This month, Peter Mallouk and Jonathan Clements take the road less traveled, giving you a list of what NOT to do in 2023. Plus, learn why early in the year is the best time to contribute to many investment vehicles.
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!
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Jonathan Clements: Hi. This is Jonathan Clements, Director of Financial Education for Creative Planning in Overland Park, Kansas. With me is Peter Mallouk, President of the firm, and we are Down the Middle.
It’s that time of year when everybody is telling us what to do with our finances to prepare for the year ahead. But here at Down the Middle, we prefer the road less traveled. We aren’t going to tell you what to do with your money in 2023. Instead, we’re going to talk about the things that you probably shouldn’t do. First up, don’t extrapolate 2022’s losses into 2023. The past year was highly unusual with both the broad stock market and the broad bond market posting losses. Peter, what would you say to anybody who thinks 2022’s performance is a good guide to 2023?
Peter Mallouk: Well, what’s interesting about the stock market is it’s up about three out of four years, and that probability stays just about the same regardless of what happened the year before, so it doesn’t matter if the previous year was negative, or positive, or really negative, or really positive, your odds are about three out of four. Now, there are a lot of factors that go into that, but what a lot of people are tempted to do is try to call the bottom like, “Hey, when will we be in a recession? Then I’m going to tilt more heavily into stocks as we’re coming out of the recession.” The reason that’s a mistake is because the stock market is forward-looking, as you know. Basically, it doesn’t look at, “Hey, what’s what’s going on today?” It’s looking at what’s happening down the road.
An example I like to use is if I had a sandwich shop, and I was selling it to you, Jonathan, and you did some research and you found out that there was going to be construction on the entrance to the road to my sandwich shop and it was going to go on for two years, you would not wait for that construction to start to decide what you would pay me. You’re going to pay me very little for my shop because people can’t get into it. If I was selling my shop and you did your research and it was widely known to the public that huge office buildings and schools were going up around my sandwich shop, even though they’re not built yet, people are going to pay more for my sandwich shop knowing all those people are going to be there. All that future news gets priced in today, and the stock market is doing that, which is why you see these false starts in the stock market as people try to guess when we’ll be approaching a recession because the market will move up in the middle of a recession, it won’t wait for a recession to be over.
Jonathan: All right. The next thing that you probably shouldn’t do in 2023: don’t freeze in the face of market losses. That’s the response of a lot of folks who, after losing money in 2022, worry that their own actions will make things even worse. While sitting on your hands isn’t a terrible response, it’s better than panicking and selling, it means you’re missing out on the opportunities presented by 2022’s market decline. So Peter, what should people be doing at this point in the market cycle?
Peter: Well, I think people look at risk and reward and they apply it to everything equally. I think that’s a big mistake. There’s this saying, “Hey, more risk, more reward,” and that’s not true. Some risks are not rewarded. They were stupid risks to begin with and there are losses and you won’t recover from them. We see that with some of the cryptocurrencies exchanges, or some cryptocurrencies. We see that with some of the small stocks that had no earnings, no reasonable expectation of future earnings. We see it with a lot of NFTs and things like that, where things are down 70% to 90%, sometimes 100%, and they’re not coming back, so don’t double down on those things.
However, if you own quality, risk is rewarded, so if you’re looking at a quality bond portfolio versus a quality stock portfolio, we have a reasonable expectation that the stocks will outperform the bonds going forward, and so it makes sense to continue to contribute to those quality positions and accumulate as much as you can. If you’re retired and you’re not living off all the income, use that income to continue to purchase more securities. If you’re not retired, these bear markets are a gift and continue to contribute to the high-quality riskier positions in your portfolio and you’ll come out on the other side in great shape.
Jonathan: Probably the thing we should also mention is that in addition to continuing to invest in broadly diversified investments where there’s a good chance that you’ll benefit from any market recovery, also this is a great time to be looking at taking tax losses. Even in 2023, even at the start of the year, it makes perfect sense to take tax losses. There is no rule in finance that says you have to wait for the end of the year to realize your tax losses. In fact, if you haven’t realized tax losses in 2022 and you’re sitting on them in early 2023, you might want to take them now because, by the end of the year, that opportunity may have disappeared.
Peter: Yeah, I think that tax-loss harvesting is a big missed opportunity for most people because they only do it once at the end of the year. At Creative Planning, we’re doing it all the time throughout the year. If you look at some of the most severe bear markets, like COVID, ’08-’09, those markets both happened to bottom in March of their respective years and fully recover by the end of the year. If you waited until December to tax-loss harvest, you missed the opportunity, so I’d echo your point, you should be doing it throughout the year. Do it in January because otherwise, you might get the recovery before you’ve had a chance to take advantage of it.
