On this week’s episode we’re exploring the common denominator between three distinct investor personalities. Creative Planning’s Chief Investment Officer, Jamie Battmer, joins us for that discussion, plus he shares some critical investing insights and why sticking to the basic principles of investing are a smart move as you look ahead to 2025. With the end of year fast approaching and the election only weeks away, this is an episode you won’t want to miss.
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 your host, John Hagensen. And on this week’s show, I’m joined by creative planning Chief Investment Officer Jamie Battmer to talk about how to prepare your investment strategy as we approach the year-end. Also, why estate planning isn’t what you might think it is, as well as how much risk you should take in your portfolio as you approach retirement. Now, join me as I help you rethink your money.
Personality drives almost everything. Yes, even your money because as much as you like to think you have free will, the truth is so much of what you do is driven by who you are at your core. Nature is way stronger than nurture. I’m not a scientist. I don’t know if that’s technically accurate, but anecdotally, I 100% know this to be true. And I don’t know if I would’ve believed that before I became a dad, but having a big family from different biological backgrounds, we have adopted four and we have three biological children, it’s made it crystal clear. These kids are all growing up in the same house, with the same rules, the same environment, the same flawed father who’s doing the best he can and yet they couldn’t be more different.
One of my kids is introverted and sensitive, struggles with anxiety. Every new situation is a total stress bomb, hates change. Meanwhile, the next kid in line, we call her the jitterbug. That’s putting it mildly. This kid is so adventurous, carefree, and loves a challenge. In her 20s, I already know she’s going to be backpacking around Europe, staying in hostels. I’m going to be asking my wife, “Have you gotten proof of life text in the last month?” I’m pretty sure she doesn’t know what fear even is, and she’s been like that since she was a baby, doing crazy things that have kept us on our toes. These traits don’t change as they grow up. It’s who they are. It’s like their handwriting or their fingerprint. And you know what? It’s going to impact them as adults when it comes to money as well.
Morgan Housel said something that has always stuck with me. Most financial arguments happen because we are playing different games. We’ve all got different goals, perspectives and backgrounds, and we talk past each other because we don’t realize that we’re not even trying to do the same thing. Have you felt frustrated with a spouse because you’re not on the same page or you don’t understand why a family member or one of your friends is doing what they’re doing with their money? It just makes no sense to you. Maybe it’s because they’re completely different than you.
Understanding your money mind, what makes you tick is so crucial to not only financial success, but contentment, fulfillment, peace around your money because this overarching theme affects how, affects how you spend, it affects how you think about your future. And I want you to remember, and this is really important, so don’t miss it, there are no good or bad money personalities. It’s not that you want to drift into one category because that’s the superior one. No, they’re just different. Just like those personality tests, I’m sure you’ve taken them before. I’ve taken a bunch of these things. There are healthy and unhealthy versions of all personalities. And I want to dive in a bit deeper today with you on this idea.
If you can understand who you are and how you approach money, that really is the first step in the foundation that you can build upon for financial success. There are three primary ways that we all as humans tend to view our money and let’s break each down.
The first is the happiness-oriented mindset. These are the folks who see their money as a source of happiness and experiences. Absolutely nothing wrong with that. In fact, the positive side of this mindset is that they aren’t going to die with millions of dollars that they never enjoyed. They’ll have made memories, they’ll have traveled, experienced life. Driven that sports car that they always wanted to buy, and generally. They do a good job of living in the moment. This is my wife. She is a thrill seeker. She loves change. She’s fast-paced, and not in an irresponsible way. She’s a healthy example of this type of money mind, but she’s not sitting around thinking, “Well, this is for our security and if we don’t have it, I’m going to feel really worried about that.” I’ll get to that money mind here in a moment.
Frankly, it’s a lot of fun to be married to someone with that personality because think of the person who takes that spontaneous family vacation to Disneyland. Even stretches the budget a little, but I mean, Big Thunder Mountain, come on, you got Space Mountain, dark. So fun. Who doesn’t want to eat a giant greasy Turkey leg for some ungodly amount of money? I mean, doesn’t that sound fun waiting in lines? It’s all about creating experiences, building those memories you’ll carry with you. That’s this happiness-oriented mindset. And to that person’s point, you can’t take it with you.
Here’s the risk of this hardwiring around your money. They can live too much in the moment, short on savings, focusing too much on today and not enough on the future. You probably know someone like this. You may be this person, the person who says, “Why save for retirement when I could book another trip to Vegas?” And I’m not suggesting you shouldn’t enjoy your money, but if you’re constantly living for today, you might find yourself in a tight spot later on.
