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The Importance of Staying Invested

Published on December 12, 2022

John Hagensen

After a year of market volatility, high inflation, and crypto crashes, it’s understandable to be hesitant about investing — but John’s here to tell you why it’s more important than ever to stay invested. Plus, Director of Client Services Micah Lawson joins the show to discuss what you need to know about the new IRS 401(k) limits.

Read more on the new retirement plan limits for 2023

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 Higginson and a head on today’s show. We’ll look at the importance of staying invested even during uncertain times, the success you can find even in the midst of poor market timing, as well as a game of rethink or reaffirm regarding one of the most notorious investments. Now join me as I help you rethink your money.

With the World Cup in full swing, I want to start by taking a journey across the pond over to Barcelona, Spain. My wife Brittany, and I had the opportunity to visit Camp Nou, the legendary Barcelona Football Club Stadium about a decade ago while vacationing in Barcelona. Now, at the time I was moderate soccer fan, but after seeing in person a 5’7″, 155 pound wizard of a soccer player named Leo Messi, I was hooked. And if you’re someone who follows soccer, the name Leonel Messi means something to you. Along with Pele and Maradona, maybe arguably the greatest footballer of all time, but Messi has quite the journey to becoming the Leonel Messi that is worth nearly a billion dollars and one of the most followed people on Instagram and famous people in the entire world. You see, he grew up in Argentina and his father and him made a really risky decision at the time to leave Argentina as a 13 year old and head to Barcelona, to their football clubs academy to see if he could make something of himself.

And you think our inflation’s bad. At the time in Argentina, inflation was at 2600%. Unemployment was over 20%. And this young Leo Messi had a hormone imbalance where he needed injections. I told you he’s only 5’7″. He was projected to possibly not even get to five feet tall without these treatments. Well, diabetics couldn’t get insulin cancer patients couldn’t get their treatment. It was an absolute disaster in Argentina. So him and his dad head to Barcelona as a 13 year old and as they say, the rest is history. But I share that with you because I think there is a clear takeaway for us. How often can you trace the origin of blessings today in your life back to trial and difficulty that initially prompted you to take action? I know for me some of the greatest challenges led to some of the greatest progress.

And so as we look at the markets today, a year in which we’ve had some of the worst stock and bond performance in over 50 years and there’s tremendous pessimism around the future prospects of the economy, I want to remind you that this too shall pass. And in the meantime, there are opportunities that exist for you and I so that when we are on the other side of 40 year high inflation, no, not 2600%, but rather near 8%, that you will still be able to accomplish your goals. That those financial and interwoven life priorities are not derailed as a result of what is in front of us today. And this high inflation, as you know, has caused the Fed to aggressively raise rates, which slows the economy and gets inflation under control. And likely that will be the key to this bear market ending Creative Planning President Peter Mallouk spoke recently on his podcast regarding inflation’s role in this bear market. Have a listen.

Peter Mallouk:  The main issue that’s been at the forefront of the market this entire year and is going to stay the same for the rest of the year is inflation. The market has to see inflation under control because it knows, because the Fed has been very frank about it, that the Fed will continue to raise interest rates until they have controlled inflation. And controlled inflation means down near 2% against. We got a long, long way to go. Now anyone that’s selling cars or anyone that’s building houses or anyone that’s selling refrigerators or washers and dryers knows that inflation is subsiding in many parts of the economy, but it’s not where it needs to be. And we still have that extra $5 trillion sloshing around the economy and home prices have not given back this huge leap that they took post covid. And I think until we get a little bit more of a softening, the Fed is going to continue to raise rates. This has been front and center and higher rates. The market gets very concerned about higher rates because if it costs more to borrow, you can afford less real estate, you can afford less equities, you can’t afford to invest in companies that don’t pay earnings right away. It has an impact on all sorts of investments. And so until we get interest rates under control and inflation under control, we’re going to see problems.

John: Again, that was Creative Planning President Peter Mallouk. And so the real question that I presume you care about is what can I be doing? What can I control in the midst of a lot of aspects of this economy and markets that I don’t have any control over? Well, the answer is you’ve got to stay invested. If there is one thing that I can encourage you on, it is you can’t jump in and out. You cannot deviate from your long-term strategy in the midst of temporary uncertainty. And let me share with you the importance of staying invested. I’ve got three reasons for you. The first is time in the market smooths out the volatility of your returns. It’s like Charlie Munger said, “The big money is not in the buying and selling, but in the waiting.” Think of it this way, if you put all of your money into the stock market, even a diversified portfolio, and you wanted to know what your potential outcomes were 12 months from now, historically speaking, you could be up about 50% or down about 40%.

Think about that for a moment. You have an approximate 90% delta on what could happen. Now if you’re thinking to yourself, “John, this is why I hate the stock market, you just told me of 50% or down 40%, it is so unpredictable.” Yes, you’re correct. The stock market is incredibly unpredictable and uncertain over short periods of time. But if you stay invested over longer periods of time, you don’t expect that the market will earn you 50% per year every single year on average for 10 or 15 or 20 years. That’s unrealistic. The market’s shown to average about 10% a year and has for the last 100 years. Well, on the other side of this coin, and thank goodness this is true, isn’t the market’s also not going to lose 40% year after year after year. And this concept of mean reversion is important when you’re going through the really bad periods.

