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RETHINK YOUR MONEY

The Word That Defined Our Wealth Journey in 2023

Published on December 18, 2023

John Hagensen
MSFS, CFP®, CFS, CTS, CIS, CES

Looking back on 2023, which words will resonate in discussions about our finances and investments? John explores this question, examining how the events of the past year challenged our financial resilience and reshaped our mindset regarding wealth. (2:23) He also collaborates with Charlie Bilello, Creative Planning’s Chief Market Strategist, to delve into the most significant surprises of 2023 (9:56) and caution against placing undue trust in 2024 pundit predictions. (11:33)

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, the Magnificent Sevens Meteoric 2023, my conversation with Chief Market strategist Charlie Bilello, as well as an examination of just how risky the stock market actually is. Now, join me as I help you rethink your money. I had a client this week tell me in a meeting, they’re a radio listener, that I looked way younger than they had envisioned I would. Now for any middle-aged man like myself who wakes up with giant bags under his eyes most mornings, that was pretty cool. I liked it. So I did what any respectable wealth manager would do. I offered them free wealth management and financial planning for life. Yep, they manipulated me into no fees. Well played. You know who you are.

Now, of course, I didn’t do that, but I was appreciative of the comment. And the reality is, though, even as we age, we don’t feel old. I remember when my auntie turned 40 years old when I was a kid, I was like, “Man, she is older than dirt. 40. Man, crazy. Hope she’s around a couple more years.” And of course, thinking back to my childhood, my parents, none of my friends parents, I mean, they didn’t know anything once I hit about 13 years old, but then you become a parent. Mostly, I think I know what’s up when it comes to my kids, but then they start using words like rizz. In fact, I heard another podcast. I love talking about it. These guys are about my age, and I thought, “Yeah, what the world is rizz? My kids are saying it as well.” And if you too don’t know what rizz is, you definitely don’t have any rizz. It’s short for charisma. Charisma’s too long.

It’s too hard to say, so we got to say rizz. It’s rizz, yo. Webster actually listed authentic as the word of the year. Rizz was one of their runner-ups, and I’m not sure why it was authentic, but I’m going to assume that the dictionary knows what it’s talking about. Webster’s 2022 word gaslighting, 2021, pretty obvious, vaccine, and 2020, pandemic. Investopedia just released their 2023 terms of the year, and they serve as a fantastic recap as we reflect back on the past 12 months. First, American dream. This term originated during the Great Depression, and it often refers to a collection of milestones like buying a home and a car and getting married and having kids, and probably, most of all, at a broad level, economically prospering.

Yet the dynamics of the past year made this harder for most people and times have changed, and this is not in everyone’s plan, regardless of their ability to do so. Some people don’t want to get married or have kids or ever own a house. We have the whole fire movement, financial independence, retire early. “How can I retire at 39 years old?” That’s cool. Whatever works for you. Personal finance is a lot more personal than finance, and we all have unique goals and dreams. And I think it’s fantastic for you to pursue whatever’s important to you. But there’s been a lot of talk around the American dream becoming unattainable. I think we should rethink that. What if it’s less about circumstances and more about our expectations? They have gotten so much higher. Many Americans are no longer happy with just a small house and one car and two kids and a dog.

We’ve made so much progress. It’s been so good that our typical baseline for normalcy has increased dramatically. The American dream that most want now, according to a recent study, it costs $3,455,000. That’s what it’s going to take to achieve that American dream. Second term, bank failures. Remember when banks used to be boring? That’s kind of how we want them, isn’t it? I often remind clients, “You don’t want what I’m doing for you to be exciting. You want this boring. You don’t want to have exciting meetings with your doctor, and you also don’t want your banks going broke.” But in 2023, we talked a lot about banks, didn’t we? And hopefully, you gained a better understanding of exactly how your money is protected. How FDIC insurance works? What are the limits? Where do you bank, and how does the treasury support ultimately the banking industry?

Next 2023 term of the year, artificial intelligence. The future of AI went mainstream and really became the hottest investment theme of the entire year. Many pundits attributing a great deal of the growth of the market, the fantastic returns we’ve seen in 2023 as a reflection of the exuberance of artificial intelligence. It’s probably the most terrifying and fascinating, maybe controversial technology that we have encountered in decades. Next term, certificate of deposit. You may think, “Why in the heck are you talking about CDs? I’d rather watch paint dry. What’s there to know about CDs?” Well, this year finally offered savers a real choice for their safety nets. When you can go down the street to your bank and get a short or intermediate-term CD at over 5%, they were among some of the most popular investment vehicles for the year of 2023.

