It’s the start of a new year, and resolutions are on the mind — especially financial ones. But how do you know which to prioritize? This week, John reveals the ONLY financial resolution you need to make this year, and financial psychologist Dr. Dan Pallesen joins the conversation to give practical tips and tricks on how to make your resolution stick.
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!
Transcript:
John: Welcome to the Rethink Your Money Podcast presented by Creative Planning. I’m John Hagensen and ahead on today’s show, we’ll discuss how you can have success with your money here in 2023 by sharing the five money rules to remember, the steps to take for accomplishing your New Year’s resolutions as well as my answers to your personal finance questions. Now, join me as I help you rethink your money.
Now, if you’re like me, you may have spent considerable time with family over the holidays. It’s one of the blessings of the holidays. Our son from the Army was back home. We finally got a picture with all nine of us. My wife loves those, kids not so much. Trying to get nine people, seven of which are kids, two of which are three and under all looking at the camera and not looking homeless is quite a challenge. I’ll tell you that.
Whenever I’m around my wife as she’s with the kids for extended periods of time, I am amazed at her ability to multitask. She will be on the phone, cooking a meal, holding a baby on one hip, helping another kid with a homemade craft while figuring out the grooming calendar for our dog this quarter.
And meanwhile, you have me, I can barely walk and chew gum at the same time. That’s a challenge for me. I am decent if focused on one thing, but give me a scenario where multitasking is required, it’s bad. I mean, it’s ugly. And because of that, when I need to multitask, I become incredibly overwhelmed. And here’s the challenge and this sort of loop that we get caught up in.
Well, progress requires change. We won’t achieve different results doing the exact same thing over and over. We know that. Well, that change then requires us to deny our bias toward the status quo. Google New Year and financial plan, you’re going to find hundreds of articles all giving you different advice, 10 money moves, 5 must dos, 6 ways to take it back to the basics, and it’s overwhelming.
My objective each and every week, but in particular for this show as we kick off a new year, is to simplify all of this for you. I don’t want you to feel overwhelmed because if you are, you’ll go back to what’s familiar. And if you go back to what’s familiar, you won’t be willing to pivot. And if you’re not willing to change, you won’t make progress.
And so here is the theme for today, the only financial resolution that you need to make this year is get a financial plan and stick to it. If you’re wondering, do I have a financial plan, I might have one, John, I’m not sure, I kind of have one, here are the nine components that should go into a financial plan. Give yourself a mental checklist as I go through these. Do you have these?
- What are your financial goals? This is the entire purpose of a financial plan. What are our objectives, and what would we like to see happen with our money? Then you can build a plan and chart a course to give yourself the highest probability of accomplishing those.
- A net worth statement, complete balance sheet for your personal finances. Do you have one of those?
- Budget and cash flow planning.
- Debt management plan. Do you have any debt, student loans, credit cards, mortgages, auto payments?
- A retirement plan. If at some point I stop working and my income ceases, are we in a position that we’ve saved enough to generate the income necessary to maintain our lifestyle?
- Emergency funds.
- Insurance coverages.
- Your estate planning.
And 9. Your tax plan.
By the way, this is just a start. These are the nine basic things. Some people may need more components to their plan, there might even be more complexity, but these nine components are essential to any comprehensive well-built financial plan. And judging by that list, you’re going to need someone with tremendous experience in these areas. And if you’re lucky, you can find somebody who actually enjoys doing it as well.
Here at Creative Planning, we’ve been helping families build out financial plans, real, true comprehensive financial plans since 1983. And here’s the other reality, no one person can do all of those nine things. Well, I suppose if someone’s a certified financial planner, CPA and attorney, maybe, but building out a tax plan and estate plan and all that financial planning, you’re going to need a team.
I’m a certified financial planner with my master’s degree in financial services, have experience helping thousands of families. I can’t do all of those things on my own for our clients. I rely on our team, 50 attorneys, 85 CPAs, over 300 certified financial planners, many of whom are specialized in specific areas of finance. I lean on those people.
And so if you’re trying to accomplish this on your own right now, or you have an advisor, but it’s one person, are they an attorney? Are they a CPA? Probably not. Probably doing a great job, but it’s just an incomplete job. Mistakes are far too high with your life savings to not get this right. Visit us at creativeplanning.com/radio. Why not give your wealth a second look?