Investors have told me often, “John, I just don’t like volatility. I hate volatility.” No, that’s not true. You don’t hate volatility, you hate downward volatility. When the market is skyrocketing, nobody dislikes volatility. But again, the reason you stay invested in the midst of uncertainty is because you need to give the market time to work back to its averages. If you’re constantly jumping in and out, you’re subjecting yourself right back to the beginning of that, where I could be up 50% or down 40%. But as Tom Petty said, “The waiting is the hardest part.” Another reason that it’s important to stay invested is that fearful investors are their own worst enemy. You know what matters in the short run? Interest rates, a Georgia Senate runoff, sentiment, supply chain, lockdowns, energy spikes, wars, a million other things. You know what matters in the long run earnings, nothing else matters but earnings.

But as long as there are billions of people walking around on this planet, there are going to be companies producing goods and services and you want to be an owner of those companies so that you can participate in their earnings. Remember speculators focus on the short run, investors play the long game. Third reason, it’s important to stay invested even in the midst of uncertainty, you may miss out on dollar cost averaging opportunities. You see, dollar cost averaging is a bear market superpower because what you’re doing when you’re dollar cost averaging is systematically on a regular basis purchasing more stocks. And obviously when you’re a buyer, you want to be buying things on sale. And as the term references in its name, you’re averaging in your purchases at better prices. It’d be like you’re a real estate investor and you have rental properties, but you just decided every single month I buy another rental property.

Well, if you did that over 20 years, would it really matter all that much what exactly the real estate market was doing seven years and three months into that 20 year period? No, you’d look over the two decades and say, “I bought some houses high. I bought some houses low, I bought a whole lot in between.” But you’d also say “Across all these houses, I paid the average price of the real estate market the last two decades.” You see dollar cost averaging removes significant risk of market volatility. But let’s just suppose that you didn’t dollar cost average, that you are one of those people trying to time the market and maybe right now you’re sitting on the sideline and you’re saying, “Man, I want to get in, but I’m going to stay in cash right now because it’s just so obvious right now, John. Think about it. This recession’s looming. There’s no good news. Why would I want to put my money to work today?”

Well, one of my favorite articles of all time written by Ben Carlson over on his blog answers this question, what if you stashed money in cash and then just deployed it into the market happened to do so at the absolute worst time? What if you only invested at Market Peaks? We’re going to use Carlson’s example of a fictitious guy named Bob. Bob’s just the worst market timer ever. Bob began his career in 1970 at age 22. Now Bob’s a diligent saver and he starts saving two grand every single year and he’s disciplined. He actually bumps that up by $2,000 each decade until he could retire at 65 years old. By the way, that was at the end of 2013. So his working years from 1970 to 2013.

But here’s the key distinction. Bob saves this $2,000 every year and then 4,000 the next decade and 6,000 the next decade into cash, not dollar cost averaging directly into his investments but into cash. And then he takes those lump sums at periodic times where he feels like the coast is clear and the market’s going to do well and that’s when he dumps it into the S&P 500. So he is diversifying into the 500 largest US stocks. But remember Bob is the worst market timer ever. So in December of 1972, he invests the six grand that he saved in his bank account only to be subjected to a 48% crash. Now he saves $46,000 in his bank account because he’s like, “Man, that was brutal. This is why I don’t like the stock market.” And in August of 1987, drops it into the market only to lose 34%.

He saves another 68 grand. And right before the turn of the century, right before the.com bubble burst in December of ’99 puts that 68 grand to work. What happened? You and I both know market dropped 49%. Then in October of ’07, right before the great financial crisis, he had another 64,000 saved up and he invested that only to watch his investments drop 52%. And so to tally this up, he saved $184,000 over the course of his 43 years of working and happened to invest those at the absolute just terrible worst possible time historically speaking, he ever could have. What possibly is the lesson here from Bob? Don’t be Bob, this guy’s awful. Like don’t do that that. Well no, that’s actually not, you. See, even though Bob only bought every time at the top of the market, he still ended up a millionaire, $1.1 million at retirement on his $184,000 that he saved.

How is that possible? First off, he was a diligent saver. He saved starting at 22 and did so for over four decades. But here’s the even bigger lesson for us. Bob never sold. So yes, he invested at the wrong times, but he never ever sold out of his investments once he put them in. When the market dropped 52%, he didn’t sell, he didn’t panic, he stayed put. Now of course, had he just dollar cost averaged over the 43 years, he would’ve had $2.3 million instead of $1.1. But the encouragement that I hope this provides you as we sit here today with terrible stock and bond performance, negative sentiment and a poor economic outlook, is that you have to stay invested. And that confidence in ability to stay disciplined starts with a great financial plan. And if you’re not sure where to turn and you’d like our help, we here at Creative Planning have local advisors ready to answer your questions.

When’s the last time you’ve had a complete wealth plan? I’m talking to estate planning, financial planning, tax planning, and had that provided to you in a clear and an understandable way without the advisor trying to sell you something. We’ve been helping families just like you since 1983. Here at Creative Planning, we’re a law firm with 50 attorneys, a tax practice with over 85 CPAs, a wealth management firm with over 300 certified financial planners. Visit us today at creativeplanning.com/radio to request to meet with a local advisor. Again, that’s creativeplanning.com/radio. Why not give your wealth a second? Look, when we come back due to inflation, 401(k) limits are increasing. I’ll share those with you ahead on the show. Stay tuned.

