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What Should Be in Your Financial Toolbox?

Published on May 15, 2023

John Hagensen

You wouldn’t want a toolbox filled with only hammers — you need other tools to get the job done! The same goes for your financial toolbox. The most successful investors use a variety of tools to combat the risks posed by inflation, volatility and rising interest rates in order to avoid running out of money. Find out what should be in your financial toolbox on this week’s episode (6:41). Plus, learn whether you’re more likely to make money in a bull or bear market (36:55). The answer may surprise you!

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 a head on today’s show. The tools needed to solve your specific financial risks. Why, where you retire plays a key role in your financial plan. And finally, how big of a concern should the dollar falling apart be when it comes to your investment strategies? Now, join me as I help you rethink your money.

I have breaking news. Now, the reason this is breaking news is because my iPhone told me that this was breaking news in giant red text. Yep, it was about a week ago, and as I went to click curiously on what this might be, here was the headline, “APRIL WAS THE BEST MONTH OF THE S&P 500 SINCE JANUARY.” No, I’m not kidding. That was breaking news all caps because the market had its best month in three months. The reason I bring this up is because the financial media is not advice. It’s not even useful most of the time. But just like sports and celebrity gossip and politics just looking for clicks, it’s easier than ever before to find information yet more difficult to find truth. And because there are so many mediums to consume news and every single platform is competing for your eyeballs, they have to be more and more sensationalized, even in the most ridiculous ways to grab your distracted attention by whatever means necessary.

And this really is the genesis of what we refer to as clickbait. According to Dow Barr’s annual study that they’ve been producing for decades now, the S&P 500 has averaged about 10% per year for the last 30 years. While the typical American has averaged half that, 5% during that time. And I would contend that a huge responsible party for that under performance is you receiving information from the wrong source. So what’s the right source? Where should you be consuming information? Well, somewhere that’s credible and a place where their motivation is aligned with your success. So let’s start with credibility. How do you know if the source where you’re gathering information is credible? Because it’s not always as obvious as the National Enquirer while you’re in the checkout line at Target that says, “Tom Brady is coming out of retirement to play soccer for Manchester United.”

Like you know that that’s not true because the source isn’t credible. But unfortunately, when it comes to financial information, it’s not always quite that obvious. Well, I would suggest that you look to social proof. This week I was having problems with my air conditioning. I went to Yelp, searched for air conditioning companies, and the company that I used had over 500 reviews, 4.9 stars. This doesn’t guarantee that I’ll have a great experience or that they’re better than a company with lower reviews, but when their scheduling process is completely dialed in and they send the picture of the technician 30 minutes before he arrives, and that person calls me when they’re 10 minutes out and they’re professionally dressed and then they diagnose the problem and say, “Here’s exactly what the cost is going to be, here’s what’s going on, here’s how we can help fix it.” There’s some trust and credibility there because this company’s been in business for decades and I’ve seen that hundreds of other people have had great experiences with them. And when it comes to credible financial advice, the same principle can be applied.

And no, it’s not that you have to work with Creative Planning, but I do believe there’s some credibility in the information you are receiving when we’ve been helping families across all 50 states and over 75 countries around the world managing over $200 billion of combined assets under management and advisement, have been in business since 1983, have over 300 certified financial planners, over 50 attorneys, over a 100 CPAs. We have twice been named the number one firm in America by multiple sources, CNBC in 2014 and 2015 by Barron’s in 2017 and by RIA Channel, which is published by Forbes in 2020. Additionally, our president, Peter Mallouk, was named by Barron’s as the number one financial advisor in America, three consecutive years in 2013, 14 and 15. And just this past year, we had seven wealth managers named to the Barron’s Top 100 independent advisor list in America.

There’s some credibility there, and I think that should be considered when you are looking to avoid the landmines of the financial media to make sure that you’re receiving advice that is credible. And secondly, that is in your best interest consuming information from a source who has an alignment of incentives that they succeed when you succeed. This is the entire problem with a paid financial newsletter or a company being paid by advertisers for how many people click on their headline. Whether or not that headline has negative ramifications on your life and your money doesn’t matter for that company. That’s not how they’re financially rewarded. And this is why I suggest receiving your financial information from a source that is a registered investment advisory firm, not aligned with a broker dealer, not a registered representative, not an unlicensed media outlet. But someone or some firm who makes money when you are a client over long periods of time.

Meaning you are happy and you’re choosing to stay and pay their fees. And that when your account values are higher, their fees are also higher, and when your account values are lower, their fees are lower and they’re not receiving one penny more. If you invest in investment ABC versus XYZ. In a world where we are consuming that information at warp speeds, your ability to avoid mistakes will be the number one factor in whether you achieve your goals. And you’ll give yourself the highest odds of avoiding those mistakes by receiving objective advice from credible and motivationally aligned sources. If you’re not sure where to turn and you’d like to speak with one of our local advisors just like myself here at Creative Planning, schedule your complimentary visit at creativeplanning.com/radio. Well, I want to transition over to my garage, specifically my toolbox.