Next term, inverted yield curve. One poll showed 90% of economists projecting a recession in 2023, and they pointed in part to this inverted yield curve. Well, we ended up getting neither, which we’re all thankful for. But it certainly isn’t normal to receive a higher interest rate when you lend money for a shorter period of time, making it noteworthy for these last 12 months. How about debt ceiling? Threats of a government shutdown as the US government approached the debt ceiling? Well, it made its annual return once again, but don’t worry, we solved everything. We’ve got the budget balanced. It’s not over 33 trillion and continuing to increase at… Oh wait, yeah, no, it is. Oh, I forgot. Yeah, all we did was kick the can down the curb, guaranteeing that we’ll likely see this term again in 2024. Yeah, we’ll figure that out later.

I mean, can you imagine? “Hey honey, we’ve got $400,000 of credit card debt. Ah, we’ll be fine. Let’s figure it out next year.” So those were Investopedia’s terms of the year. I’ve got a few of my own. About inflation. How focused have we been on inflation for the last, not just 12 months, but 24 months? Well, what’s finally cooled, which leads me to my next term, soft landing. Did the Fed actually pull this off? Well, they may have. The market spiked on Wednesday after the Fed indicated that their policy objectives were working. They were seeing progress, and they expected to cool off rates in 2024. And I don’t believe we can recap 2023 without mentioning the Magnificent Seven. Nearly 30% of the S&P 500 index is comprised of these Magnificent Seven stocks. Just pause there for a moment. There’s 500 stocks in the index. The largest seven account for 30% of the index. The top 10 stocks in the S&P 500 account for a third of the entire index.

And not only is this degree of market concentration unprecedented, but data back to the 1950s shows that small-cap stocks, not mega caps like we saw this year, have nearly always led the market during the first year of a new bull market. The Magnificent Seven stocks, Apple, Microsoft, Amazon, Nvidia, Alphabet, Tesla, and Meta platforms, have accounted for almost 70% of the S&P 500’s return in 2023. Now, the vast majority of the index is also up. It’s not as if they’re up tremendously, and most everything else is down. A lot of the companies within the index are also positive for the year. They have been carried by the Magnificent Seven. However, I don’t think it’s reasonable to highlight 2023 without also acknowledging 2022 because the returns seem outrageously good in 2023 until you step back and look at the previous 12 months. Got crushed in 2022. In fact, when you look at it that way, only three of the seven have even outperformed the broad index when accounting for 2022.

Those three, Nvidia, the clear winner, is up 55% since January 1st, 2022. Microsoft is up a little over 12% since January 1st, 2022, and Apple is up a little over 8% since January 1st, 2022. When you look at it that way, their returns seem more reasonable, especially considering the other four that I didn’t mention, they’ve actually underperformed the index as a whole when looking at the past 24 months. Lastly, the Fed and interest rates. Even as a financial advisor, I haven’t paid this much attention to interest rate movement and what the Fed was going to say next. Not because we were making dramatic changes to our client’s portfolios but because what they were saying was moving the market. It was having an impact in the short term on investor sentiment, and it was normal here in 2023 on certain Wednesday afternoons immediately following the Fed statements to see huge movement either up or down in the markets based upon a few sentences.

Well, whether you were in stocks or bonds, 2023 has been really good year and a very welcomed one on the heels of 2022’s abysmal performance. I am joined today by a special guest, Creative Planning Chief Market Strategist Charlie Bilello. Charlie’s known in the finance world as the master of charts. His ability to distill complicated topics into one visual aid. I’ve never seen anything like it. Charlie is an award-winning author who has been named by Business Insider and MarketWatch as one of the top people to follow on X, and his market insights are often featured in Barron’s, Bloomberg, and the Wall Street Journal. I do not know a lot of people other than Charlie who have a JD, an MBA, and hold a CPA certificate. On top of that, he has the designation of chartered market technician. My friend and my colleague, Charlie Bilello, thank you for being here with me on Rethink Your Money.

Charlie Bilello: Thanks, John. Great to be back.

John:  We’re here at the end of 2023, and when it comes to the markets, there were plenty of surprises, which is where I want to begin, Charlie. In your opinion, what were this year’s most notable headline surprises?

Charlie: Number one would have to be the recession calls at the end of last year coming into this year. I did a poll on Twitter where over 90% of the people that responded said we’re either in a recession or going to be in a recession in 2023. That was how bad sentiment was. And if you look at economists, I think it was even higher. It was very few people saying there wasn’t going to be economic weakness, so that would have to be definitely number one.

The fact that there was no recession this year, and we actually saw in the third quarter just for that quarter growth be above 5%. And then, moving to the stock market, John, and this is a real fascinating thing, and it seems to happen more often than you would think, these strategists entering this year were actually predicting a down year for stocks.

You don’t often see that. You often see them predict it’s going to be positive, 5%, 10%, various amounts. But on average, strategists were actually expecting stocks to be down this year. And we know as of now, S&P 500 up 20% for the year, NASDAQ 100 over 40% increase. So, boy, did they get it wrong, and the list goes on and on from there. Pretty much every major thing that people predicted coming into this year was wrong.