Announcer: Have you been rattled by the markets this year? Maybe you lost sleep, obsessively checked your balances, or even pulled out of investing altogether. If this sounds familiar, you either don’t have a   Planning. Our wealth managers, CPAs, and attorneys work together to create plans and portfolios that balance your long-term growth needs with short-term stability so that you can prosper in any market condition. To get started on a plan or to get a second opinion on one you already have, go to creativeplanning.com/radio to schedule a meeting. This one small step could change your entire perspective on your financial future. Why not give your wealth a second look? With our team’s expertise across investing, taxes and estate planning, you can be confident every element of your plan is working harder together no matter what the market is doing. Just go to creativeplanning.com/radio today to request your free meeting. That’s creativeplanning.com/radio. Now back to Rethink Your Money, presented by Creative Planning with your host John Higginson.

John:  I am being joined now by an extra special guest. His name is Micah Lawson and he’s a client relations manager here at Creative Planning on our 401(k) team. Has over a decade of experience in this area and he works on a daily basis providing education and guidance to plan sponsors and participants alike. And I’ve asked him to come on today and share with us some of the updates as we approach the new year. And so Micah, thank you so much for joining me today. Let’s just start with a recap. What are the current four deferral limits for 2022 in case someone listening is trying to make sure they max out before the end of the year?

Micah Lawson:    Yeah, great question. So for 2022, the elective deferral limit to a 401k, a 403(b) or 457(b) plan is 20,500. That’s actually up from the previous year of 19,500. There’s other limits of course as well. There’s simple IRA limits, that’s 14,000 for 2022. They catch up for any participant over the age of 50 is 6,500 in a 401(k) or 403(b) plan. And then there’s the maximum amount that can go in at the plan level, which is 61,000.

John:  Well, I’ve had plenty of people not adjust their contributions to reflect the higher limits. What do you advise people do to ensure that they are maxing out?

Micah:  Yeah, now’s a great time of year to kind of take a re-look at that. Typically we advise each January for participants to look at what they’re saving and make sure if they’re expecting to max out that they’re still doing that. But for all your listeners today, I would encourage them, especially if historically they’ve maxed out to check that, because we run into that a lot, John, where we meet with a participant, they’re like, “Oh yeah, I’m set to max out. I get paid 26 times a year. I just did the math and did the exact amount for those 26 paychecks.” And they don’t remember to update that when it increases. So someone who did that three years ago could be missing out if they’re 50 or older could be missing out on $5,000 difference of deferral amounts.

John:  Wow. Yeah. Well we’ve seen with inflation at 40 year highs, the estate tax exemption go up almost a million dollars. Social security checks are increasing over 8% and deferral limits are increasing as well for 2023. What are those Jumping to Micah?

Micah:  The IRS just announced them and I think we can share kind of a chart with all your listeners that’ll be very easy to see and all those different limits. So the 2023 limits for deferrals are 22,500 for someone under the age of 50. The catch up also was increased. So is that additional 7,500 for someone over the age of 50 bringing in total contribution limit to 30,000. And then of course there’s a lot of other limits. We’re kind of focusing on the good here, but there’s obviously social security waste base increases. So in some ways there’s people who are high earners that might be taxed more as well. So something to kind of check off now is what you’re set to contribute for the rest of this year. Someone probably has four to six paychecks left between now and the end of the year. See if there are any tweaks that need to be made to make sure you’re taking full advantage of those tax savings in 2022, but then immediately put something on their calendar for early January to increase it again because it’s one of the most significant increases in the last decade to these limits.

John: Well, fantastic advice. Thanks so much for updating us, Micah, on these new 401(k) limits as they are set to increase and I look forward to having you back on the show soon.

Micah:  Thank you, John.

John:  Again, that was Micah Lawson here at Creative Planning, a client relations manager on our 401(k) team. And if you have any questions around your 401(k), whether you are the plan sponsor, business owner, or you are simply a participant in a plan, we have a team here at Creative Planning with tremendous experience ready to help in any way we can. Get your questions answered by going to creativeplanning.com/radio. Again, any 401(k) questions you have as the end of the year approaches, get them answered by going to creativeplanning.com/radio. Well, I want to transition over to another scenario where a prospective client came in with a whole pile of cash and it wasn’t because they just had a liquidity event. It was “John, this is our strategy, markets are down, things are bad, I want safety.” The problem is cash is not an investment strategy. Cash is really misunderstood.

It feels safe, but it’s not. If you’re in the woods and you come upon a grizzly bear, it feels really safe to run away as fast as you can. But as you might know, the best chance of survival by far is to fall down and play dead because you’re not outrunning a grizzly but feel safer. Just start running. Oh, by the way, I want this show to add as much value to your life as possible, not just financial. If you run into a polar bear or a black bear, just run forest run because plain dead doesn’t work for those types of bears. So I hope you’re Dwight Schrute from the office and your bears really well. But when it comes to bear markets, you see what I did there, right? By the way, that nice little segue, bears, bear markets. Yep, I know, but it feels safer to be in cash, but it’s absolutely not.

