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The Path to Overcoming Financial Mistakes

Published on November 20, 2023

John Hagensen

No one is immune to mistakes — not even the wealthiest investors. Living with our mistakes is inevitable, but compounding them isn’t. Join John as he shares some of the biggest mistakes he’s seen in his career and how to avoid them. (2:07) Also, discover a fresh perspective on market drawdowns (27:22) and how understanding the “why” behind your goals can give you the momentum you need to reach them. (43:43)

Episode Notes

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

John Hagensen: Welcome to the Rethink Your Money podcast presented by Creative Planning. I’m John Hagensen, and ahead on today’s show, how to overcome financial mistakes before they compound, the undeniable link between gratitude and money, as well as the most reliable single predictor of which funds will overperform their peers. Now, join me as I help you rethink your money.

We all have to live with our mistakes. We’ve all made them, but we don’t have to compound them. I love the quote that a wise response may not erase a dumb mistake, but it can redeem it. As a parent, I tell my kids, making a mistake is one thing. I get it, you won’t be perfect. And there’ll be consequences depending upon what the infraction is, but if you lie to me about that mistake, if you try to cover up that mistake, if you compound that mistake with another mistake, oh, now it’s about to get real. You’re going to be in a lot more trouble. I remember our now 20-year-old, he’s going to be embarrassed that I’m sharing this, he didn’t like having to stay in his room at night. He had that great idea, “I’m going to sneak out of the house,” so he cut the little wire on the window sensor in his bedroom.

Of course, this doesn’t work. Kids can’t get away with anything these days. It’s like, oh, I was immediately notified on my app that we lost power to the window sensor. “Well, that’s weird. I wonder what’s going on down there in his room.” We’ve got cameras everywhere, Life360, you are not getting away with anything these days. One mistake and a small consequence of going to his room turned into a big one. Making mistakes is inevitable to our lives. We’re sinful human beings. But what is your reaction when you realize that you’ve made a mistake? And I can tell you that every client I’ve ever met with has made plenty of past financial mistakes, even the really successful, the really wealthy ones have made a lot of financial decisions that they wish they could have back, but the commonality that they share, they’re really good at learning from them.

You see, when we think about the past, we usually either beat ourselves up over mistakes or we spend time reminiscing, neither of which is productive for our future. On the flip side, we may focus a lot on the future, planning for the future, trying to predict the future, talking about the future. I’m a financial planner. My natural personality is strategy, analysis, charting a course, reviewing that course. It’s like the exact opposite of my wife’s. My wife breaks out in a cold sweat at even the sound of that. But what can be very difficult is living in the present, not the past, not the future, the here and the now. All that is certain in your life is right now. That doesn’t mean you get a lame bumper sticker that says YOLO. “That’s how I live, baby! I don’t care about anything. Future may not be here.”

No, I’m not saying that. But you start to square the circle when you’re able to live in the present with a peripheral eye on the future and just enough memory of your past to ensure you don’t repeat mistakes. That is worth striving for. One of my researchers on the show, Kenny Gatliff, chartered financial analyst, made me aware of a fantastic article posted this month by Dorothy Newfeld on the 20 most common investing mistakes according to the CFA Institute. And I’m going to run through each of these 20 quickly so that you’re not only aware of these mistakes, but that you can learn from them. And here’s the best part, if you haven’t made these mistakes yet, learn from everyone else’s mistakes. And if you’ve made a few of these, join the club. They’re the 20 most common according to the CFA Institute.

Number one, expecting too much cash. Having reasonable return expectations will help you keep a long-term view without reacting emotionally. Here’s the data. 15.6% per year is the investor annual return expectations, almost 16% a year. Financial professionals, when we’re running hypothetical financial plans, we use 7% as an annual return expectation. Does that mean you’ll only earn 7%? No. Does it mean you’ll absolutely earn 7%? Of course not. Think of that disconnect of nearly 9% between what investors expect, and what most financial advisors use as assumptions for planning.

The second mistake is no investment goals. Often investors focus on short-term returns in the latest investment craze instead of their long-term investment goals. Only 59% of investors say that long-term growth is their top goal.

The third mistake is not diversifying. Diversifying prevents a single stock from drastically impacting the value of your portfolio. Did you know that only 21.4% of US stocks one in five beat the market over 20 year periods from 1927 through 2020?

Number four, focusing on the short term. It’s easy to focus on the short term, I just mentioned that. But this can make investors second-guess their original strategy and, in turn, make careless decisions. Over 50% additional higher transaction fees were paid by investors with a short-term view.

Number five, the old buying high and selling low mistake. Investors average annual loss in returns due to buying high and selling low versus just buy and hold strategies, 2% per year. Think about that over the long haul.

Number six, trading too much. One study shows that investors with the highest trading activity saw poor performance to the tune of six and a half percent on average of underperformance per year by most active traders within the US stock market.

Number seven, paying too much in fees. What a mistake this can be. The average fee for an ETF or mutual fund as of the end of 2022 is now below a half a percent. If you’re paying more than 0.2, 0.3, 0.4% in expense ratios, you are paying too much.

