Things aren’t as bad as we think. Despite all the market ups and downs of the past few years, there are a lot of positive signs. Join John as he presents the argument for having financial optimism regarding your wealth and retirement. (2:13) Plus, hear from Creative Planning’s Chief Investment Officer, Jamie Battmer, about what we’ve seen so far in 2024 and what you should be focused on. (11:00)
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, why things are good. Yeah, I said it. Things are really good. Why chocolate bars could take a bigger bite out of your wallet than they typically do and one of the most surprisingly enormous expense items for Americans. Now, join me as I help you rethink your money.
Almost 20 years ago I was an airline pilot and two trips from my time as a pilot really stand out to me. The first was a flight going into Reno. Reno’s Airport essentially sits in a bowl with very complicated arrival procedures. We had a blistering crosswind, and the pilot was legitimately, I feel bad saying this, but the worst stick I had ever flown with. Now, mind you, I’m in my early twenties. I’m a first officer with far less experience, but it became obvious that I was going to need to help this captain. We landed safely, but passengers, I can tell you, were not commenting on a smooth landing, giving us high fives as they exited the aircraft. That’s for sure. I was not about to be the one standing at the door of the cockpit wishing everyone a farewell. I’m like, you can do that after that landing. I don’t want to be responsible.
The mini lesson here goes back to a financial planning nugget that I said last week on this show, which is that your pilot is far more important than the weather when it comes to aviation as well as when it comes to your personal finances and your financial advisor. You will experience both good and bad markets. Plenty of both and you want someone navigating who has experience, who has precision, and who’s seen this all before. If you enjoy the show last week’s episode and all previous episodes are available on the radio page of our website at Creative Planning, or you can subscribe to Rethink Your Money wherever you listen to podcasts.
Anyhow, that was just a tangent for my main point, which is my second memory as an airline pilot. I flew on a four-day trip with easily the most negative person I’ve had the displeasure of being engaged with. Remember, this is important to note. I was trapped in a five by eight-foot locked cockpit for the majority of 96 hours. I remember the first leg I commented, “Man, it’s beautiful up here. It’s smooth air. It’s going to be a good trip.” Captain goes, “Ah, I need different sunglasses. It’s so bright up here.”
Next, I’m dunking some Biscoff cookies into my coffee, commenting on how delicious they are. He’s like, “Oh, the old ones we used to have were way better. They were a lot sweeter. They switched to these other ones a while back and I can’t stand the aftertaste.” “Hey, I saw our hotel is right downtown Nashville. This is going to be a good overnight on day two. It’s a great spot.” His comment, “It’s always loud downtown. I sleep terrible at that hotel,” and on and on and on. I’m like the hype guy trying to get him excited about things and it was like every single thing was the worst thing ever.
It’s such a great reminder that our perspective, not our circumstances will drive our contentment. To that point, if you are a pessimist looking for negativity, you’ll complain whether you’re overnighting in Nome, Alaska or on the beach in Fiji, one of those glass bottom huts with a water slide off of it. I’m going to get sunburned. It’s too far away. While this may sound ridiculous, I interact with prospective clients and a handful of current clients who like to complain when it comes to their finances, when it comes to the economy, when it comes to the stock market, and maybe somewhat surprisingly the size of their portfolio, their actual circumstances from a financial perspective, doesn’t correlate to their peace of mind or their satisfaction.
Consider this, stocks are near all-time highs. Unemployment is near all-time lows. Gold is near an all-time. High real estate is at or near all-time highs. Bitcoin and crypto, and if you speculate with that, that’s near an all-time high, and bonds are paying around 5%. Yeah, markets are experiencing some volatility recently, mostly because inflation is still running hot, but that’s because people have jobs and are still spending money. The idea that even when things are better than anyone in the past could have ever predicted, there will still be certain people who worry and who complain.
I had a family member of mine text me a YouTube clip of some millennial economist, and I don’t mean that word millennial to be derogatory, I am a millennial, but it was a classic interview for 15 minutes of cherry-picked data points basically explaining why everything sucks and why the world is terrible. I had another friend who asked me if I was worried since it seems like so many businesses aren’t doing well. “We’ve talked to a lot of people. John, small businesses just are not doing well.”
I don’t want to minimize by the way, there are certainly in a country of 330 million people, those who are doing better than others, and there will always be people who aren’t doing well and who are struggling, and I don’t want to minimize that pain, but I’m speaking broadly here. We love fear. We love caution, and I think in a lot of cases it’s because it feels more intellectual than optimism. Pessimism’s seductive.