And let me share with you a few reasons why. I mean, first off, the number one reason you invest is to outpace inflation, hopefully grow your purchasing power over time. If you had a million dollars and inflation was at 4%. 25 years later, your purchasing power would be less than 500 grand. Over half your money would be eroded at 4% inflation. If inflation’s at 6%, just over 200 grand, nearly 80% of your purchasing power would be eroded in 25 years. Obviously right now we’re sitting at 40 year high inflation. Let’s go all the way back to 1928. Your odds of beating the S&P 500 while sitting in cash have been 31%, again over rolling one year periods. But of course, the longer that your cash sits, the lower your odds are of beating the market. So listen to this and I don’t want you to miss it.

An investor in the S&P 500 has beaten cash in every 25 year period, including those who bought at the peak in 1929 right before the Great Depression. The name of the game with investing is to recognize that none of us have a crystal ball and therefore give yourself the highest probability of success possible given the information that you currently have. I want you to expect volatility and I want you to embrace volatility. If you’ve got a pile of money in cash right now, don’t lie to yourself and say, “I’m just going to sit in cash until volatility blows over and then I’ll get back in. That’s what I’m going to do.” Statistically, as I just mentioned, 70% of the time you are going to be wrong. The risk of being out of the market is often greater than the risk of being in, especially when inflation’s at nearly 8%.

Another reason cash is not an investment strategy is that missing out on the best days can be really costly. You see, during bear markets like we’re sitting in right now, volatility tends to cluster right? What I mean is the best days in the market are often concentrated around the worst days in the market and it’s really advantageous for you in the long run to not be out of the market on those best days. We just saw a few weeks ago, the market spiked 5% a day. You do not want to be on the sideline when that happens. In fact, I’ll post this chart to the radio page of our website atcreativeplanning.com/radio for you to review. It shows that from 1997 to 2016, a period that includes two large bear markets, if you just missed the 30 best days, all of your returns were wiped off, right?

If you just held the entire time, you may just under 8% per year. Think about that. You missed 30 days over a 20 year period that earned nearly 8% a year and as a result, you were flat, you earned nothing. Remember, focus on time in the market, certainly not on timing the market, but let me share with you my observations as a wealth manager having met with thousands of investors as to why. Even though statistically it’s insane to carry a ton of cash, people do it. There are a couple reasons. Number one, they might say that cash is king, but that’s not really what they mean. You see, you might carry a lot of cash because you like the flexibility of cash. You like knowing that it’s available to you. And to that, I would say there are many ways to invest, especially now that rates have risen, where you can have things in lower volatility, investments that are paying healthy interest rates, and you can still get your money back within three days.

You don’t need to go lock it up for five or 10 or 20 years being eaten away like little termites by inflation. But by far and away, the number one reason in my experience that people have cash is that they have no conviction about where to invest that cash. And this ultimately comes back to the fact that there is no measurable written, documented, definable financial plan that guides each of these investment decisions. Which leads to my question for you. Do you have that? Do you know with intentionality exactly how every single dollar that you’ve ever saved is deployed for a purpose within the context of a larger strategy that looks at your taxes, that evaluates your estate plan? Because once you have that, you don’t sit with hundreds of thousands of dollars in cash because you have confidence and conviction of exactly where that should best be invested in accordance with your written financial plan.

And I know this is something that I discuss multiple times every single show, but it’s because really nothing else matters. All of these other discussion points are rendered mostly irrelevant if you don’t have a comprehensive financial plan. And if you either don’t have that or you’re not sure how buttoned up your current one is, and you haven’t sat down recently with a firm like us here at Creative Planning, a law firm, a tax practice, a financial planning firm, and met with a fiduciary, not selling you something, but acting in your best interest to answer your questions and provide you clarity around your entire financial plan, I want to offer you the chance to sit down with a local advisor and allow us here before this year ends to reaffirm the parts of your plan that are going great and also help you rethink some of the areas that could be improved. Visit us as thousands of others before you have done by going to creativeplanning.com/radio. And when we come back, it’s time for rethink or reaffirm and I’ve got a great one for you today that and more ahead on the show.

Announcer:  At Creative Planning, we provide custom tailored solutions for all your money management needs as our team is structured to cover all areas of your financial life. Why not give your wealth a second? Look, visit creativeplanning.com Now back to Rethink Your Money presented by Creative Planning with your host John Higginson.

John:  Kids really do say the darnedest things, don’t they? And it was no different this last week. And by the way, this isn’t just a funny story. This is really critical for your financial wellness because Jude, our kindergartner, he discovered a strategy that will guarantee all of us riches. And thankfully he shared it with me. In turn, I’m going to share it with you because that’s the kind of guy I am. I’m, selfless and I want to give up the goods. So we are at this Christmas market where a bunch of elementary kids that are in this entrepreneur startup club have booths. There are about a hundred of them set up on the high school football field. Some of these kids have baked goods and carnival style games, and our son had succulents planted in upcycled mugs. My wife Britney and I give Zaya our second grader and Jude our kindergartner, $20 each so that they can go around to the booths and actually support some of these kids that have worked really hard on their businesses.