The second money mind is the person that is protection-oriented. And by the way, this happens to be the category that the vast majority of people fall into. These are the people who see their money as providing security. For them, money is their safety net. And if that’s the case, think about this, can that net ever be too big or ever be too strong? These folks are super disciplined about saving, and that’s the positive here. They’ve lived below their means for decades. They’ve built up a huge cushion. This is the person who gets a lot of excitement seeing their net worth grow. They love seeing cash build up in their savings account, but sometimes that security outweighs logic. Sure, it makes them feel safe, but here’s the irony, what are they saving it for? They struggle to spend it.
I’ve seen this time and time again, a client comes in, they’ve done everything right, they’ve saved millions of dollars, now they’re in retirement, and I’m asking them, “What do you want to do with it? You can take all of this money out every year and you’re still going to have a bunch left over.” They can’t enjoy it. They’re afraid to spend even a penny because that money is security, and if I start taking money out of that, it increases my anxiety. It’s that safety blanket and they just cannot let go. And no matter how many times I show them the math and their financial plan and distribution rates and superconservative projections and you still have seven figures sitting there at 99 years old, doesn’t change the fact that it feels risky.
A lot of engineers tend to struggle with this. I had one who had saved over $3 million, and by the way, didn’t make crazy amounts of money. That was just maxing out 401Ks, living very frugal, working his spreadsheets, and he was still worried about running out of money. He and his wife didn’t take any vacations. They drove a 20-year-old car. I swear it was a badge of honor. He loved that he had this crazy old car that didn’t even have basic safety features that you would have in a more modernized vehicle. He was essentially hesitant to do anything fun in retirement because he couldn’t shake the fear of losing money. And that’s the unhealthy side of this mindset.
So we have the happiness-oriented mindset, the protection-oriented mindset, and the third, the generosity-oriented mindset. And these make sense, right? Because all you can really do with your money is spend it, save it or give it at the most fundamental level. So the generosity-oriented person sees their money as a way to enhance relationships, someone who loves to give to others. They want to take care of everyone around them, friends, family, charity, and this, by the way, can be a beautiful thing. Many positives to this mindset of generosity. They tend to be filled with a lot of joy and fulfillment in helping others, right? They’re the ones always picking up the check. They’re loaning out money to friends. They’re making sure loved ones are taken care of. But the downside, it’s a double-edged sword. Sometimes they give too much.
I can think of a handful of clients who destroyed their financial plan because they couldn’t stop helping their children who were irresponsible, had fallen on hard times and they wanted to help them, even to the detriment of their own financial situation. Hey, you can’t keep helping your 45-year-old who says they’ve been looking for a job but just can’t find one for the last two years. You are enabling them.
And so the downside is trouble setting boundaries or looking out for yourself. And that’s a lot like parenting, right? As much as we love our kids, at some point, we have to let them fly on their own, and if we catch them every time before they fall, they’re never going to learn how to get back up. And the same thing applies with our money. If you’re constantly bailing out your kids or your grandkids, you’re actually not helping them. You are holding them back. And this is where having a financial advisor can really help. Just like you want your kids to grow and thrive with the right support and helping them identify their strengths and their weaknesses, an advisor can help you with your finances to do the same thing. Having an experienced fresh set of eyes who can provide you with an objective perspective may help you better understand yourself and the way you think about money and maybe your blind spots, and that can be invaluable.
Jamie Battmer is the Chief Investment Officer here at Creative Planning. He leads our investment policy committee overseeing the strategies we use to guide the investments as we manage or advise on a combined $330 billion for clients in all 50 states and abroad. He has a master’s degree from the London School of Economics, and today he’s going to share some of his insights regarding how you can approach markets, especially during turbulent times. So let’s dive in.
Jamie Battmer, thank you for joining me on Rethink Your Money.
Jamie Battmer: Hey, John, thanks a lot for having me again.
John: Well, the markets have been up. It’s been a fantastic year so far. The most common question, no matter how much we write about it or I talk about it, from clients and I’m sure listeners is, “Yeah, but there’s an election upcoming.” Jamie, how does that impact the final few months of the year?
Jamie: It’s a great thing about our democracy is that people can be emotionally charged and be excited for their candidate, be fearful of the other or however they want to respond, but emotions, as we know, serve no purpose in prudent portfolio management, and the data just really supports that. What’s really interesting, a lot of money managers say, “Don’t let politics impact investment decision-making,” and that’s true. If you only invested while Democrats were in office or you only invested while Republicans in office, you have underperformed dramatically compared to just staying the course.