Number eight, focusing too much on taxes. Now, I know you’re thinking to yourself, “Wait, that’s counterintuitive. Shouldn’t I be reducing taxes? John, you always talk about coordinating your taxes.” Yes, but don’t let the taxes tail wag the investing or financial planning dog. Certainly tax loss harvesting can boost returns, but making decisions solely based on tax consequences are often not merited.

The next mistake is not reviewing regularly. Reviewing your portfolio on a quarterly basis or at least annually to make sure that you’re staying on track or if your portfolio is in need of rebalancing.

The 10th on the list of most common investor mistakes according to the CFA Institute is misunderstanding risk. Too much risk can take you out of your comfort zone, but too little risk, which I see often for retirees results in lower returns that don’t help you actually reach your retirement goals. It’s important that you build a great financial plan and recognize the balance for your individual situation.

Number 11, not knowing your performance. You certainly don’t need to be fixated on weekly performance, but if you have no idea how your investments are performing over a five-year period or a 10-year period, you likely won’t have a good feel for whether they’re meeting your investment goals, especially after factoring in fees and inflation.

Number 12, reacting to the media, and this is a big one. Just stop listening to Jim Kramer. It’s a very entertaining show. By the way, I’m not picking on Kramer. His show’s pretty funny. But it’s not investment advice for your specific situation. Most of the media is negative. And negative news in the short term triggers a lot of fear. But remember to focus on the long run. Since 1920, the market has been positive 73% of all calendar years. It’s the greatest slot machine you’ve ever stumbled up to on the Vegas strip. Three out of every four times you pull down the handle you win.

Number 13, forgetting about inflation. Nobody’s forgetting about inflation, CFA Institute right now. Not after what we’ve just been through. But historically, inflation’s averaged a little less than 4%, which means that after 20 years, $100 is only worth 44, which means that the value of a hundred dollars after 20 years at 4% inflation is only $44.

Number 14, trying to time the market. I’ve talked extensively about this here on Rethink Your Money. It’s extremely hard. I’ve never met anyone that can do it effectively over long periods of time. There are millions of variables accounting for the movement of the market. Good luck trying to forecast the way 7 billion people on the planet, most of us, like myself, irrational much of the time, how we’re going to respond. And the best example of this is COVID. If you told any rational person in 2019 that in 2020 the entire world would be shut down, millions of people would be dying from a global pandemic, and gave them the chance to time the market, they would’ve either shorted the market or at a minimum gone to cash. The market finished up nearly 20% in 2020. See timing the market’s so hard because not only do you not have a crystal ball, but even if you did, the way the market would respond to those events likely would be very different than your expectations.

Number 15, not doing due diligence.

Number 16, working with the wrong advisor, which in my mind goes hand in hand with not doing due diligence. Are they independent? Are they credentialed? Are they fiduciaries? Meaning do they have no proprietary products or third party kickbacks so their objective, removing as many of the conflicts of interest as possible? Are they credentialed? Do they know what they’re talking about? And are they required to place your interests ahead of their own? Believe it or not, the vast majority of quote, unquote “financial advisors” in America are glorified salespeople that are required legally to sell you reasonable things.

The next mistake is investing with emotions. The average investor annual loss in returns due to emotionally driven investment decisions is 3% per year.

Number 18, and I see this with a lot of retirees chasing yield. Higher yielding investments often carry the highest risk.

Number 19, neglecting to get started. Consider two people investing $200 monthly, assuming a 7%. Notice, I didn’t say 15 or 16% like most investors expect, 7% annual rate of return until the age of 65. The person who starts at 25 years old has 520 grand. The person who starts even just 10 years later, still pretty young at 35 years old, has less than 250,000.

And the final most common investor mistake according to the CFA Institute is not controlling what you can. While no one can predict the market, you can control the small contributions over time that you make. You can control your savings rate, which can have powerful outcomes. Did you know that you’d have $1.2 million if you simply invested $15 a day for 50 years and only earned 7%, $1.2 million? If you’ve made mistakes, join the club. I’ll be sitting there waiting for you along with plenty of people that you would recognize as some of the most financially successful men and women to have ever walked the Earth. I hope this list helps you reflect on mistakes you may now be able to avoid and achieve better outcomes for yourself. If you have questions and would like to sit down with us here at Creative Planning, we have been helping families gain clarity around their finances since 1983. Why not give your wealth a second look at creativeplanning.com/radio?

Think back to a difficult situation in your life where at the time you felt like absolutely no good would come of it. But now having gone through it, you’re on the other side and you realize you simply didn’t see the whole picture. At the time, you just didn’t have a broad enough perspective, couldn’t possibly see the whole picture, but it was beautiful. My wife, Brittany and I had a very painful failed adoption experience. This was several years ago, and we were even at the hospital only to be told that that baby wouldn’t be ours. And as devastating as that was, as much as we didn’t understand why we felt led to adopt this child only to have it all fall apart, that was merely the end of the chapter, not the whole book. Fast-forward, we now have our nine-year-old daughter, my most precious, incredible little third-grader because of that failed adoption, because she came to us just a few months following that seemingly devastating event.