Plus they get to do some shopping, kind of fun. Of course, they bolt on a dead sprint to the far end of the football field to buy slushies, probably the smartest entrepreneur in the entire group who has done the market analysis and realized my consumer is a bunch of kids, let me just freeze sugar. So boom, Zaya and Jude are both down to $18, but they’ve got their sugar high and bright blue mouths for the entire rest of the day. And this is when Jude says,” Hey dad, I’ve got a lot of money.” “Yeah, you do Jude.” And I think he’s just alluding to the fact that he has $18. But no, what he’s realized and goes on to explain to me is “Dad, I gave them one and they gave me five back.” His little eyes had lit up like he discovered the fountain of youth, unlimited riches.

He’s like, this is crazy. I get a slushie and then they give me more money. I love shopping. I get why mom and grandma love shopping. This is fun. I’m getting rich. And so if you hear nothing else on today’s show, just take the Jude approach, go out and buy things with cash and they’ll give you more money in return. And so there you have it. But of course I also explained to Jude why that wasn’t true. Because while ignorance is bliss, I couldn’t let him go on any longer having a dad that’s a financial planner. And so I said, “Jude, we’ve got to rethink this. Let’s play a little game, Jude of rethink or reaffirm. We got to rethink that.” And I also want to play that very same game with you right now on a different and far more believable financial headline. And that conventional wisdom is I need gold because inflation is really high.

I have heard this countless times over the last 12 months. John, what do you think about gold? Inflation’s high. And part of this is because these gold companies spend an insane amount of money advertising. It’s unbelievable. I was listening to one of my favorite sports podcasts that I will leave nameless because I don’t want to call them out that directly. And this live read interrupts my glorious jog. And here’s what it said, “We are living in tough economic times with soaring grocery prices, high inflation and an unstable stock market. Do you really want to gamble with your investments? Well then consider gold and precious metal investments. XYZ company can help protect your wealth and financial future. Don’t leave retirement to chance. Invest in gold.” Interesting. Tough economic times, soaring grocery prices. Do you want to gamble? Do you want to leave your retirement to chance?

Huh? Well, if not, there’s a clear answer here. It’s just golden precious metals, that’s the safe thing. So let’s examine this, and I’m going to start in 1970 because if you go back further than that, the US was on the gold standard and price was basically fixed. Gold basically had an incredible run in the late ’70s, which coincided with a period of high inflation. So it immediately created this reputation and sort of skewed the data, especially early on. However much of that spike was attributed to us leaving the gold standard and the value of gold simply adjusting to the free market. And by the way, it also bubbled and then crashed really hard, unrelated to inflation. Okay? So that’s what happened at first. And so since that big run up, 1981 to October of this year, gold returned, and I don’t want you to miss this, it’s so brutal.

2.5% annualized. And what was inflation over that 40 plus year period? 3%. What the S&P 500 returned over that same period of time? 11% annualized. How about 1981 through 2001? That 20 year period, gold was down 53%. Imagine being invested in the stock market. You’re diversified in index funds, you shred your statement for 20 years, you open it up and your million dollars is worth 470,000. 20 years later you’d be like, wait, what? Worst investment ever. But again, I mean gold, you need gold. If you don’t want to gamble. You want to not leave your retirement to chance. During that same 20 year, what was inflation at? 105%. S&P 500 grew by 1523%. So again, to recap, gold down 53%, inflation up over 100% and the S&P up 1523%, the purchasing power of gold dropped 80%.

And because we know how poor our behavior often is as investors, we pile in at the end when things are hot and we get out when we’re scared, when things aren’t doing well, just imagine who piled at the end of 1980 because gold really was that hot new investment off the gold standard inflation had just had back to back years of 13%. So it’s like, “Oh, go grab gold, it’ll help.” If you had done that, you would’ve lost 80% of your purchasing power over the next 20 years. Meanwhile, stocks were up 16x. But how about this latest period of inflation? Because we just went through a period which is basically kind of in theory why people owned gold. We had a global pandemic and the global economy effectively stopped and then through monetary and fiscal stimulus, just slammed rates to zero and just pumped trillions of dollars into the economy setting off record 40 year high inflation.

So the convergence of exactly, theoretically, at least why you would want gold. For the last two years since the beginning of 2021 inflation’s up 14%. That’s been on every headline. Everywhere you turn gold is down 14%. S&P 500? Man, the market’s been terrible. It’s up 6% over the last two years. So here’s the summary of gold. Since 1970, gold’s been marked by two huge run-ups, ’76 to ’80 and 2007 to 2011. The remainder of the years have been long periods of losses. Oh, and by the way, it’s volatility’s been greater than stocks. So if you’re looking for like T-Bill returns with more volatility than the stock market and less liquidity than… Yeah, yeah, don’t gamble with your retirement, just go buy gold. And so the verdict of this rethink or reaffirm, we are absolutely going to rethink the need to buy gold because inflation is high and a few other negative aspects of gold.