The late great Hans Rosling wrote one of my five favorite books easily of all time titled, Factfulness: Ten Reasons We’re Wrong About the World and Why Things Are Better Than You Think. Hans describes the negativity instinct, which is our tendency to notice the bad more than the good. We all do this from time to time, especially if we’re not self-aware and we’re not careful. Rosling invites the readers to think of the world as a premature baby in an incubator, and I love this analogy.
He writes, “Does it make sense to say that the infant situation is improving? Yes, absolutely. Does it make sense to say that it’s imperfect that it’s still not great? Yeah, absolutely. Does saying things are improving imply that everything is fine and that we should all relax and not worry? No, not at all. Is it helpful to have to choose between bad and improving? Definitely not. It’s both. It’s both, better and bad at the same time. This is how we must think about the current state of the world.”
So, I want to encourage you when you hear about something terrible, calm yourself by asking if there had been an equally large positive impact, would I have heard about this. You see being factful is remembering that good news is not news. Good news is almost never reported. Also, that gradual improvement is not news. When a trend is gradually improving with periodic dips, you’re way more likely to notice the dips than the overall improvement, and how true of the stock market is that. It’s averaged 10% per year for a century. Yet, we pay way more attention to the one out of every four or five years that we experience a bear market, rather than the simple fact that long-term diversified investing has compounded your wealth in a manner that doubles your money every seven to 10 years by simply owning at extraordinarily low cost with very low friction some of the best companies in the entire world.
Also, factfulness is a reminder that more news does not equal more suffering. More bad news is sometimes due to better surveillance of suffering, not a worsening world. Remember, as a result of the internet and social media, we can now see the worst things as isolated as they may be from a planet of 8 billion people in real time. Well, that’s very different than reading your local newspaper because in your town awful atrocities aren’t going to happen every 10 minutes like they will across the entire globe that you now are aware of.
So, I remind you again, things are pretty darn good. Only 13 countries representing 6% of the world’s population are still inside the developing world. So by all objective measurements, the world is getting better. Extreme poverty is being reduced. Health and nutrition and longevity is improving. While we may still have skirmishes here and there, certainly what’s gone on in Ukraine recently in the Middle East, it’s not perfect, but compare and contrast that with what we’ve seen over the past several hundred years when it comes to global instability in war, things are getting better.
Morgan Housel pointed out something that I think is very astute. We associate optimism with being naive, with a salesperson. Where pessimism, oh, you’re trying to help people. You’re being cautious. Frankly, pessimists sounds smarter than optimists. They’re more intellectual. They’ve thought through more things so they’re aware of the concerns that the optimist just isn’t smart enough to comprehend or isn’t detailed enough to identify. Housel said, and I quote, “A good bet in economics. The past wasn’t as good as you remember, the present isn’t as bad as you think, and the future will be better than you anticipate.” So, remember the next time someone suggests how bad or scary or maybe even how awful things are, remind yourself that you’re living in the most affluent period in all of human history.
It is time for this week’s one simple task where I help you make 52 improvements to your plan, one incremental move at a time. Today’s tip, confirm your assets are titled correctly and owned by your living trust going through probate is a lengthy process because each state has a statutory period where you have to leave it open for creditors to make claims. Usually that can be for six months, and probate is public. Anyone can look up your situation and see exactly who’s getting what. Do you really want people to know exactly how much your kids are getting and when they’re going to get it? I would think not.
So even if you’ve checked the box on setting up your estate plan, which may very well include a revocable trust, the key is making sure that your assets are titled and owned by the trust. Otherwise, it’s worthless. I’ll include an article on the One Simple Task section of the radio page of our website that offers details and suggestions on how to ensure your assets are titled correctly so that you can avoid some of these issues and costs for your loved ones.
My special guest today is Creative Planning Chief Investment Officer, Jamie Battmer. Jamie is responsible for leading the investment policy committee here at Creative Planning as we manage or advise on a combined $300 billion along with our affiliates. Prior to joining Creative Planning, Jamie served as Chief Investment Officer at Lockton Companies. Jamie has a master’s degree in economics and economic history from the London School of Economics. Jamie Battmer, thank you for joining me on Rethink Your Money.
Jamie Battmer: Hey John, thanks a lot for having me.
John: Quarter one ended a couple of weeks ago, markets have shown a little chop to start quarter two, but I want to focus on the first three months of the year. What did you see in that first quarter?
Jamie: It’s almost wild to say 2024. We should be in flying cars and stuff like that, but all we saw was just the continued momentum that started in earnest at the tail end of 2023. Essentially late October, October 27th, markets bottomed out. Full 10% correction, people freaking out, moving money to cash, moving money to bonds, their usually the exact wrong decision at the exact wrong time. After that, fed pivoted some of its language and really from that point on it was just rising tide, lifting all boats.