Now, let me be clear that the positive outcome such as this one isn’t always revealed to you right away. In fact, you may never see the entire ripple effect of a bad situation and who it ultimately makes an impact on. But that doesn’t mean that you can’t still feel gratitude. So often we incorrectly define gratitude as being thankful for the good things in our lives, but that’s not gratitude. In simple language, gratitude means being thankful for all things, both the good and the bad for every event in your life. Now, let this truth serve as an encouragement for you that by practicing gratitude in your life, you’re counting your blessings intentionally every day. And one of the immediate and selfish outcomes is that this habit will make you a happier person day by day.

And to discuss this very topic, I have an extra special guest, doctor of psychology and certified financial planner, Dan Pallesen. Dr. Dan, thank you for joining me on Rethink Your Money.

Dan Pallesen: Yeah, thanks for having me, John. And in the spirit of being thankful, I want to thank the listener. I’ve come on a few times, I’ve never actually thanked the listener, but truly, thank you.

John: Yeah, that is a great reminder. And with Thanksgiving this week, I want to dive into the links with you between money and gratitude. What does the research tell us, and what conclusions have you personally made as a wealth manager and psychologist regarding their relationship?

Dan: Yeah, I love this time of year. I love Thanksgiving. I think it’s actually my favorite holiday. I love getting together with friends and family and just focusing on what we’re grateful for. There are links between-

John: And the sweet potato pie.

Dan: That’s right.

John: Don’t leave that out.

Dan: Yeah, that’s right.

No, there are links between money and happiness, and money and gratitude. And famously Daniel Kahneman is a Princeton psychologist, and he has this research. I say famously, famously in my world, being a financial psychologist, it’s not like a Brad Pitt movie, but it has to do with do we become happier, more grateful as we have more money? What they found is there are links between money and happiness to a point.

Once people’s basic needs are met and they track, once you enter the world of median income or median net worth, your basic needs are met. As you have more money, you don’t necessarily experience more happiness. So this has really been cited for a while, but more recently, as we’re digging in more in depth to this concept, we are finding that there are continued links between money and happiness, even as people earn more or accumulate more. But now the common ground is just if someone is intrinsically happier, if they’re just more likely to experience gratitude as they have more of a resource of money, it enhances their life. And so it’s sort of common sense, but yes, there are links between money and happiness.

John: Maybe the better way of putting it is that it doesn’t continue to proportionally increase at the same rate as your income increases, but certainly if someone’s generous, and they have more money to be generous with, and they’re well-adjusted, that may make them happier to some extent.

Dan: That’s right.

John: But to your point, it’s not going to make somebody who was miserable, and now they have more, “Oh, now I’m immediately really happy because my income is higher,” yeah, that makes a lot of sense. Once you can pay for a medical expense, and you’re not constantly worried about paying bills or have tens of thousands of dollars at 20% interest in credit cards, that obviously is going to have an impact on your mental health and your happiness.

Okay, so there’s evidence that more money can bring about more happiness for some people. We just discussed that. How about the reverse, Dan? Are people that are happier just more likely to have money because their very nature is more of a happy disposition?

Dan: Yeah, that’s a great question. And now you’re thinking like a social scientist. It’s like the chicken or the egg, which comes first, money or happiness? Happiness or money?

John: Call me Freud.

Dan: So it’s a great question. The results are mixed. So there is some evidence that if you’re just a naturally more optimistic, happy person, you put yourself in positions to earn more money over your lifetime. Think of a field like sales where you face a lot of rejection. Someone who’s naturally more happy or optimistic is better suited for that industry, because for them, every rejection they get just gets them one step closer to the acceptance. So there is some evidence where optimism, happiness, and gratitude are linked to a better lifelong accumulation of wealth. But on the flip side, there are those that are naturally more grateful, that might be more willing to accept deals that are not in their favor. They might accept lower salaries or lower opportunities, again, because they’re just naturally pretty grateful. They’re not out there seeking it. They’re not as ambitious, because they’re already in a really positive state.

John: It does seem intuitive that a happier person is someone that others want to be around more, and people are drawn to, and that’s going to increase relationships and stability, which often is the root of increased salary or other job opportunities, or if you own a business, people wanting to do business with you, because we know people want to do business with people that they like.

Dan: Absolutely.

John: And people would prefer to be around someone happy than someone that’s miserable, and an Eeyore most of the time. I’m speaking with Dr. Dan Pallesen, doctor of psychology, certified financial planner, a wealth manager here at Creative Planning. What’s been your experience, Dan, over the course of your career as a psychologist and wealth manager in terms of that link between money and gratitude specifically, so not happiness, but gratitude and money?

