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Protecting Your Portfolio From Politics

Published on September 25, 2023

John Hagensen

Does your portfolio care about politics? It’s a question we’re all asking as we head into 2024. But even outside election years, understanding the relationship between the market and political dynamics is crucial. Join us as we explore how these two arenas intersect and what knowledge you need to make informed investment decisions year-round.

Episode Description

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

John Hagensen: Welcome to the Rethink Your Money Podcast presented by Creative Planning. I’m John Hagensen, and ahead on today’s show, how your preferred politician winning or losing an election impacts your strategies, the most regularly occurring irrational money moves that I see time and time again, as well as why, maybe surprisingly, more effort doesn’t often equate to better investment outcomes. Now, join me as I help you rethink your money. Well, if you’re like me, emotions get in the way of making the right decision from time to time. The greatest challenge in personal finance isn’t actually picking the right stock or having a good knack and feel for which way the market’s going to move.

No, it’s making pragmatic decisions in the midst of fear and in the midst of greed. You see, the stock market has earned nearly 10% per year for the last 40 years. That’s the happy news. The sad news is that the average American stock mutual fund investor has earned only about half of those returns. To quantify this, $100,000 40 years ago would have grown to over $5 million if invested in the S&P 500 and no, that’s it. Shred your statement. That’s all you had to do, but that same $100,000 for the average American in the last 40 years has grown to a mere 735,000. You didn’t mishear that. Instead of $5 million by doing absolutely nothing, shredding your statement, losing your login.

Never once looking at your investments, that produced over $5 million. The average American on that 100,000 didn’t even finish with one million. This is what is often referred to as the behavior gap, and so while we’re still a year out from the next presidential election, I’m going to talk about it because I’m already answering questions. We all know the media loves conflict and distress. Everything is a huge deal. The world’s ending. If this happens, it’s going to be horrible. I used to think that religion was the big divide, the controversy. Politics was like, “Hey, religion, hold my beer. I’ve got this.” The amount of contention and stress and angst around the opposing political party here in America.

If you hear nothing else the rest of the show, remember this, the stock market does not care about your political beliefs. It also doesn’t care which political party is in power. The stock market doesn’t see red, it doesn’t see blue. The stock market sees green. It cares about one thing, profitability and growth prospects, period. In 2009, I had a client, hardcore Republican, insistent that they would not invest in the stock market once President Obama was elected. The whole country was going to collapse and they didn’t want any part of the stock market. Well, really stupid move regardless of whether they liked him as a president or not because the S&P 500 increased nearly 200% during his presidency.

I had another client more recently who voted Democrat, couldn’t stand Trump, and coming out of the 2016 election, went to cash. Again, really dumb move. The market was up nearly 20% during the first year of Trump’s presidency, and so I say it again, the stock market doesn’t care about your political beliefs and if you think that politics is more contentious today than ever before, we might want to rethink that. Listen to this during the John Adams versus Thomas Jefferson campaign. Each had some crazy statements about the other one. Here was John Adams’ key advertisement. If you elect Thomas Jefferson, murder, robbery, rape, incest, and adultery will be practiced throughout the land.

Are you prepared to see your dwellings in flames, female chastity violated, or children writhing on the pike? It’s actually pretty crazy. Now, Thomas Jefferson, he got plenty of streets and high schools named after him, wasn’t really taking the high road though either. His campaign said John Adams is busy importing mistresses from Europe or trying to marry one of his sons to the daughter of King George. He is a hideous hermaphroditical character with neither the force or firmness of a man nor the gentleness and sensibility of a woman. Dang, that’s harsh. So yeah, this political unrest is nothing new.

When we turn our gaze toward modern history, the markets have gone up under most presidents, under almost all of them. Why? Because that’s what the market generally does over time. The stock market has made 10% a year for over 100 years, and part of the market’s return is simply inflation and dividends, and then some is attributable to future earnings of companies. So if we step away from the hysteria of the moment, and certainly in election seasons, that’s how it feels, and think about how you and everyone you know has lived the last dozen years. What do I mean? Well, after President Obama won, did you still go to In-N-Out Burger and get food? Did you still buy Nikes?

Did that change when President Trump won? Well, now I’m not going to go to Home Depot, not going to do it. I am not going to drive my car anymore. I’m a Democrat. I don’t like President Trump. No. You see, most of what we spend money on and most of how we live our lives doesn’t change all that much regardless of who is in the Oval Office. Yeah, you still go to Amazon Prime and you buy stuff and it amazingly shows up two hours later at your doorstep. You get a new iPhone, you keep going to Chipotle, and that’s why the markets continue to increase. Here is some recent presidential performance. Clinton, S&P returned 210%. Obama, 182%. Both of those are Democrats.