It turned out to be a great year for both stocks and bonds, which was great on the heels of 2022 being so difficult, but that momentum carried on into Q1 through the whole quarter. Very low volatility, continual high after high, it was just a continuation of what we saw at the tail end of 23. It was also nice, it impacted a lot of different investments and it wasn’t just a magnificent seven. Yet, those stocks were still hyperbolic. Of course, Nvidia, Meta. Apple was down 10% in Q1. A lot of people were saying, well, as soon as these things start struggling, the overall markets are going to struggle and that really just wasn’t the case.
John: The narrative that the biggest companies are propping up the rest of the market was certainly challenged with Apple’s poor performance. Yet, the market screamed onto new highs as you mentioned. I’m curious though your thoughts on the Fed. Let’s pivot there. Back in the day people would analyze things like how thick the chairman’s briefcase was as they walked across the stage and then deduce what policy decisions might be looming as a result. Any possible edge for information was prioritized. Certainly, that hasn’t changed in 2024, but the difference now is that the Fed not only talks. They talk a lot, and when they talk it as a material impact on the market movement. Jamie, why does the Fed have this much power?
Jamie: I’m a big believer in actions speak louder than words, but with the Federal Reserve, every word matters. Every word is analyzed. Literally changing a the to and, you say, okay, what’s that mean? How are they pivoting? So, the power this small group of men and women have to move markets is extraordinary. It’s usually a very good thing. Sometimes it can be a bad thing. Federal Reserve missteps not only reinforced but just furthered the Great Depression. Andrew Jackson hated the Fed so much, he literally blew it up. So, a long line of animosity towards the Fed really that growth that started in earnest the tail end of October. It was driven by the Fed very overtly saying We’re going to lower interest rates three times in 2024. Very specific verbiage that in my opinion was actually unnecessary to be so explicit. That’s essentially them saying we know what the future holds.
While they’re very powerful, their crystal balls are just as foggy as ours. They’re changing their dot plots all the time, and so being explicit with the number three was unnecessary, because what happens if they don’t have to do that? That means the economy is probably doing better than anticipated. Inflation still a boogeyman, but we’re within a healthy range. It’s under control. Two years ago it wasn’t. And so if they have to not lower interest rates as much, it means the economy’s probably doing better and then that’s great. That means people are having more jobs, doing well, can afford more stuff, and let’s save that dry powder for when the going really gets tough. The power is extraordinary.
The last thing I’ll say there is I really don’t like how oftentimes yes, they are servants and they work hard, very smart men and women, but as soon as they roll off the Fed, they start getting these huge speakership payments and they still move markets. Again, when Greenspan left, he still moved markets. He had no control. So for them to be able to have that power and also get paid six, seven figures to speak, that’s where the conflict is there. Yes, too much power in too few hands. I don’t feel like we need to blow up the Fed like Andrew Jackson did.
John: Yeah, I think some regulation is helpful, and I remember that week well in October. The market just took off like a rocket ship. I’m speaking with Creative Planning Chief Investment Officer, Jamie Battmer. What companies moved the needle in quarter one? We saw it wasn’t Apple. Which companies did move the needle?
Jamie: Well, Nvidia is still just the market, darling.
John: Ding, ding, ding, ding, ding. I knew that one was coming.
Jamie: Yeah. Meta, they’re a beneficiary of the excitement as well, but they parsed down the magnificent seven to the tremendous two. Usually when people start getting moniker things just like the FANGs, just like the NIFTY 50 in the seventies, that’s usually when the excitement’s already passed. Yeah, obviously-
John: It’s not fun, Jamie. It’s so much more fun to have some catchy names for it.
Jamie: Yeah. I get called lots of catchy names and not all of them are bad, but Nvidia, it has spiked higher. A few companies are still built into just the excitement of what AI can potentially unleash, but a lot of those companies and I hope it continues to do well. Hopefully, AI makes everything better, healthcare productivity, but a lot of the excitement I think is mispositioned with them because things have to work out really perfectly for those valuations to continue to be married.
Just like it had to work out perfectly for Cisco, for those valuations to move forward in the year 2000. Well, it didn’t happen. They’re gone, but the Internet’s still great. Just like AI’s probably going to be great, but if it’s not perfect, they’re concerned. So I think the markets are misreading it. It’s how it can make any company more efficient, more productive, reducing overhead, reducing time having to analyze things by 30, 40%. I think the downstream benefits there. Yeah, Nvidia is the darling of driving things, but a lot of companies are reporting strong earnings still.
John: I know that the company’s taken off when my dad, who’s only loosely interested in finance, just a little bit here and there, will send me some things. I was hanging out with him a couple of weeks ago and he said, “Man, I wish I had bought Nvidia way back.” So I know when he’s getting it. That’s downstream and it’s notable. Everybody really is paying attention to what Nvidia is doing and for good reason. The returns have been absolutely wild.