Dan: Well, whether I’ve worked with a couple in a counseling setting or reviewing their financial plan, I’ve seen firsthand that money can be the source of some really intense emotions, and more often than not, it’s fear or greed. I think fear and greed are the two emotions that are most commonly associated with our money. And when you think about fear and greed, the way to soften the experience of those emotions is shifting your focus from what you don’t have, which causes the fear and the greed, and shifting to what you do have.

So again, whether I’m working with a couple in counseling, going through their annual review and their financial plan, shifting to what you do have, which is another way of just defining gratitude is just focusing on what it is that you do have, and shifting that focus, I’ve found, is so powerful in making any sort of meaningful impact or progress in your relationship, in your mental health, your behavioral health, or with your financial plan.

John: Yeah, that’s great advice. I want to live a life of gratitude, and I don’t always, and I think that’s a challenge for all of us as humans, especially in American culture where it’s a lot about get what makes you happy, accumulate as much as possible, even though we know there’s not a lot of value in being the richest person in the graveyard, we still, for some reason, are trying to achieve that. Do you have any final tips here for how to experience more gratitude?

Dan: Yeah, and first of all, I want to give you a break too because I think we’re all wired in a very similar way. I’ve talked about this before when I’ve come on the show that our human psychology, we’re sort of wired to identify what could go wrong or what is wrong, what’s a potential threat, and it’s a really powerful, adaptive, and survival technique. But when it comes to being wired for gratitude, we have to bring more intentionality to it. But yeah, there are some ways to cultivate having a life of gratitude.

My favorite exercise to assign or homework to assign when I was a therapist was a gratitude journal in which you have a journal or you have some index cards, and every night you write one or two things that you’re grateful for, and here’s the key. It always has to be something new, because I would assign this to people that I was working with in like a counseling setting, and inevitably they would say, “Well, my family, and my job, and my pet, and my home.” And there’s some basic stuff, but over time, when you have to think of something new, what it does is it rewires people to, as their day is going by and a positive experience happens, they remember that, and they go, “Oh, that’s going to be what I’m grateful for today,” and they actually attend to it. Or doing it more informally with a partner or a spouse just at the end of the day, “What are you most grateful for?”

I’m a parent of some young kids. My favorite thing of this stage of life, I have a two-year-old and a five-year-old, is when we get together at dinner, my two-year-old will always start asking, “What was the best part of your day?” And it’s always prompted-

John: Highs and lows.

Dan: The highs and lows, exactly. And what’s the best part of the day? And just being able to recall your day and notice what went well. So just having some presence of mind throughout your day can be cultivated through something as simple as a gratitude journal.

John: Well, and I can see where coming up with something new also forces you to think through the things that you’re grateful for that you just don’t often consider, because there are so many of them that are below the surface, maybe a layer below family, faith, having a house, all of those basic ones that you immediately are drawn to, but there are thousands below that that you often overlook, and I think that’s a great exercise. I’m sure to some extent too, Dan, doing that at the end of the night is probably also valuable in the sense that, I know there’s a lot of research around what you go to bed thinking about has an impact on how you wake up.

Dan: Yeah, and John, to your point, when we think of something new that we’re grateful for, what I’ve seen as a therapist, it shifts from things to experiences. It’s easy to go through your life and identify the things, or even the people in your life that you’re grateful for, and you go through that list, you identify them, but after you’ve sort of gone through that list, now you’re faced with, “Well, what’s new to me this day?” And the shift becomes more on experiences rather than things, and I think that’s what helps people retain or change their disposition to be more grateful.

John: I love that you start thinking about things like, “I love the way that the wind sounded through the aspen trees with the sun on my face while I was sitting outside for five…,” just things that you totally take for granted if you’re not being intentional about it, right?

Dan: Absolutely.

John: Well, any other closing thoughts here on how to experience more gratitude?

Dan: John, one of my favorite things to go back to, again, regardless of the setting if I’m working with clients in therapy or financial planning, is back to this simplicity of the Serenity Prayer. Are you familiar with this?

John: Oh, yeah. It’s great.

Dan: Which is essentially grant me the serenity to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference. And it’s so simple, but it’s so powerful. And when we can recognize what’s out of our control and release that, it can actually increase our ability to be grateful that we’re not in control of everything, be grateful for what we’re in control of, and knowing the difference between the two. And so again, it’s all about shifting our perspective on what we have rather than what we don’t have, and what we can control in our lives versus what we can’t. And I think those two things really help to solidify a life of gratitude.

John: Well, I appreciate you sharing your wisdom and insight with us, Dan. Hope you have a great Thanksgiving. If you’re like my family, we’ll be going around the table talking about what we’re grateful for and everybody be crying into their mashed potatoes, so it’ll be great. I got that to look forward to. I hope you have a fantastic Thanksgiving with your family, and thanks for joining me here on Rethink Your Money.

Dan: Thanks again, John.

