s a bad day. So you want to pay attention to the financial stability, which is why these bonds are rated.

Another risk is inflation risk. They may pay you 5% interest for 10 years and then per the agreement at the 10-year mark, your bond matures and they give you your $10 back. Well, if inflation was really high, your $10 isn’t buying near as much as it used to. You’re not getting a chicken burrito bowl anymore at Chipotle for that 10 bucks. That’s your inflation risk with bonds.

And the last primary risk is called interest rate risk, which we just saw over the last couple of years with rising interest rates. If you have a bond paying 3% and new bonds are paying 7%, no one wants to buy your 3% bond from you, and the only way they will is if you provide a huge discount to the new 7% bonds.

Creative Planning president Peter Mallouk recently released a book titled Money Simplified. And I will post a chart from this fantastic book to the Radio page of our website showing just how much has been earned by bond holders since 1979, and I think you’ll find it staggering just how much more money was earned from interest than principle.

Changing gears to another topic that has been front and center recently. Why just invest in the S&P 500 and forget about everything else? Why diversify, why own small cap, why own value, why own international when the companies I’m familiar with, the S&P 500, have simply produced, for now well over a decade, the best returns? And the reason you can’t just throw all your money in the S&P 500 and forget about it is because there are long periods of time where large United States companies don’t do well. I know it almost seems inconceivable considering the heater that they’re on, but if we look at January of 2001 through December of 2010, so we’re talking about a 10-year period, large cap United States stocks earned, drum roll, please, zero. They made you no money for 10 years.

Now what’s most interesting and why diversification is still important is that that wasn’t the case for all asset categories. Small cap stocks made 78%. International was up 134%. And this one’s wild, emerging markets made 437% over that 10 year period. Think about that for a moment. US stocks were flat while emerging market stocks were up nearly 450%. Real estate was up 228%. And bonds, boring, old, collect my interest bonds were up 175% during that decade.

And before you say, “Well, that was one decade and it was an anomaly and I’m not worried about it. Give me the magnificent seven. I like me some Microsoft and some Amazon and Meta and Apple and Alphabet and NVIDIA” and Tesla. I don’t know. Netflix got kicked out. They were in the FANG. Now they’re gonzo. “But yeah, throw in some Netflix for me too. I like streaming around the holidays.” No, it gets worse than that last decade.

Consider Japan, biggest bubble of a developed market. Did you know that if in the mid 1960s you invested $1,000 in Japan’s stock market, by the late ’80s it was worth nearly $40,000. What an incredible run. Today that once $40,000 is at about 30,000. Think about that. We’re talking 35 years and you are still down. Now, valuations were out of control at the time. There were other demographic challenges in Japan. And like a lot of things in life, hindsight bias is 2020. I mean, we’re like, “Oh, well that was so obvious. Look at valuations.” But it wasn’t obvious at the time. And for those Japanese investors who had no diversification outside of Japan’s stock market, they have gone through a financial massacre. Forget about trying to retire. And I don’t tell you this at all to scare you, but it’s to show you why you should not just put all of your money in the S&P 500 and forget about it.

Well, it’s time for listener questions. And to read those for us, one of my producers, Lauren, is here. Hey Lauren, who do we have up first?

Lauren Newman: Hi, John. The first question I’ve got is from Sarah in La Jolla, California. She says, “I’m facing a significant decision and would greatly appreciate your insight. My husband and I are in the process of deciding who should be our beneficiary for our trust life insurance policy and other assets. He strongly believes that his mother should be the beneficiary, but I have reservations about his choice. I feel that designating someone younger may be a more practical decision in the long run. Any advice?”

John: Well, let me start by saying my wife and I were in La Jolla recently. Wow, it is a beautiful place, and I hope you’re not taking that for granted. It is especially amazing here in November. No question about that. But this is a great question. Beneficiary designations obviously allow you to declare who will inherit your financial accounts and receive your insurance benefits after you’re gone. The decisions that you make can have a significant impact, certainly on your loved one’s lives. And I’ve seen this botched before. I’ve seen an ex-wife receive a $1 million life insurance payout while the current wife who was never switched over as the beneficiary by the now deceased husband had never changed. And if you’re wondering, the beneficiary designation supersedes anything you may have in a will, or in this case, a revocable trust. And yes, that was a really, really good day for the ex-wife and a horrible day for his now widow.

