On this week’s episode, we’re making the timely correlation between the Olympics, the stock market and a Powerball winner — and sharing how to have a winning formula when it comes to your investments. We also welcome Chief Market Strategist Charlie Bilello back to the show for a candid conversation about the Federal Reserve, where we’ll get his opinion on the impending rate cut.
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 your host, Jon Hagensen. And on this week’s episode, I’m making the timely correlation between the Olympics, the stock market, and the true story of a Powerball winner’s nightmare. Also, what’s going on with this recent market volatility? I’ll make sense of that for you and provide the information that you need. Finally, I also welcome back to the show, Chief Market Strategist, Charlie Bilello, where our candid conversation regarding the market’s rebalancing and the Federal Reserve leads to his opinion on the impending rate cut. Now, join me as I help you rethink your money.
Yep. There wasn’t already enough to talk about going on in the world, going on in our country, enter stage right, the Olympics. I personally enjoy the Summer Olympics a lot more than the Winter Olympics. Now I know our Canadian friends up north and the Swedes, Norwegians are like, “Wait, what?” No, there’s no cross-country skiing, and conversely, unless it’s the movie Cool Runnings, the Jamaicans are having more success on the track than the bobsled.
A little history on the Olympics, the first Olympic Games took place in 776 B.C. No, you didn’t mishear that, 776 BC. And then, in 393 A.D., it’s like a thousand years later, the Olympic Games were canceled and they didn’t start up again for over 1,500 years. The first Summer Olympic Games had just 14 participating countries, and until 1912, first place Olympic medals were made of solid gold, like actual solid gold. So it wasn’t just about winning to be the winner, it was like, “Ah, it’s a nice piece of jewelry.”
Did you know that at these 2024 Olympic Games in Paris, medals contained a piece of the original iron from the Eiffel Tower? What makes the Olympics exciting are the backstories and understanding the level of commitment and discipline for these athletes to achieve their ultimate goal. If you’ve ever had a family member who swims, even just competitively as a kid or in high school, that is no joke. You are up way before the sun every single day. These gymnasts are practicing these routines for thousands and thousands of hours. And they get up on the beam and hope to not fall after a lifetime of training. That’s what makes it dramatic. That’s what makes it suspenseful. That’s what makes it beautiful when they pull it off, especially considering the patriotism of the games as well.
When looking at the application of life, investing, these Olympic Games, the commonality is that winning takes time. You don’t just walk out of the stands, get on the uneven bars, and win gold. Between Biles, Ledecky, Scheffler coming in with a 29 on the back nine in the final round to win gold, training for the Olympics is a long and an arduous journey that demands years of dedication, hard work, and meticulous planning. Aspiring Olympians, they often start their training at a young age and commit to their sport 100%, all-in, parents are all in. The whole family’s committed before ever reaching anywhere near the elite level required to compete in the Olympic Games.
And this isn’t any different than you and I as investors. Now what I’m not referencing is that you need to be focusing on the stock market day and night to have success. In fact, I would contend that’s the opposite approach. But I am saying that compound interest takes time. Building wealth takes time. Starting as early as possible is massively beneficial, and then allowing your money to compound over decade-long periods works like magic. There are no stocks for the long run that make 50% per year compounded for 80 years, at least we haven’t seen that yet.
And just like our Olympians, winning big with investing means surrounding yourself with the right people. It means having the right coach. All of these Olympic athletes have coaches. They train and receive feedback from people they trust and who hopefully have their best interests in mind. The same is true with a financial advisor, but how do you know who to trust? “I don’t know. They have a nice office. They seem really cool. They’re friends with my brother-in-law. I play softball with them. They’re members at my country club. They’re a neighbor. They go to my church.”
Those really aren’t great proxies for determining if they’re going to be a great financial advisor. You wouldn’t pick a surgeon that way. “My neighbor, I think he went to med school.” What? No. Find the right person, the best person, to coach you. Because when you hire the wrong person, bad things can occur. Advice you receive may not be ideal. Events like what happened to a couple in Minnesota is what can happen.
And I don’t share this with you to scare you, but rather to really help you understand this does exist out there. Probably the most important decision in winning over the long run with your money is making sure the guidance you’re receiving is optimal. It’s in your best interest. And that doesn’t mean it needs to be from us here at Creative Planning; but use a set of criteria that you feel provides you with the highest likelihood of independent, objective advice that’s hopefully removing as many conflicts of interest as possible.
So listen to this happy yet sad story, like all at the same time, it’s all wrapped into one, regarding Paul and Sue Rosenau. I hope I’m pronouncing their last name correctly. So we’re warping back in our time machine to spring of 2008. Paul Rosenau, a construction supervisor in Minnesota, bought a Powerball ticket. He hit the $59.6 million after-tax jackpot. That’s not pre-tax, that’s after tax. In fact, I believe the giant check showed $180.1 million.