John: Well, doesn’t it sometimes feel like the momentum you are experiencing will ask forever? Well, it certainly does for me, but unfortunately, it doesn’t. Ask MC Hammer. How about Vanilla Ice? Think about Nebraska football, that one comes to mind. All kinds of momentum. One of the best programs in the country. Back in the Tom Osborne days, and even before that, from 1963 to 2001, we’re talking about 38 years, the Nebraska college football team had 27 top 10 finishes, and won five national championships. Did it last forever? Unfortunately, for all you Cornhuskers listening, you know the answer. No, it did not. Last 10 years, zero top 10 finishes, seven losing seasons. Nebraska has fallen so far that I can actually hear you right now through my headphones, pleading with me, “Can you talk about something relevant? Why do we care about this?” I know, those of you listening near our Omaha office, certainly those of you who live in Lincoln, I got nothing but love for you. I’m not trying to pick on you, but your football team went from an unprecedented four-decade run to this.

But this happens in other areas of life. Remember The Price is Right? I know it’s still on, but not with Bob Barker in his skinny microphone, reminding us to help control the pet population by having our pets spayed and neutered. Technology? And if you’re somebody who was anybody at the airport in the early 2000s, you had some nice luggage and probably an expensive suit, and you definitely had a Blackberry. Same thing happened with big, active mutual fund companies. Money was pouring and there was really no end in sight. Like mutual funds aren’t going anywhere. This momentum isn’t fading until it was. In 2020 alone, 289 billion flowed out of mutual funds, while 502 billion flowed into ETFs. As of now, $22.1 trillion still remains in mutual funds as compared to 6.5 trillion in ETFs. That’s as of the end of 2022, with mutual funds mostly hanging on due to their use in 401k plans.

But it won’t be all that long before there is more money in ETFs than mutual funds, a thought that was inconceivable even a decade ago. Blackberry, Bob Barker, Vanilla Ice, these were big things. But society changes, technology advances, and cultures shift. And the same is true when it comes to investing. And this is likely the most difficult part of trying to time the market. It’s almost impossible to figure out when to get out of General Electric before it drops 70%. Or Washington Mutual before it goes under in 2008, because after all, you don’t want to get out of Microsoft, and it’s had multiple drops of more than 50%, only to eventually recover. Markets are cyclical. Let me provide you with an example of United States and international stocks.

The decade of the 1970s were won by the US. The 1980s, international. The 1990s, US. From 2000 to 2009, the lost decade for US stocks, international clearly won. And the last 13 years were back to the US overperforming international stocks. In fact, Charlie Bilello, our chief market strategist here at Creative Planning, posted a chart to X that I will include on the radio page of our website at creativeplanning.com/radio if you’d like to view it, that shows the worst performing areas of the equity market in 2022. NASDAQ tech growth have been the best performers thus far in 2023. And conversely, the best performers from 2022, energy, value, equal weight have been the absolute worst in 2023. That’s not surprising. If you understand the history of not just markets, but humanity, there is mean reversion. And trees don’t grow to the sky.

So the next time you’re caught up in the idea that what’s happening today, it’s going to continue, probably not. And our first piece of common wisdom to rethink is that drawdowns mean the future will not be good. Creative Planning president, Peter Mallouk, spoke about this recently on his podcast. Have a listen.

Peter Mallouk: I think this is really interesting from a psychological standpoint. We know bear markets happen about every five years, 20% drop or more. We know corrections, 10% drop or more, happen every 12 to 18 months, and the average correction’s about a 14.5% drop, but I’m probably isolated in this take, is I actually think what we’re going through now for investors is worse.

So when you go through COVID, we had that 34% drop, fastest 34% drop in history, but you’re just so stunned. You’re so focused on the external threat. At that point it was COVID, but whenever you have a huge drop, there’s always an external threat. There was the housing collapse, “Am I going to keep my home? Is the economy going to even function? Is the banking system going to function? 9/11, what other terrorist event is coming?”

So you’re preoccupied with this other force that created that event. And economics, the market’s moving so fast, you’re shellshocked. So you get through it, but you’re traumatized. There’s blood everywhere, but you’ve gotten through it because you didn’t have time to react. Investors have a much harder time with this long slog. And here we are, almost two years of nothing. It reminds me of 2000, 2010, the S&P 500 earned zero, and everyone’s like, “Well, why is all my money not in emerging markets and overseas?”

And here you can say, “Well, why am I in stocks at all? 1.8 years, no return?” But that’s how the market works. Nothing’s ever the same.

John: Peter’s absolutely right. It is never the same. And when you say, “John, this time’s different. Don’t you get it?” And you’re right, it is different.

The dot-com bubble bursting was caused by tech companies that not only didn’t have earnings, in some cases they didn’t even have a revenue. So they were trading at valuations of infinity.

9/11 was a horrific terrorist attack.

The financial crisis due to housing.

2020, a global pandemic. And the last two years, the story’s interest rates and inflation as a result of that COVID policy and supply chain disruptions.

And so yes, it’s different, and you can talk yourself into what’s happening now will continue forever as I just discussed. But history, while it doesn’t repeat itself, it often rhymes.

In 1957, there was a 19% drop. One year forward return, 36%. 1962, a 20% drop followed by a 22% one year forward return. 1970, an 18% drop followed by a 45% increase over the next year. 1974, 18% drop followed by a 23% increase. ’87, a 28% drop followed by a 28% increase. 1990, the market drop 19% only to have the next 12 months advanced by 33%. And the list continues on and on.

