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The Problem With New Year’s Resolutions…

Published on January 2, 2020

Peter Mallouk
President & CEO
Jonathan Clements Headshot

Jonathan Clements
Director of Financial Education

Hosted by Creative Planning Director of Financial Education, Jonathan Clements and President, Peter Mallouk this podcast takes a closer look into topics that affect investors. Included are in-depth discussions on financial planning issues, the economy and the markets. Plus, you won’t want to miss each of their monthly tips!

Time Stamps:

[0:00] – Happy New Year, and Happy Birthday, Jonathan!

[0:35] – New Year’s resolutions – why they fail, and how they can succeed

[7:00] – The dangers of calendar-based wealth management

[11:00] – Harvest tax losses all year long, if needed

[11:40] – Peter Mallouk’s tip of the month

[13:00] – Jonathan Clements’ tip of the month


Jonathan Clements: This is Jonathan Clements, Director of Financial Education here at Creative Planning in Overland Park, Kansas. And here with me is Peter Mallouk, my co-host. Peter is President of Creative Planning and we are down the middle. So, Peter, it’s January 2nd. Guess what? It’s my birthday.

Peter Mallouk: Happy birthday, Jonathan.

Jonathan: Yeah. I am 57 today, and as soon as we’re not on video I just want you to know that I still look like I’m 21.

Peter: You do.

Jonathan: I am 6’6 and not a single gray hair on my head. It’s early January and a lot of people have New Year’s resolutions. But given that it’s January 2nd, they have probably already broken them.

Peter: That’s true, yeah.

Jonathan: And so why is it that it’s so difficult for people to stick with their New Year’s resolutions? Why is it that we break them so quickly?

Peter: Well, there’s a lot of research around this and it basically indicates that people set these very high, total drastic change in behaviors like from never going to the gym to, “I’m going to go to the gym every day at five in the morning,” or, “I’m going to start a diet that’s going to change completely how I’ve eaten for the last 20 years and I’m going to do it drastically today and sustain it for forever.” And so people either abandon it quickly or you go through the diet and then you realize, “Wait, I can’t, not eat carbs for forever,” or, “I can’t, not do whatever for forever.”

And it’s the same thing, I think, with finance and money management as we… You try to do change your behavior incrementally and you try to change the little things that you do every day that create the good habits that get you towards success.

You don’t have to say, “I’m never going to go on a vacation again until I get my house in order.” “I’m never going to buy a thing I want.” You don’t have to go totally drastic. You just have to say, “You know what? I’m going to start saving a certain amount of money per month and I am going to go speak with my advisor,” if you have an advisor, “I’m going to speak with my advisor this amount of times per year.” You have to put little things in place that are repeatable and they’re not drastic so that you don’t hold yourself to the standard you can’t keep and abandon everything. It’s just taking steps in the right direction is the way to do it. You don’t have to climb the highest mountain on day one. Climb on a couple hills first, just get going in the right direction.

Jonathan: I think one of the problems with setting this really high goals is that to meet them, we have to expend an enormous amount of willpower. And the more willpower that’s involved, the more likely we are to fail. I mean, the fact is it’s tiring to change the way we behave, to overcome our instincts or to remake the habits that we currently have is exhausting. And if we make those goals too big, we are indeed likely to fail. I think one of the things that people should think about once they’ve decided what it is about their behavior they want to change is to figure out why it is that they behave badly. For instance, a lot of people feel like they spend too much. And so ask yourself, “Why is it that I spend too much? When is it that I tend to go on a shopping spree?”

And often you can find that there are certain triggers. It’s when you go shopping with certain people that causes you to spend a lot, or you’ve had a really rough day at the office and you want to make yourself feel better so you stop at the mall on the way home and the next thing you know you’re $500 poorer. Once you figure out what it is that you want to change, I think the next thing to do is to figure out what triggers the bad behavior because once you know yourself well, you can start to address those points at which you tend to stray. So if you always tend to head out for fast food right after you’ve had a fight with your wife, maybe you need to find something else to do at that juncture.

Peter: Not a new spouse. Something different.

Jonathan: And once you decide what you want to change and what triggers the bad behavior, probably the next step is to make it harder to engage in the bad behavior. For instance, if you don’t want to eat junk food, don’t have junk food in the house. It’s really difficult to eat the junk food if you’re going to have to get into the car and drive to the convenience store. You’re less likely to do it. Similarly, if you want to make sure that you save more, if you automate your savings, whether it’s into your 401(k) plan or having the money pulls out of your bank account and put into your brokerage account. If you make it automatic, you’re less likely to end up spending that money.