How was overall quarter one for the stock market? What were some key moments you saw? I talked with Chief Market Strategist here at Creative Planning, Charlie Bilello, and he was telling me that we’ve already basically beaten all analyst projections for the entire year in the first quarter based on what most were predicting. So it was a great first quarter. What were some key moments?
Jamie: Yeah, first off to your dad, tell him the great thing is he is purchasing Nvidia if he’s purchasing the S&P 500. So-
John: I told him it, Jamie. I told him
Jamie: That’s the great thing is so it’s working on your behalf even when you don’t know about. Just like when the world’s on fire and people say they wouldn’t be investing if someone held a gun to their head. Well, they probably still are because it’s happening automatically in their 401K. That’s the magic that makes it work.
Charlie and I are in agreement there that we blasted through the expectations already, but these were the same people putting their expectations out there. That thought at the beginning of 2023, for the first time ever, the S&P 500 they projected was going to be down. Well, no, it turned out to be 20 plus percent return. So these forecasts are way less accurate than weather forecast, but some reason we yell at weather forecasters a lot more than we do these people, and I’ve never fully understood that. So be nice to your local weather forecaster. They’re fact orally more accurate than the market forecasters.
Just like they were way off last year, they underestimate this year, because again, they have no crystal ball. These were the same group of people I mentioned to begin 2008, they projected the stock market was going to be up 11% on average, and it turned out to be down 39%, so they just missed it by an even 50%.
John: No big deal. Just a small miss. Can you imagine your local meteorologist saying this is what the exact weather is going to be nine months and four days from now. That’s basically what these forecasters are doing with the markets, and not only do people listen to them, they’ll act and move money around that they’ve worked a lifetime to save. Let’s shift over to bonds, Jamie. Anything interesting you saw there in the first quarter?
Jamie: Well, we saw slightly negative returns. Flat to negative returns, but that was on the heels of really strong returns in 2023, which was great. Because the real surprise, the bugaboo was by some measurements, 2022 was the worst year for bonds ever.
John: Which makes sense with how rapid rates rose.
Jamie: Absolutely.
John: When you actually look back at what happened, it makes sense, right?
Jamie: That’s the beauty. It works under mathematical principles. It’s not the animal spirits of stocks and that, yeah, inflation grabbed hold. We had to raise rates. Rates going up. Bond prices go down. So it didn’t put into question the integrity of bonds, even though we prefer to be owners versus lenders more often than not, but these were high quality bonds. Bonds issued by the government, bonds issued by Apple, they were still down seven, eight, nine, 10, 11, 12%. It was just a byproduct of interest rates having to move higher so quickly.
Then inversely this year, we haven’t had to lower rates as quickly as anticipated, because the economy’s continuing to chug along. So that’s led to mediocre returns in the public market space. In the private credit space, continues to perform very, very strongly. Again, it’s just a nice diversifier. It’s not better. It just brings a different risk profile to portfolios in regards to fixed income and the floating rate nature of most private credit terms makes it more receptive to interest rates spiking, inflation spiking. So obviously it really did great comparatively speaking in these choppy markets. Hey, nice thing is what was paying 0.5% for a decade is now paying 5%. So it’s a bumpy road to get there, but it’s not a dead end street, even though we are overweight to equities because of the long-term likely out performance.
John: 2022 was a practical reminder of what we know to be true and that is duration matters when it comes to bonds. People talk about how bad bonds performed in 2022 and for good reason. We know the data, but a long-term bond may have been down 35 or 40%, and a short-term bond was down three.
Jamie: People overly classify bonds as all conservative. Just not the case. We like to take our risk on the equity side.
John: Totally agree.
Jamie: Again, keep your bonds pretty stable, pretty conservative, shorter duration. High-yield bonds, they were called junk bonds until about 15 years ago.
John: Terrible marketing. Junk bonds sounds terrible, Jamie. Let’s go with high-yield.
Jamie: Yeah, some Wall Street marketing maven said, hey, I bet I can sell it if we don’t call it junk. Better, but it’s still junk. Again, if it’s going to go down as much as equities, but it doesn’t have the same type of upside, take that risk on the equity side, but still stay diversified in the fixed income side.
John: Gazing forward, what are you looking for in quarter two that may affect the markets? What data or reports are you watching? What changes might you make depending on what happens?
Jamie: Well, like we talked about and we’re picking on those other forecasters…
John: Give me a price target. What is the market going to do the next three months Jamie?
Jamie: If I go on right… Again, someone tells you what the market’s going to do over the next three months, six months, nine months. It doesn’t tell you anything about what the market it’s going to do, but it tells you everything about that person. Again-
John: That’s good. Yeah. You are a very smart man, but I wouldn’t want us acting upon what you think is going to happen in the next three months. What are you looking for?