Spreads are insane. Storage fees are high, right? That’s why the next time a cold caller calls you up and says, “Well, we’ve got all these great deals on gold and here’s why you should buy it and we’ll give you discounted storage fees.” Just think to yourself, why did a perfect stranger call me just out of the… “Ah, they’re so kind, the goodness of their heart.” To offer to sell me this commodity That’s going to be an absolute must if the world ends or inflation is high. And how counterintuitive is that? Why wouldn’t they be hoarding gold for themselves? What if the world ends? What if our currency goes to zero? What are you going to do? Lug around a bunch of gold bars in a backpack and sliver off a little piece of it down at QuickTrip to get a six pack? No. So instead, what should you be doing?

Invest in things that pay you. Bonds pay interest, stocks pay dividends, real estate pays income. And remember just when you thought it couldn’t get any worse, here’s the zinger. Gold doesn’t compound. If you place four gold bars into your safe and 20 years later you open up your safe, I don’t care if you’ve been blaring Marvin Gaye, Let’s Get It On. There aren’t little gold bars crawling around in there asking for a snack and a late bedtime. You’ve still got four gold bars in that safe and you’re just hoping someone will pay you more than what you bought them for prior. So again, basically other than that, I love gold. And if this is bringing about any questions in your mind, maybe it’s that you own a lot of gold, maybe it’s just that you’re wondering if you should be rethinking some of the strategies that have been promoted to you and maybe unfortunately, by commission hungry brokers masquerading as financial advisors because they’re everywhere.

The minority are firms like us here at Creative Planning where we’re not duly registered, we’re not also brokers. We’re not receiving third party kickbacks from fund companies. We’re not pushing our proprietary funds, but rather acting as fiduciaries, legally responsible to put your best interests ahead of our own. That’s the same standard that you receive from CPAs and attorneys. And we are a law firm in a tax practice with attorneys and CPAs and also from our wealth managers. We think you should be getting objective advice on your life savings. If you’ve got questions, go to creative planning.com/radio to speak with a local advisor. You’ll be sold nothing. There’s no pressure to become a client. We have provided this to thousands of people just like you and are managing or advising on $225 billion in all 50 states and 75 countries around the world. And we’ve been in business since 1983.

Why not give your wealth a second look, visit us right now at creativeplanning.com/radio. Let’s examine one other piece of common wisdom as we continue on with rethink or reaffirm. How about this one? The best investment vehicle to minimize taxes is to invest in your 401(k). All right, so let’s unpack this because there are some advantages to retirement accounts. 401(K)s, 403(b)s, thrift savings plans, traditional IRAs, step IRAs, simple IRAs, right? You name it. But really as I see it here are the biggest pros to deferred retirement accounts, two of which are behavioral, one is financial. So the first is they come out automatically from your paycheck. So if you’re employed somewhere and you have a 401(k), you’ve just got it set up where it automatically gets taken from your paycheck. That automation is critical. It’s huge. Number two is also behavioral. You get hit with a 10% penalty if you pull out of those accounts early.

And so those two controls are very valuable. Now, by far, the biggest financial benefit to many deferred retirement accounts is that you have the opportunity to receive an employer match on your contributions, right? So you’re effectively receiving a 100% return on your investment with those match dollars the moment it goes in, subject obviously to vesting rules within your plan. And so if you notice I didn’t mention in those three primary advantages, the tax benefits. You see, oftentimes people jump to the tax savings as like the most important benefit of those types of plans. It’s not because remember, if you make $100,000 and you put 10 grand into your 401(k) and you’re in a 22% tax bracket and your CPA says, “Oh my gosh, great job. By deferring that $10,000 of income into your 401(k), you just saved yourself $2,200 on your taxes.”

I know I did that fast, so I apologize, but I hope you’re following with me. Now, the reality is though you didn’t save $2,200. What you did was very different. You just went to the IRS and said, “Hey, can I pay tax on that $10,000 of income later?” You see, you still have to pay tax on that $10,000 of income. You’re just pushing that obligation into the future. Now, why has conventional wisdom always been that that would be smart? Well, because the theory would be that while you’re working, you make more money, you’re earning income, and then once you go to retire and you withdraw the money from those accounts, you’ll be in a lower tax bracket. That potential arbitrage is the only benefit. So what would your tax savings be if let’s suppose that was correct, and you get into retirement and you’ve gone from the 22% bracket to the 12% bracket, your savings on that 10 grand was $1,000.

That 10% difference? Well, that’d be huge. That’d be amazing. But in working with thousands of retirees, here’s what I’ve seen. You don’t usually end up in a significantly lower tax bracket. And to exasperate this even further in the reason why the talk of the town the last few years has been Roth IRAs and Roth 401(k)s, well, it’s because currently we’re in the lowest tax rate environment that we’ve seen in decades. When the Trump tax reform was enacted, we took already low Bush tax cut rates and lowered them even further, and then expanded income amounts you could earn within those lower brackets. And so yes, if you are someone like I met with earlier this week who’s making $1.8 million of income and not maxing out retirement plans and not considering something like a defined benefit plan where they could defer hundreds of thousands of dollars of that income to a later date, well, yeah, that person, it’s probably reasonable to assume that when they’re in retirement, which is going to be in about five years, they won’t be making $1.8 million a year.