But John, what’s really interesting, most people know that. Anyone go out to Yahoo Finance, Google Finance anywhere right now, and you’re going to see some headline that says, “Oh, this sector will be good if Harris wins the election,” or, “This sector of the market will be good if there’s a renewed Trump administration.” But even with that, the data is just absolutely non-supportive of. The narrative does not equal the reality of the situation.
Take renewable energy as the example, and if you pulled 100 people on the street and said, okay, “What type of administration would be better for renewable energy, sustainable energy?” probably 9,900 people would say Democrats would be better for that. Well, the data shows that compared to looking at the Obama administration, the Trump administration, the Biden administration, renewable energy did extraordinarily better under the Trump administration compared to either Obama or Biden, but I’m not making a politically charged point there. The exact opposite is true and they say, “Oh, Trump, he’s a New York guy. A big bank guy.” No big banks did dramatically better under Obama and Biden. Traditional energy did dramatically better under Obama and Biden. And so the data just isn’t supportive. Even these sector themes that we’re all going to be inundated with between here and the election, you keep calm, carry on, you’re unemotional. That wins even in the craziness of election years.
John: Well, I think it speaks to the idea that it’s not good or bad, it’s better or worse, and if that were the case, all of that theoretically is priced into the market based upon the likelihood that that candidate would be elected anyhow. So it just speaks back to that difficulty of exploiting inefficiencies because if you do happen to be on to something, it would be priced in already and that’s what makes it so difficult to outperform the market.
Let’s talk interest rates. They’ve come down a little bit, but they’ve remained elevated, Jamie. How should investors be thinking about bonds and equities in the current environment?
Jamie: It is nice that with interest rates higher now what you’re earning, your money market account isn’t zero. What bonds are paying isn’t 1%. That’s great. But again, harking back to what the data supports, cash underperforms stocks 100% of the time over a 19-year period or longer. You’re just rewarded more for being an owner, stock ownership versus being a lender with bonds. And so yes, it’s nice that they’re yielding higher, but the data supports they’re still going to dramatically underperform. It is nice that the Federal Reserve is lowering interest rates now, and so they’re not moving quickly, a gradual process. And so yes, a positive thing for small businesses, that’s a positive thing for people taking out 30-year mortgages on new properties, but at the end of the day, fixed income, the cash should be there to support withdrawal needs not arbitrarily set because you’re of a certain age.
It’s a real tragedy, John, in that we do not adhere to this and that your average investor, where do they have money? They have money in their house and they have money in their 401k. And those that allow themselves to be defaulted into something like defaulted into a target date, say they’re on the brink of retirement, say they’re 65 years old, they’ve got 50 to 70% of their portfolio in bonds, and as interest rates have moved so much higher over the last couple of years, that 50 to 70% of someone’s retirement nest egg that they’re about to start dipping into has actually not made any money. So the fact that market professionals are generically dumping people into these huge fixed income allocations and justifying and say, “Oh, rates are higher,” the data still doesn’t support it. Take your risk on the equity side, lean into the aggressive, but well diversified side as much as you can and you won’t be rewarded over the long run.
John: Well, and not to mention time horizons. That 65-year-old has a high likelihood of living to 90 or 95, meaning unless they want to end up in their kid’s basement at 85, some of those dollars are still going to be sitting in the portfolio 20 years later if they’re 65 years old, meaning why would you want any of that sitting in fixed income when you know the time horizon is still decades long? I totally agree with you. I think it’s the most common misunderstood mistake in retirement planning is people getting not too aggressive, too conservative too early in retirement. Jamie, why is it so hard to anticipate the right stock in advance?
Jamie: Because what’s the right stock today is so rarely the right stock tomorrow. What’s today, NVIDIA, 2000, last time we had a tech induced bubble, it was Cisco, and you know what? The broader markets recovered just fine. The S&P 500 is up hundreds of percent since then, but Cisco is still down about 70%. Before that, it was ExxonMobil. Before that, General Electric. Before that, Ford. One point, it was Eastman Kodak. Those of us that can remember when there was a photo development booth on every street corner, Eastman Kodak was great, but the world changed and they were completely disrupted, and that’s why, what is the great name today is just so rarely the great name tomorrow. Fall in love with investing in just the great names broadly, and knowing that they will change, that’s what supports successful long-term outcome.