Jamie: To be honest, a little bit of volatility is a good thing. After we’ve had this just tremendously calm run since late October, a little bit of chop is good, a healthy pause. I’m not saying I want a downturn, but that’s not a bad thing. Continued expansion of that it’s not just the markets are driven by a few stocks. That’s nice to see that the merits of a well-diversified portfolio are paying off again. We’re trying to see that.
I would like to see us not necessarily start to lower interest rates, where they’re projecting in June. Again, that happens because that means the market is continuing to surprise to the upside like the economy. I’d love to see another 10% quarter for large cap stocks, but the data says it won’t be. The historical data also says usually big gains beget more gains, and hopefully that pans out for our clients. Those are some of the key trends I’d love to see manifest themselves in the next quarter.
Most importantly, none of those are going to change anything in the way we manage money because again, the portfolio that’s right for you in the sunniest of market conditions should be the right one for you in the darkest of financial hours. If this volatility presents itself, we’ll rebalance. We’ll try and tax loss harvest. Readjust that way, but if someone’s making wild oscillations associated with their underlying asset allocation, that asset allocation wasn’t probably right in the first place.
John: I’ve been speaking with Creative Planning Chief Investment Officer, Jamie Battmer. Thank you for sharing your insights with us here on Rethink Your Money, Jamie.
Jamie: Thanks a lot, John. Appreciate the time.
John: Sometimes we look at others and we think that person is nuts. Like a slow decision maker thinks the quick mover careless, while the decisive person thinks spending another hour researching televisions for your family room is a colossal waste of time. In reality though, neither person is crazy, because all of us have unique upbringings and experiences that have shaped the way we see the world and in turn the way that we spend money or save money or give money. I bring this up because I saw a stat last week on the heels of the enormous lottery winner and it blew my mind. My first thought was, people are crazy. What are they thinking? Then I had to remind myself, no. No one’s crazy. They have reasons in their mind that make sense for the actions that they display.
Americans spent over 113 billion on lottery tickets last year. That’s more than they spent on movies, books, concerts, and sports tickets combined. To contextualize how much Americans spent on the lottery, it’d be the ninth largest company in the world. That’s mind blowing, isn’t it? The iPhone is a $200 billion a year business while Americans spend 100 billion on scratcher tickets each year. This recent price of over $1 billion is more than nine states in America spend on their education per year.
Now let me pause for a moment. If you happen to be the person who won the billion dollars, you might want to register for our upcoming webinar on how to properly manage a sudden windfall. You would fit into that category, and that’s being hosted by frequent guest of the show, Doctor of Psychology, certified financial planner and wealth manager here at Creative Planning, Dan Pallesen on April 23rd. I’ll have a link on the radio page of our website if you’d like to register. By the way, even if you maybe will just be inheriting a little less than a billion dollars or are maybe selling a business for, again, a little less than a billion, maybe it’s just a retirement windfall, and that’s okay, you can still register, again, at creativeplaning.com/radio. There is a link for that April 23rd webinar on what to do with a sudden financial inflow.
So, we spent 113 billion on lottery tickets last year. Maybe it’s because the odds aren’t that bad. No, that’s not the case unfortunately. The odds of winning the Mega Millions is one in 302 million. Now your odds of winning the Powerball are in fact better. They’re one in 292 million. To put that in perspective, you’re 19,000 times more likely to be struck by lightning than to win the jackpot. As the late great author Daniel Kahneman who wrote Thinking Fast and Slow said for emotionally significant events, the size of the probability simply doesn’t matter. What matters is the possibility of winning. People are excited by the image in their mind, the excitement grows with the size of the prize but doesn’t diminish with the size of the probability.
So why would we spend this much money on something that we are so unlikely to benefit from? A lot of it comes down to FOMO. We have a great fear of missing out, but again, no one’s crazy. Whether it’s the decision to buy a lottery ticket or a meme stock or a house during a housing bubble, it makes sense to us at the time. Isn’t it true how good we are at seeing clearly the folly of others’ mistakes, yet how blind we are to our own? Every decision we make, we rationalize in our head as we make it. We assume the weird decisions made with money only apply to other people and we judge people solely off of their actions, but when judging ourselves, we have an internal dialogue that rationalizes exactly why we made the decision we did.