Rosenau was a devout Lutheran, son of a pastor. He recalls with a tremor in his voice how he and his wife Sue felt when they woke up the next morning. They realized that their granddaughter Michaela had died exactly five years earlier. She had a rare neurodegenerative illness that strikes infants and generally kills them in less than four years. In fact, their granddaughter had died at the age of two. Rosenau recalls, and I quote, “We were very sure that the Powerball jackpot was divine intervention. And we were very sure what we were supposed to do with it.”
And Jason Zweig over at The Journal wrote a great summary of what ensued next. And what they hadn’t counted on though was that human intervention can be destructive, and it’s heartbreaking. And it shows how powerfully fees and commissions can pervert financial advisors’ judgment and ultimately crush your wealth.
The Rosenau’s promptly used $26.4 million of their winnings to fund a nonprofit focused on finding treatments for children with this disease that took their granddaughter. These are the kind of people you hope win the Powerball. If somebody’s going to win it and it’s not you, this is who you want to win it. But having almost no investment experience themselves, they hired a local financial advisor and insurance agent, whose name I’ll redact at this time, we don’t need to pile on this person’s family, he’s since passed, to manage the family and the foundation’s money.
Now, this advisor claimed to be putting his new clients’ best interests ahead of his own, but that’s not what the evidence suggests. In fact, last month an arbitration panel, run by FINRA, instructed Principal Securities to pay $7.3 million in compensatory damages to the Rosenau Foundation. For full disclosure, it’s worth noting that during the arbitration proceeding, the firm denied the allegations which included the selection of unsuitable securities and failure to supervise the advisor, and failure to disclose fees and expenses, and also declined any request for comment by Jason Zweig before he wrote this article in The Journal. So I want to be clear on their stance.
But listen to what happened that led up to this. Only weeks after their Powerball score, the Rosenau’s were flown on a private plane to Principal’s headquarters where they met with senior management and recalls Rosenau everybody but the janitor. According to what was submitted in those arbitration hearings, their advisor started by buying $18.9 million of variable annuities for the foundation, which earned an estimated $1.2 million in commissions.
Think about this. You get a new client. You recommend a certain type of investment, and in short order, you see over a million dollars hit your personal bank accounts. Now, variable annuities generally have a lot of the market risks of mutual funds in their sub-accounts, but at vastly higher costs. Now they provide some tax deferral. They may provide some guaranteed income if you were to annuitize the contract at some point. But instead of being allocated to a commission-free, exchange-traded fund let’s say, that 0.1% per year, the variable annuities charged the foundation annual fees of up to 2% or more, and carried commissions that could exceed 6% upfront. By the end of 2011, this advisor had allocated almost 93% of the nonprofit’s total assets to variable annuities.
In April of 2017, Rosenau emailed the advisor asking for a statement disclosing fees and commissions and charges and transfer fees of any kind that will be charged for the purchase of any investment device you are planning on using. The advisor emailed back, and I quote, “There is no fees on this product.”
Meanwhile, the advisor had been repeatedly selling some of the variable annuities and buying others, earning fresh commissions along the way. This is a practice known as churning. All told, he had the foundation buy more than $47 million in variable annuities according to evidence at the arbitration hearing, generating an estimated $3.3 million in commissions. And yes, a variable annuity may provide some tax and income benefits as I referenced, but a foundation isn’t taxable. It just requires steady growth of its assets and ready liquidity to ensure that it can meet its annual spending needs. So the limited advantages of a variable annuity just at a high level, they’re not even useful for a foundation, while their high costs and low liquidity are detrimental as Zweig points out. Matthew Wright, the former Chief Investment Officer of Vanderbilt University was quoted in the article as saying, “I’ve never heard of a nonprofit entity purchasing variable annuities as part of an investment strategy.” I personally haven’t either.
The bad advice just continued. In 2015, Sue Rosenau learned that she had ovarian and uterine cancer. In early 2017, according to a complaint in a separate civil lawsuit filed by the Rosenau Foundation in a Minnesota district court, this advisor recommended that the foundation sell a $3 million life insurance policy on her life at a discounted price of $1.46 million. She was already sick, and they gave up a $3 million death benefit to receive less than half. The complaint claims that the advisor and company didn’t disclose to the family or the foundation that a doctor who consulted on the sale had estimated that Sue would die within about two years. And unfortunately, she died in July of 2018. Had the foundation held onto the insurance policy instead of selling it, it would’ve collected the full $3 million.