And so you can see how important it’s to understand the role that beneficiary designations play within your overall plan. Creative Planning Certified Financial Planner, McKenna Girtz, wrote a great article on this last month. I’ll post it to the Radio page of our website if you’d like to read it in its entirety where she covers the six things you need to know when it comes to choosing your beneficiaries. The first is a more broad overarching theme, which is what are your estate planning objectives? Because that estate plan will require some updating throughout the years due to changes in your wishes. And I just mentioned the divorce scenario, your family dynamics, certainly laws change. We’ve seen the estate tax exemption pinball around now at one of the highest levels we’ve ever seen set to get slashed in half in 2026. When the Trump tax reform sunsets, there are internal and external factors that will impact your overall legacy objectives. And it’s important because you may spend considerable time and effort and even money drafting a trust and creating an irrevocable trust and a money’s going to a donor-advised fund and a foundation, whatever it might be.

But again, if the ex-wife is the listed beneficiary, that’s supersedes those instructions. It’s important that you make a list of all accounts for which beneficiaries are designated and set reminders to review those on a regular basis. If you’re working with us at Creative Planning, we have this built into our process. If you’re not working with us and you’re wondering like, “Have I reviewed it recent enough?” A really good question to answer is, “Have you had any major life events recently?” Marriage, divorce, birth of a child, death of a beneficiary. I see that occasionally. Someone listed that isn’t around anymore. “Oh, there’s no contingent beneficiary listed? Where’s this money going? Oh, probate.” The second consideration? Minor children. Remember, minors cannot directly inherit financial accounts or any life insurance proceeds.

So if you do designate a minor as your beneficiary, the court’s going to need to appoint a guardian to oversee the inherited assets, which can be a lengthy and expensive process. Here’s what I suggest in lieu of that, designate a trust or a trusted adult to oversee the management of your assets if you were to pass away while you have minor children. Do you have special needs beneficiaries? If you wish to financially support a loved one with special needs, it might seem logical, “I’m going to list them as my beneficiary.” However, when you do that, it may have the opposite effect if those inherited assets make them ineligible to receive the needed government assistance that they currently qualify for. This is a really bad scenario.

I’ve seen grandparents pass away. Their special needs grandchild inherits a million dollars. They’re thinking, “This is going to be great. That’ll provide for them for the rest of their lives.” No, you just made them too wealthy to qualify for extremely valuable government benefits. There are ways around this by establishing a special needs trust and the name of the trust as the beneficiary. This is obviously a complex financial strategy. Be sure to consult with an estate planning attorney who has experience in this area before implementing.

What about your charitable giving goals? From a tax planning standpoint, it can minimize what the IRS inherits. If you take otherwise taxable accounts like IRAs, that would be taxed ordinary income to any of your family members. Well, the charity, assuming there are 501(c)(3), is exempt from paying tax on those assets. So make sure you’re assigning the right beneficiaries to the right accounts from a tax standpoint.

Our final two considerations before choosing your beneficiary, our family dynamics. Every family has its own unique circumstances. I get it. I have a family too. So take that into account as well as contingent beneficiaries. In addition to those primary beneficiaries, it’s important to consider and name contingent beneficiaries in the event that the primary beneficiary predeceases you.

If you have questions about your beneficiaries or your estate plan, we have an office there in San Diego and we’ll be happy to speak with you. All right, Lauren, who’s next?

Lauren: Shawn from Phoenix, Arizona writes, “I read an article about big banks and brokerage houses experiencing some of the same troubles we saw with SVB last year. Should I be concerned?”

John:     A really good question, Shawn. I mean, you’re definitely thinking next level. I can certainly tell you pay attention to these things. But in short, no, you should not be concerned and I’ll tell you why I’m planning on nerding out for a minute or two. So if this goes a little too far into the weeds for you, you can just tune me out, start running through your mental to-do list until my next topic. But I know all you do at yourselfers, you engineers, you’re thinking, “Come on, John, bring it on. I love it. Let’s go.”

So SVB, Silicon Valley Bank, and other small banks that ran into issues had many of their large deposits from tech startups and other small businesses, which resulted in those deposits being really volatile and prone to move. In addition, because of these banks being a temporary holding spot for large deposits, the relationship between the bank and the depositor, it wasn’t sticky. There were many near substitutes for depositors that were basically interchangeable. So as soon as there was even a hint of a problem at the bank, it made logical sense for them to pull all their money out and go elsewhere.

And lastly, these banks were earmarked for large uninsured deposits. And so the result of this was when Silicon Valley Bank took these paper losses on their longer duration assets, it led to a run on the bank and forced them to realize all of those paper losses in a short amount of time and become insolvent. Now, let’s look at brokerage houses and bigger banks. They’re built largely on individuals and brokerage cash positions, most of which are federally insured and are primarily held for longer term and are connected with additional client relationships. They do have one similar problem, unrealized losses on longer duration positions due to rising rates. There’s very little fear of a mass pull out of assets, which would cause that bank or large brokerage house to be forced to sell and realize those losses.