Peter: That’s right. I think that when you think about how this applies to 401(k)s, there’s enough researcher on this that there was a law introduced that passed that allows people to have what’s called automatic… Oh, I don’t even remember what it’s called, but you get to increase your contribution every month. So you’re contributing 50 a month and then next year it’ll automatically go up a few percent and then it will go up a few percent automatically. It basically counts on the 401(k) participants inertia and their unwillingness to look at things or change things and they wind up saving more and more and they don’t even know it.

Jonathan: And that’s a great strategy. Once you’ve got yourself on that path, you are going to the gym more frequently, you’re eating more healthily, you’re saving more on a regular basis. The key to taking that behavior and turn it into good habits is to be able to keep it up for some period of time. And if it’s a less onerous thing to do, if the mountain isn’t quite so big that you’ve set yourself to climb, it’s going to be that much easier. What you also want to do is try to create positive feedback because somehow or other you’re going to have to get through this period until that new behavior becomes a habit. Research suggests that it can take anywhere from 18 days to 254 days. This is actually from piece of academic research.

Peter: As I said, it’s very specific.

Jonathan: It is very specific.

In order to take that new behavior and make it into a habit where you start to do it without thinking, and to get through that period, what you need is positive feedback. For instance, when it comes to saving money, you may want to track how much you’re saving each month. So you start to feel good about the amount that you’re putting away. You might want to share what you’re doing with other people, how much you’ve lost in weight or what you’ve been eating so that they say, “Good job,” and you keep at it because you need that positive feedback in order to persist. Otherwise, you’re going to slide back and the next thing you know you’re going to be at the drive through in McDonald’s and it’s all going to be over.

Peter: Right.

Jonathan: The other thing that people often do at the beginning of the year is rebalance their portfolio. I’ve heard so many people say, “It’s January one, the first thing I do is I take my portfolio, I see how it compares to my model asset allocation, the percentage they want to have in U.S. stocks, in foreign stocks, in bonds, in cash investments, and so on.” And then I rebalance back to it, but that’s not the way things work here at Creative Plan, you have somewhat different approach to rebalancing.

Peter: I mean, there’s three ways to do this. One is you could never rebalance, and the most likely outcome you never rebalance, say you’re 50% stock at 50% bonds, you live forever. One day you’re going to be 99% stocks because stocks probably going to earn double or triple what bonds do over the long run. If you never rebalance, it becomes the huge majority of your portfolio, which might not match your goals or your risk tolerance. Most people who are rebalancing will do calendar based or periodic rebalancing every year. Using your example, I’m going to rebalance or some do it every quarter. I’m just going to rebalance back to the allocation between stocks and bonds or international in U.S. Some people will slice and dice rebalancing million ways to Sunday. At Creative Planning, we use what’s called periodic rebalancing, and that basically means instead of tying it to a calendar, we’re tying it to market volatility.

The most recent example is if you look back at December of 2018, the market had dropped 19.8% in just a couple weeks. So we were rebalancing our client portfolios then, at the same time we were tax harvesting in which is a different subject, but we were rebalancing then. Now the day after Christmas that year, the market roared back. By the time you got back to January one, most of the losses have been recovered, about half of them. If you waited till January to rebalance, you missed an opportunity to do one of the best things rebalancing does for you, which is selling high and buying low. If you take in it the last extreme example we had was March of 2009. The stock market at the beginning of the year had dropped… Sorry, from March one to March nine had dropped about 30%.

We’re rebalancing over those few weeks. Well, by the end of March, all of the years losses had been recovered. The market had recovered 30 plus percent in those few weeks, didn’t recover all its losses from the previous year. It took years for that to happen. But if you are rebalancing while the market’s dropping, you are going to have a better return over the long run than rebalancing annually. Now this is all predicated on one thing that all rebalancing is predicated on, which is that the market comes back. So if you’re just rebalancing once a year, you’re doing it on the idea that I’m going to rebalance and I expect a certain long-term rate of return from stocks and bonds and that’s why I’m bothering with rebalancing. It’s the same thing that happens if the market drops 20% today, we’re going to rebalance as soon as possible because we’re operating on the belief that every economic cycle, every recession, every stock market pullback, there will be a recovery and we will have not missed the bottom just because we waited till some arbitrary calendar event to take advantage of that.