In 2019, Principal fired this advisor. And certainly, Rosenau wishes that the foundation had never invested in the annuities that dragged down its returns significantly, costing him tens of millions of dollars of potential growth if he had just been in a basic index fund portfolio. But he’s also very proud that he’s been able to foster an extensive program to research this disease that took his granddaughter.
But even after prevailing in this arbitration hearing, he marvels at how fees and commissions can distort the behavior of people who sell investments. And I’ll end with this quote from Mr. Rosenau. “Why would you take money away from poor dang kids that don’t even have a year or two to live?” he says, his voice rising. “What the heck’s wrong with you? How much is enough?”
Now I understand that I spent a lot of time providing the details referencing that article. By the way, if you’d like to read it in its entirety, you can find that Wall Street Journal article online, where Zweig goes into even more detail. I share that with you to say, as human beings, we follow incentives. I think it’s easy to assume the best of people. And it’s a good way to live life, not walking around assuming the worst and being a total pessimist, but also be a realist.
When there are conflicts of interest between you and your financial advisor, it may not be this egregious. It’s probably not with almost $60 million of assets and as high profile. But this sort of thing, it’s certainly a lot more common than I wish it were. So choose your advisor wisely.
I am joined today by an extra special guest. Charlie Bilello is the Chief Market Strategist at Creative Planning. He’s an award-winning author with a background that spans the global investing landscape. Charlie has been named by Business Insider and Market Watch 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. Charlie, it’s good to have you back.
Charlie Bilello: Great to be with you, John.
John: A lot of volatility as of late, but markets are still up year-to-date. If someone hasn’t rebalanced over the last five years, they’re likely overweighted in equities. So when you get a drop, I think sometimes like we’ve seen, there’s a bit of FOMO, investors wishing they had previously rebalanced. Is now the right time?
Charlie: This is the way I would think about it. The average investor, let’s say you started out 60/40, so 60% stocks, 40% bonds five years ago, talking about your stock portfolio more than doubling, so 15% per year over the last five years, while bonds essentially flat due to that rise in interest rates over the past few years. So what you have now is a very different portfolio from a risk perspective. You now have 75% stocks and 25% bonds. This is a good problem to have, because it means your portfolio overall has done very well.
John: Sure.
Charlie: Bonds haven’t helped at all with that, but stocks have more than made up for it. But the question at this point is if nothing’s changed in your life, if your risk tolerance is the same, you still have the same income needs, you still have the same expected withdrawal rates, are you comfortable now holding that higher risk portfolio, which is what you have? So I wouldn’t think about it in terms of returns. We don’t know what the returns are going to be the next five, 10 years. And when you’re rebalancing and taking money from the stock side and adding it to the bond side, you’re not really thinking about returns.
It’s the opposite of what we talked about in 2020 when the stocks crashed and you said, “Okay. Let me take some from bonds, put it towards stocks. That’ll likely be helpful in terms of returns.” This is very different. This is all about risk. This is all about mitigating that volatility and if you have those income needs in the next few years, making sure you have enough in that side of the portfolio where you won’t need to take from the stock portion at that point in time, which might be a much worse point in time than today.
John: Along the same lines, Charlie, we have this time period dubbed The Great Rotation. We’ve got this huge shift in leadership, small-caps over large-caps, value over growth, international versus US. It goes without saying, tech and large-caps here in the United States have dominated. Is there a rotation? And if so, what should investors be thinking about?
Charlie: So absolutely along the lines of rebalancing, this would be front and center for most people.
John: Right.
Charlie: Because again, if you had a diversified portfolio five years ago, 10 years ago, and you just had market weights, well now your portfolio is much more concentrated in large-cap growth US tech stocks, which have done by far the best over the last decade plus.
Now we’ve recently hit a crazy extreme in some of these relationships, and you and I have been talking about this. This is something we haven’t seen for a long, long time. We saw the ratio of large-caps to small-caps was basically just looking at large-cap outperformance hit its highest level since 1999, so that’s kind of the peak of the dot-com bubble or not far from it.
John: Nothing happened following that, right Charlie?
Charlie: Yeah, no big deal there. And we also had the ratio of growth stocks to value stocks, so outperformance of growth names at the highest level since March, 2000, basically the week of the dot-com bubble peak. So put those two things together, what it means to me is you have at one end of the market, the rubber band is extremely stretched in one direction and that’s leaving you susceptible if you don’t have these other areas in terms of your portfolio, if it goes in the other direction in what you called The Great Rotation there, a hundred percent is what we’re seeing. Over the past few weeks, we’re seeing the opposite of what we saw over the past decade with small-caps trouncing large-caps, value stocks crushing growth stocks, and lo and behold, international stocks, the stocks nobody has wanted, actually performing better than US stocks.