Now we go to a Republican in Eisenhower, up 129%. Reagan, 117%. Truman, another Democrat, 87%. H.W. Bush, Republican, 51% over a four-year term. Lyndon Johnson, a Democrat, 46%. Trump, 43%. Jimmy Carter, 28%. Gerald Ford, 26%. Neither of those were great, Democrat and Republican. John F. Kennedy, obviously cut tragically short, up 16%. Nixon, Nixon was down 20%, Republican, and George W., his eight-year term, down 40%. Now, if he were here, George W. would likely be saying, “Wait a second, I came into office and there were the terrorist attacks of 9/11 and the dotcom bubble bursting, and then right as I left, we were at the bottom of a bear market due to the great financial crisis.”

So maybe he was a little bit unlucky on the timing of his eight-year term, but you can see there’s no rhyme or reason to which political party generates the best stock market performance, and if we extend it beyond the White House and include Congress, it’s remarkably close. You have a Republican sweep, the average presidential term, and we’re talking 48 months, a four-year term, the market has increased on average by 48%. If it’s a Republican president and a divided Congress, it’s up 38%. If it’s a Republican president and a Democratic Congress, up 49%. Democratic President and Republican Congress, up 46%. Democratic President and a divided Congress, 45%. A Democratic sweep, up 41%.

I know I just threw a lot of percentages at you. I’ll post that chart along with another article written by Kenny Gatliff, chartered financial analyst here at Creative Planning, to the radio page of our website so that you can look through these further, but let me end that dataset by pointing out the baseline. All elections on average over a 48-month period provide a positive return of 47%, basically right in the middle of the percentages from the various combinations that I just shared. Now, I’m not failing to acknowledge that yes, tax hikes may have an impact on your business. It should have an impact on your financial planning strategies. Do you defer more? Do you convert more to a Roth?

Do you file an S-corp election? All of those things matter, and the president and Congress and the Supreme Court, they all have great influence on those policy decisions, but we’re talking about the stock market and your investment strategies, and so as an investor, the one thing that you need to be aware of as we circle back to the conversation on our emotions is your behavior because the one component that shows a major discrepancy between when a Democrat or a Republican is in office is how the sentiment of Democrat and Republican investors align or contrast with that candidate. Well, I’m going to go way back for this, back to 1896.

If you had $10,000 in the Dow Jones Industrial Average, it grew to about $7 million by doing nothing. Now, that’s not that surprising. We’re talking about 125 years plus of compounding returns, but we know that when a Democrat’s elected, left leaning investors tend to be more aggressive and Republican investors may pull back their equity exposure. They’re less confident in the direction of our country because their political party didn’t win, and here’s what’s crazy is since 1896, a Republican only invested when Republican presidents were in party, that $7 million is less than a million.

And in the same light, if a Democrat investor only invested when a Democrat president was in office, they did a little better, but were still just slightly under $1 million, and again, to reinforce by comparison, if all you did was stay invested the entire time, regardless of whether you liked the president or not, you had $7 million. Now, you may be thinking to yourself long-term, I understand that, but what about during an election year in the midst of all of this uncertainty? Are those good times to invest? Well, the overall return of the S&P 500 since 1926 is right around 10%. The average return during election years, what do you think that was? Take a guess. It was higher. 11.3% is the average return during election years.

And while that’s certainly not a predictable pattern, like increase your stock exposure during election years because returns are even better. No, I’m obviously not suggesting that, but it certainly doesn’t necessitate a change in your investment philosophy to decrease risk, to get less growthy, to seek more stability purely because we are in an election year. Here is the takeaway for you and I. There’s always going to be political questions. There will always be turmoil. The media is going to prey upon your emotions, especially when it comes to politics. The “other side” are always going to seem like they’re terrible for the economy and for the country in general, yet I want you to be reminded of what the data shows us.

And that is that the stock market doesn’t care, and this is fantastic news for us because it’s generated strong returns through all combinations. What’s fairly common as wealth increases or time capacity increases, people consider what it might look like to move states, in part maybe for lifestyle, but in some cases, for a lower cost of living. I have a friend whose father is in retirement and just moved to Nebraska for that very reason, better quality of life due to lower costs, and a big part of those lower costs can, in some cases, be lower taxes. Maybe it’s eliminating state income tax by moving from California to Florida or Texas as so many have done. However, there’s other considerations.

In states like Texas, you’ll avoid state income tax, but pay extremely high property taxes. So if you’re in retirement, that might not save you a lot of money because you don’t have a lot of income and maybe you have a nice house. So there’s certainly more to consider than just income taxes, but rather looking at your total taxes. Maybe you’re somebody who loves shopping, you know who you are, so you’re going to move to Oregon. I’m paying no sales tax. Hey, before you do that, just know you have to pump your own gas.\

And as someone who went to undergrad in Oregon, I can tell you I’ve wasted way too much of my life sitting in my car waiting for the gas attendant to come over and start the pump. Don’t get out. Don’t try to pump it yourself. They will slap the back of your hand. So there are trade-offs with all of these choices, but the reality is that we live in a more mobile society today than ever before and there are financial implications to our resident state, and to discuss this further is Creative Planning Senior Tax Director Ben Hake. Ben, welcome to Rethink Your Money.