John: Why do you think they got it so wrong?

Charlie: The biggest challenge, number one is human behavioral bias that we have of recency bias.

John: Mm-hmm.

Charlie: And after 2022, where you have the worst year for the stock market since 2008, and you have the Federal Reserve hiking interest rates, you have inflation the highest since the early 1980s, you had any number of other things going on, obviously, the Russia-Ukraine conflict and you have the fact that earnings are going down, you put all those things together, well, it looks like a recession would have to be coming and that should mean the stock market should only go down further.

Now, why didn’t that lead to a recession? Well, you and I covered it a few times this year. But the biggest reason was that we were really insulated a lot of Americans and corporations from these rises in interest rates so far. And we talked about the fact that all of these homeowners are locked into these low-interest rate mortgages, and if they don’t have credit card debt that’s floating rate or auto loans that can be floating rate or other debt that’s floating and they just have this fixed rate mortgage.

Well, this has actually been a blessing for a lot of people because the interest that they’re getting on their cash has gone up, and they have this fixed-rate mortgage expense, and their wages are going up. And the biggest part that people didn’t predict, John, was that the labor market would continue to be strong. So as long as people have their jobs and not only have their jobs but actually are earning more than they did a year ago, it’s very hard to push the economy into recession because people are still spending, and spending is the biggest component obviously of the US economy.

John: It begs the question, does the Federal Reserve in an economy where a lot of our biggest debt is locked in for 30 years, did they not have quite the power? Maybe the levers they’re pulling aren’t quite as impactful as they may be in other countries where, in particular, mortgages are on shorter terms.

Charlie: That could certainly be the case. There are people saying now, in hindsight, this time is different. They weren’t saying that a year ago.

John: Right.

Charlie: And it also could be, though, John, there’s this idea of a long and variable lag to Fed policy, and perhaps we just haven’t seen it yet, and I don’t think the notion is incorrect that rising interest rates, all else equal, is going to slow spending.

John: Right.

Charlie:  We’ve seen it in terms of auto purchases, we’ve seen it in terms of the housing market, not in terms of prices, but in terms of activity which has collapsed and any area that really requires financing, we’ve seen a slowdown, but that hasn’t been enough because of the reasons that we’ve talked about yet to push the economy into recession. So I don’t think that rising interest rates was the wrong thing. For one thing, all they were doing was normalizing interest rates.

Clearly, that by itself isn’t going to tell you exactly when a recession’s going to begin. Now, if we look at 2024, and a lot of people are saying now a very different tune than last year, it’s very interesting the predictions of a recession have come way down. The predictions of stock market going down are absent, so perhaps now the surprise for next year is going to be, well, things aren’t going to be as rosy as people are viewing, and once again, they’ll get caught in terms of that prediction game being wrong.

John:     It speaks to recency bias, and I think it also speaks to the fact that some of these things were priced in. It was a really bad year in 2022 for both stocks and bonds. Maybe that’s why 2023 we’ve seen what we’ve seen. And I’m speaking with Creative Planning Chief Market Strategist Charlie Bilello. What are the predictions that we shouldn’t listen to that you’re hearing right now for 2024?

Charlie: I would throw out any prediction other than viewing it as entertainment.

John: Sure.

Charlie: If you’re a long-term investor, don’t base your portfolio decisions on these outlandish forecasts, or any forecast for that matter.

John: All right, Charlie, then what’s the S&P going to be at? What are you-

Charlie:  Yeah. Yeah, right.

John: … calling for the 12-31 [inaudible 00:15:59] 2024?

Charlie:  I’m a strategist, so I am supposed to put out that target, but I refuse to do so because it’s such a ridiculous concept to say where the level of an index is going to be at a certain point in time in the future.

John: Especially 12 months from now.

Charlie: For sure. Tomorrow, I could tell you within a hundred points, most likely where it will be, but 12 months-

John: thank you for that, Charlie. That’s really helpful.

Charlie: … not helpful whatsoever. But if we look at where Wall Street is, John, they’re looking for five to 10% gain. They’re back in terms of a normal. I looked recently at who was at the highest end of the forecast, and Deutsche Bank was predicting a pretty strong market for 2024 in their forecast, and they talked about a lot of reasons why they think that’s going to be case. And so I said, “Oh, that’s interesting. Let me go back and see what they predicted for this year to see how they did with that prediction the year before.” And lo and behold, John not so good in that prediction.

They actually predicted for 2023 that earnings would go down, the stock market would be down, and that the economy would go into a recession, and you could say, “Okay, everyone gets it wrong sometime. Perhaps that was just a bad year for Deutsche Bank.” So I went back to 2022. What were they predicting going into that year? If you remember 2021, obviously great year for the markets when Deutsche Bank was extremely bullish for 2022, said, “Earnings going to be very strong, economy is going to be strong.” What do we actually see the worst year for markets since 2008? So the lesson isn’t just Deutsche Bank. It’s any of these banks. Don’t base your investment decisions based on something that’s really just entirely luck.