Jonathan: So Peter, you mentioned cryptocurrencies. If somebody asked me, “Should I be bottom fishing in cryptocurrencies?” I would say, “Absolutely not.” I mean, even Bitcoin, which is down around three quarters from its all-time high, it’s just a quarter of its previous all-time high, even that I would not consider to be a buying opportunity. In fact, I’m not sure there would ever be, in my mind, a buying opportunity in cryptocurrency because I have no idea what these things are really worth. Would you disagree? Is there a price at which you would be telling people to buy cryptocurrencies?
Peter: No, my position has been the same on this from the very beginning, which is somewhere between 99 to a hundred percent of these cryptocurrencies are going to get to their final price of zero. They don’t have any future expected earnings. It requires widespread adaptation. Could there be a winner or two of these nine or 10,000? Absolutely, there could, but it’s a very low probability reward for a risk of total and complete loss, so I don’t think… When you look at the top 20 out of the 9,000, if one of those survived, that would be a lot, so no, I would not go bottom fishing here. I think there’s a long way to go down, even from these levels. The average cryptocurrency, as you know, is down over 90%, and even what I think most would consider the very best of the best are down about 75%. I think there’s a long, long way to go to get to zero for most of these.
Jonathan: I think one of the things that investors need to keep in mind is that with many investments, there is no need to own them. Most people can build great portfolio just with stocks and with bonds. You don’t need to get any more exotic than that. There certainly are other areas of the financial markets which potentially offer good returns, but there is no requirement that you invest them, and there’s certainly no requirement that you have cryptocurrencies in your portfolio.
Peter: Yeah. One general nice rule to have as an investor, if you’re trying to own things that won’t go to zero, you generally want to own things that are going to bring income to you currently or in the future. When you buy stocks, you get dividends. When you buy bonds, you get interest. With real estate, you obviously get income or future income. With the alternatives of those, which are private equity, private lending, private real estate, same thing, you get paid, right? When you go to an investment where you’re not getting paid and your only possible gain is someone else paying more for it than you did, your probability of having a bad, bad outcome goes up a lot. That’s just the reality of it. As a general guideline, if you’re trying to have a high probability of a result you want, just stick with things that have the ability to turn into cash for you, that have the ability to turn into income for you.
Jonathan: One of the problems that comes when we have dramatic swings in the financial markets is that we start to think only about investment issues, and so one of the things that I would say to listeners after what we saw in 2022 is to think about other areas of your financial life, and don’t procrastinate on important tasks just because they don’t seem as urgent as dealing with your portfolio right now. If you don’t have a well-established estate plan, if you don’t have life insurance and you should, if you have a lot of money in one single stock and you really need to scale that back, if you haven’t been saving enough for retirement, don’t delay on those things. Make sure that you focus on every part of your financial life and not just on what’s going on with the broad stock and bond market.
Peter, it’s time for our tip of the month. What have you got for me for this month?
Peter: All right, look, early in the year is the best time to contribute to all sorts of investment vehicles, whether it’s your health savings account, a Roth IRA, traditional IRA, a 401(k). The reason is, if you are in a position where you can fully contribute to these, or contribute to these in an accelerated way, you get the same limit. You have the same limit, obviously, as if you put money throughout the year, or at the end of the year, but you’re allowing your money more time to compound. If every year you’re contributing 5,000 in retirement plans, but you’re doing it every January, you’re going to wind up with a lot more money in your account down the road than if you contribute that money throughout the year. Now, some people go, “Well, but then I’m not dollar-cost averaging.” Well, you still are dollar-cost averaging, you’re just doing it every January, so every year instead of every month. You’re not timing the market. To the extent that you’re in a fortunate enough position to accelerate your contributions to anything that you can, do so, and you’ll come out ahead.
Jonathan: I would argue that that is particularly good advice for early 2023, given that we already have seen a substantial decline in the stock and bond markets. I mean, we’re not market timers here, but valuations are more attractive today than they were a year ago, and if you’re an investor with a consistent bone in your body, if you like to buy things when they’re on sale, now is a good time to be buying.
Peter, my tip of the month is to encourage people to create a wishlist of the things that they would like to do and buy in the years ahead. Maybe it’s an expensive trip, maybe it’s house remodeling, maybe it’s a new car. I see two great virtues in creating a wishlist. One, it gives you time to think about whether these are really the things that you want to do with your money, whether you really want to spend that couple of thousand dollars to remodel your house, or maybe there are better uses for that money.
Second, as we know from the research, one of the best ways to get pleasure out of our money is to anticipate the spending of it, so if you’re going to book that summer vacation, do it now so you have six months to think about how much fun you’re going to have when you go wherever it is that you’re going to go. You want that period of anticipation. In fact, the anticipation may actually prove to be the best part of the vacation, so take my advice: drop a wishlist for what you want to do in the years ahead, revisit it often, and it will not only help you to make better consumer choices, but also it will bring you greater happiness.
That’s it for this month, Peter. This is Jonathan Clements, Director of Financial Education with Creative Planning. I’ve been talking to Peter Mallouk, the President of the firm. We are Down the Middle. Happy New Year to everybody. Thanks for listening.
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 reliable but is not guaranteed.