And you’re absolutely right, John, everyone has a long-term time horizon. If you’re 100 years old, the odds are you’re going to live to 103. And so you’re still probably going to see some market volatility, and so you need that diversification, and so not being beholden to the individual names is so important because for every rock star, there’s 1,000 wannabe rock stars waiting tables. It’s just very, very difficult to effectively hit that diamond in the rough.
John: Let’s talk inflation, Jamie. What should people be doing with their portfolios in light of where inflation is at today?
Jamie: Inflation is just a by-product of life. There’ll be periods where it’s very, very low like it was for the last 20 years. They’d be periods there was high for the last couple of years or the late ’70s or early ’80s. The house my parents still live in, when they bought it, the interest rate they paid was 17.5%.
John: It’s wild. I know.
Jamie: Think of that. That’s still more than two times what people are having to pay today, and so it’s just a necessary by-product and needs to be factored into your long-term financial planning. Just thinking, oh, I have X amount of dollars today. That X amount of dollars will pay off in the long run. No, you have to factor in that bacon prices are going up, heating prices going up, home prices are going up. That has to be factored into it, but it’s a necessary component. But actually, in long-term, part of why they’re starting to lower interest rates is that the broader trend line with inflation is positive and really it’s all about the trends, not necessarily things being binarily good or bad, but the trend line is we are moving back towards more that two to 3% inflation target, so take that as a positive, but it always has to be factored into long-term planning. You can’t just bury your head in the sand and pretend like that erosive nature of inflation is not something that’s going to impact the portfolio regardless of what the levels are inflation.
John: Are there certain sectors, asset classes or industries an investor could consider diversifying into that you perceive to be underappreciated right now?
Jamie: If inflation is a concern, obviously real assets and the benefit from private markets that how we design it to optimize that access, create greater accessibility, create less hoops for people to jump through.
John: You mean cash and fixed income? Good idea to get out of those if you’re worried about inflation, or not out of them, but maybe minimize those and make sure you don’t have too much of them, right?
Jamie: Yeah, it really depends on, again, just what your withdrawal needs are. That’s where you need to factor in. Again, if you’re 65 and you’re about to retire, yes. My dad is still happily working all day long and he’s 82, and so it really depends upon what your unique needs are. You’re not just a number that was on your birth certificate. Making all these wild oscillated changes, though, that’s where portfolios get injured. That’s where long-term prudent financial plans get disrupted if you’re making dramatic changes. So be diversified. Yes, if you need income, you have fixed income. If not, broadly diversify it in the equity markets in both the public and private sectors. And so maintaining that diversification, not chasing the hot dot continues to be and always has been successful, prudent investment practice.
John: Well, and the reality is when people tend to get that out of whack, chasing the hot asset category and saying, “Why do I want international? Look at how much it’s underperformed or look at small cap over the last 10 years,” that hasn’t done as well. And we know that things are cyclical, and every asset category tends to have its day in the sun, in the shade, and we tend to be pretty bad timers of that rotation.
Last question, Jamie, for those who haven’t checked their portfolio in a while, what’s one thing they can do before year-end to set themselves up for success in 2025?
Jamie: The key is the same thing you need to be doing every year, and actually the same thing you need to be doing on a regular basis for your portfolio is making sure you’re optimizing everything within your control. You can’t control who wins the election. You can’t control how much a Federal Reserve is lowering interest rates. You can’t control what’s going to happen in the Ukraine or Middle East, but you can absolutely control the tax optimization of your portfolios, making sure you’re funding your 401k in the right fashion, be it traditional way pre-tax, maybe a Roth 401k after tax. That depends upon you, not when someone arbitrarily says based on your age or based on your income. The idea is looking for ways to constantly rebalance.
Tax loss harvesting and rebalancing, a lot of people do it, but they do it at the end of the year. They say, “Oh, it’s a December exercise. We need to generate this before the end of the year.” That’s ludicrous in our mind because you’re essentially saying only one of the 12 months of the year provides the opportunity set to look for tax loss harvesting opportunities.
Take 2020 is the example. The fastest market decline ever when markets fell in essentially a month 35. That was between February mid-February and mid-March. If you just fell asleep at the end of 2019, didn’t wake up until New Year’s Eve 2020, you’d say, “Oh, the markets were up healthy. It must have been a pretty quiet year,” or no is the exact opposite as we all know. And again, you’re missed out on the ability to tax loss harvest occurred in late March, it didn’t occur in late December. So those that are failing to optimize that, look for opportunities to rebalance like what we do via all of our portfolios, via direct indexing that we utilize for taxable dollars, you’re missing out on the opportunity, but then also making sure you’re filling up the right accounts.