So they might get it right next year, but it won’t be because they have this crystal ball. They have skill in forecasting this. It would just be because of luck. And as the late Charlie Munger once said, “You don’t want to play games that are based on luck. You want to try to remove luck from the equation as much as possible.” How do you do that as an investor? You diversify. You have a plan, you stick with that plan, and you don’t make these short-term gambling bets based on predictions and forecasts that nobody can do with any consistency whatsoever.

John: Just this last week, my wife and I were on a morning walk, and we’re pushing one of our kids in that little plastic pink car with a steering wheel on it, and my wife says, “I saw on social media that rates are going to drop five times next year and kind of thinking about flipping a house.” She’s really wanting to flip houses, and she continued, “Maybe it’d be a good time to buy a home because you’ve told me, John, that when rates go down home, prices often go up.” And I kind of laughed, not because she was wrong in her assumptions or that she was saying anything stupid. It was logical.

But I was laughing because I said, “Do you realize that this is what I talk about almost every week, that while forecasters predictions often seem plausible, their historical accuracy is atrocious? And you can’t actually make financial moves based upon what an Ivy League economist predicts on Instagram.” But Charlie, that’s confusing for people because it’s different than basically every other aspect of our life. There are so many variables between now and this time in 2024 that are not just unknown, but they’re completely unknowable. No one can possibly predict or forecast them with accuracy, no matter how intelligent they are.

Charlie: It’s confusing, especially for people who are in professions that have a correlation between effort and time spent. There’s that famous 10,000 hours rule popularized by Malcolm Gladwell in the book Outliers, where he talks about the Beatles talks about tennis players, chess players, spending 10,000 hours on their craft and becoming experts and becoming better.

John: Yep. And it makes sense, right?

Charlie: It makes sense. But all of these things, you have to break it down there. These are fixed games. Rules of tennis don’t change. The rules of chess don’t change. If you’re playing a musical instrument, it’s the same instrument tomorrow as today. You’re going to get better at all those things, and that’s encouraging, and that is true for most professions. A doctor and look at their progression in their career from residency [inaudible 00:20:13] they’re established in their career, they’re going to get better. They’re going to learn, they’re going to experience, they’re going to study, they’re going to get better.

The problem with markets is you’re not dealing with a fixed set of rules. The rules are constantly changing, and as those rules are changing, well then, you can’t use the past to instruct you of what to do in the future. So 2024, regardless of what happened this year, is likely to be completely different. So the lessons you learned this year, in terms of X, Y, and Z tech stocks outperformed, growth stocks outperformed, small caps underperformed. You can’t use that as a template for what will happen in 2024. It’s not a fixed game.

The 10,000-hours rule, unfortunately, doesn’t apply to investors. What’s weird is not only does effort and activity not lead to better results, it actually has shown to be hazardous to your wealth, the more you do those things. So few simple things, stay the course, diversify, save, spend less than you earn. If you do all those things, you’re almost guaranteed over a long period of time to compound and be successful. None of it has to take 10,000 hours to learn. The hard part obviously is digesting it and sticking with it and not trying to outsmart yourself.

John: Well, as the great Morgan Housel says, “It’s much less about intelligence and much more about your overall disposition and emotional maturity.” I couldn’t agree more, Charlie. I say there’s three rules of investing, and if you know them, you’re better than about 99% of the world, which is buy stocks, diversify, meaning if you need to have some bonds and cash and other things because you have some income needs or your risk tolerance, diversify.

That’s the second rule. And number three, rebalance. Literally do that for the rest of your life and spend less than you make, and you’ll be ahead of almost everyone else if you just follow those three basic rules, but I think that’s counterintuitive. “Wait a second, John, that’s too simple. How am I going to be better than most people doing something that simple?” But the reality is-

Charlie: I’ll give you one more. I’ll give you one more.

John: Yeah, okay.

Charlie: How about don’t obsess over all of it. Don’t look at your statement. Just the fact that the people who look at their statements less frequently.

John: More often do worse. Yeah.

Charlie: Do worse once a year for most people is enough, which is mind-blowing to people. I don’t need to be studying what the DAO did today or what this trend or that trend is not really. It’s actually counterintuitive, and we hear all these examples of people that pass away, and everyone’s like, “How did they AMAs this fortune?” They did not. I mean, there was a guy recently nobody knew he lived in a trailer park. He had three or $4 million, and all he did was buy index mutual funds and hold them, and that compounded, and he lived within his means.