Ben Hake: Thanks, John. I’m excited to be back.

John: So let’s start off at 30,000 feet. Generally speaking, Ben, what should people factor in when considering moving states?

Ben: We’ll start with the income tax side. So a lot of people, and you hit a lot of the common ones, Wyoming, Texas, Florida, generally speaking, it’s either warm, it’s got nice sights, and has very low income tax, but where a lot of the times I start with my clients is when you retire, how are you going to live? How are you going to pay for your things because a lot of states have very advantageous tax laws for retirees. So the vast majority of states aren’t taxing social security benefits. There are a number of states, actually even throughout the Midwest and in the Northeast, that aren’t taxing pensions, 401(k), IRA distribution.

So if that’s going to be the makeup of your income, yeah, you could move down to Texas or Florida to be able to save some income taxes, but when you compare to what you’re actually going to pay at your resident state or where you’re currently living, it might not be, hey, I’m comparing 8% to 0%. It’s just the interest in dividend component, and so I’m paying effectively 1% on my income versus zero and that’s when we start to look at some of the other taxes where it’s like, yeah, that may be the case.

But when you go down to Texas, they still have roads, they still have fire departments, they still have schools and they got to pay for them. A lot of the times, you’re going to see that in either higher property taxes, higher personal property taxes, sales taxes. There’s a variety of ways that the state’s got to finance it. So it’s not just quite as simple as looking at your tax return and saying, hey, last year, we paid 10,000. Now it’s going to go to zero. There’s the savings. You got to look at it holistically for those purposes.

 John: And it really picked up during COVID. You saw the ability for people to work from wherever and that’s when people started thinking to themselves, am I unnecessarily paying extra taxes and potentially living in a place that I was only at because that’s where my company said I needed to be? I think that was where the mobility really kicked in, and I saw a lot more people wanting to move states to not just save on taxes, but for a better quality of life all around.

Ben: Yeah, that’s definitely, I think five years ago this was a retirees or people maybe looking to change homes, downsize, get to a place where maybe they liked it a little better, and since COVID, we’ve been having this conversation with a lot more families, a lot more people who are in the midst of their career, but yeah, again, they’ve got that flexibility where going in the office isn’t required. So why live in California when Wyoming, Colorado, some other western states are available as an option as well?

John: Maybe it’s just the beach though. Maybe they just want to surf. Maybe the beach is worth 13% state tax. Let’s talk retirees, Ben. What do you think retirees specifically should be considering?

Ben: Well, a lot of the times, again, we look at it from a financial standpoint, but the thing maybe even before we do that is, is this something you want to necessarily do? Generally speaking, you’re not going to be able to move your entire extended family. So you may have grandchildren, you may have children that right now are 10, 15 minutes away in town. If you’re going to move down to Florida, you might not be able to see them that easily. So a lot of people aren’t just wholesale severing. A lot more people are going to say, hey, I’m going to winter down there, or I want to spend some time down there and I’ll already be there.

What are the options I can look at to maybe save a little in income taxes? So the big thing is if you want to be a resident of Florida, you got to be there for 183 days or over half of the year, and then you got to do some of the simple things like register to vote and hopefully vote there, get your driver’s license and set up your life there because Florida’s never going to harass you about becoming a resident there, but your old state, California, New York, Maine, Massachusetts, some of those ones on the coast, they can get aggressive, especially if they think that you might be possibly trying to dodge a fairly large tax bill.

John: Yeah, that makes a lot of sense. How about for employees?

Ben: The employee side, that’s a little unique too because again, most people think, hey, my employer’s in New York and I moved to, let’s call it North Carolina, I want to be a little closer to the beach. That’s pretty simple. I’m going to now pay North Carolina’s tax rates, and states have a lot of rules in place where they want to get their clause in you and get those tax dollars back. So New York’s a great example where they say if you’re just living down there for your convenience, New York’s still going to tax you on your income even though you’re living in a different state, and when there’s a couple of other rules, if you’ve worked for some tech companies that have got some equity grants that maybe you worked in California for a long time.

And right as those start to vest and become real money, you move to Wyoming, California’s got rules in place that say, hey, if the bulk of that was earned there or some portion of it was, we’re going to tax you pro rata on our share of it. So even though you’ve moved and it feels like in that scenario, maybe you’ve even sold your property in California and New York and you only have the one house now, those states can still come back and get you on those items. So it’s definitely something that as you consider those moves, don’t just assume it’s going away, but might be a good thing to talk to your tax professional, make sure you’re not going to get an unwelcome surprise from our old state a couple of years down the road.