Well, let’s face it, for investors, this past year was quite a mess, wasn’t it? Basically the market trended lower throughout the entire year and every major stock market saw negative returns. Creative Planning president, Peter Mallouk wrote an article for our clients here at Creative Planning that took a look back at 2022, as well as some of the principles we can apply here in 2023.
And so for a brief recap, the S&P 500 finished down 19.4%, Nasdaq down 33.1, small cap was down 21.5 and international stocks were down 20%. Now, big tech, which carried the market in recent years, I mean that came back to Earth in dramatic fashion, didn’t it? Amazon down 51%. Meta Facebook down 66%, Netflix down 50%, Microsoft down 28%, Google down 39%, Tesla down 65%.
Well, how about bonds? Did they provide solace? We know the answer to that. Every few decades, the stock and bond markets go lower together, and 2022 proved to be one of those years. The US Aggregate Bond Index down 13%, 30 year treasuries down 31%. That downward performance is only 2% difference from the Nasdaq, which are tech stocks. We’re talking bonds. And the US Treasury Bond Index as a whole down 10.7%.
If you were a speculator last year, you were clobbered. Hundreds of cryptocurrencies lost 100% of their value, as did thousands of NFTs and many are never going to recover resulting in permanent losses. Crypto index down 80%, NFT index down 88%.
The popular internet crazed meme stocks, they finally returned to their true market value, Bed Bath & Beyond down 83%, AMC down 85%, GameStop down 52%, Opendoor down 92%.
And as I speak of often on this show, we were reminded once again at how exceptionally terrible Wall Street is at forecasting. I mean, consider that last year, 9 of 10 investment houses predicted stock market gains in 2022. Instead, the market had its worst year since 2008. This is a reminder that when we hear the word forecast, we should just replace it with guesses.
From 2000 to the present, the average Wall Street forecast from the likes of Goldman Sachs, JPMorgan, and Morgan Stanley has missed its target by an average of 13%. Now, given that the stock market averages 7 to 10% per year, depending upon what period you want to measure, a 13% miss is statistically enormous. And so as Peter says in this article, short-term stock market forecasts can best be summarized in one word, worthless.
So here are the five truths to remember for this upcoming year. Number one, a planning led investment approach with a quality diversified portfolio is a solid path to surviving a bear market and ultimately thriving. When it comes to our investments, we often make this more difficult than we need to. Long-term financial success requires you to have short-term income needs in safer vehicles that are available, that yes, we expect to earn lower returns over the long haul.
Once your needs over the next five to seven years are covered with safer assets, you can then invest in more volatile asset classes. Again, assuming that they are strong, diversified investment portfolios, not under-diversified stock picking portfolios with very little predictability. And this allows your growth-oriented investments while volatile in the short-term, to work back to their averages over the long haul.
A second takeaway is that investors that piled into hot trends will likely never recover. Imagine that when you invest in holdings that have no reasonable expected earnings, the bubble often pops.
Number three, the stock market cannot be timed. Consider this, if you were a buy and hold investor since 1980, $1 has grown to $78 and 31 cents. But instead, if beginning in 1980 all the way through 2019, you bought US stocks at the official end date of a recession and then sold at the official start date of the next recession, seemingly timing the market perfectly, your $1 didn’t grow to $78, it only grew to 31. How can that be? That’s surprising, isn’t it?
Well, even if you could predict the beginning and the end of every recession, which we all know none of us could do, stock market returns don’t tie directly to the economic cycle. And so don’t bother wasting your time with this worthless endeavor because remember, the market is forward looking.
Number four, the market is going to go up in most years, down in some years and up and to the right over time. And that’s why there’s so many things that factor into the stock market returns that year to year predictions are completely irrelevant, they’re erroneous. And it’s even worse if you’re acting upon those short-term predictions because it’s likely to cause you great financial harm. But as the famous saying goes, ultimately it’s the time in the market, not timing the market that favors the disciplined investor.
Over a one-year period since 1901, we’re talking 120 years, 73.3% of the time the Dow Jones Industrial Average has positive returns. Every rolling three-year period is up 86% of the time, and every 10-year rolling period since 1901 is up 97% of the time. And again, that’s just large US stocks as measured by the Dow Jones. If you’re diversified into international, small companies, growth, value, micro cap, well, then those numbers even look better. The odds are in your favor.