So what we’ve been saying all along is we can’t predict when this tide will turn, but there are cycles to everything. And when it turns, it might not be this neat, orderly reversal.
John: It usually isn’t.
Charlie: It usually isn’t, and this is proving to be the case once again. It’s a very violent reversal, where you had money rushing into stocks like NVIDIA and Microsoft and Google, and now they’re rushing out of them into these unloved areas, small-cap, value being the most prominent example.
John: Let’s transition over to the Fed and the Michael Jordan pump fakes that they giving us. You remember when MJ would just palm the ball and give that little up fake and get you going? I know the market is pricing in this, “The Fed’s going to cut and things.” Charlie, is this going to happen? And if so, what should investors do?
Charlie: It seems very likely. I wouldn’t have said that a few months ago, and we weren’t saying that. But as we get closer to that September meeting, the closer you get and the closer markets are pricing that in, I think the odds go way up. Right now, it’s 100% probability. That’ll likely fluctuate with the data points.
John: Can anything be 100%, Charlie? Just saying. How can you say it’s 100%?
Charlie: The markets are pricing it in. It means the bond market has already priced in that move and then some. But that could change.
John: As they say, the bond market’s the smart money, right? I don’t know. That’s what they say.
Charlie: The bond market is the smart money, and when it comes to the Fed, the Fed has really deferred to the market in every single meeting since 2009. So there was a time back in the day during the Paul Volcker days, some of your listeners might recognize that name, who broke the back of inflation in the early 1980s by hiking rates up to 20%. That seems crazy today. We’re at 5% and everyone’s begging for a re-cut. But back in the day, nobody knew what Volcker was going to do coming into the meeting. He could hike a few hundred basis points, he could cut a few hundred basis points.
That day is long over. So the Fed has determined, for better or for worse, that that meeting is going to be telegraphed what they’re going to do way in advance. So they’re likely to give a signal well before that September meeting that, “We indeed have the data that we need to cut,” and things are trending in the right direction in terms of their own metrics. They’re looking for 2% inflation. We’re not there yet. We’re at 3% in terms of the CPI. We’re a little bit below it in terms of the PCE, which is what the Fed likes to focus on.
But we’re not at 2%, but they’re saying that balance now has shifted because it’s not just inflation that is the Fed’s mandate, but also maximum employment. And if we look at that unemployment rate, all of a sudden it’s a very different picture than a year ago. Today we have the unemployment rate rising from one of its lowest levels in history a year ago, now we’re above 4%. Still low; the historical average is around 5.5%, so still well below it. But the Fed is now thinking, “We need to get ahead of a slowing labor market. Wage growth is coming down. The number of job openings is coming down. Perhaps we now need to focus more on the unemployment rate than the inflation rate.”
John: The idea of a soft landing means at some point you have to start flaring, when you get into ground effect in putting the landing gear down. You can’t just drive 60 miles an hour and expect a break at the red light all at once. So I think the Fed’s probably looking at that now. And if they can pull it off, it’ll be one of the more impressive things considering what we’re going through, 2020. Wouldn’t you say?
Charlie: Absolutely. There’s very little historical precedent, really none in the last 50 years for a Fed aggressively hiking interest rates to curb inflation and there not being a recession at some point in the next few years. The key part of that saying though is in the next few years.
John: Yeah, the lag effect, right? We may not be feeling it at this point.
Charlie: We still may not be feeling it. And if you look at the data, if you look at consumption data, you look at retail sales, you look at the effect on the auto market, you look at the housing market slowdown, you’re just starting to really see the cumulative impact of that.
So Tesla recently reported earnings 7% lower sales than a year ago. A lot of different areas that rely on borrowing, most people are not buying 40, $50,000 vehicles with cash. Over 80% of those vehicles are financed. So that rise in interest rates, average auto loan is over 8%, well that has led to a big drop in demand, which has helped inflation, but it’s also leading to a little bit slower economic growth. And the Fed, as you said, is going to try to time it perfectly here, cut interest rates. Don’t make too much about 25 basis point cut. The big question is are they going to do a series of rate cuts? The market’s saying they’re going to do about a percent and a half in cuts by the end of 2025. But the market was very wrong entering this year. They could be very well wrong again in that expectation.
John: I like to rip on the Fed, but I also need to give them their due a little bit and give them some credit here that they’ve done a lot of things right along the way too, considering the circumstances.
Charlie: They’re solving their own problems. So yeah, we’ll give them credit for the problems that they caused by printing-
John: Oh, I’m being nicer than you.