No, I’m not suggesting that we go here because I have an incredible set of tools. In fact, my garage and my tool set is pretty, nah, I have the essentials, but my buddies who are handy just kind of scoff at what my setup looks like. They’re right, it became obvious the other day when I needed to do a project that would’ve been able to be done in about 5% of the time if I had a nail gun, but I didn’t. So I had to hammer every nail by hand. And I think we all understand that specific tools are useful when they’re used as intended. When it comes to our money, I find that many financial debates are just two people arguing that an Allen wrench is better than a tape measure. It’s like, wait a second, if you have a little bolt with that internal hexagon socket, well, I mean, the tape measure’s not going to be very good for you, but by contrast, if you’re trying to measure something, what good is the Allen wrench? In the same vein, people will say, “Well, I don’t like bonds. I mean, bonds are terrible.”

Yeah, if it’s in your 401(K) and you’re 40 years old and you can’t withdraw the money for a couple of decades without a 10% penalty, then why are you worried about volatility? Bonds probably are bad. Conversely, if you need the money in three years, why do you not like bonds? When it comes to financial risks in particular, there are tools that we can use for our benefit to effectively complete that project. The first risk and probably the most obvious is principle risk. If you’re an investor and you need the money to accomplish goals that you have for your life in the future, it’s normal that you would be concerned about losing your initial investment. So what are the most effective financial tools to hedge against principle risk? Well, certainly you can own cash underneath the FDIC insurance limits if you buy CDs. You can purchase short-term government treasuries backed by the full faith of the United States government. But there’s also a less obvious and highly effective tool that has historically helped combat principle risk, and that is a broadly diversified stock portfolio.

That’s right. I know it sounds counterintuitive, but if you have a longer time horizon and are okay at accepting some volatility along the way, consider this the worst 10 year period since 1940 for a diversified stock portfolio, well, still positive 13%. If instead of 100% stocks, you have half stocks, half bonds, the worst 10 year period since 1940, up nearly 50%. So broadly diversified stock portfolios have been maybe surprisingly good at controlling principle risk. Of course, that does not apply to individual stocks, which should absolutely be avoided if principle risk is the priority since any single stock can go to zero and many have over the years. So the best tools to combat principle risk would be cash, CDs, government bonds, and over a longer period of time, even a well diversified stock portfolio.

A second financial risk is longevity, just simply outliving your assets. Is that something that you have thought about? We are living longer than ever before. And what’s the tool to combat outliving your money? Simply put stocks. Stocks have provided approximately a 10% annual rate of return for the last 100 years. You need growth. A common mistake for people early in retirement is to get actually too conservative. Don’t manage your portfolio based upon age or risk tolerance because that may lead you to say, well, I’m 75 years old and I don’t ever want to go back to work. So I’m very conservative and combine that with the fact that I’m in my mid-seventies. I’m not going to own any stocks or very few stocks. Instead, base your asset allocation and stock percentage on your time horizon. Monies that you don’t need for 15 years, even if you’re 65 years old, should be in stocks if you want to provide yourself with the best chance of not running out of money.

So we’ve talked about principle risk, we’ve talked about longevity risk. How about interest rate and credit risk? Well, the tool to hedge against that is short duration bonds. See, people get bonds wrong often because they chase yield and the longer you lend money as a bond holder, the higher theoretically the interest rate is in a normal yield curve environment, which makes sense, right? If you lend money to a friend for 10 years, you’d expect them to pay you a higher interest rate than if you’re only going to lend them money for six months. But a lot more can happen in your friend’s life over 10 years. Also, a lot more can happen with interest rates during those 10 years as well. We have recent examples of this. From 2021 to 2022, the 10-year treasury bond yield increased 3%. The performance of short-term government bonds, they were up 2%.

By contrast, the performance of long-term government bonds, they were down 30% in value. They’re both bonds, but one was up 2% and the other was down 30. That’s why the tool for combating interest rate risk is staying short with your bonds. When looking at credit risk, just take the last three years, 2020 through the end of 2022, short-term government bonds up 1%. High yield bonds, also known as junk bonds, meaning you’re lending money to lower credit quality borrowers down 13%. So the tool to combat interest rate and credit risk is not just a blanket generalized answer of bonds, but rather short term bonds. So we’ve talked about principle risk, we’ve talked about longevity risk, we’ve talked about interest rate and credit risk. Next up, purchasing power or inflation risk. Now, if I had mentioned this one five years ago, you’d have tuned me out and said, oh, I never… I don’t know, inflation’s not a big deal.