John: I’m speaking with senior tax director here at Creative Planning, Ben Hake. How about when there’s a little more ambiguity? I think it’s a bit easier. If I’m a retiree, I fully sell my home, I move to a new state, I change all my doctors, get a new driver’s license there because I don’t even have a home anywhere else, that’s a little more clear cut. How about for the person who is trying to play the game? Let’s just suppose someone’s listening and says, “I’ve got some flexibility here. I’m probably going to maintain two properties. Clearly, one of the states is a better place for me to set up residency from a financial perspective.” What are the considerations that you would remind that person of?

 Ben: So, the first one, each of the rules for each state’s going to be a little different because no one can make it easy, but generally speaking-

John: I think that’s very key though, Ben. I think people need to understand it’s not just Ben’s going to give you the answer for all 50 states. It’s very specific to individual states.

Ben: Correct, but generally speaking, the big thing is going to be physical presence. So at a bare minimum, we got to be 183 days in those other states. Now you can look to what’s happened under residency audits from some of these states. So some of them are going to say, hey, that’s all well and good that that’s what you said. Give us your credit card records and we’re going to go through every transaction and see where those originated from. Give us your cell phone logs and we’re going to look where every single one of those initiated from.

So it’s not just I have a calendar that said this is where I stayed that night. The states will look at those things. So we want to be cognizant that we’re not just saying on paper that’s what we’re doing, but that we’re actually doing those things. Now, some of the other is, again, it’s interesting what the state looks at when they audit. There’s been audits where when the auditor’s there, they’ll open up the fridge and say, okay, what’s in here? Does this seem like a house where somebody’s actually living in, but as soon-

John: It’s crazy.

Ben: Yeah, I was going to say, so make sure if it’s like my fridge, lots of condiments and maybe occasional leftovers that should have been thrown away a week ago, but generally speaking, those are the things where in addition to just making sure you’re dotting your I’s and crossing your T’s, you actually want to be there the 183 days and then do as much as those other things, but it’s really a documentation item versus anything super sophisticated that you got to do.

John: Arizona had some legislation a while back that made the top state income tax rate significantly higher, and so there was a lot of conversation in Arizona about this and it was during COVID, so people were like, “I’m just going to buy a house for 250,000 outside of Houston, Texas and claim Texas residency.” It’s like, well, your kids still are enrolled at a school in Arizona. You really still live in Arizona. It sounds great, but that is not going to work. I think these are really good reminders that you actually do have to live where you’re claiming residency. So does it make sense for someone to move?

Ben: It really is going to be specific to each person’s set of facts, but I would say there are times definitely where it does make sense. I hate to pick on California all the time, but we’ve got some people that are consistently paying 10% plus on their income and although they love the weather and all those sorts of things, by moving to another state, they can drop, in some scenarios, even six figures in their annual tax expense there. So there’s definitely cases where it is, but I think more often than not, people shouldn’t just be looking at the dollars at the bottom, but is it again, are we going to move away from friends and family? Are we going to go to a location where maybe we don’t know the right community they want to live in? So there’s a little bit of risk there.

John: Would you say that a typical scenario where it might make sense is if you’re going to have a windfall in a particular year that you can forecast, maybe it be selling a business or inheriting a lot of taxable money where it may make sense to preemptively, a year or two in advance, move states knowing that you’re going to have a once in a lifetime type of event so that we’re able to save, in some cases, I’ve seen people save seven figures because it’s a huge transaction and they’re not living in that state any longer like New York or New Jersey or California?

Ben: Correct. And a lot of the time, it’s going to be a lot of planning that goes into that. Just like you said, we’re hoping to do that a year or two in advance, and I also advise a lot of my clients, you don’t want to just be a Florida resident from one year. If we do that, the state’s going to say, well, in ’21 and ’23, you were in New Jersey, but in ’22 when you made $15 million, you were in Florida, that might stand out.

John: And if you’re listening and you are an aspiring professional golfer like myself, who’s actually not anywhere near ever going to achieve that, keep in mind that I’ve seen professional athletes’ tax returns. There’s always a conversation when a free agent, they’re going to pick the Dallas Mavericks or the Miami Heat because they have no state tax, and if they go to the Lakers, they’ve got to pay California state tax.

But actually, all of those road games where they play in these other arenas, those states take a portion of their overall salary. So it saves them money on about half of their games, but not on the away, and my point in the golf scenario is it probably doesn’t matter as much for those people where they live necessarily because they’re earning money at all these various tournaments. Would you say, because I’ve often wondered this, for endorsement deals and things like that, they’re able to benefit by living, a lot of the golfers live in Jupiter, Florida, for example, just per the location, maybe they’re able to save on that, but they’re still paying state tax when they win a tournament at Pebble Beach, probably paying California on that?