So, here’s my final thought on the extravagant amount of money spent on lottery tickets. While the odds are awful, people buy them and people disproportionately buy them who sit in the lowest income cohort of Americans, the lowest income earners spend the most money in a dollar sense and an incredibly high amount as a percentage of their income relative to higher income Americans, which at first may seem, again, crazy. However, imagine you felt hopeless in your financial situation and many around you appeared to maybe not be billionaires, but practically speaking have already won the lottery. They live in a nice house, their kids are in great schools, they’re taking relaxing vacations, and in careers that are fulfilling. If that were your situation, you may feel like you’re only shot, as low of a probability as it may be, it’s better than zero. That’s how bleak certain people feel about their situation is to buy a lottery ticket, especially those who have experienced a generational cycle of poverty. So while I personally have never bought a lottery ticket, the people who do aren’t crazy.
Another piece of common wisdom that I’d like to rethink together is the more sophisticated investment strategies will provide better returns. I thought of this one reading an article on the California Pension Fund. We don’t need to look any further than this as an example. Hundreds of CFAs, hundreds of pages of investment mandates, incredibly complicated, overly expensive, highly political, are trying to keep everybody happy, whether it be on climate or inclusion and a million other factors, and the performance stinks. I heard another CFA on a podcast say that they could replicate their strategy by utilizing four or five low-cost ETFs and it would effectively do exactly what they’re trying to put together. Look at the state of Nevada, by contrast. They have a guy managing nearly $60 billion with one employee.
The tie-in for you and I as regular investors is to remind ourselves not to do the same thing as the California Pension Fund. We tend to add complexity because we think it’s better, simply because it has more going on. Well, it’s got to be better. Look at all these various things. Look at these unique investments that others can’t invest in. It must be good. Remind yourself there are three simple rules to investing. Buy stocks. They’ve made around 10% per year for a hundred years. Then diversify per your goals. Like if you need money tomorrow, it shouldn’t all be in the stock market. If you don’t need any of it for 30 years, you probably don’t need as much in bonds or any. Own small stocks and large stocks and US stocks and international stocks in value and growth, which you can do for a remarkably low cost with virtually no friction, and then rebalance that allocation. Those are the three simple rules to investing.
John, that sounds too simple. That can’t be great. Why? Why does it need to be more complex to achieve better returns? Consider this if you only bought the S&P 500, which is suboptimal from a risk and return standpoint, but if you just said, I know, but I’m going to take this to the extreme. I’m going to go as simple as possible. You would’ve made about 10% per year the last 30 years, even if you had forgotten you had the account. Like 30 years later, oh, yeah. I forgot about that account. I better open it. Oh, I’ve been in an S&P 500 index fund and that’s doubled my money every seven years for the last 30 years. The average American has only earned about half those returns. Because remember, simple things aren’t always easy things.
So, you follow those three rules while making smart tax trades, having your assets located in the right spots, have a dynamic written, documented financial plan that’s coordinated with your estate planning wishes, then automate, have accountability, and a good advisor, that’s it. Meeting with thousands of clients and prospective clients, I’ve had a front row seat in watching people build, build, build, accumulate, accumulate, grow, grow. Then they reach the mountain top. They have enough and they come in and ask me, how do I get rid of all this crap? How do I simplify my life? The question I want you asking yourself is how do you build the most effective plan that accomplishes your objectives in the simplest way?
That’s the game I want you playing. That’s the goal. Not just how do I get there, but how do I get there without adding layers of unnecessary complexity? Because I promise you, once you do, there will be a stage in your life, I don’t know if it’ll be at 50 years old or 60 or 80 or it’s when your kids inherit it, but at some point there will be that moment of, wow, there’s a lot of moving parts here. How do I make this easier? That is the goal. One of the ways many choose to simplify is by delegating their wealth management to someone else. I don’t think everyone needs a financial planner, but I do think everyone needs a financial plan.
These aren’t rhetorical. Ask yourself these right now. Do I have the expertise to manage my own money, handle my tax strategies, my estate planning needs, my investments, and my retirement income. So that’s the first question. Do I have the expertise? Do I have the knowledge to do this? Second question, do I have the time to do this? Third, do I have the desire to spend that time to ensure that this is done right and that it’s optimized? Now, many of our clients answer no to all of those. I don’t have the expertise, I don’t really have the time, and I don’t have the desire. Even if only one of the three is a no…
For example, I have the expertise and I have the time, but I don’t want to or I have the time and I have the desire, but I don’t have the expertise or I have the expertise and I like doing it, but I don’t have the time. If even one of those three is a no, but you also prioritize making sure that this is done correctly, then you need to hire a financial advisor, period. It doesn’t need to be Creative Planning. Not all roads lead to Creative Planning.
Of course, I believe wholeheartedly and what we’ve been doing to help families for the last 40 years, as we manager advice on a combined $300 billion along with our affiliates. Nearly 500 CFPs, over 200 CPAs, over 50 attorneys operating as independent fiduciaries, directly helping our clients without many of the conflicts of interest that have persisted for decades within the financial industry. So yeah, I believe what we offer is of incredible value and I think competitively we stack up against anybody. Most importantly, even if it’s not Creative Planning, find a great independent fiduciary that can help you.