Again, be it the Roth, be it the kids or grandkids education savings accounts, those tax prudent adjustments, John, just by doing that, just by putting the right puzzle piece in the right account can add an additional 1% after-tax returns per year and you’re not having to make one market call right. You can celebrate New Year’s happily knowing you have objectively done the right thing, and that’s what we’re always trying to do for our clients in our planning-led dynamic.
John: Yeah, it’s such a great point. It’s like with rebalancing or tax loss harvesting. If I just decide that I’m going to apologize to my wife once per week, Sunday mornings, I’ll say I’m sorry, it wouldn’t make a lot of sense just as you explained with rebalancing or tax loss harvesting. It should be timed relative to actually what’s going on and the opportunities that exist that may not exist at a later date. Great insights as always, Jamie, and thank you for joining me here on Rethink Your Money.
Jamie: Hey, thanks a lot, John. Appreciate you having me.
John: I want to shift gears a little bit and talk about a simple yet critical principle that so often gets overlooked. Whether it’s life or with your finances, there’s a natural tendency to overcomplicate things. When it comes to your money, sticking to the fundamentals can be one of the smartest decisions you’ll ever make. If you deployed $100,000 in an index that tracks the 500 largest US stocks, did absolutely nothing, certainly no fancy trading or worrying about daily news cycles 40 years ago to just the simplest strategy, today that $100,000 would be worth over $5 million. Think about that. Buying great companies, letting them grow, participating in their profits and expected future earnings. This isn’t some theoretical number, it’s real. The broad stock market has earned around 10% per year for 100 years. Why do we overcomplicate this?
I get a lot of talking times like this. “Well, the market’s at all time highs. This isn’t a great time to invest. I should wait a while.” The truth is all time highs are the norm. They’re not the exception. The trend of the stock market is up, so it’s near or at all time highs’ a lot more than you think. In fact, if you go back to January 1st, 1988 through the present, if you invested on any day, your five-year returns are 71.4%. If you only invested at all time highs, your returns were not 71%, but 78.9%. You averaged a little more than 1% more per year over every five year period for the last over 35 years if you only invested at all time highs. Now, I’m not suggesting that that’s the right strategy, but it’s certainly not an important data point that should change in any way your investment strategies. But again, man, that sounds too simple to just not even worry about it. Time in the market always trumps timing the market and then staying patient.
Here’s another simple truth. Investing in stocks is really just buying ownership in companies. That’s all it is. I know it feels confusing and weird and the prices are moving around and I don’t understand everything about it, but what you’re basically saying is that I believe people will live on the planet and they’ll continue to need goods and services, and so there will have to be companies that provide those, apple, Microsoft, NVIDIA, Google, thousands of other ones, including your local grocery store chain. When those companies do well, you do well as an investor because you’re an owner of them, and here’s the best part, you get to be an owner without doing anything. You don’t have to show up for board meetings. You don’t have to make strategic decisions. You just own your little piece of thousands of companies and when they make a profit, you benefit from it. So stick to these three basic rules of investing and you’ll be ahead of the vast majority of Americans.
Number one, buy stocks. Participate in the growth of those companies like I just discussed. Number two, diversify. Own a lot of different types of investments to spread out your risk, to create more predictability of returns, to tighten that variance of those returns. This may include owning some more stable investments along the way if you need money out of your account over the next five, six, seven years, and then rebalance when necessary to make sure that your portfolio stays aligned with your goals. And most importantly, don’t get emotional. Don’t overcomplicate it. The ups and downs of the market are normal. An average correction during a calendar year peak to trough is about 14%. It’ll feel violent when it happens. It’ll feel scary. It’s normal. At the end of the day, it’s the simple principles that lead to long-term success.
Well, it’s time to dive into one of my favorite parts of the show where we rethink common financial wisdom together. These are those pieces of financial advice that get thrown around like gospel truth, but sometimes if you take a closer look, well, they may not be quite as solid as they first appear. I hear this from so many people. “I don’t need a financial plan. I don’t have enough money to invest,” or, “I don’t need a financial plan. I’m happy with my investments,” and that right there is the problem. It’s like saying, oh yeah, a car is only about the tires. Tires are important. We’ve all had a flat or a blowout, doesn’t run very well, so your investments certainly matter, but there’s so much more going on under the hood.