Ben: Exactly. That’s exactly correct. We also run into that with business owners. My business is going, we’ve made it really successful. I don’t even have to be engaged in the day-to-day as much. Can I move down to Florida? Well, if you’ve got a factory in California or whatever state where that’s all being earned, that income is still going to be taxed there until you have a liquidation event. Now, again, those could be structured where, hey, I’m a Florida resident, I’m getting all my cash and that’s where it’s going to be taxed, but generally speaking, the operations are still going to be taxed at whatever state it’s being performed in. So there are some nuance there that just becoming a Florida resident may not in and of itself save you a whole lot of income tax.

John: Yeah, and that’s the point. You really want to plan for this. You really want to have great advice. It’s interesting that you use business owners. You feel like maybe there’s more business owners listening than tour players on PGA right now, so maybe that’s a little more relevant of our other-

Ben: Maybe that’s my client.

John: Scenario. No, but it’s great advice, Ben. You really want to talk with your CPA, talk with your wealth manager, talk with your attorney, make sure that you’ve thought through everything before you make a life altering move where you’re uprooting your life because let’s face it, where you live is a lot more than just about the taxes.

Ben: Exactly.

John: Well, Ben, this was an interesting topic. Look forward to having you back again on Rethink Your Money.

Ben: Thanks, John.

John: Well, one of my coworkers here at Creative Planning shared a hilarious story with me that just applies perfectly to all of our personal finances. She has a husband, who mind you, is six feet, four inches. This is not a small man, and the guy refuses to buy a king-size mattress because you know what? That would require not only a mattress, possibly a box spring, but more importantly, a new headboard, and they already spent money on a headboard. Did they spend money on it last year or maybe the year… No, they spent money on it 12 years ago, but he’s pretty tied into this thing. To add more to this story, she mentioned to her husband after talking with a few of us in the office that we all thought he was nuts.

That he spends eight hours every single day on his bed, this would be a worthwhile investment. I know. Got to give up the headboard from a decade earlier. You can do it, but when she brought that up to him, he said, “But you didn’t tell him about the comforter. We’d have to get a new comforter that we already bought for this size bed that won’t fit anymore.” I asked her and she said the comforter was $50 on Amazon, and while it’s pretty humorous to laugh at other people’s irrational money moves, it’s probably a good thing that we’re not closely evaluating just how nonsensical all of us are from time to time with our money.

And one of the reasons we make these irrational decisions is out of what is called the sunk cost fallacy, which is our tendency to follow through on an endeavor if we’ve already invested time or invested effort or money whether or not the current costs outweigh those benefits, and the problem is this sunk cost fallacy can become a vicious cycle. We’ll continue to pour resources into these endeavors that we’ve already invested in. That whole idea of throwing good money at bad money is where this term comes from. It’s describing this sunk cost. The more we invest, the more we feel committed to continuing the project, which in turn means the more money and time and effort we’ll likely continue to put in.

Now, it’s one thing to joke and laugh, which we absolutely should, about a tall man sleeping in a very little bed because of this sunk cost fallacy, but what other important things in your life and with your money may in fact be suboptimal as a result of this sunk cost bias? Here are the two most common examples that I see as a financial advisor. The first pertains to investments. I already bought this mutual fund. I already bought these stocks. I already bought this bond at a certain price and I already made that decision and I spent time researching that money move, so I want to hold onto them. The stock or bond or expensive garbage variable annuity that you were sold doesn’t care what you bought it for.

An easy way I advise to combat this, imagine the million dollars that’s in your IRA that’s invested in securities that you have sunk cost bias toward was simply a stack of $100 bills just all piled up. They weren’t invested in any particular security, and now you had the choice today in 2023 to build an investment allocation relevant for your current goals, for your current wishes, for what you know to be true today. Would you buy those exact same securities? In many cases, the answer is no, and the other practical example I see is regarding financial advisors. You may be thinking to yourself, well, I’ve already worked with this person for a really long time. We’ve been over there for 10 years.

We have so much history with this financial advisor. Doesn’t matter. Don’t let your sunk cost impact your future decisions. Let’s use the pile of money example again. Million dollars falling off your dining room table, $100 bills everywhere. You don’t want to do it yourself because you either don’t have the expertise, the time, the desire, or some combination of the three. You decide you want a financial advisor. Are you going to the exact same financial advisor you currently work with if you had no relationship with them? They were just one of the hundreds or thousands of advisors that you had to choose from based upon your criteria, would you rehire that advisor?

If you’re not sure or your answer is probably not, then why are you continuing to stay with them year after year? Well, it’s because of sunk cost and we’re all susceptible to it if we’re not aware. Well, it’s time to rethink the common wisdom that if you put in a lot of effort, you can beat the stock market. Now, this line of thinking is in fact rational. With most everything in life, the more effort we put in, the better our expected outcomes are. With investing, it’s simply not true. I’m going to post a chart to the radio page of our website if you would like to view it, but I’ll give the cliff notes now.