John: It’s so good. “What did Fred do? Oh, actually, Fred lost his login 40 years ago and forgot about the account with three or $4 million.” Well, Charlie, I’m going to wrap this up with something that I just told a friend who asked me about what I thought would happen in 2024, and I said, “You know what? I’d give it about a 70 to 75% chance the market’s up next year,” and that’s really all that we know, right. We play the probabilities to give ourselves the highest chance of success with the information that we have. So great reminders. Charlie, as always, thank you for joining me here on Rethink Your Money.

Charlie: Absolutely great to be with you.

John: November finished as one of the best months in the stock market of the last several decades. Common logic is to take profits off the table. And I think, on the surface, it seems wise and prudent, but the data says rethink it. The market, believe it or not, actually performs better following months that have been as good or better than the 8.9% increase. Believe it or not, I mean just an amazing month that we saw in November. In fact, if you look at data from Bloomberg going back to 1950, three months following a rise of 8.9% or more, the average S&P 500 return, it’s up another 3.3% as compared to only being up 2.1% in the three months following a month that does not rise by 8.9% or more, which is obviously most months.

This speaks to the fact that momentum often begets momentum. That 10% average return that the market’s provided over the last century. It’s not linear. It doesn’t grow it a little less than 1% per month, month after month after month. No, in fact, the contrary is true. The market returns are delivered often in short, dramatic bursts. Six months following a rise of 8.9% or more. The average return since 1950 is 9.2%, as compared to only 4.3% if the market hadn’t risen by that astounding 8.9%. And when evaluating the 12 months following a month of 8.9% or more, the average return since 1950 for the S&P 500 is up 14.5% instead of the more typical average 8.8% 12-month forward return after a rising period of less than 8.9%. Let this serve as a reminder.

Lesson 1,228,716 as to why market timing doesn’t work. Remain invested regardless of what’s happened over the last six months, six hours, six years. Stick to your long-term game plan, center that around your goals and your priorities, your tax situation, your estate planning, and then enjoy life and do your very best to not mess it up along the way. Fear and greed will creep in. We’re all humans. And that’s why a fantastic financial plan that you understand, that you believe in and feel conviction about is really the key to your long-term financial success. If you’d like to speak with one of our local wealth managers here at Creative Planning, just like myself, visit creativeplanning.com/radio.

Now, just as so many other listeners, we’ve helped families for 40 years grow, protect, and transfer their wealth. Why not give your wealth a second look? At creativeplanning.com/radio or by calling 1-800-CREATIVE. I always love those Mission Impossible movies. I think there’s, I don’t know, 10 of them now, however many. They just kept making them. Tom Cruise never ages. Still looks like he’s 45 years old. I’m not sure what Fountain of Youth the guy found. But one of the great parts in every single one of these movies is that he should die 20 different times but somehow doesn’t. He’s holding onto the rails of a helicopter. It explodes at 8,000 feet. As he falls, the blast didn’t blow out his eardrums somehow, miraculously.

It didn’t completely obliterate him into a million pieces. He just throws out a parachute he happens to have, hits the ground, takes off a random mask that made him look like a different person. Gets on a motorcycle, goes 80 miles an hour into a subway, jumps on top of a train, lays flat as he goes through a tunnel that would’ve decapitated him, but it didn’t because he’s Ethan Hunt, and the movie ends, and somehow he is still alive, which is pretty important if you want to continue to make more Mission Impossible. Well, the next time someone tells you that a 60% stock, 40% bond, AKA, the 60/40 portfolio, “You know that thing’s dead. It doesn’t work,” which almost everybody had been saying after 2022.

I want you to think of Ethan Hunt. Think of Tom Cruise. Red light, green light. That’s what I want you thinking about. It’s not dead. In fact, we just saw in November, not only a phenomenal year in the stock market, but the second-best month in the past 30 years and the ninth-best since 1976 for a 60/40 portfolio. It gained 7.3% in November, and driving the move higher in stocks and bonds was the sharp decline in interest rates, with the 10-year treasury over three-quarters of a percent below its October high and with two-year yields falling almost just as much. Now, how much does having 40% in bonds impact your returns, your volatility?

Well, your worst year was 2008 for either portfolio where the S&P 500, a full stock portfolio of 500 largest stocks was down 37%, a 60/40 portfolio only down 22%. Your standard deviation, which is that measurement of volatility at 11% in a 60 40 and a 16% when it comes to the S&P 500, your annualized average return in a 60 49 0.8% as compared to 11.4%. So if you have 15 or 20 years to let your investments bounce around and you have no need to sell any of them, maybe you’re young, and it’s within a retirement account, you will drag down your returns historically by a couple of percent per year by allocating 40% of the portfolio to bonds.