A financial plan is about everything. How you handle cashflow, you build your reserves, you manage your taxes, you protect your estate, even things like education planning, debt management, risk management, and insurance. Investments are just one piece of the puzzle. Imagine you’re a general contractor and you’re building a house. You don’t start with a crown molding. You don’t figure out if you want granite or quartz countertops. You’re not looking at the appliances. You start by laying the foundation. So you need to have the basics, your goals and objectives because those drive everything. They sound whimsical, but two people on paper can be identical, but they have completely different objectives and therefore their plan will not and should not look the same. You need to lay all of that out before you start worrying about how wide of plank you want on your hardwood floors, not the other way around. So remember, a financial plan covers all aspects of your financial life, including, yes, the investments.
Let’s shift gears a bit to estate planning and our final piece of common wisdom that estate planning is just about passing on your assets. That is what we tend to think about at first thought around estate planning, a house, the investment accounts, the car, the family jewelry, what’s going to happen with that when we’re gone, but there’s so much more to it than that. Estate planning is about making sure your wishes are followed if something happens to you, whether it’s health-related decisions, guardianship for your kids or even healthcare directives.
I had a client come in, they thought they were buttoned up because they had a will and a few basic documents that they had done online, but 10 years earlier. But when we dug a bit deeper in their initial planning process, we found out they hadn’t designated a healthcare proxy. There was no plans in place for their minor children. I mean, can you imagine the mess that would’ve been created if something happened unexpectedly? It’s not just about who gets what. It’s about making sure that your wishes are carried out and your family’s taken care of in the way that you want.
And along those lines, another big aspect of estate planning that I think is so often missed, and I don’t want you to miss this, and that is the impact your decisions have on the people who are left behind when you are gone. Sure, you want to minimize taxes, you want to avoid probate, you want to make sure that the money goes where you want it to go, but what happens next? How much time have you spent thinking about how that would affect your kids or your grandkids? Will it help them? Will it hurt them? I know that feels counterintuitive. Wait, I’m giving them more money. How could that hurt them? I’ve seen money tear apart. Families comes in trust to one spouse. Now all of a sudden the other spouse doesn’t have any access to those funds. It creates a weird dynamic in the marriage. Seen multiple kids, one kid’s disinherited because the parents don’t really like them as much or think they’re as responsible. Maybe they weren’t wrong, but now it creates terrible family dynamic for surviving children over the rest of their adult lives.
How do you create an estate plan? I would rather call it actually a wealth transfer process in a way that creates more unity for your family, in a way that enhances the most important values that you care about in those whom you love and those organizations that you desire to aid. In fact, one of the most important things you can do when it comes to your estate planning is think about the non-financial impact of your estate. Is this going to motivate my kids? Will it hinder them? Will it support their goals or create dependency? These are the questions that need to be a part of your estate plan because passing on your assets is about a lot more than just minimizing taxes. It’s about leaving a legacy that truly reflects what you value.
Well, it’s time for this week’s one simple task where I help you make incremental improvements one week at a time. Sometime this week I want you to write down a last-90-days goal. Now, I’m not talking about your final-90-days. I hope that’s not the case, but I’m talking about the final-90-days here in 2024. Believe it or not, we’re now under that this year, so let’s make them count. Whether it’s a personal or a professional goal, focusing on the fourth quarter through December 31st can give you momentum and set you up for success in 2025. We’re all making New Year’s resolutions come January. Think through how you can start to lay the foundation a couple months before that because there is still plenty of time for you to finish strong.
Here are a few tips for a higher likelihood at success. Be specific and realistic. So pick a clear goal, whether it’s maxing out your 401K or paying off the last bit of credit card debt or saving an extra grand in your emergency fund. Don’t just say, “Well, I want to save more,” define it. Also, break it down into actionable steps. If your goal is to save $1,000 by the end of the year, figure out how much you need to save each week. It’s about 75 bucks. And then, finally, write it down where you can see it, whether that’s your bathroom mirror, on the lock screen or your iPhone, on your desk, somewhere you’ll be visually reminded because seeing that goal over and over can help keep you on track.
And here’s really the thing about goals. They do keep us moving forward, even when life inevitably gets in the way. And the beauty of focusing on these last 90 days or so of the year is that you can still make meaningful progress. There’s not four days left. You’ve got plenty of time. You can reference all of 2024’s, one simple tasks on the radio page of our website at creativeplanning.com/radio.
Now let’s move on to listener questions. And one of my producers, Britt, is here to read those for us.
Hey, Britt, how’s it going? I think we have one this week from Bob who I met at Connect 24.