If you look at all large cap funds, which are essentially trying to beat the S&P 500 index, according to Morningstar over a one-year period, it’s about a coin flip. About 51% underperform and about 49% over-perform. Every three years, 74% of large cap fund managers underperform. Over a five-year period, 86% of fund managers lose to the index. Over a 10-year period, 91% of those fund managers lose to the S&P 500, and over a 15-year period, 93% of funds underperform the simplest, lowest cost, most diversified index itself. The chart also shows mid-cap managers and small cap managers. The results are the same. In fact, last month, Creative Planning President Peter Mallouk commented on this very topic here on Rethink Your Money. Have a listen.

Peter Mallouk: It’s interesting because when we start with the bias, if you’re talking to somebody who’s got 500,000, one million, five million, this is a small part of the population. It’s not a big part of the population. They tend to be more successful. Sure, some of them are lucky, but most of them worked really hard, they saved a lot, they’re really diligent. They’re good at repeating the behaviors that create wealth, and so their whole lives, their brains have been trained to believe, which is accurate in almost every field, the more effort I put in, the smarter I get, I will get an edge over other people. This works in professional sports.

It works with architecture, engineering, medicine, law. It works in construction and so you expect, well, I’m going to enter this area where there’s millions of people investing, and of course, if I try harder or get smarter or some combination, I will beat them. So it’s a natural feeling to have, and what’s different about the markets is there’s so many people in them that you have so much smart money on both sides of every trade that it’s very hard to beat it enough to win, winning meaning after fees and taxes, that you’ve beaten just buying and holding a basket of securities and rebalancing and tax harvesting and things like that. So there’s just enormous bias comes into play that makes us want to believe that we can beat the market, and that’s the starting point of all of the big mistakes that happen along the way.

John: You see more effort when it comes to trading and investing, it doesn’t correlate to better returns. Our second piece of common wisdom to rethink together is that the economy’s more uncertain today than it usually is. Yeah. Well, we talked about sunk cost bias earlier. This is a great example of recency bias. Things that are happening now seem more impactful and more important than similar events in the past. In 2013, what we were worried about, government shut down, US stock performance. What’s this new thing called Bitcoin? Is Europe going to recover? We’ve got rising interest rates. How about this one? Remember Obamacare. In 2018, we were going through a trade war. Trump just implemented a bunch of tax cuts.

Yikes. Our deficit’s going to even go through the roof more, and the Fed raised interest rates and we’ve heard a lot about that recently, but they raised interest rates three times in 2018, and now here in 2023, and we’ve been hearing about a recession forever. Not too long ago, it was all about how to control inflation, get used to uncertainty as an investor. If you want certainty, you have to accept very low returns. So I’d like to encourage you, if you are waiting right now to invest money because things feel uncertain, you’ll never invest. They are always uncertain, and there’s no reason to think that right now, the economy is more uncertain than it usually is. It is time for listener questions and to read those, one of my producers, Lauren, is here as always. Hey, Lauren, who’s first?

Lauren Newman: Hi, John. So the first question I have today is from Harry and he writes, I have a general question regarding social security. The government keeps saying that social security will run out of money by 2030 or 2035. Do you know if the US government took money from the Social Security Fund to fund other government programs, which means the government would owe the money back to the fund?

John: Yes, the US government has in fact borrowed from the Social Security Fund, but they do so with a little bit of a positive spin because they have to pay it back with interest, but the main reason why it’s underfunded at this time is that we’re living way too long, and I know you’re laughing right now. You’re saying, wait, that’s a bad thing? Isn’t that a good thing? Well, it is for our relationships, assuming that we’re healthy and still have a great quality of life. We get to see great grandkids and spend more time with our kids and grandkids and spouses, but it’s not good for social security.

Consider that it was enacted in the thirties. At the time, full social security age was 65. An average American life expectancy was between 62 and 63 years old. This was old age poverty insurance. If you happen to still be alive and you’re in your sixties or seventies and you’re out of money, here’s a social program that will provide a safety net. Now, more than half of American retirees rely on social security for over half of their retirement income. Nearly a quarter of American retirees rely on Social Security for 100% of their retirement income. Many are electing the income benefit at 62 years old and living to 100.

They’re receiving this for 30 to 40 years, which again, to be clear, at the time this program was put in place, that longevity was simply not baked into the calculations. The program was stressed even further with how large a generation the boomers are, and of course, are now going on social security. This program is not going away. It would have a catastrophic impact, but something’s going to have to change. A few of the proposals that have been thrown out there, it may shock you, the Republicans and Democrats have different ideas for how to get Social Security back funded properly.

Some of the ideas thrown out there by Democrats are to potentially raise the tax rate, just have more come out of paychecks towards Social Security and/or remove the wage cap on social security taxes. So once you make over $160,000, you’ll still see Medicare taxes coming out of your paycheck, even if you make a million dollars a year on all million, but Social Security stops at that 160,000, which is why, by the way, practically speaking, even if you made a million dollars per year, you don’t get into retirement and all of a sudden have a $12,000 a month social security benefit. You have the same amount as somebody who made 160,000 because you paid the same amount into Social Security.