Now, I know what you’re thinking, “Man, that person’s rolling.” They are. They’re crushing it. But that’s the type of person that should be deferring income because it’s reasonable to assume that that arbitrage could be pretty significant even if rates go up, which we expect them to with over 30 trillion of national debt. And even if higher rates aren’t passed the sun setting of the current rates at the end of 2025, remember right now if you are married and you file jointly, you need to be making nearly $350,000 of income to jump from the 24 to the 32% tax bracket. So obviously this isn’t personalized advice, and I’m painting with a very broad brush, but if you are single, cut that in half, about $175,000 of income. And if you’re under those limits, you most likely would benefit from contributing to the Roth side of your retirement plan if one is offered.

Again, talk to a CPA before you make those elections. Come talk to us here at Creative Planning. We help people with this very same question across the country every single day. And so are we rethinking or are we reaffirming that the best investment vehicle to minimize taxes is your 401k or similar type of retirement account? That is a resounding rethink, and it’s why true or real financial planning, however you want to label it cannot be done without CPA integration, without a tax plan attached to that investment plan. If you’re not getting that, come talk with us here at Creative Planning and we’ll go through a personalized analysis for you of your financial situation so that you can rethink or reaffirm the strategies that you have in place. I want to be clear, if you reach out to us, there’s no pressure to become a client, you’ll be sold nothing. We are fiduciaries committed to helping you find a richer way to wealth. Visit us today to speak with a local advisor by going to creativeplanning.com/radio. When we come back, I’ll share with you listener questions and answers so that you can learn through the experiences of others that and more ahead on the show.

Announcer:  Are you only thinking about your taxes around April 15th? If so, you might be leaving a lot of your hard-earned money on the table. From tax loss harvesting to making tax mark charitable contributions, there are many ways to save on taxes and boost your wealth. At Creative Planning. Our wealth managers work with in-house CPAs and attorneys to proactively look for tax efficiencies in every element of your financial plan, helping ensure your money is working as hard as it can for you day in and day out. To see where you could be saving more on taxes, go to creativeplanning.com/radio to set up a visit with one of our wealth managers. We’ll review your plan and identify opportunities to save you a bundle on taxes. If you’ve never had a financial advisor review your tax return, now is the time to go to creativeplanning.com/radio to set up a free introductory visit. Find out now what you could be doing to minimize your tax burden and maximize your wealth because it’s what you keep that matters. That’s creativeplanning.com/radio. Now back to Rethink Your Money, presented by Creative Planning with your host John Higginson.

John:  It’s time for me to answer listener questions. Remember, if you have questions that you would like me personally to answer, you can email radio@creative planning.com. I do my best to respond to all of those and maybe even we’ll share that on the air if I think it’s something that is broadly applicable and useful. Again, email me at radio@creativeplanning.com to get your questions answered. My first one is from Kenneth in Arizona. “I’ve been out of the market for a little over a year. With a future recession obvious, should I still be out of the market?” Well, I hope Kenneth listened to the beginning of the show because I spoke extensively about why you should not try to time the market, why you need to stay invested, but really this all comes down to time horizons. If Kenneth needs this money two years from now, putting it in the market, and I’m assuming he’s referencing the stock market, is a risky proposition.

More times than not, the account will be worth more money than it is today, 24 months from now or 36 months from now. But it absolutely could still be down and down significantly, if you look historically at volatility in the returns of the market. But if these same dollars in question are parts of Kenneth’s plan that he doesn’t need for let’s say seven years or 10 years, or 18 years or 23 years, then who cares about a recession? Dollar cost averaging, rebalance strategically and buy more if there’s a recession and things go on sale within the context of your broad asset allocation. And of course, you should be in the market because as mentioned earlier, there’s been no rolling 25 year period since the 1920s where cash has outperformed the market. If Kenneth needs this money in six months, of course he should be out of the market.

If Kenneth doesn’t have a big enough emergency fund, well then probably some of those monies should be out of the market. If he needs some of those dollars in four years, well maybe consider bonds paying four, five, 6% now as a result of higher interest rates. And that’s why the answer to this is much more layered than just should I be in or out because I think recession’s coming. But much more important is when do I need these dollars and how much of them do I need? Next let’s go to Lee in North Dakota. His question, which piggybacks a little bit here on Kenneth’s question, and Lee said, “I’ve heard you talking about staying in the market all the time, but when the market’s in a downtrend, why wouldn’t you sit on the sidelines until the market’s broader trend goes positive?£ Now, I’ll say this, trend following, especially from kind of the quant side of financial management has become popular.

And the basic idea of trend following is that you’re not necessarily jumping in and out of the market trying to time it on a daily basis or pick the right stocks. You’re just looking at rolling averages of the market and saying, “Are we in at a macro level? Like an uptrend or a downtrend? And if we’re in that downtrend, I’m going to lighten my equity exposure, I’m going to be less in the stock market. I’m going to have more conservative investments, and then I’m going to tilt it the other way once I see that trend reverse.” Now, obviously in theory, this is amazing, right? Like, okay, I’m going to catch the upswings. I’m going to invest in great bull markets, and when there are bear markets, I’m going to avoid suffering those losses by being on the sidelines or heavy in bonds. Wow, that’s amazing, isn’t it?