We need to talk about chocolate. That’s right. I come from a long line of chocolate lovers. I would stack my mom’s side of the family up against anyone else in the world in terms of their love for chocolate. If you suggested that maybe vanilla was on par with chocolate, or hey, vanilla is the most popular ice cream flavor, they would look at you even though I said no one’s crazy earlier in the show, they would look at you like you’re crazy. They don’t care about your past experiences and why you feel the way you feel. Chocolate is objectively the best.
While I’m more of a vanilla guy, you skip a generation on certain things, my two-year-old daughter Luna, she loves chocolate. The other day, she was living her best life, just carefree. I couldn’t find her. We’re looking for her, went into the kitchen, looked in the pantry. She was just working quietly and privately on devouring a king-sized chocolate bar. One of those ones that has all the little squares you can break off. You’re supposed to break off like one at a time. She was just whole thing unwrapped like Charlie in the Chocolate Factory, taking big old bites off of it. I took it from Luna so that she didn’t lose her mind completely from a bigger sugar rush than she was already going to have, but maybe I should have also, because of how expensive chocolate is.
Chocolate lovers, have you heard of this historic cocoa shortfall? That’s right. The cocoa market will suffer a large deficit in 2024 for the third consecutive crop season. The most pronounced shortfall in modern history. Since the start of the year, cocoa prices have skyrocketed by 140%, making it consistently hit record levels due to these poor harvests extreme weather conditions in major cocoa producing countries in West Africa such as the Ivory Coast, Ghana, and Cameroon have impacted production. While this huge spike in cocoa is record setting for that commodity in particular, we’ve seen other commodities have significant price increases as well.
If you remember back to COVID, as the global economy was rebuilding, many commodity prices were surging as a result of supply chain disruptions. Remember, lumber? Went up 304%. Iron was up 114. Soybean oil was up 85%. Corn, 85%. Tin, that’s right tin, T-I-N, was up 80%. Copper, 65%. That’s when everybody’s stealing copper out of partially built houses. Lean hogs, not to be confused with husky hogs, lean hogs up 56%, while silver also was up 53% during that 12 month stretch from 2020 to 2021.Mostly, I just thought this was interesting to see the spike in cocoa prices, but it’s also worth reminding ourselves that owning individual commodities, much like individual stocks, within your portfolio and being under diversified is one heck of a wild ride. Halloween’s still six months away, but if nothing changes, I suspect my kids may see more smarties than KitKats in their plastic jack-o-lanterns this fall.
It’s time for listener questions and one of my producers, Lauren, is here to read those questions for today. Hey, Lauren, how’s it going? Who do we have up first?
Lauren Newman: Hi, John. So first is Joseph in South Carolina. He asks, “I’m working on an estate plan for my elderly mother. This is the first time she has created one. What do I need to make sure we have for her?”
John: Thanks for the question, Joe. I want to preface my answer by saying I recommend that you sit down with an experienced estate planning attorney. Generally, that consultation is complimentary, to get the questions that are specific to your mother’s situation answered. There are five elements to address within an estate plan: a living will and a healthcare power of attorney, a last will and testament, a trust if necessary, a financial power of attorney, and a list of beneficiaries. These five factors can ensure that your health related, financial related, and asset related wishes are carried out even if you’re temporarily or permanently incapacitated. Again, speak with an attorney. If you’re not sure where to turn, you can visit the radio page of our website at creativeplanning.com/radio to request that and we’re happy to help you out there in South Carolina. All right, Lauren. Who’s next?
Lauren: So next is Harris in Carlsbad, California. He says, “My spouse and I are starting to explore the idea of a donor advise fund. Are there limits or ranges we should be aware of? What type of assets can be donated? What should I expect for fees?”
John: Well, Harris, I love Carlsbad, California. That is a beautiful place. Let me pause for a moment and explain what a donor advised fund is. It’s an account where you can deposit assets for donation to charity over time. So a sponsoring organization manages the account and then you, the donor. Recommend how to invest the assets and where to donate them. The donor can also claim a tax deduction for making contributions to the fund.
Once those assets are deposited into a donor advised fund, the sponsoring organization has a legal control over them. So it’s really important to know, once money goes into that donor advised fund, you’ll likely receive a tax break for that. That’s because they’re not yours anymore. Even if the money hasn’t been distributed out to your church or Habitat for Humanity or the Humane Society or wherever it’s going, you’ve already received the deduction because it’s out of your estate. So as long as you choose a charity that’s recognized by the IRS as a US charitable organization, the sponsoring organization will usually use your charities of choice.