Jonathan: And of course, the problem with periodically balancing like that, where as the market goes down is it’s extremely painful along the way.

Peter: Yes, you have to have incredible discipline to do it. I mean, because it’s not really one day you’re doing it like in December, we probably rebalanced in tax harvest at six or seven times. We did more trades for our clients in that few week period than we would normally do in a quarter. So if the stock market drops from 27,000 to 25 and you rebalance it doesn’t mean it’s not going to drop to 24. You rebalance again in 22 and you rebalance again.

Eventually, we’re rebalancing at the bottom. It’s sort of when mortgage rates were at 5% and they went to four, we told our clients refinance, then they went to three and a half and we said refinance. Then they went to two and a half, we said refinance. Well, I mean we don’t know where the bottom is, which is why we keep doing it. The great thing with rebalancing is its free to do it. Most of the trades cost zero, but you are dialing up the risk. You’re shifting from monster stocks when it feels like the knife is falling and you’re trying to catch it. But if you are really disciplined and you do that, you come out ahead.

Jonathan: One of the things that just mentioned on this, it’s a little bit of a pet peeve, is a lot of people wait until the end of the year to do tax loss harvesting. There is no law that says you can only take tax losses at the end of the year. If the market has a big decline in April or May, you should not be shy about taking tax losses at that point because they may not be available at the end of the year.

Peter: I mean, we go back to 2009, use the same example, wherein the market collapsed 30%. You should have done your tax harvesting right then if you wouldn’t until the end of the year, the opportunity was 100% gone. None of it was left. You missed it completely by tying that event to the calendar. But you’re right, that’s how most harvesting is done.

Jonathan: It’s the end of the podcast and you’re on the hot seat again, Peter. It is your tip of the month.

Peter: We started by talking about goals and I think that my tip is when people have goals, aim at the bottom of the mountain, I’m going to climb the mountain. They feel like they’ve got to put their head down and get to the top of the mountain and then plant the flag. And I’ve never really believed that and I’ve always encouraged my clients not to do that and my team here not to do that. There need to be a bunch of stops along the way to celebrate what you’ve done. You have to have these steps along the way where there is a celebration. A celebration does not mean you have to have all the friends at your house and throw a huge party. It could be going to dinner with your spouse, it could just be pouring a glass of wine and talking about what you’ve accomplished.

But we all are really good about looking at, here’s where I am and here’s where I need to go. We’re all doing that to ourselves every single day, but we don’t really look at how far have I come. And so taking the moments to just go, “Hey, if I look at what I did in the last year or five years or 10 years, that is a much more positive and reinforcing.” Now there will be times where we look at it and go, “Gosh, I really haven’t done anything in the last year.” But for most people you’re making progress and you can be proud of some of the things you’ve done. And so really systemically finding a way to look at that I think make you a better investor if you’re focused on the money part of this, but just makes life more enjoyable.

Jonathan: Boy, Peter, I didn’t sure I can come up with something quite as thoughtful as that, but here’s my tip of the month. Because it’s early January, one of your goals for 2020 should be to max out your 401(k) plan and it’s much easier to max out your 401(k) plan is if you aim to do it from the beginning of the year. So for 2020, the maximum contribution to a 401(k) is $19,500. If you’re under age 50, if you’re 50 and older, you can put in an additional $6,500. That’s the so-called makeup, catch up contribution, not makeup, catch up. If you want to max out your 401(k) in 2020, up your contribution to make sure you’re on track to reach that amount, and it may have one additional benefit, which is depending upon how your company matches. Some companies match pay period by pay period. If there’s an employer match and you don’t contribute in any particular pay period, you may miss the match for that pay period. By contributing regularly throughout the year, you may be more likely to get the full employer match.

Peter: Right. You definitely want to get the match as free money. It’s the best return you can get on anything but you want to contribute as fast as you can and get the match so that your money’s in the market as long as possible to compound as you were laid out.

Jonathan: Peter, that’s it for this time. We are at the end of our podcast. This is Jonathan Clements, Director of Financial Education here at Creative Planning, sitting here with President Peter Mallouk, and we are down the middle.

Disclosure: This commentary is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed to be reliable but is not guaranteed.


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