Yeah. So would like riding unicorns around in the sky and having pots of gold to go pick up at the end of rainbows, that would be awesome too. To execute this over a lifetime of investing without making mistakes and without missing market spikes is darn near impossible. And the primary reason for that is that markets recover too rapidly. We think the crashes and the drops are quick. The recoveries are often even faster. Think about the great financial crisis. Market was down over 50% peak to trough. And just when negative sentiment was at its peak in March of 2009, when there was blood in the streets and the entire financial system was likely to go under the market was up 40% in just a few months. One year later, the market had gone up over 70%. But an even better and more recent example of this is what happened with the pandemic.

Imagine trying to be a trend follower in 2020. We have the fastest bear market in the history of the market. So basically the trend reverses from positive to negative in the blink of an eye, and the market’s down over 30%. Just as you say, “Wow, I mean this pandemic’s nuts. This thing’s crazy. I mean, businesses are being forced to close right now. Schools aren’t open. This is a clear down trend.” You move to cash. Well, effectively, as you’re making that trade, we saw the fastest recovery in the history of the market. And of course, in short order, the market was already back up over 50%. While you were on the sidelines, just now becoming aware, !Oh wow.” You’re rubbing the little sleep eye crusties out of your eye in the morning going, “Wait a second, now we’re in an uptrend. I guess I better get back in.”

Oh, well, that worked out really well. I’m pretty sure you make a lot of money by selling low and buying high. Good job trend follower. And by the way, I’m not beating Lee up over the question because in theory it’d be amazing, but in practice, I’ve yet to see anyone pull it off over long periods of time. Again, if you have questions, do what Kenneth and Lee did and email those over to radio@creative planning.com. Of course, if you’d like a second opinion on your financial situation, whether it be your taxes, your estate planning, your financial planning, you can request to speak with a local credentialed fiduciary here at Creative Planning by going to creativeplanning.com/radio. Again, that’s creativeplanning.com/radio to get your most important questions answered in a comfortable environment with absolutely no pressure to become a client.

And my philosophy is we don’t just learn to learn. It’s not useful to know more information. So instead, we want to learn to live. It’s in the doing where we actually see benefits and there’s such a deeper meaning behind our money because if you really stop and think about it, money is certainly not the root of all evil, right? The love of money is. That’s often misunderstood. But money is also amoral, like it’s not good or bad, it’s just a tool that we can use for obviously great, good or terrible things. And this time of year around the holidays, I know for my wife and I, we feel extremely blessed because when we’re talking about getting each other gifts, and by the way, I’m a terrible gift giver. My wife is amazing. You almost have to stop and pinch yourself because it’s not like I need anything and I’m using that need word intentionally. There’s things that I want, but all of my basic needs are covered.

And if you’re in that situation right now too, it’s worth just pausing and counting our blessings. That’s not how everyone in the world is positioned. That’s not even how everyone in our country or in your town are. There’s tremendous need, and I encourage all of us to look for those opportunities, especially during this time of year, to be mindful of people that are struggling and to use our money in ways that will help those people. And one of the things that happens as a parent is the gift giving for kids can become way too much of the focus of Christmas. It’s all about what are we getting? Give me your Christmas list. So my wife and I implement with our kids a gift buying process that is something that they want, something they need, something they wear, something they read. So every kid gets four gifts.

I have to continually remind my wife, “Don’t put like four gifts inside of one package that’s cheating.” She loves giving gifts. It’s like, “No, that’s not the point of this.” And yes, if you remember your multiplication tables from elementary school with our seven kids, that’s still 28 gifts plus stockings. You can see where before we did this, it was nuts. How many gifts were piled all over our entire room. But I think a lot of this is lifestyle creep. You just kind of continue to build upon what you’ve done in years past. And if you’re advancing in your career, you start making a little bit more money and you just all of a sudden you look down at the room and go, “What is going on here? We’ve got to get back to the whole point of this thing. It’s certainly not all of these gifts.”

And if you want to implement something similar with your kids or your grandkids, go ahead and steal it from me. I stole it from somebody else. I don’t even remember who, but it certainly wasn’t my idea. I heard it somewhere several years ago. And maybe even consider with some of the extra money you would’ve spent on gifts discussing with your kids or grandkids, how you can deploy those dollars to someone in need because the ripple effect of that generosity is certainly a more significant use of those dollars than another toy that’s going to be donated five years from now, or another pair of shoes that they’ll outgrow. And as always, I am grateful for you spending some time with me as together we seek to make progress in these areas where our life meets our money. And remember, we’re the wealthiest society in the history of planet Earth. Let’s make our money matter. If you enjoy the podcast, please subscribe, share, and leave us a rating.

Disclaimer:  The preceding program is furnished by Creative Planning an SEC registered investment advisory firm that manages or advises on $225 billion in assets. John Higginson works for Creative Planning and all opinions expressed by John or his guests are solely their own and do not represent the opinion of Creative Planning. This show is designed to be informational in nature and does not constitute investment advice. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on this show, will be profitable or equal any historical performance levels. Clients have creative planning may maintain positions in the securities discussed on this show for individual guidance. Please speak with an attorney, CPA or financial planner directly for customized legal tax or financial advice that accounts for your personal risk tolerance objectives and suitability. If you would like our help request to speak to an advisor by going to creativeplanning.com. Creative Planning tax and legal are separate entities that must be engaged independently.

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