So the primary benefits of a donor advised fund, and they’ve increased in popularity as a result of the Trump tax reform because of the doubling of the standard deduction, is that you can donate lump sums but not have to figure out yet when you want to distribute those monies, which organizations you want to provide donations to. Because you bunched maybe two, three, five, 10, 15, 20, or even a lifetime worth of donations all at once, you got way over the standard deduction amount while not disrupting your actual donation schedule with the organizations themselves.
So while Harris, I know this isn’t your question, but I think it’s important to set the stage for someone who’s donating $5,000 per year to their church and they have almost no other deductions, they’re probably receiving no tax break because they’re going to claim the standard and not itemize anyhow, as a result of the Trump tax reform that went into effect in 2018 and doubled that standard deduction. That person now can drop $50,000 into a donor advised fund. Obviously, they itemize because $50,000 is way over the standard and then still give $5,000 per year each year. In fact, they’ll have something left over at the end of the 10 years most likely if it’s invested properly in the markets behave, because the other $45,000 is able to be invested in growing along the way.
So now back to your question on specifically what are the limits and ranges and costs. The larger donor advised fund sponsors allow them to be set up with initial donations as low as zero, while some of the smaller community-based or affinity-based donor advised funds may have minimums that range from 5,000 to 25,000 or more. Practically speaking, very low minimums. Most sponsors accept donations by check, bank wire, electronic funds transfer, and some of the larger donor advised fund sponsors also accept a variety of non-cash assets, which might not be possible for some of the smaller nonprofits to accept.
So, you can donate assets like mutual fund shares and long-term appreciated securities, which can be really nice to offset capital gains, including publicly traded stocks and bonds, certain restricted control or lockup stock. Even some complex assets such as privately held C-corps and S-corp shares can be donated to certain donor advised funds. Private equity and hedge fund interests, life insurance policies are all available with certain custodians. So if you plan to donate these types of holdings, make sure that your donor advised fund sponsor will accept them.
Specific to your fee question, typically they charge two different types of fees. One fee covers administration, the cost of running the program, including and providing donor support and then the donor advised funds investments will also incur fees. Generally on the first half million dollars, so 500K, it’ll be around maybe a half percent or $250, whichever is greater. Certainly if the balance is only $1,000, you want to be mindful of that, because if there’s a baseline fee of 250 bucks, that may equate to 25% fee on the account. Which is why even though there may be very low minimums, it’s got to be a balance big enough that you want to get some of it invested and helps you with the bunching of donations for the deduction benefits.
If you have $2,000, you’re better off sending that directly to the organization rather than a donor advised fund, but oftentimes that fee is tiered. So on the next 500,000, it may be a third of a percent and then over a million 0.2 of a percent. I’ve also seen rather than tier just flat annual administrative fees and that usually starts above 5 million and are typically less than two tenths of 1%. So the costs are relatively small for the benefit of controlling your tax strategies, having the growth out of your estate, and off of your tax return, while providing control to donate as you see fit.
Thank you for those questions. If you have questions you’d like me to answer on the air, email [email protected].
I was recently asked by someone, what are your top priorities? I thought to myself, this is an oxymoron. Because every time you use the plural form of the word priority, you lie to yourself about what actually matters at the present moment. There’s wise insight from Gary Keller’s book, The One Thing, where he said, and I quote, “To be precise, the word is priority, not priorities.” It originated in the 14th century from the Latin, prior meaning first.
Priority is synonymous with first. First can’t be first, second, third, fourth, fifth, sixth, and seventh. They’re all first. No, they’re not. One is first, and in the same way, priorities doesn’t make sense. See, once you realize that the word priority shouldn’t be plural, then you gain victory over all the areas of your life. Having priorities makes you less productive, because you’re balancing multiple, sometimes conflicting pursuits. The thing is doing the one most important thing as best you can produces meaningful results.
So, the next time that you’re confronted with a choice of this or that, remind yourself there can only be one priority that sits atop all else. The more definition you find around what that is, the more confidence you’ll have in your decision-making and more broadly in all the choices you make in life. Remember, we are the wealthiest society in the history of planet Earth. Let’s make our money matter.
Announcer: Thank you for listening to Rethink Your Money, presented by Creative Planning. To hear past episodes or learn more about the topics and articles discussed on the show, go to creativeplanning.com/radio and to make sure you never miss an episode. You can subscribe to Rethink Your Money wherever you get your podcasts.
Disclaimer: The preceding program is furnished by Creative Planning, an SEC-registered investment advisory firm. Creative Planning along with its affiliates currently manages or advises on a combined 300 billion in assets as of December 31st 2023. United Capital Financial Advisers is an affiliate of Creative Planning.
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 the 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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