And our fifth and final money rule to remember, there’s more good news for the disciplined investor. And as Peter so often points out, as clouds are lifted and the markets begin to recover, they tend to do so at a rapid pace. While you and I have no idea when this bear market will subside and when it will give way to the next bull market, we do know recoveries are often very, very fast.
Consider this, after the market bottoms, it recovers at an average rate of 41% over the following three years and 71.8% over the following five years. Of course, we never know when the market has in fact actually bottomed until it’s well into the rear view mirror.
And so to recap these five principles, a planning led investment approach is a solid path to not only surviving a bear market but ultimately thriving. Number two, chasing hot trends is likely to leave you with losses that’ll never recover. Number three, you can’t time the stock market. Number four, the market’s going to go up most of the time, it’ll be down occasionally and up over time. Number five, when the market recovers, it recovers at a rapid pace.
There is still tremendous uncertainty around the economy, inflation, interest rates and volatility. Why not give your wealth a second look? You can visit us creativeplanning.com/radio. That’s creativeplanning.com/radio.
When we come back after the break, I love setting goals and I love New Year’s resolutions, but I’m like most people, I struggle sticking with them. And if you can relate, you will not want to miss my conversation with Dr. Dan Pallesen as we discuss the motivation behind resolutions and how we can accomplish them. That and more ahead on the show.
Announcer: Have you been rattled by the markets this year? Maybe lost sleep, obsessively checked your balances, or even pulled out of investing altogether? If this sounds familiar, you either don’t have a financial plan or you’re not confident in the one you do have, and it’s time to change that.
At Creative 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 Hagensen.
John: I’m joined today by a special guest. His name is Dr. Dan Pallesen. He’s not only a doctor of psychology but also a certified financial planner. He’s a wealth manager here at Creative Planning and I’m really looking forward to this discussion. So welcome back to the show, Dan. Thanks so much for joining us here on Rethink Your Money.
Dr. Dan: Hey, happy to be here, John. Thanks.
John: You know the drill, the gym’s packed in January and by March you waltz right in and drop off the kids at the empty childcare area because people aren’t keeping their New Year’s resolutions. So my question for you is, if we’re so bad at this and we know we’re bad at this, why do we continue to even make these seemingly pointless resolutions?
Dr. Dan: John, I think it’s because we love fresh starts. We love the stories of rising above our past and just coming out on top and there’s no time in the year other than the start of the year where we feel like we can start over. So it’s called the Fresh Start Effect, and it’s just this temporal landmark, it’s this point in time that really doesn’t change all that much. December 31st or January 1st isn’t that big of a change, but we put so much meaning to it. So it feels to us like a fresh start.
So it’s like it’s no matter what happened in the previous year, what failures we feel like that we went through, we get a fresh start. So it’s we’re all on the same page, we’re all starting fresh. That’s why we continue to make these New Year’s resolutions.
John: So what you’re telling us here is that even though the sun sets and rises just like any other day on the calendar, we understand that, there does remain some real value for us in mentally turning the page to accomplish new goals through this fresh start perspective.
Dr. Dan: If you think about it, we like these fresh starts. I mean, a lot of us will make some kind of a resolution around our birthday. We’re saying this year, starting on my birthday, I’m going to do this. Or if you think about when you typically start a diet, you’re not starting a diet on a Wednesday. We typically say, right … We go into the weekend, we’re eating more than we want, we say on Monday, I’ll clean this back up, I’ll start my diet on Monday.
It’s like we want these points in time that feel significant to us. And like I said, there’s nothing like the start of a new year that helps us feel motivated to make some changes.
John: Your example of binging over the weekend reminds me of the person getting the quad stack patty at the In-N-Out drive-through the day before their quadruple bypass.
Dr. Dan: Hey, that’s right. That’s right. Yep, yep.
John: Yeah, we’ll switch over to the salads the day after the surgery.
Dr. Dan: Exactly.
John: All right, Dr. Dan, well, give us the psychology behind why we struggle to keep our New Year’s resolutions. We desire it, we want to, we know that, but it’s hard. And we want to do better this year, so how can we?