Charlie: By printing money and holding interest rates at 0% and buying all those mortgage bonds causing a housing bubble, and now they’ve come to the rescue by doing their job, which was raising interest rates to a normal level and trying to bring down inflation. The question will be in years to come, were they too quick to cut rates? I will still make the case that we don’t need to rate cut here. They should continue to try to bring that rate of inflation down, because the consequences for a lot of Americans who are not very happy about the price increases, the consequences of them getting it wrong here and cutting too soon to me is much, much worse perhaps than not cutting soon enough, which they seem to be saying they need to do.
John: Well, perfect. I’m time stamping this. We’re going to come back and check the scoreboard in a couple of years, see if you are right, Charlie. Thanks so much as always for joining me here on Rethink Your Money.
Charlie: Thank you, John.
John: Well, the Olympic Games have now wrapped up, and I opened the show highlighting the correlation of long-term discipline and specifically the value of great coaching and accountability along the way from our amazing athletes to maximize their success with how important it is to hire the right coach or the right financial advisor when it comes to your money if you also want the same long-term success.
From winning gold medals or winning the Powerball jackpot, let’s continue that winning conversation when it to your investing. How do you win? How do you have success? How are you victorious when it comes to your money? Well, I think common wisdom is that to win, you’re going to need to be invested in high-performing stocks, and that’s absolutely positively true. If you invest in the stock market, you’re going to need to benefit from the winners.
Well, an ASU professor, Professor Bessenbinder, discovered that four out of every seven stocks in the US have underperformed cash. Think about that, one-month T-bills since 1926. And just 4% of all companies accounted for all the wealth gains for the entire stock market during that time. So looking at the last 100 years, more than half of all stocks lose to cash. Obviously, the stock market hasn’t lost to cash and that’s because the winners win big. They’re Michael Phelps. If you look at all US listed stocks, just over 29,000 of them since 1926, the median cumulative return is negative 7.41%. Most stocks are terrible over the long run, but the biggest gainers more than make up for those losses.
More data that stood out from his research that I think you’ll find interesting, 17 stocks over the last 100 years had cumulative returns of more than 5,000,000%. That’s crazy, 5,000,000%. The annual returns of these mega winners were a little lower than you might expect, with an average of 13.5% annualized, which speaks to it’s not about timing the market, it’s time in the market. It’s that compound effect of exponential growth. Altria was the best-performing stock over the entire period with annual returns of 16.3% from 1926 through 2023. Again, longevity. NVIDIA, the current most noteworthy stock, had the highest annualized returns of any stock with at least 20 years of data. It clocked in at 33.4% per year of growth. And just 38 stocks survived the entire 98-year period studied.
So what are the takeaways in knowing that a handful of stocks essentially drive the entire growth of the market? Well, recognize that the stock market is very hard to beat because picking the winners is hard. It truly is trying to find a needle in a haystack without having a crystal ball. It’s why the famous quote of Bogle saying, “Why try to find the needle in the haystack when you can buy the whole haystack?” has become so popular. Diversify to ensure that you own the winners, rather than trying to find them.
It’s also worth noting though, that with that strategy you will hold losers. Index funds and broad diversification, you’re not just going to own losers, you’re going to own a lot of losers. But the winners will more than make up for those losses, and that’s the beauty of the stock market. That’s the beauty of broadly diversifying, owning index funds. So in the end, the way that you ensure you’re standing on the podium in the game of your personal finances by capturing the growth of those massive winners requires you to broadly diversify.
Common wisdoms, as you know, exist often for a reason. They hold truths that are true or mostly true, but oftentimes are worth exploring and rethinking. This week’s common wisdom is something that gets thrown out often. It’s a cliche, it’s a one-liner that you’re familiar with. You’ve definitely heard of it, you’ve probably said it at some point. Let’s look at how it applies to our money and why it’s kind right, but often not really. “Better safe than sorry.”
How appropriate is it for us to examine this concept in the midst of significant volatility the last few weeks in the stock market? When intense volatility and drawdowns occur in your accounts, your logging in and you’re just seeing your account balances get lower and lower and lower, and all the headlines are terrible. You come back to this saying, and it feels true and right, “Better safe than sorry. I’m feeling sorry right now.” But as the great financial author Morgan Housel posted to his account at X, “This is the biggest decline in the market since the last one you don’t remember or care about anymore.”
How true is that? We’re creatures of the moment, aren’t we? How difficult is it when trying to invest for decades to not put too much stock in recency bias, like what’s happening right here and now? In my experience, oftentimes it’s not “Better safe than sorry,” it’s “Too safe that makes you sorry.” I know, probably improper English, but you get the idea. One of the most common regrets of those in hospice care isn’t pointing out the failures they’ve had, it’s the risks that they didn’t take. It’s the chances they didn’t pursue, the dreams they didn’t chase after.