Most recently in 2018, the market was down 17.5% followed by a 31% increase. And think about what we’re living in right now. Last year, 2022, the market was down 18% so far here. In 2023, as we look to close out the year on a high note, we’re up nearly 20%. That may be surprising to you. I don’t think overall investor sentiment is euphoric. It almost feels like we’re not up in value because we haven’t retraced all-time highs. But remember, as fast as market crashes are, recoveries can happen quickly too, and no one, and I mean no one’s going to shoot flares up in the air to signal the bottom. “Hey, coast is clear. Here comes the recovery, time to get your money back in the market.”

Always remember that the market is forward-looking. And it recovers much quicker than sentiment. By the time you feel good about market conditions, about the economy, and investments, the market has already bounced far above its lows. So the next time we’re in a drawdown, and you’re thinking, “Oh, this is terrible, when will this end?” It will end. And it’ll probably end with a lot quicker recovery than you ever would’ve expected in the moment of that pain.

When you reflect on those last two years with your money, 2022, and now here in 2023, do you feel confident that you’ve made wise money moves, proactive tax moves within the context of your personalized, written, documented, dynamic financial plan? Or are you maybe leaving opportunities on the table? If it’s been a while since you’ve had a second opinion, or maybe you don’t have a financial plan at all. Speak with a local advisor just like myself here at Creative Planning by visiting creative planning.com/radio now. We help clients in all 50 states and over 75 countries around the world, why not give your wealth a second look?

Our next piece of common wisdom to rethink is that investing is all about winning. Now, if you want to be successful as an investor, well you’re going to have to hit some home runs. Let’s rethink this, because conversely, it’s often what you don’t do that ordained success or failure. In many instances, it’s not about winning, it’s about avoiding losing, which by the way is more attainable in many cases than actually winning the game. Think of it this way, successful investing, it’s about surviving. It’s about never looking down while you’re sitting at the table only to realize, “I’m out of chips.”

You see, being a successful investor means having a disposition and spirit of optimism and hope in human progress with a healthy level of paranoia that over the next several decades, some crazy stuff is going to happen. And when it happens, you better know your time horizons, you better position size appropriately wherever you’re taking risky bets, and never have a scenario, even a tail-risk type scenario that can blow up your entire plan. Invest with a level of humility that acknowledges at any moment, “I could go bust.”

In general, here’s how you do that for monies that you don’t need for 5, 6, 7 years or longer, broadly diversify in the stock market. For monies you don’t need for 10 years or longer, and maybe have a little higher net worth, and not as much of a need for liquidity with all of your portfolio, that’s where alternative investments may have a fit with a smaller portion of the portfolio. For monies that you need over the next year, they should be in an emergency fund, in a money market. Shoot, you can make over 4% in the money market, right now.

And for the rest of the money that you’ll need over the next five years, keep in safer, more stable investments like high quality bonds that are still paying near 5%, depending upon credit quality and duration. Are they corporates? Are they munis because you’re in a high tax bracket and you want tax-free municipal bonds? Rates have certainly come down the past two weeks but are still looking really good. And ultimately ensure you have no big bets in any single spot that could expose you to not volatility, that variability up and down of returns, but permanent losses.

Well, it’s time for listener questions, and as always, one of my producers, Lauren is here to read those. Hey Lauren, who do we have up first?

Lauren Newman: Hi, John. So the first question I got for you today, Jerry in Kansas writes, “My portfolio has been pretty much flat the last year. I understand why, but is there anything I could be doing to get ahead?”

John: Well, if your portfolio is flat the last year, you do have a problem. And the reason I say that is because the NASDAQ is up about 30%. Small cap is close to flat, but I doubt you have all of your money in small cap and small cap value. The S&P 500, that index that tracks the 500 largest US stocks, is up about 20% year to date. International is up about 18%. Really other than long-term bonds, which are down about 5% year to date, all of their broad asset classes are in the green, and bonds even are paying really healthy interest rates.

Now, if you look specifically at sectors, utilities are down about 10%, they’ve gotten hammered this year. Healthcare is down about 5%. Real estate’s down a couple of percent, but broad indexes, you’d have to try to be flat year to date, because unless you were in a portfolio of small caps and real estate and utilities and long bonds, which I hope you weren’t, you should have made some pretty good returns.

Now, if we broaden that out a little bit further, and maybe you’re just generalizing and saying over the last year, we still haven’t retraced the highs of January 2022. So over the last just a little less than two years, the markets are down. Even with the solid returns in 2023. So if you’re referring more to a couple year period, then that would be pretty consistent with the broad markets. When looking at market history, over the last 50 years, as an example, about every year-and-a-half, there will be a correction where the market drops over 10%. The average correction is about 14%. And as mentioned, that’s happened 29 times in the last 50 years. But here’s what’s interesting. I think so often, we say, “Well, the market’s high, I don’t want to invest.” Or, the market’s down, “Ooh, things are bad. I don’t want to invest.”