Dr. Dan: The motivation is there and that’s why we make them. There’s a lot of us, when we make the resolutions, we believe that we will follow through, but we see over and over again through studies that most of us abandon our New Year’s resolutions before February even hits.
John: Wow.
Dr. Dan: I think the reason for that is we don’t have good systems built around our resolution. So I have to give credit to a behavioral economist, Dan Ariely, who’s a professor at Duke University. He has a great TED Talk where he talks about launching a rocket into space. And at the end of the day, there’s really two things that matter, and this applies to behavior as well, we need fuel and we need to reduce friction. I know rocket science is this complicated thing, but when you boil it down, we just need to increase fuel and decrease friction, and that’s how we get a rocket into space.
And that’s how we follow through with goals and with resolutions. That fresh start effect is the fuel, and it’s almost like pouring gasoline on a big bonfire. It burns bright and it burns fast and it burns hot, but we burn out. And so we need to also reduce friction in our lives. And what I mean by that is setting up our environment in a way that helps us follow through with our resolutions.
John: I’ve heard the example that if you want to start working out or maybe going for a jog in the morning when you go to bed, have your running shoes sitting out, have your running shorts there, have your hoodie because you know it’s going to be cold and you won’t want to get out of your cozy warm bed. And have those things ready to put on so that it creates a trigger, but it removes friction, makes it just a little bit easier, right?
I mean, I don’t know if you have other examples, but obviously something else that comes to my mind, if someone says, I’d like to quit smoking, don’t buy cigarettes, don’t have them in your house. I want to quit drinking, don’t have your favorite bourbon sitting where you can see it all day. You know what I mean? There’s some obvious things.
And this certainly applies to our finances as well and not like these other elements of our lives, success with our money often boils down more to our behavior than any other factor. So Dan, I ask you, what financial applications do you see?
Dr. Dan: Parallels with money and with working out and fitness, I mean, they go on and on and on. And so I think there’s a lot that applies in just goal setting, especially around our money. I would say 99.9% of us want to be good with our money. We want to save more money, we want to invest well. We have these goals around money, so it’s not a matter of increasing motivation. I think most of us are motivated to do better or be better or continue to do well with our money. We have the fuel.
John: Totally agree. We need to remove the friction.
Dr. Dan: Exactly. Exactly. I’m thinking of a client I was just working with the other day where her income is such where she qualifies to make Roth contributions and her approach over the last few years is go through the year and then whatever money is left over in savings at the end of the year, she wants to put into her Roth account. But as you probably know, life happens and money gets consumed in one way or another and she would always have less money at the end of the year than she thought she did to invest. She’s just kind of breaking even.
And so this is a really simple way, but we just started to automate her Roth contributions. In 2022, the limit for her was 6,000. So we would just start with $500 a month going into her Roth account. Now in 2023, those contribution limits have gone up a little bit. So she can put about $540 a month in her Roth account. And it’s just automating it so she doesn’t even think about it.
And I can tell you what she adjusts immediately. It doesn’t feel like she’s losing anything, but she bases her cash flow around that contribution that’s already been made and that’s a way for her to fund. So the point of that story or the takeaway is when we can automate, that’s the best way to reduce friction.
John: Well, that’s fantastic advice. We don’t need to run the marathon with a parachute strapped to our back, that’s for sure and make it harder than it already is for us to accomplish our goals. Automation is so critical and it’s something I talk about regularly on the show. We can’t give ourselves too much credit in the midst of the busyness and complications of our lives that we’re going to, even with a ton of friction, actually maximize our wealth. It’s unrealistic.
Well, thanks so much Dr. Dan. Happy New Year and look forward to talking with you again soon.
Dr. Dan: Happy New Year to you, John. Always a pleasure. Thanks.
John: That was Dr. Dan Pallesen, certified financial planner and a wealth manager here at Creative Planning. And the only New Year’s resolution you need to make here in 2023, when it comes to your money is to get a real true financial plan and stick to it, period. Everything else we’re discussing takes a backseat to that one resolution.
And I want to make your start to this year the best yet. If you have questions and you’d like those answered, you can visit us at creativeplanning.com/radio. That’s creativeplanning.com/radio. Why not give your wealth a second look?