Medicare, not the case. Medicare does utilize a redistribution of wealth concept by taxing the super high income earner on all of their wages, but then not giving them any better Medicare benefit than the person who made $40,000 per year. Republicans have thrown out the idea of delaying full retirement age. It was 65 back in the 1930s. We’ve only moved it to 67, yet we’re living decades longer. Republican proposals are to push back that full retirement age from 67 to maybe closer to 68 or 69, and Harry, one or a combination of a few of these will eventually likely be passed to ensure that Social Security continues chugging down the tracks, and if you have questions like Harry, submit those to radio@creativeplanning.com. All right, Lauren, who do we have next?

 Lauren: Okay. So our next question comes from Terry in Boise, Idaho. He writes, I have been thinking about my finances and wanted to get your take on using a cheap, no frills financial firm or going with a full service one. Is there ever a situation where a cheap option might be better?

John: Great question, Terry. I actually just had this conversation with a prospective client earlier this week and he’s currently using a lower cost provider, and this is what I told him as well. If you’re someone who pretty much likes doing their own investing, you’ve got the time, you have the expertise, you feel like you have the desire to do it, but you do want someone looking over your shoulder and when you reach out to them, they may be able to answer some basic questions, but you’re not looking for full service. You’re not looking for someone to be handling your investments on your behalf and managing those.

And you’re not looking for someone to be tax loss harvesting and reviewing your estate planning documents and having attorneys update those, identifying ways to reduce your taxes through strategies of charitable giving and whatever else it might be, then a lower cost, more self-directed approach may be fine, but in the case of my meeting this week, this person has a special needs family member, they’re in their seventies and desire continuity if something were to happen to the family CFO who’s been running point on their planning, and the complexity around their taxes in their estate has increased.

So they actually want someone else to be helping identify what they could be improving and guiding the ship, not just waiting to receive calls and answering basic questions. So I think it really comes down to what services you need and then whether you find value in paying for those. People that work with a firm like us at Creative Planning are saying, I want a written, documented, dynamic financial plan. I want guidance around my taxes, my estate planning. I want help on Medicare, risk management, continuity for family members through your trust company potentially, and not that all of our 60,000 plus clients at Creative Planning need every one of our services.

We have all sorts of in-depth business services and bill pay and accounting and cybersecurity, and our retiree clients who are not business owners don’t need that, but we have those services offered because we really want to help our clients with any circumstances that come up in their life that involve a dollar sign. There’s no right or wrong answer. It really comes down to how much help are you looking for and are you someone kind of likes doing it yourself, but doesn’t want to be entirely on an island, or are you someone who is looking to delegate your situation to a team of professionals? All right, Lauren, last question.

 Lauren: Next, I’ve got Merrick in Houston, Texas. She writes, hi, an attorney I know recently recommended that I look into a charitable remainder trust. I don’t have a ton of knowledge about that. Can you tell me what this is exactly and why I would want one?

 John: So, a charitable remainder trust, which you’ll hear referred to as a CRT, is an irrevocable split interest trust with charitable and non-charitable components. I know you’re like, wait, now I’m confused. What are you talking about? Let’s unpack this. CRTs are created when a donor gives property to a trust, names a non-charitable income beneficiary, most often the donor him or herself, either for life or for a set number of years, and then they’ll ultimately name a charity as the remainder beneficiary. That’s where the remainder comes in, and there are really two common types, the first being a charitable remainder annuity trust.

That pays a fixed annual annuity amount to the non-charitable beneficiary. So in most cases, it’s the individual that sets this up. Every year, they’re going to get money from this, and regardless of whether the property and the trust increases or decreases in value, the annual payment always remains the same. The second type is a charitable remainder unit trust. That pays to fixed annual percentage to the non-charitable beneficiary. So instead of a fixed amount, which is a contrast to that CRAT that I just described, the charitable remainder annuity trust, a CRUT, charitable remainder unit trust, annual payment will fluctuate based on increases or decreases in the trust value.

So Merrick, I don’t know why you’re considering this, but generally speaking, the reason you would is first off, because you’re charitably inclined. This doesn’t make sense just to try to get a tax break if you ultimately don’t want to give money to a charity. This is someone who already says, I want to get money to charities. Well, this is a way for the individual to benefit from an income stream standpoint while still getting a partial deduction for that charitable contribution that’s going to come down the road and you get that deduction now. Here’s, Merrick, what I would consider though before executing one of these. It’s a big decision. There are payment limitations.

So federal tax rules will limit the annual payment amounts to ensure that the charity is projected to actually receive at least 10% of the initial asset value, meaning you can’t say, well, I’m going to do this thing and then just get a ton of income out of it where there’s probably going to be nothing left over for the charity and still think you’re going to get a deduction. There’s rules around that. Additional contributions is a consideration. That CRAT, the annuity trust, cannot accept additional contributions where the CRUT, the charitable remainder unit trust that I described can make further contributions to the trust in later years.