Neither one necessarily makes us feel emotionally like it’s a great time to buy, that whole idea of being greedy when others are fearful, and fearful when others are greedy. Warren Buffet’s not saying, be greedy when others are fearful, assuming that there’s not high amounts of national debt and interest rates rising faster than they ever have in history and geopolitical unrest… No, it’s be greedy when others are fearful. That’s what’s making people fearful.

But I think some context might be helpful. Since 1950, the stock market is within 1% of an all time high about 20% of the time. Over 17,000 trading days, that’s happened. The market is within 5% of its all time high 27% of the time. So what that means is almost half the time, about 47% of the time, the stock market is within 5% of its all-time high. And the reason that’s relevant, one of the biggest explanations for why it’s not a great time to invest from the pundits is the market’s kind of high.

I’ve had plenty of prospective clients come in and say, “Johnny, I want to invest, but market’s kind of high right now. I’m going to wait. I don’t think it’s a great time to invest.”

47% of the time, it’s within 5%. The market’s within 10% of an all time high 16% of the time, and it’s more than 10% below it’s all time high 37% of the time. And those periods that make up that one third, those are the great opportunities to rebalance, to harvest losses, they’re going to occur with regularity as I just mentioned 37% of the time. But the challenge of trying to time the market when it’s near its bottoms is that the market grows over time. Don’t be surprised if you’re on the sideline and the market never ever pulls back to what you were hoping would be the buying opportunity.

We have plenty of examples of this where the market seemed high, it was within that 5% of its all time high, and for the next three, four or five years, it just continued to run straight up. It never presented that pullback, that buying opportunity. And when it finally corrected, it never even got close to when you started on the sidelines. And that happens almost 50% of the time, as I just mentioned. We have a surfboard in our pantry at the Hagensen home. And we mark our kids’ heights on it with a sharpie. We even marked my mom on there. That even grandma got on there, it’s weird. She’s actually been shrinking the last year, so her mark was almost an inch lower. I don’t know if it was a mistake on the measuring or if she’s just getting smaller, but forget about that because her shrinking isn’t actually making my point.

Crew’s our 12-year-old. He’s hitting puberty, he’s in that tweener stage, he’s already in a 10-and-a-half shoe size. He looks like a Great Dane puppy with his feet so disproportionately large to his body. But if you look at his height over the years, he just keeps growing, just keeps getting taller.

You’re like, “Why are you telling me this? This is obvious. He’s getting older, John. Of course he’s getting taller. It’s not a shock.”

The exact same thing is true when it comes to the stock market. It goes up into the right over time, it’s earned about 10% a year for nearly a century. So yes, it gyrates up and down, and yes, there’s volatility, and there’s periods of prolonged down markets. But over time, assuming the world doesn’t end, the broad markets continue to forge higher.

Housing prices are another great example of this. In 1982, someone paying $102,000, that’s right, just over a $100K, for a home in San Diego, that was the median home price. That was near an all time high for real estate in San Diego at the time. I’m sure people in 1982, when they were buying that house, it didn’t feel cheap. Like, “Dang, am I buying high here into this real estate market? I can’t get it for five figures anymore, it’s six figures. This is crazy.” Today, the median home price in San Diego is $1,025,000. It’s 10X what it was in 1982. And yes, there have been times where that real estate market boomed. It just shot higher. It exploded like we saw in 2020 and 2021. And there were times like ’08, ’09 where there were major corrections. But over time, it grew a lot.

And if someone in 1982 said, “I’m just going to wait until we get back a little below a hundred grand before I buy a house,” they’re definitely not overlooking the Pacific Ocean from their house on the cliffs in La Jolla, I can tell you that.

And so, as today, we sit and look at the market that is off of its all time highs by a little bit. Remind yourself, as a disciplined investor who has a long-term mindset, you’re going to invest often over the rest of your life near all time highs.

And so, for this question, if you’re down off of all time highs, that’d be normal. But if you’re down year to date, something is really wrong with your investment strategy. But if you have questions about your portfolio, we have an office there with local wealth managers just like myself ready to help. And we can review your asset allocation, your portfolio, your fees and expenses to see in fact whether you’re underperforming the broad markets. And you can request that now by visiting creativeplanning.com/radio.

All right, Lauren, last question.

Lauren: Finally, Matthew from New Prague, Minnesota. “I’d like to use low cost ETFs and steer away from high expense ratios on the funds I’m invested in. What’s your philosophy on those types of funds, and what do you look for in your investments as far as expense ratios go?”

John: My philosophy is, go as absolutely low cost as possible. In fact, Morningstar did a study on this a while back. And they headlined the results, the clear link between fees and performance. To summarize their data, low fee funds have given investors the best chance of success over the long-term. The study went on to say that you’ll notice that there is a clear relationship between fees and performance. Firms with high fees have below average performance, while firms with low fees have a higher likelihood of above average performance, but it isn’t guaranteed, obviously.