Up next, an all new game of rethink or reaffirm, where I’ll break down common wisdom or a hot take from the financial headlines and we’ll decide together whether we should rethink it or reaffirm it. That and more up next.
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 Hagensen.
John: Before I jump into an all new game of rethink or reaffirm, I wanted to share with you something that I’ve learned as a wealth manager meeting with thousands of hardworking Americans looking to do a great job with their money. Your success and your contentment here in 2023 as we start a new year will be far less driven by your circumstances, by the outcomes and far more by your perspective. Let me give you an example.
Two people are sitting next to each other on a commercial airliner. They’re in coach. One’s in 25 A and the other’s in seat 25 B. Now the passenger in 25 A, they’re looking out the window, checking out the scenery, sipping some ginger ale, tapping their foot, humming a song. They’re in a good mood, they’re happy. The person in seat B, they’re not happy with their situation.
And no, by the way, if you’re thinking, well, John, that’s because the person in seat B is in the middle. I already know that. I’ve flown enough to know B is always a middle seat. But no, that’s not the point. Okay? This is my example. Don’t try to hijack it.
No, the person that’s happy in seat A used to ride a Greyhound to get around the country. They’d buy bus tickets and now they’ve got a higher paying job and they can afford to fly. But the person in seat B who isn’t feeling a lot of contentment, they used to fly private, their business collapsed, they had to file bankruptcy, and now they’re in the back of the airplane in coach sitting in a middle seat. You see those two passengers’ circumstances basically identical. Their perspective though on that circumstance are miles apart.
Remember, frustration is the gap between expectation and reality. And I cannot emphasize to you enough that the absolute most important part of your financial plan for your overall satisfaction will be the one that never requires your lifestyle to take a hit. When we feel as though we are taking a step backward, it can create considerable unhappiness in our lives.
Now, let’s suppose you agree with this, the next question is, how do you do it? How do you build a plan that maintains your lifestyle and hopefully continues to elevate it over time? I have three suggestions for you.
The first, build in margin to your plan. Now, I’m not talking about margin accounts where you’re borrowing against your securities. I’m talking about margin as in flexibility for the uncertainty as in a buffer so that you’re not constantly running all the way to the max within your plan.
My observation is the reason we fail to do this so often is because as we get the raise at work, instead of spending half the raise and saving the other half to increase our savings rate, to give ourselves a bigger cushion, we spend all the raise because now we can buy the way nicer house or the better car or take a really expensive vacation.
And so in essence, what I’m suggesting is lifestyle creep is a real thing and it’s okay to reward yourself as you make more money as you tackle and accomplish professional goals, but you’ll be better off lifestyle creeping a little slower, a little more gradually because that’ll give you a higher likelihood even in the midst of uncertainty for your lifestyle to never have to take a hit. But it’s easier said than done.
Remember, just because you can, doesn’t mean you should. And any financial decisions that are a should I, those are a lot more nuanced and difficult to answer than the could I questions. The could I is pretty pragmatic. Can we afford this? Can we do this? When you can’t afford it and the question becomes, should I do this, well, that’s when good accountability can be incredibly useful.
Here’s my second tip, stop comparing yourself to others here in 2023. You want to find contentment, you want to have perspective, and you want to avoid ever needing to take a big step backward because of something unexpected occurring in your financial life? Then stop trying to keep up with the Joneses because there’s always going to be somebody better looking, richer, happier. I don’t know, you name it.
And the problem with comparisons are that they’re ugly either direction, either we feel pride and arrogance because we’re looking at someone who’s not quote unquote, “at our level,” or we feel envy and jealousy towards someone who is further ahead.
And so in addition to building in margin and stopping with the comparisons, my third tip for you to find success and contentment in this new year is to simply have a financial plan. And so I will say this again, the only financial resolution that you need to make this year is to get a financial plan and stick to it.
And we here at Creative Planning have been helping families just like you since 1983, managing or advising on $225 billion. Get those questions answered. Let us reaffirm the things that you’re doing well and let us bring to light some of the things that you might not be aware of by going to creativeplanning.com/radio.
Well, it’s time for an all new game of rethink or reaffirm where I break down common wisdom or a hot take from the financial headlines and we’ll decide together whether we should rethink it or reaffirm it.