So that may be a reason that you pick one versus the other depending on if this is going to be just a one-time deposit or you expect future liquidity events. Another consideration is the tax status. These are especially useful for donors who have low tax basis assets that have appreciated significantly. A lot of folks do this after selling a business that’s almost entirely capital gains. If you happened to buy Apple back in the 1980s and it’s now worth $50 million, might want to consider this. Don’t know Merrick’s situation. Probably not a lot of people listening saying, yeah, that’s me, but if it is even to a lesser degree, that highly appreciated security type scenario is where these can work really well.

Well, Merrick, I think you’re thinking about the right things, and if you have more questions and you’d like to speak with one of our attorneys or a certified financial planner here at Creative Planning just like myself, you can visit creativeplanning.com/radio right now for a second opinion. Well, as I do each and every week, I’d like to close with a discussion around why any of this even matters. You work hard, you squirrel away some money, you invest it properly, you have a great estate plan, you’re doing everything you can to legally minimize taxes, you’re financially independent, you’re able to retire. Well, it sounds pretty good, right, but then what? You see, money’s not inherently valuable.

It’s a tool that can be used for other aspects of your life that are valuable, and I want to share an inspiring story of a guy named Hody Childress. He was a farmer living off of his meager retirement savings in the small town of Geraldine, Alaska. About 10 years ago, he walked into Geraldine Drugs and he pulled aside the owner, her name was Brooke Walker, to ask if there were any families in town who couldn’t afford to pay for their medications. I told him, “Yes, unfortunately that happens often,” recalled Walker, who’s 38 years old, “And he handed me a $100 bill all folded up.” Childress told her to use it for anyone who couldn’t afford their prescriptions.

He told her, “Don’t tell us soul where the money came from. If they ask, just tell them that it was a blessing from the Lord.” The following month, Childress returned to hand Walker another folded up $100 bill and he repeated this every month for years, but as the years went on, Childress’ $100 bills added up to thousands of dollars, she said, noting that she was usually able to help two people every month who didn’t have insurance or whose benefits wouldn’t cover their medications and they otherwise couldn’t afford it. What a cool story. I think there are a few components that are great takeaways for you and I.

How about first off, that Hody Childress was not a wealthy individual, but he gave what he had. Second thing he did, he wasn’t walking around this small Alaska town with a giant check, you know those huge ones, saying, look at what I’m donating. Aren’t I amazing? He discreetly and anonymously was helping people, not because he wanted the recognition, but because he genuinely wanted to better other people’s lives, and this concept around generosity is not radical. It’s not something we haven’t all heard of before. Research suggests that many people, they think that spending money on themselves will make them happier than spending it on other people.

But there is a mountain of evidence from various studies that directly contradict that premise, and there are a few reasons I’d like to highlight for that. Number one, when we give to others, it helps promote a view of ourselves as responsible and giving people, which in turn makes us feel happy. It improves our self-esteem. Giving to others also helps cement our social relationships. Being generous with those in need creates a deeper connection with them. Giving to others also triggers within us, even if it’s just subconsciously, that we’ll be okay, that we don’t need to have a scarcity mindset, that we’ve got enough, and by giving to others, we’re reinforcing that.

Lastly, giving to others is an act of humility. When I look at my personal situation, I’m quite confident that much of what I have, and it’s far less than so many others, but what I do have is the result of a lot of factors that were completely out of my control. Have I worked hard? Sure. Have I tried to apply myself and treat clients and coworkers with genuine care and respect and follow through? Yeah, of course and that certainly played a role in my present circumstances, but so much has been out of my control, like being born in America, like living in the golden age right now in 2023 where we have access to modern medicine and information and knowledge like never before. We get on an airplane for a couple hundred dollars and fly across the country.

What a great time to be alive. I had access to great education, and all of those things played a huge role in my life. I didn’t do anything for them. You see, when you give to others, you’re acknowledging that you’ve had enough go right in your life that you’re now in a position to help others who have had less go right in theirs, and that willingness when we lower our pride and we pause, which is key here too, to be mindful of just how blessed we are prompts a generous spirit. We’re born with a purpose greater than simply advancing our happiness, and we find meaningful purpose when initiating good deeds for others. May this be an encouragement to you as we remind ourselves that we are the wealthiest society in the history of Planet Earth. Let’s make our money matter.

 Announcer: Thank you for listening to Rethink Your Money, presented by creative planning. To hear past episodes or learn more about the topics and articles discussed on the show, go to creativeplanning.com/radio, and to make sure you never miss an episode, you can subscribe to Rethink Your Money wherever you get your podcasts.

Disclaimer: The proceeding program is furnished by Creative Planning, an SEC registered investment advisory firm that manages or advises on a combined $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.

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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