So is the financial tie-in that I think you should allocate your portfolio to speculative investments and just, “YOLO. Just go crazy. Because if you don’t, you’re going to regret it.”? No, of course not, but getting too conservative while still having a long time horizon is one of the most common mistakes that I see. And by the way, it’s rooted in reasonable and intuitive logic. If you’re 65, you just retired, you’re not going to have a paycheck anymore, it’s very reasonable to think to yourself, “I don’t want to lose this nest egg that I can’t rebuild since I don’t want to have to go back to work in my eighties or run out of money and live in my kid’s basement.” That makes perfect sense, right?
But risk and volatility are not the same thing. Those words are incorrectly used interchangeably. I’m not suggesting that 65-year-old should be overly concentrated in a handful of stocks that could end up being Washington Mutual and AOL and Peloton and Enron, and now they’re living in a van down by the river, of course not. But they should build a financial plan that takes into account their specific individual objectives, and then synthesizes the investment portfolio with those goals and with those income needs. For example, what do they need over the next five to 10 years from the portfolio in income? That’s a good starting place for a buffer of more stable investments like bonds to ensure that they’re able to wait out stock market environments that are volatile, bear markets and crashes, without selling stocks when they don’t want to.
However, the 65-year-old who says, “I’m retired and I’m in good health and expecting to live another 30 years hopefully, Lord willing,” and then puts 90% of their money in CDs and bonds and cash because they’re retired, “Better to be safe than sorry.” No. It’s likely not going to be better safe than sorry, because some of these dollars need to be there 30 years from now, and why would you want those barely keeping up with inflation historically, if at all? And if in cash, it’s unlikely to even keep up with inflation, so maybe it’ll be sorry that they were so safe.
The reason I find this timely is because if you’ve been following the markets at all the last couple of weeks, there’s been huge drawdowns and massive volatility that create anxiety. Your account balances are down from what they were. Things looked great, and then all of a sudden, whoa, they don’t.
Creative Planning Chief Investment Officer Jamie Battmer provided some great research on the recent market volatility and how to have perspective in the midst of it. And I’ll reference his words on the matter as we rethink whether the stock market gyration is something you should be concerned about. Now, my near weekly public service announcement is to remember at a broad level that what bleeds, leads. The financial media seizes on this type of volatility, puts it front and center, as does even more broad news outlets because they know that fear and that anxiety and that emotion that they can conjure up in you drives ratings and clicks. So it’s very typical anytime there’s volatility like this for you to feel like this, “Ooh, man, this must be a big deal. I’m seeing it everywhere. The sky is falling-type Chicken Little media coverage.”
But much of your peace around your money will be less about the circumstances and more tied into your expectations. Remember, frustration is the gap between expectations and reality. And I find that unless you’re well-educated on this and you understand the reality of the markets, your expectations may be off. And that may affect how much relevance you put on today’s headlines or a few weeks of market movement.
The reality is the market’s not even down 10% from its recent highs. So in many cases, it might not even be enough to trigger a rebalance to take advantage of lower prices. Of course, good advisors will continue to diligently monitor, as we do at Creative Planning, the situation to see if there’s an opportunity within each client’s account for rebalancing when it presents itself.
But 10% declines are the rule; they’re not the exception. In fact, if you go back to 1980, 63% of all calendar years witnessed a 10% or greater decline. So even if you’re 100 years old, you’ll likely see several more 10% declines during your lifetime. And by the way, that’s because if you live to be 100, the average life expectancy is 103. So yes, the math works. If you’re near or new into retirement, you’re in the category that would be considered the most vulnerable to emotional overreactions. I’m hoping that you see 15, 20 more of these corrections during your lifetime, because that means you lived a long time and the markets did what historically they’ve always done.
On average, any given year sees a 14% market decline from peak to trough. I don’t want you to miss that, so I’ll say that again. You should expect if you have a million dollars broadly diversified in the stock market over the course of a calendar year, that you might log in at some point and see $860,000. That is not an anomaly, but you better believe if that happens, the headlines are going to make you feel like it is. These declines can be stressful in real time, but are a key dynamic of the long-term benefits of equity ownership, owning companies. Pauses and declines often help reduce or eliminate market irrationalities that inevitably form.
Jamie wrote, “Maybe AI won’t replace good night hugs and reading books to children at night or chew our food for us after all. Who knows. The future forever remains unwritten, but we’re highly confident periods of market declines will continue to occasionally manifest themselves. And that’s a good thing. That provides the return premiums as to why stocks make more than more stable bonds. Despite that 14.2% average intra-year drop, annual returns over the course of a calendar were still positive in 33 out of 44 years.”
But here’s why I think you may be feeling this one more than in the past. Since October 27th of 2023, so for over nine months, the markets have had a historically unusual climb. In fact, for only the fifth time in the post-World War II era, the market saw a 30% increase with no major bouts of volatility. We have had a strangely smooth ride, and I think that makes the recent market volatility feel more unusual. But actually, what’s been unusual was how calm the last nearly year has been.