Let me give you four bullet points for why you don’t need to be worried about rising interest rates and its impact on bigger banks and brokerage houses. First off, there’s a large quantity of individuals versus the temporary holding of large deposits from small businesses and tech startups. Number two, these are long-term clients with other relationships at the bank and brokerage houses. First, short-term, no relationship. We drop a huge amount of venture money into the account. And the second we think it might not be a good bank to have it at, we pull all of it. Number three, smaller deposits are federally insured versus large uninsured deposits. And number four, paper losses that are unrealized with no reason to sell an underwater position equals no cash crisis. These places can hold those longer duration bonds until maturity. Hopefully this puts your mind at ease.

All right, Lauren, I think we should head to Kansas.

Lauren: Last, we have Danny from Wichita, Kansas, and he asks, “With SECURE 2.0, is the 35,000 529-to-Roth provision total per account? Or if I change the beneficiary, could I do another 35,000?”

John: Well, Danny, I’ve got some good news for you. When SECURE 2.0 headlines came out around the 529-to-Roth rollover provisions, a lot of financial advisors, we were thinking, “This may be fantastic because clients are going to be able to roll out hundreds of thousands of 529 tax-free to Roth IRAs. This is the greatest loophole ever.” And of course that wasn’t the case. The rollover provision is limited to $35,000 lifetime. But to answer your specific question, it does appear from the law that $35,000 lifetime limit is per beneficiary, not per owner. So if you have several 529 plans for different beneficiaries like children or grandchildren, you might be able to use the 35K rollover for each of them if all of the other conditions are met.

Wooh! Those were some good questions this week. Thank you to Sarah, Sean, and Danny. If you have questions, please send them my way by emailing radio@creativeplanning.com.

Well, I have to say one of my favorite things, whether it be professionally as a financial advisor or spiritually or with my marriage or parenting, I love learning, growing, attending conferences, listening to podcasts. Sometimes I drive my wife crazy. In fact, it’s one of the things I’m working on. Don’t have an AirPod in all the time. I can just be hanging out. I can just be going for a walk. And my wife, Brittany and I had the opportunity to go out to California to attend a small conference that was hosted by a well-known author, and it was called The School of Whimsy. And I must say I actually had no idea what it was. Genuinely. My wife kept calling it a marriage conference, and I’m like, “I don’t think this is a marriage conference.” She asked, “Well then, what is it?” I said, “Well, I don’t know. No clue. We don’t have any details, but I’ve heard it’s really good.” And I’m pretty sure it’s not a marriage conference, but it was amazing.

It was amazing because it sparked in me a different way to look at life. Remember, we move in the direction of our most powerful thoughts. And before that, it’s important that we remember we see what we look at. So if we see what we look at and then we think about what we’re seeing and we’ll move in the direction of those most powerful thoughts, then the conclusion is it’s really important to control what we are consuming, what’s powering those thoughts.

The host of the conference wears a Boston Red Sox hat every single day in every photo he takes, while he speaks, while he’s hanging with his family. I’m guessing he takes it off at bedtime. I don’t know. You’d have to ask his wife. But my guess is it’s hanging on the bedpost because I’ve never seen the guy without this hat. Well, I, finally at this conference, I got the low down on why he wears this hat. He said, “I don’t like the Boston Red Sox. I’m not a fan. In fact, I’m not a sports fan. I’ve never even been to a baseball game in my entire life.” And he’s in his 60s.

“But I had a neighbor who was a close friend of my wife and mine, and she was a diehard Sox fan. And when she had stage 4 cancer and was on her deathbed and he asked her, ‘What can I do to continue your legacy? You’ve lived such an incredible life. Any wish you want, I’ll do it.’ She said, ‘I need somebody to hold down my Red Sox. Somebody’s got to represent’.” And he looked her in the eyes the week that she passed away and he said, “For the rest of my life, I will wear a Boston Red Sox hat on my head in honor of you.” And he has, and he continues to.

The big idea for you and I is to take action, to do something you’ve thought about in your life, then put on your heart. Go with the Nike slogan, just do it. Earl Nightingale said, “Don’t let the fear of the time it will take to accomplish something stand in the way of you doing it. The time will pass anyway. We might just as well put that passing time to the best possible use.” And on this Thanksgiving weekend, what a great reminder that is. Because 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 podcast.

Disclaimer: The proceeding program is furnished by Creative Planning, an SEC registered investment advisory firm that manages or advises on a combined $245 billion in assets as of July 1st, 2023. 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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