But if you’re someone who likes the idea of reducing risk or you have a need for some of the money within your portfolio here in the near future, this is why you add bonds. You add bonds to significantly decrease your downside. So I think it’s pretty clear, as we turn the page on 2023, the 60/40 is not dead. Can we rethink the notion that the stock market is risky? I just had someone else this week say, “Yeah, I thought about investing, John, but the stock market, it’s just way too risky for me.” If you are well diversified and you are in the market for a long time, historically speaking, your outcome of returns are fairly predictable. If you buy one stock, yes, it can be Enron or Washington Mutual or America Online and you can lose everything.

Shoot. It could be General Electric, and you don’t lose everything, but you suffer a massive loss that probably will never peak back to a new all-time high. But when you are globally diversified, and you own thousands of the largest companies around the world that are producing goods and services, for that to go to zero, what would need to happen is that all of those companies simultaneously go bankrupt. If that occurs, you have way bigger problems than the fact that your IRA balance has collapsed. The world is over. We’re eating each other’s arms. Like get your guns, go get in your bunker. So we need to rethink that the stock market broadly is risky, but what is true is that it’s very volatile. It’s very unpredictable over short periods of time.

If you go all the way back to 1950, over a one-year period, you could be up 47% or down 39%. So yeah, it is risky if you need to sell everything 12 months later, which is why any competent financial advisor would tell you, “Probably not smart to be in the stock market on short-term monies.” But over a rolling five-year period, best scenario, you’re up 28% per year over a five-year period. What’s your worst-case scenario since 1950? You could be down 3% per year for five years. If you look at 10-year rolling periods, man, we’ve had a decade stretch. The best one where you made 19% per year for 10 years, but worst case scenario, down 1% per year. If you extend it out to 20 years since 1950, your best rolling 20-year period, you were up 17% per year.

We’re evaluating whether the stock market is risky. What’s your worst 20-year period since 1950? You still made in the stock market 6% annually for 20 years. That’s been your worst-case scenario for a 20-year period. The lesson, the stock market’s incredibly volatile. It’s unpredictable over short periods of time. But if you have a long time horizon and you know what you’re doing. And you don’t rip off the emergency exit door and jump out at the first sign of turbulence. Yeah, you just buckle up your seatbelt, historically speaking, you’ve always landed safely at your destination. The other side of that same coin is that the bond market, unlike the risky stock market, it’s safe. Well, it depends on what type of bonds you own.

In 2022, long-term bonds lost over 30%. High-yield bonds lost over 30% in 2008 during the stock market crash. Short-term bonds, last year, virtually flat. Maybe depending upon exactly what you own, they might’ve been down a couple of percent. Bonds absolutely can be very safe if you are purchasing high credit quality, meaning where you’re lending money is very unlikely to go broken, not be able to pay you back at maturity, and that you’re not lending money for 20 or 30 years where your ability to unload that bond, certainly in an environment where interest rates have risen can leave you with a huge loss. And I know sometimes interest rate risk can occasionally be a difficult concept to comprehend, but I think there’s a simple way to look at this. A bond is simply a loan. When you own Microsoft stock, you are an owner of Microsoft. You are a shareholder.

When you own a corporate bond, you are lending money at a predetermined interest rate to Microsoft with the expectation that when that bond matures in one year or five years or 20 years or 30 years, they will then deliver your principal back. But if a couple of years ago you made that loan to Microsoft at 2% and then in 2022 rates went through the roof and at that time Microsoft may be issuing bonds at a lot higher interest rate. I mean, shoot, you can go down to your bank and get a CD for 5%. If you’re holding a 2% bond that doesn’t mature for 29 more years, not only are you not happy because you’re seeing the CD rates out there, and you’re seeing what government treasuries are paying, but you better believe none of your friends want your bond.

Nobody wants to buy the two percenters from you. So the only way you possibly can get rid of it is by discounting it enough to make it on par with what’s currently available in the open marketplace. So we need to rethink the idea that all bonds are safe, high credit, short-term, very low volatility. Historically, you have a very low probability of losing a lot of money. But you start lending to junkie companies to get a higher interest rate or you’re lending for decades, you’ll find that there is considerable risk even in bonds. Well, it’s time for listener questions, and we have a lot of them this week to get through. Lauren, who do we have up first?

Lauren Newman: Hi John. So the first question I have today is from Becky in Wichita, Kansas. She says, “I’ve consistently given to nonprofit organizations each year, but now I’m aiming to increase my donations to roughly 10% of my yearly income. Can you provide guidance on an effective strategy or approach I should consider for maximizing the impact of my increased donations?”

John: Well, Becky, I love your heart here, wanting to give back to great organizations that are making the world a better place. I wrote an article earlier this week that I will post to the radio page of our website specifically on strategic generosity, a guide to optimizing your charitable giving. And here are four quick strategies. Number one, donate stock. It doesn’t need to be cash. So, often, we default to cash, but if you have highly appreciated stocks, donate the shares instead. You’ll get the same exact deduction, but with the added bonus that instead of needing to sell those stocks and deal with the tax bill, just donate the shares directly.