Here’s the irony. Markets fell a full 10% in late October of 2023, about 10 months ago. But you’ve probably already mostly forgotten that. Is that noteworthy in your mind? It wasn’t even a year ago. Unfortunately, massive money movements occurred shifting out of stocks and into bonds and cash during that correction in October of ’23, which was of course the exact wrong decision at the exact wrong time. And the lesson to be learned in that is to focus long-term, stay disciplined, understand your broad financial plan. Monies that you have in the stock market should be earmarked for longer-term objectives, meaning what happened 10 months ago or what happens 10 months from now won’t impact your ability to take a vacation or cause for concern as to some major adjustment that needs to happen inside of your portfolio. Because again, you should expect this type of volatility.
So this notion that it’s better to be safe than sorry, which feels even more true during times of downward pressure on the stock market. When you emotionally look at your accounts and think, “Why am I invested in this? That’s down in value.” Remind yourself that proper expectation setting is one of the most important contributors to your financial peace of mind and ultimately your financial success.
Well, it’s time for this week’s One Simple Task, which has I don’t think ever been quite this simple. This week’s One Simple Task for radio listeners was to subscribe to the Rethink Your Money podcast. But because you are already listening to the podcast, I’m going to assume that you’ve already subscribed. You’ve already figured out that it makes more sense to listen when you want, how you want to be able to search for the topics that you actually care about, and have it fit within your life, whether it be at the gym or taking a walk or on a road trip. Wherever you are, you can listen to it as you listen to all other podcasts.
So for you, I’m going to give a One Simple Task #2, like a One simple Task Junior, and that is to leave us a five-star rating as well as a review if you have time. That really helps us out and allows more people to find hopefully financial information that helps them make better money moves.
Well, we are here to listener questions, one of my favorite parts of the show. And one of my producers, Britt, has joined us to help me out. I think Joyce had a good question. Let’s start there.
Britt Von Roden: Sure thing. Joyce in Oregon shares that she’s heard you talk about marriages and money previously on your show. So she wanted to get your take on whether or not you think it’s a good idea for her and her husband to divide their household expenses.
John: Well, Dalvin Brown over at The Wall Street Journal had a recent article that addressed this and had some very interesting conclusions. His was that couples say they found the financial formula for a happy marriage with a spreadsheet. Of course, that’s oversimplifying. “Our whole marriage can go from being terrible to great if we both learn pivot tables.” No, that’s not necessarily the case. And the breakdown isn’t always 50/50 if you’re going to keep some separation of your finances.
But most US couples, somewhat surprisingly, keeps some of their finances apart, research shows. In fact, a bank rate survey conducted late last year found that 62% of married adults and those living with a partner kept some or all of their finances separate. And those who kept their money separate say they found it best to divide the mortgage, the car payment, Netflix and other streaming services, maybe internet and other bills based on each person’s income and whether both use it.
Couples who do this say it’s liberating and prevents fighting over money. In fact, the Journal used an example of a married couple with two children, and their process of agreeing to who pays for what and what the percentage breakdowns are. And then, as their salaries adjust, the percentages toward who pays for what shift accordingly, which I thought was a pretty unique way of doing it. It seems to work well for them.
Here’s my take, Joyce. I’ve had clients who have everything together, others who have everything separate, some who are similar to the example couple I just shared, some combination of the two. But it’s very personal and often situational. So if you’re on a second marriage, and both of you came into the marriage with money and children or grandchildren that you’ve accumulated prior to marriage, there’s sizable assets, or a big discrepancy in net worth between the two, I think estate planning and strategizing money and how you’re going to integrate or not integrate can be really important for a healthy marriage. Or put another way from the negative slant, if you don’t do that, it can be very pervasive within a marriage. It can really make a marriage toxic.
My wife, Brittany and me, we got married when she still had one semester of college left at ASU. I was a First Officer flying regional jets around for peanuts, take a couple packs of Biscoff cookies as my dinner because that was about all I could afford. So every single dollar that we have as a family, we built together. So for me, it would be unimaginable to have separate accounts and “You’re going to pay for this and I’m going to pay for… Oh, you want to shop for more throw pillows? Well, you’ve got to use your own account for that.” It wouldn’t serve a purpose, it would be more cumbersome. And I am 100% of the feeling that nothing is mine or hers. Of course, it’s all hers. No, I’m just joking. It’s all ours.