For example, 87% of American funds share class have below average fees, but only 46% of its assets have a star rating of four or five stars, end quote. And so while I’m certainly not using that excerpt as a declaration on American funds, they’re just a good proxy to make my point. When it comes to publicly traded investments, stocks, bonds, mutual funds, ETFs, I don’t see a viable reason to use anything other than ultra low cost funds. And the reason is simply that the more expensive funds statistically have no higher likelihood of outperforming. In fact, they’re more likely to underperform as a result of that fee hurdle. So you’re literally paying more with without any expected higher probability of success. Fees and taxes are the two things you can directly control. So ensuring that you’re minimizing them as best as possible is really important.

Think of it this way, if there were a fund out there that charged 5% per year in fees, we would all fall out of our chairs and think they were nuts, so expensive. But if they returned 30% per year and you net 25 even after the 5% fee, you’d think their costs were a bargain. You’re like, “Man, I’m glad they only charged me 5%.” But unfortunately, that doesn’t exist. Look at the hedge fund world. 2% in fees and then 20% of your profits yet have underperformed simple low cost index fund portfolios over the past decade plus.

So Matthew, my advice for you, go as low cost as possible when it comes to building out and diversifying your publicly traded investments.

I recently had a client come in for a first appointment. And during the course of that process, I certainly ask about their financial situation, what’s bringing them in, find out what their goals are, and the husband told me, “My goal is to retire as early as possible.”

He was only in his young fifties and he was like, “I want to peg this thing at 55 if possible.” And he kept circling back to that goal as we would discuss other things. But then I learned why. It wasn’t just about retiring at 55. There was nothing magical about that number. But I came to find out that his father passed away in his late fifties and missed out on a lot of life, even a lot of his life. So this client didn’t want the same thing to happen to him, he wanted to travel with his wife and be an involved parent and grandparent and wanted to maximize whatever time he had left to spend with his family and make memories rather than grinding. And he was in a high pressure, high paying type of job that required a lot of travel.

Now, I remember another scenario where a client was willing to put their entire retirement savings on hold, blew my mind at the time, to max out their two children’s college funding. As a certified financial planner, I’m trying to explain to them, “Hey, this is why in the airplane, they tell you to put your mask on first before helping others, because retirement’s one of those things that you can’t fund after the fact where college, your kids can get the degree, and then they can pay off their loans, and it’ll be fine. I don’t think this is a wise move,” come to find out, his parents didn’t help with his college. And although he went on to be a very successful doctor, he was riddled with student loans that took him well over a decade to pay off. And he, in those moments of paying off his student loans, made a commitment, “When I have kids, I’m going to make them work hard, I’m not going to hand them things, but if they are wanting to pursue education, not just a bachelor’s degree, advanced degrees, medical degrees, law degrees, I’m paying for every single penny.”

It may not, on the surface, have seemed logical, but once you understood more about his reasoning, oh, okay, I get it.

A final example I have was from a client who donated, get this, 90% of everything he made. Nine-zero. 90%. He made about 500 grand a year, lived on 50, and donated around $450,000 every single year. He wasn’t going to be able to retire anytime soon where he easily could have without all this giving.

But as I learned more about his circumstances, he immigrated to America from an impoverished area of India. He still visited his family multiple times per year, and was supporting countless families inside of this village where he still had friends and families with the resources that he was earning as an engineer here in America. And even on 50 grand, he was living in America.

He told me, “John, I feel like I’m living like a king. I got a great neighborhood. We got food,” and of course, that perspective was continually renewed when he’d go back to his native country and see how others were living.

He also understood the leverage of how strong an American dollar, this 450 grand a year, how far that stretched in these impoverished villages. He told me, ‘Hey, John, God blessed me with the immigration lottery,” and he had a brilliant mind. And that was what he did.

At first, you go, “Why would anyone donate 90%? Just do like 20 or 30, and then you can have a super cool car and a really nice house. You’ll still be giving back a lot by most people’s standards.” No, when I learned more about his story, it all made sense.

You see, when you uncover that why in your own life, in the lives of those around you, it helps connect the dots. And pertaining to your own goals, understanding your why is like rocket fuel for your goals. It’s incredibly motivating. Understanding not just the what, but the why increases your empathy and your gratitude, which go hand in hand. And so on this Thanksgiving week, I’m going to encourage you pause and feel gratitude for every part of your circumstance, because after all, we are the wealthiest society in the history of planet Earth. Let’s make our money matter.

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

Disclaimer: The proceeding program is furnished by Creative Planning, an SEC-registered investment advisory firm that manages or advises on a combined $245 billion in assets as of July 1st, 2023. John Hagensen works for Creative Planning, and all opinions expressed by John or his guests are solely their own and do not represent the opinion of Creative Planning or this station. This commentary is provided for general information purposes only. Should not be construed as investment, tax, or legal advice, and does not constitute an attorney-client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed. If you would like our help, request to speak to an advisor by going to creativeplanning.com. Creative Planning Tax and Legal are separate entities that must be engaged independently.

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