Common wisdom number one, it’s difficult to change financial advisors. Let me tell you what’s difficult. What’s difficult is being the Denver Broncos trading away three players, two first round picks, two second round picks, and then signing Russell Wilson to a $240 million plus extension when he still had two years left on his contract.
I mean, nobody’s feeling sorry for the new owners that Walton family, I’ve heard they’ve got some money. I don’t know, Walmart? I’ve never heard of it. But that, that’s difficult when you’re talking about changing quarterbacks. Now, fortunately for you, if your situation with your financial advisor is similar to the Denver Bronco’s predicament with Russell, you have way more options, none of which are punitive.
You see, when you switch financial advisors, it’s quite simple, most of our clients at Creative Planning maybe sounds harsh, but are firing their current advisor to work with us. Occasionally they’re someone who is a do-it-yourselfer or someone who’s just had their retirement accounts.
And maybe that person’s saying, well, I felt sort of comfortable doing this when it was just in my 401k and I was still working, but now there are a lot more complexities. I need to drive income from the portfolio. I don’t understand the tax implications from those distributions. I don’t know which accounts to take first. I’m not sure how I adjust my investment mix because I’m now phasing into retirement. That person certainly hires us too, but the majority of our new clients come from working with a different financial advisor.
And one of the things that I’ve observed is that it’s often not that that current financial advisor is doing a terrible job. I mean in some cases they are and they absolutely should be fired, but in most cases, the advisor that’s being fired is doing a decent job, it’s just an incomplete job.
And I want you thinking about this, if you currently have an advisor, they’re not throughout the year doing tax planning, combing through their return, running projections. Most advisors are just looking at the investments. Most advisors aren’t attorneys. They’re not able to draft legal documents, create trusts, or help create business documents.
See, that’s what makes us truly unique at Creative Planning. There is a reason Barron’s dubbed us a family office for all because family offices have in the past been exclusive to families with 8 or 9 figure net worths or 10 figure net worths. But here at Creative Planning with 50 attorneys and 85 CPAs and over 300 certified financial planners, being a law firm and a tax practice and obviously a wealth management firm, we are able to offer complete wealth management.
And back to the common wisdom of, it’s difficult to change financial advisors, no, it’s not. The answer to this is to rethink it. Generally a new agreement is signed and we are able to pick up the existing investments exactly as they’re constituted and place them under our management.
And in many cases, the custodian doesn’t even change. Maybe your accounts are currently at one of the major custodians, Charles Schwab being an example. We often don’t even need to move the account. You just say, I’d rather have Creative Planning helping me with these things than my current advisor. And by the way, if we’re not a good fit, generally this is the case with most advisors that you’d be looking to switch to.
And so if you’re looking back on this past year and you’re not 100% confident that you made the moves proactively that you should have been making, well, whether it’s us here at Creative Planning or another firm, I want you to know it’s a simple process to change financial advisors. You are not locked in like the Denver Broncos are.
And our second piece of common wisdom for today’s show, when the market is bad one year, it’ll continue to be bad the following year. Creative planning president, Peter Mallouk spoke about this very topic on his podcast Down the Middle, and I’ll let him take the reins on answering this one. Have a listen.
Peter Mallouk: Well, what’s interesting about the stock market is it’s up about three out of four years and that probability stays just about the same regardless of what happened the year before. So it doesn’t matter if the previous year was negative or positive or really negative or really positive, your odds are about three out of four.
Now, there are a lot of factors that go into that, but what a lot of people are tempted to do is try to call the bottom like, hey, when will we be in a recession? And then I’m going to tilt more heavily into stocks as we’re coming out of the recession. And the reason that’s a mistake is because the stock market is forward looking as you know. Basically it doesn’t look at, hey, what’s going on today? It’s looking at what’s happening down the road.
And an example I like to use is if I had a sandwich shop and I was selling it to you, Jonathan, and you did some research and you found out that there was going to be construction on the entrance to the road to my sandwich shop and it was going to go on for two years, you would not wait for that construction to start to decide what you would pay me. You’re going to pay me very little for my shop because people can’t get into it.
If I was selling my shop and you did your research and it was widely known to the public that huge office buildings and schools were going up around my sandwich shop, even though they’re not built yet, people are going to pay more for my sandwich shop knowing all those people are going to be there. All that future news gets priced in today.