The shares are then sold by the receiving entity with no tax owed. Number two, utilize a QCD, qualified charitable distribution if you’re 73 or older and taking RMDs. I’ll expand on this further in an upcoming question. Number three, bunch your charitable gifts. If you’re taking that standard deduction of the $27,700 for married couples or cut that in half if you are a single filer, then you’re in the 90% of Americans who currently do not itemize. In that case, bunch, as the term says, all of your charitable giving into one larger donation, receive that big tax benefit in that single year, and then receive the standard deduction in all subsequent years until you bunch another donation.

Now, if you don’t like the idea of giving five years all at once to your church, you’d rather spread it out over five years, consider a donor-advised fund where you’ll receive the donation upfront. But then can distribute the money in whatever cadence you’d like to the organization. So again, you can donate stock, utilize a QCD or bunch deductions, and many cases, while parlaying that with a donor-advised fund. All right, Lauren, who’s next?

Lauren: So next, we’ve had a number of questions regarding RMDs over the last couple of weeks, so I’m going to read through those. “Can I wait to take my RMD until next year’s tax time, or does it have to be done by the end of the year? What happens if I don’t take my RMD? I turn 73, and I’m now required to take my RMD. If I don’t need the money for my RMD, what can I do with it? Can I donate to my church, or do I have to take it?”

John: Your RMD must be taken by December 31st to avoid a penalty, and that amount is based upon the aggregated value of all of your retirement accounts as of December 31st of the previous year. When it comes to IRAs, you can take that distribution that required amount entirely from one account. When looking at 401(k)s and workplace retirement accounts, each RMD must be calculated at an individual account level and withdrawn from each account. There is one small wrinkle. In the first year, that you’re required to take that minimum distribution. You are granted until April to take that distribution.

But remember, if you do so, you will still need to take your second RMD, again, in that year before December 31st. Regarding what happens if you don’t take your RMD, there is a 50% penalty, which I believe to be basically the largest penalty in personal finance. So you want to make sure you get that money withdrawn and pay tax on it before the stated deadline. If you don’t need the money, you can take the distribution and reinvest it right back into a brokerage account, put it in your bank account, buy a fancy car, take a vacation, buy some shoes, whatever you want. The IRS just says, “Take it out and pay tax because you have been deferring that income for long enough, and it’s time to pay the piper.”

And speaking of donating the RMD, if you’re going to do so, especially with that standard deduction doubling with the tax cut and Jobs Act in 2018, it’s often best to use a strategy referred to as a qualified charitable distribution, sending the money directly from your retirement account to your desired charity because if you take the distribution, put it in your bank account, then write the check to the charity, you may not receive a deduction if you’re not over the standard, which many aren’t with the higher limits. This allows you to have your cake and eat it to it. It satisfies the RMD. You disinherit the IRS from the transaction and still receive that entire standard deduction. All right, Lauren, who’s next?

Lauren: Joe in Minnesota says, “If bonds bring down the long-term potential of a portfolio, why would you even have them in there? Wouldn’t it just be better to have a full stock portfolio, and then if you need to pull money from the portfolio in retirement, you just take from whatever stocks are up and don’t touch the stocks that are down?”

John: Well, Joe, it’s all about sequence of returns risk. Stocks are down more than bonds, and when they’re down, they’re down more than bonds. Remember, if you lose 50%, it takes a 100% recovery just to get back to even. You have $100,000, it goes down to 50,000. That 50,000 has to now double to get back to your hundred. And more importantly, if you need to sell shares of those stocks to create income while they’re down 50%, you have to sell twice as many shares, which, ultimately, can cannibalize the long-term growth of the portfolio.

So you really hold bonds for two reasons, even though, yes, in a vacuum, they will produce a lower expected long-term return. One, you can’t take the swings of the market. You need that risk mitigation. You need that volatility dampening for your own mental well-being. Put another way, your risk tolerance is not high enough to subject yourself to a 40% down year like in 2008. And if you didn’t have safer parts of the portfolio, you would likely bail out of your long-term plan because you simply just couldn’t take the pain any longer. So that’s one reason. You just need a smoother ride. Some investors do.

And then the second reason is that you want to take distributions from the portfolio over the next 5, 6, 7 years, and you recognize that while the stock market’s up about 70% of the time over one year periods and about 90% of the time over five-year periods, if you need money 36 months from now, it’s very possible that the market is down in value. And as I just mentioned, you don’t want to sell shares of stock while they’re down in value. That’s a really good way to run out of money in retirement. But when I see a 40-year-old who plans on retiring in their 60s and has a 10% penalty for the next 20 years if they take a distribution out of their retirement account with 40 or 50% of their savings in bonds, I do ask why.