So it really is very specific to your relationship in terms of what will work for you. But with that said, here’s what is evergreen and spans across all the different clients I’ve worked with and relationships in general. Whatever you decide, be on the same page and have good communication. Whichever dynamic you determine works best for you, separate, together, arrive at it together, outline your expectations clearly, and work as a team. Even if in the end that means you’re separating out your finances for each of you to take care of specific aspects. All right, Britt, we have time for one more. Let’s go to the last question.
Britt:
For our last question today, we have Kevin in Michigan. Kevin shares that he’s been hearing a lot about covered call ETFs and thinks he may be interested. But John, he wants to hear what you think of them. Do you like or dislike the idea? What does he need to know before making his decision?
John: Well, if you’ve been seen and hearing a lot about these vehicles, then you’re ahead of the game, Kevin. I think a lot of listeners probably aren’t familiar with what you’re referencing. But investors are pouring dollars into these exchange traded funds that do offer this combination of stock exposure, so you’ve got some upside of the stock market, and some fat income payouts as high as 12%. If I just stop there, you’re like, “What are these unicorns at the end of the rainbow? How can I find this? That sounds amazing.”
But of course, like all investments, there is no free lunch. There is no perfect investment that minimizes risk and maximizes all of your returns. Everything is give and take, because remind yourself if that happened to exist, all the capital in the entire world, and there’s a lot of smart money out there, would flood to that investment.
But these hot offerings are known as covered call or derivative income exchange traded funds. At the end of 2020, there was $8 billion in this category. As of July 17th of this year, $87 billion. And the number of funds has gone from 14 to 93 during that same period. You’ve had some people calling these Boomer candy, because think of the age of Boomers, what they’re looking for. “Well, I might still have a long life left to live, so I need some growth. But man, I like the idea of having some safety. I like the idea of having some income.” It really does feel like a have your cake and eat it, too.
But not only are the inner workings of these complicated and can be quite confusing, you don’t really understand what you’re getting or where the risks are, but the tax bills are also confusing and many investors feel like they are hit with this big surprise with a much higher tax bill than they expected. Without going too far into the weeds, and if you’d like to discuss this with me personally, email into the radio show, [email protected] with your phone number and I’ll shoot you a call and give you far more specifics.
But the difference between qualified and non-qualified dividends is one of the considerations. Another important tax question is whether some of the funds distribution will be classified as a return of capital, which would be welcomed news at tax time because the cash in hand isn’t taxable when you receive it. But there’s a hitch, because the returns of capital reduce an investor’s cost basis, as Laura Saunders pointed out in her article covering these investments. So the bottom line is, if you’re considering a covered call ETF, understand the tax implications and always take the time to learn about what the tax ramifications may be on any investment before you invest.
Do you have a scarcity mindset or one of abundance? Reflect on that for a moment. How would you honestly answer it? As Stephen Covey wrote in The Seven Habits of Highly Effective People, “We are conditioned to have a scarcity mindset.” In other words, most of us are taught to believe there’s only so much to go around, and another person’s gain is our loss. But this mindset is dangerous and limits us, in particular when it comes to financial success.
One of the most compelling historical examples of an abundance mindset making a significant impact is the Marshall Plan after World War II. The United States, under leadership of President Harry Truman and Secretary of State, George Marshall, implemented a large scale aid program to rebuild European economies. Now, you may remember this from US history in 11th grade. Despite the immense costs, the plan was driven by the belief that investing in Europe’s recovery would create a stable and prosperous global economy, which in turn would benefit the United States.
This abundance mindset paid off spectacularly, because the economies of Western Europe rebounded leading to a period of unprecedented growth and stability. The Marshall Plan, as it was dubbed, not only helped rebuild war-torn nations, but also forged strong economic and political alliances that benefited global prosperity for decades and has helped avoid World War III in many respects.
So for you, foster an abundance mindset. You can break free from the constraints of fear and limited thinking. I try to remind myself the same thing, because that’ll pave the way for innovation and personal growth and lasting success. An abundance mindset encourages investing in opportunities that might not yield immediate returns. See, that’s the key. An abundance mindset says not, “What is this going to take from me today?” but “What possibly could this lead to down the road? What are the potential and possibly substantial long-term benefits?”
And here’s the good news, you can recondition yourself to adopt this mentality. When you start to believe there’s always enough to go around, something shifts. So commit today to have an abundant mindset, because those who do tend to have the most financial success. 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 preceding program is furnished by Creative Planning, an SEC registered investment advisory firm. Creative Planning, along with its affiliate United Capital Financial Advisors, currently manages or advises on a combined $300 billion in assets as of December 31st, 2023. John Hagensen works for Creative Planning, and all opinions expressed by John or his guests are solely their own and do not necessarily represent the opinion of Creative Planning.
This show is designed to be informational in nature and does not constitute investment, tax, or legal advice. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on the show, will be profitable or equal any historical performance levels. 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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