And the stock market is doing that, which is why you see these false starts in the stock market as people try to guess when we’ll be approaching a recession because the market will move up in the middle of a recession and it will wait for a recession to be over.
John: Again, that was Creative Planning president, Peter Mallouk. And this is just another reminder as to why you cannot under any circumstances, manage your investments based upon a market timing approach. And as I’ve been sharing with you throughout the show, the only financial resolution you need to make this year is to get a financial plan and stick to it. Everything else is noise. Go to creativeplanning.com/radio. Why not give your wealth a second look?
Ahead on our final segment, your listener questions and my answers, as well as what I believe to be the most valuable use of your wealth. That and more ahead on the show.
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Now back to Rethink Your Money, presented by Creative Planning with your host, John Hagensen.
John: Our first question comes from Jason in Phoenix, Arizona. What is the change to 401k matching programs in the SECURE 2.0 Act mean for me? And why is that important?
It’s a great question and for those of you listening who are unfamiliar with what the heck the SECURE 2.0 Act even is, just a couple of weeks ago on December 23rd, Congress passed the Consolidated Appropriations Act, which was a 4,155 page, $1.7 trillion year end omnibus spending bill. And while it includes numerous spending provisions across all areas of policy, it also includes significant retirement reforms.
Now, Jason’s done his homework, but specifically to this question on 401k matching programs under the current law, if you are in a 401k, let’s say, and your employer offers a match, even if you are contributing to the Roth side of your 401k, the company match needs to be distributed into a traditional 401k on a pre-tax basis.
Even if currently you are maxing out, let’s say the Roth side of your 401k, every dollar coming in from your employer is still going deferred. So you are achieving some tax diversification if you do it that way, but this new legislation tweaks it so that employers can offer Roth matching contributions. And this has never been the case before. Like other Roth contributions, employees will pay taxes on their Roth match upfront and then be able to take it out later tax exempt.
And so yes, Jason, this is a big change and there are wide ranging other implications and provisions that I will continue to share with you as they become effective, most of which at the earliest are December 31st, 2023. Thank you again for that question, Jason. If you have questions, you can get those answered by emailing [email protected] to submit your questions.
Our next question comes from Linda in Minneapolis, Minnesota. She asks, with most of my investments down in value, I don’t feel like I can judge my advisor entirely on performance. What should I be asking my financial advisor right now?
Well, this is a great question from Linda because you see what you look at, don’t you? And the problem sometimes when we’re assessing our advisor and the value that they’re bringing, we simply just look at in some cases, pretty short-term performance. And if stocks are down and bonds are down and every major index is down, to Linda’s point, it’s hard to say, well, my advisor’s not doing well because unless you had a huge allocation to energy or something like that, that was a flyer that hit, it was inevitable that you were going to have lower balances at the end of 2022 than you had at the beginning of 2022.
So here’s the questions I think you should be asking your financial advisor, and these are just a few off the top of my head, but during volatile markets, how does your firm manage financial plans in bear markets? What strategies are you putting in place to not just get through these but take advantage of them? What actions do we take in bear markets? What happens when the market corrects? What happens if there’s a crash? What do you do? And in this case for Linda, what did you do last year?
Number two, and I think this is a huge one, I’d ask, does this change my retirement timeline or my income plan? If you’re not yet retired, one of the things I’d be asking is, is my plan to retire at age, whatever it is, 67, 62, does my plan still work, or does this derail it or compromise it?
If you’re already retired and you like taking a certain amount out for income, I’d be asking, am I still in a position to continue living the way that I live and take the amount of income that I’m used to taking, and does my plan still hold up?
Number three, I’d ask, how are you going to tap my assets? How are we going to take withdrawals? Which accounts do we plan to take from first? What is the game plan for distributions? Because very few people have a goal of saving a bunch of money, never touching it and then dying with it. So at some point, how do we plan on accessing these monies?
Number four, inflation’s at a 40-year high. So if I’m Linda, I’m asking my advisor in Minneapolis, what are we doing about inflation? What’s our plan?
Number five, how are we going to handle fixed income? We were in a decreasing interest rate environment from a macro level for 30 years, now we’ve seen rapid increases in rates to try to cool off inflation, slow down the economy. How does that change our fixed income strategy? Are we buying individual bonds? Are we laddering bonds? Are we buying bond funds? What durations are we using? Are we lending money to corporations? Are we buying high yield bonds? Do we want to stick to government bonds? Are we looking for tax-free municipal bonds? I’d be asking those questions.