Britt Von Roden: Hey, John, it is going great. Thanks for asking. It’s officially my favorite season of the year, so I can’t complain. And yes, Bob actually has a few great questions for us that we’re going to be getting to over the course of the next few weeks. I’ll start with his question regarding the unique situation we’re presently in. He prefaces his question with this idea that on one hand we are urged to invest lump sums right away as studies validate the concept of time in the market outperforms timing of the market, something that you speak to a lot on the show. But on the other hand, we are continuously warned about volatility, that it occurs regularly and is the price we pay for better performance.
So that being said, with the S&P 500 up over 50% in the last two years and historically expensive at nearly 22 times next year’s earnings in a CAPE ratio of more than 35, John, his question is, what do we do? Do we lump sum into not just an all-time high but a historically expensive market price for perfection, or do we wait for the inevitable volatility and move in opportunistically? He also shares that for a younger person with a long time horizon, he’s sure that the advice would be just invest and forget about it. But what about someone in their late 50s who might only have a 10-year horizon?
John: Well, Bob, all of your points are solid, but what this really comes down to more than anything else, as it is with investing in general because we do not know the future, is that you want to focus on probabilities. Which strategy provides you the highest likelihood of success? And so regardless of valuations being higher than historical norms, the stock market on average is up about 70% of calendar years. It’s up about 90% of the time over five year periods. It’s up about 98% of the time over 10-year periods. And I know you’re not suggesting extreme market timing, but this is subtle market timing, closet market timing. In this scenario, the debate is whether to put money to work today or weight and hope that volatility is downward volatility because remember, more often than not, volatility is good volatility, the kind that you like that works the markets up and it’s really tough to guess where the market’s going to zig or zag.
So as I mentioned, the market’s up about three out of every four years. And so the vast majority of the time, if you only allocate 25% of your investible dollars to work in the first year, you have a high likelihood of being disappointed in doing so. You can use 2023 and 2024 as an example. You talked about the S&P being up nearly 50% during that time. Well, imagine if in 2023 you decided to dollar cost average under the same premise. I know the market wasn’t as high at the time, but there were people that were goosey about investing then and wanting to dollar cost average because things seem uncertain, which of course they always are.
So if you have a solid long-term strategy, you understand your time horizons. You mentioned a 10-year time horizon. Well, 10 years, you’re still going to generally end up ahead by putting the money to work right away. And sure, the market might look a little bit expensive right now, but it is so difficult to time.
So whether someone’s young or old, if the plan is not to use the money that is invested for more than five years, the strategy in my opinion is the same. Put the money to work that you want long-term in the stock market, and more often than not, doing all of that at once is going to provide you with the highest balance down the road.
I want to preface this though with a caveat. There are certain people, they sell a business, they inherit a massive lump sum, they understand the probabilities that I just described, but they’re extraordinarily nervous and would have major regret putting all of it to work, even if it’s not money they need for 20 years. And then over the first six months or 18 months, they watch the market work down, which has lower odds than it going up, but certainly is not out of the question. If it comes down to I’m not going to be able to take the plunge and invest my money unless I dollar cost average, then do so, but have very defined intervals at when you’re going to deploy money. And maybe that means you invest 25% of the balance each quarter, essentially accepting the average price over a calendar year or 12 point a half percent per quarter to be fully invested over 24 months. That certainly is not a bad option if it helps you sleep at night. And ultimately, only time will tell whether or not you had more money or less as a result.
It’s a great question. It’s a next level question. It shows me that you’re already doing so many things correctly to go a layer deeper and be thinking these sorts of things through. So thank you so much for that question, Bob, and it was fantastic meeting you out in Kansas a couple of weeks ago.
Britt, let’s go to Lonnie in Washington.
Britt: Yeah, sure. Lonnie shares that he is looking to retire in about five years and wants to start scaling back his risk. His question today, John, is how? He currently has around one million in his 401k, about 200 K in a Roth and another 500 K in a brokerage account currently all in stocks. What do you recommend for Lonnie?
John: This is a great question. As you get closer to retirement, managing risk is absolutely key. Understanding volatility and how it can work against you is essential because you want to avoid what is referred to as sequence of returns risk, and that’s when the market declines, unfortunately happen early in your retirement and force you to sell investments at a loss and at valuations that you don’t want to fund your living expenses. And the timing of withdrawals and what the market prices when you make those withdrawals matter a lot more than most people think.
Now, to the contrary, when you are accumulating wealth, that sequence of returns, the order of good and bad years, it doesn’t matter. It has no financial impact on how much you end up with after saving for a three decade period into your 401k. It just comes down to what was the average price that you earned over that time period. But once you start selling investments, I mean, you can think about this logically even with real estate. The valuation of your home doesn’t matter until you go to sell it, and then it matters a lot. So I should’ve mentioned this already, but you’ve put yourself in a fantastic spot. You’ve done a great job saving.