You have a 15, 20, 25 year, 30 year runway on these monies. The stock market’s never been down over any rolling 20-year period ever, past performance, obviously no guarantee. But you almost certainly, in that scenario, are decreasing your expected long-term returns. But if you can’t take the stress and aggravation of the market bouncing around or you need money within the next seven years, it can often be very prudent to add a safer diversified portion of the portfolio as bonds typically provide. All right, Lauren, let’s go to the next one.

Lauren: Finally, I have Julie in Houston, Texas, and she says, “What exactly is a catch-up contribution, and how does it work? I’ve heard about catch-up contributions being forced into Roth accounts, but I’m unclear on the details. Could you provide me more information on when and how catch-up contributions are mandated to go into Roth accounts?”

John: Well, the Internal Revenue Service did announce that there is a transition period that’s going to extend until 2026, but Julie, you’re on top of this. What it references is those 50 years of age and older have long been able to make a catch-up contribution, which for this year is $7,500 additional to the 22,500 into a 401(k) plan, allowing for a $30,000 contribution within a 401(k). Well, the SECURE 2.0 Act said, “We’re going to continue that catch-up contribution for those closer to retirement, those older savers, but there’s going to be a big catch that no longer can be deferred to those who make too much money.”

Essentially, the IRS said, “You know what? We still want to allow you to get more money in, especially if you’re behind. But you know what? If you’re making a bunch of money, we’re also not going to offer you an additional amount of money that you can defer off of your income.” So you can put the 7,500 extra away, but it’s going to go to the Roth side of your plan, meaning you are going to pay tax on that $7,500 this year. But quite honestly, Julie, for a lot of people, this may have been the more effective approach anyhow, given the expansion of income within lower tax brackets that were brought about due to the Trump tax reform.

So if you’re at least 50 years old and you earned 145,000 or more in the previous year, yes, you can make a catch-up contribution, but it does need to go to the Roth side of your account. But again, this transition period extends until 2026, so you’ll have more time to continue making catch-up contributions and deferring that income in the event that that makes the most sense for your overall plan. Thanks to all who submitted those questions. If you have a question you’d like me to answer on the air, email those to radio@creativeplanning.com just as these other listeners did.

As humans, we all wrestle with a set of core questions. Am I safe? Am I secure? Am I loved? Am I wanted? Am I successful? Am I good enough? And do I have a purpose? These are the seven primal questions, and knowing yours is the first step to a stronger, better, happier, and more successful life. Mike Foster wrote a book, fantastic book titled The Seven Primal Questions where he takes a deeper dive into each. We all have hidden forces that drive us, and typically, one really stands out as our primary concern. The one where we feel like we don’t measure up. It’s often due to past experiences or trauma, and it impacts our relationships and other broad aspects of our life, and it also impacts our money.

If you don’t feel safe, you’ll save, and you’ll save, and you’ll save some more. “Hey, your plan looks great. Now I’m going to save more. Why don’t you spend some money? No, I’ll keep saving” because you want to feel secure, and this is the person who dies with way more money than they ever needed. And the sad part is maybe never truly feeling safe or secure. If you feel unloved or unwanted, you’ll spend money in attempts to buy it. If you’re someone who asks the question, “Am I successful? Am I good enough?” You’ll buy things to prove to yourself and others that you are, in fact, successful. This is the person who posts their new car in fancy vacations on social media, looking for approval.

That seventh question, do I have a purpose? Many have plenty of money. I’ve met with hundreds, thousands of investors. Your plan looks great. You’ve saved enough. You’re on track to accomplish all of your goals. And in a way, there’s an emptiness because, in some cases, you haven’t answered the question, what’s the point in any of this? What’s the purpose in this money? You may have enough to be comfortable. Now, what? I want you to identify which of these seven primal questions best applies to you. Am I safe? Am I secure? Am I loved? Am I wanted? Am I successful? Am I good enough? Do I have a purpose? Now, once you know your question, I want you to restate it as an I am statement. I am safe. I am secure. I am loved. I am wanted. I am successful. I am good enough. I do have a purpose.

And then you can start looking at this from a place of strength. It’s a good and highly simplified key to unlocking some of these primal hurts in your life and turning them into strengths because, as I mentioned, it impacts not just your money but many meaningful aspects of your life. Your insecurities can be your greatest strength, in particular, when used for the good of other people because you can empathize and relate at a much more intimate level with those who also struggle with the same question.

It may be a spouse, friends, your kids, grandkids. They’re working through these very same seven primal questions, and maybe just maybe this holiday season, you can be the encouragement they need to tell them. You see them for exactly who they are. “You are loved. You are good enough” rather than who they think they need to be. Make sure those whom you care most for understand that they’re loved and cherished just exactly the way they are. And remember, we are the wealthiest society in the history of planet Earth. Let’s make our money matter.

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

Disclaimer: The 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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