And my sixth and final question that I’d ask if I were Linda, is, what are your recommended tax moves? And the reason this is important is because you intuitively know it’s not what you make, but what you keep that actually matters. Taxes are not an abstract, secondary, sort of significant part of your financial plan. Taxes are the foundation of your plan. Tax planning is the foundation of your plan.
Before you’re ever asking, what investments should I make? The question first is, where should these investments be held? Where do I contribute? Where do I withdraw? What are the tax implications? And that’s why I speak often on this show about the necessary requirement that your financial advisor is either a CPA or works directly with a CPA in a coordinated fashion.
That is why here at Creative Planning, we are a tax practice and a law firm and a financial planning firm. We are regularly reviewing your tax strategies throughout the year, not reporting what you already did, but recognizing we’re in the lowest tax environment we’ve seen in decades. We have over $30 trillion of national debt. Taxes are likely to rise. Most of your money is probably saved in retirement accounts. And if you’re like most people, you don’t have any sort of coordinated game plan right now for how you’re going to minimize taxes to the most efficient extent legally possible.
And that is absolutely what I believe you should be demanding and receiving. And it doesn’t need to be from us here at Creative Planning, find a firm similar to us. But if you haven’t had your tax return reviewed by your advisor in the last year, just fire them. That’s not financial planning. You have an investment advisor, they’re probably pretty good, but that’s not complete wealth management. And there are many tax moves to be taken advantage of right now.
If you’re not sure where to turn, you’ve never had a credentialed fiduciary like us here at Creative Planning, look at your situation comprehensively, your estate planning, your tax planning in addition to your investments, why not give your wealth a second look by going to creativeplanning.com/radio? That’s creativeplanning.com/radio.
Well, I want to end today’s show looking at the deeper meaning of our money because let’s suppose that you and I, we do almost everything right with our money, which let’s be honest, we’re not going to. Even if the effort’s there, spirit is willing, but the flesh is weak, we’ll make some mistakes.
But let’s just say we have a lot of success with our money and we’re overfunded for all of our financial goals. We’re well on track for retirement. We’re able to be generous with causes and organizations that we care about. We’re able to bless and help family members and friends that are in need. We’re able to take amazing vacations. We’re smiling when we see the balances in our accounts.
By the way, if that’s you, congratulations. It’s not by luck. It takes a lot of hard work for you to have gotten where you have. But sadly, I think so often, even for that person, it’s not like, oh wow, I have no problems now, everything is great because I’ve had financial success and my net worth is high enough that I’m going to be able to retire well.
That in and of itself won’t bring peace and it won’t bring happiness. And so if our focus is on how do we obtain wealth, it’ll never be enough. You’ll hit that benchmark and then say, well, I could have a little bit more, maybe that’ll bring me that ultimate joy.
So I want to encourage you rather than focusing on the dollars, focus on what those dollars can do for you. The money itself is insignificant, it doesn’t have inherent value. It’s not a friendship or a relationship that in and of itself is valuable. It’s only valuable because of the uses that it can provide us with.
And many rich people in America are suffering from a unique form of poverty, and that’s having no control over their time. I mean, being at the constant response of others isn’t rich, I don’t care how much money you have. And so I want to encourage you here in 2023, use whatever money you have to better control your time to provide you more freedom, to allow you the opportunity to spend more time with those that you care most for.
And I thought James Clear said it so eloquently, and I’ll leave you with this today when he said, not all uses of time are equal. And this simple truth can make a big difference in life. People who spend their time doing more profitable work make more money. People who spend their time investing in others build better relationships. People who spend their time creating a flexible career enjoy more freedom. People who spend their time working on high impact projects contribute more to society.
Whether you want more wealth, more friendship, more freedom, or more impact here in 2023, it all comes down to how you spend in value, not your money, but your time. And remember, we are the wealthiest society in the history of planet Earth. Let’s make our money matter.
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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 Hagensen works for Creative Planning and all opinions expressed by John or his guests are solely their own and do not represent the opinion of Creative Planning.
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 of 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 independent-
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