A strategy that I recommend is to create an approximate five-year buffer or cushion from your stocks, which are volatile and can be less predictable over a shorter period of time. So what this means is you’ll want enough safe, stable investments like high quality bonds to cover your living expenses for the first five years of retirement. Now, not necessarily all of your living expenses, but the portion of your expenses that you plan to pull from the portfolio. Those stable investments are much less likely to fluctuate in price and often move inversely with the stock portion of your portfolio. So this allows your stocks time to recover in the event of a market downturn without forcing you to sell them when you don’t want to.
So with your 401k dollars, you can start allocating toward bond funds or other more stable investments. There are no tax consequences to make moves inside of that retirement account because everything is tax deferred until you make those withdrawals, which are then taxed at ordinary income. For your brokerage account, you may want to gradually sell some of those appreciated stocks over the next few years, but be mindful of the tax implications. You have a few years to do this, which is great because you’re thinking about this five years in advance of your retirement, there may be an opportunity to harvest losses to offset some of those gains to arrive at the allocation that you’re hoping to achieve.
Let’s just suppose that you want to withdraw 50,000 per year in retirement. By the time you retire five years from now, with my five-year buffer concept, you’d want about $250,000 in more conservative stable investments. So this is very doable. You only need to start migrating $50,000 or so per year until retirement into more stable investments. And if you are still contributing right now to investments, one easy thing you could do is simply make your contributions over the next five years toward bonds, which would take care of 100 to $200,000 of that 250K that you want allocated towards safer investments.
Thank you for those questions today. Remember, you can submit your own questions by emailing [email protected].
Money is interesting in that it’s not inherently valuable. Its value comes from what it allows us to do, the impact it has and the security that it can provide. But here’s the thing, none of that really matters without resilience. Life is unpredictable. No matter how much you plan and try to control things, there are always going to be setbacks. Maybe you’ve lost a loved one. Maybe you’ve faced a health challenge. Maybe you’ve dealt with a marriage that didn’t go as planned. Maybe you lost your job or you missed out on a promotion that you were counting on. You’re not making as much money as you had thought you would be. You made an investment that you wish you hadn’t. Life happens, doesn’t it? And it doesn’t always go your way, but you’re also not alone in that. We all go through hard times. That’s part of life because of that inevitability, where we end up comes down to how we respond. That’s what defines you.
When I think about resilience, I think of two people, and they’re my two boys who came from Ethiopia when they were nine and 11 years old to America not knowing a word of English, having never turned on a light switch, having not even really attended school in their native village. I mean, they faced unimaginable challenges at the beginning of their lives, but what makes them so remarkable to me and why I admire them so much and I look up to them in so many ways is that they are incredibly resilient. They’ve learned, they’ve grown, and they’ve made it work, and they’re thriving. That’s what resilience is, taking what life gives you, even when it’s not what you expected and even when it’s not what you desire and you find a way to move forward. Resilience isn’t just about surviving hard times. It’s about learning from them and growing stronger and using those experiences to shape a better future for yourself, for your family, and whether this is your personal life or it’s your finances. Resilience is the key to long-term success.
Benjamin Franklin once said, “Out of adversity comes opportunity,” and that’s true, especially with your money. The people I interact with who succeed financially aren’t just the ones who make all the right moves. If you’re looking around for that person, good luck. Let me know when you find them. They’re the ones who can roll with the punches, adapt to change, and continue moving forward.
And so as I wrap up today’s show, remember, your money’s a tool and if you desire to use it in a way that maximizes impact on the people that you care about most, it’ll require resilience to help you get through the tough times. And remember, we are the wealthiest society in the history of planet Earth. Let’s make our money matter.
Announcer: Thank you for listening to Rethink Your Money, presented by Creative Planning. To hear past episodes or learn more about the topics and articles discussed on the show, go to creativeplanning.com/radio. And to make sure you never miss an episode, you can subscribe to Rethink Your Money wherever you get your podcasts.
Disclaimer:
The preceding program is furnished by Creative Planning, an SEC registered investment advisory firm. Creative Planning, along with its affiliate, United Capital Financial Advisors, currently manages or advises on a combined $300 billion in assets as of December 31st, 2023. John Hagensen works for creative planning, and all opinions expressed by John or his guests are solely their own and do not necessarily represent the opinion of Creative Planning. This show is designed to be informational in nature and does not constitute investment, tax or legal advice. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on the show, will be profitable or equal any historical performance levels. 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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