Keep in mind, even then, every 20 to 25 years in a normal inflationary environment, your money has to double simply to tread water and not go backward. The most effective tool in your toolbox isn’t treasury inflation protected securities. Believe it or not, it’s not real estate or other real assets, although both of those do pretty well in inflationary environments. The most consistently effective tool is owning stocks from the beginning of 2020 through the end of the first quarter here of 2023, the consumer price index is up over 17%. The Bloomberg US Aggregate Bond Index down 5%. We know that fixed income is a terrible tool when it comes to fighting inflation. I mean, that’s like you need to dig a hole in your backyard and you bring a level. I mean, it’s awful. But while CPI’s annualized return is 5%, the S&P 500 index during that same stretch is up 9.5% cumulatively up 34% while CPI is up 17.

And so, to recap our four risks and the financial tools you can use to complete the project, when it comes to principle risk, cash under FDIC limits, CDs and a diversified portfolio of stocks and bonds. When it comes to longevity and outliving your money, ensure that you are not going broke slowly, being too conservative. Instead, own a diversified stock portfolio. When it comes to interest rate and credit risk by short duration, fixed income, do not cheat out on that yield curve. And finally, when it comes to battling inflation, your tools are treasury, inflation, protected securities, real estate, other real assets, and as just mentioned, a diversified portfolio of stocks. The lesson in all of this is to first understand what project you’re embarking on.

Are you hanging drywall or cleaning out the gutters? From there, you can ensure that you have the correct tools to accomplish that project in the most effective way possible. If you’re not sure, if your toolbox right now is filled with 12 hammers but you’re missing a screwdriver and you don’t have any pliers, I encourage you to speak with a credentialed fiduciary who can provide a fresh perspective on your financial situation. If you’d like to speak with us as thousands of others just like you have already done, visit creativeplanning.com/radio to meet with an advisor. I am joined today by Creative Planning attorney, Annie Rogers. Annie is a regular guest of the show covering relevant estate planning topics so that you can make better money moves. Annie Rogers, welcome to Rethink Your Money.

Annie Rogers: Thanks for having me.

John: We often think of estate planning in the context of marriage, but there’s about 112 million Americans, which amounts to 47% of the adult population who are unmarried, and there are unique considerations that singles should be aware of when it comes to their estate planning. Regarding incapacity, how does a single person ensure that their partner or a parent or sibling can make those healthcare decisions or manage their financial affairs in that event?

Annie: So estate planning’s important regardless of marriage, but it is more important in some ways for people who are not married because there are rights that you have sometimes as a spouse that you would not have as someone’s life partner. In an event where you have a health crisis, if you don’t have a healthcare power of attorney, some states have a statute that say, if you don’t have this, then this is who we can talk to make these decisions. One way to avoid that is by having a healthcare power of attorney in place that designates the people you trust and want to make those decisions for you, and then that eliminates it being an issue. If you’re not married, sometimes we see conflict between family members and the life partner. And in some cases, making sure it’s clear that those are people you would want to be by your bedside in the hospital because they’re not legally a family member, because sometimes hospital policy and things like that might dictate otherwise.

John: Yeah, I could totally see that being a difficult situation. “You’re just the boyfriend,” and the boyfriend’s going, “We’ve lived together for 10 years.” And so, the last thing you want is people fighting about things that could have been sorted out by having the proper documents in place. So what happens to your home in a situation where there’s an unmarried couple?

Annie: That can get really tricky. You buy a house together and depending on how it’s titled when you purchased the home, or if you’ve purchased a house and you have someone living with you that you would want to be able to continue living there, if you passed away, you’ve got to make a plan for that. There’s something called tenants in common, which basically means you each own one half of the house. And your half, what happens to that when you pass away will be dictated by your plan, which may make it go back to your next closest family members if you don’t have a will in place or you haven’t titled the home correctly to make sure it goes back to the other partner.

John: Does the partner in that scenario have to basically buy out the other beneficiaries of that half assuming that they would be willing to do so?

Annie: Yeah, they could. Or if you have a will that says, my half of the house goes back to my partner, then that avoids that possibility. Or if you purchase it and your intention is that the other half go to your surviving partner when you pass away, you can own it as joint tenants with a right of survivorship, which means the last man standing gets the whole thing. If you don’t have a plan in place, every state has a statute that says who gets your assets, called the intestacy statute and it goes back up through your family tree. So if you’re not married and you don’t have children, it goes back to parents and siblings. If you want it to go to your partner, you’re definitely going to have to put some documents in place or make sure you’ve taken care of things to make sure that happens.

John: I’m talking with estate planning and attorney here at Creative Planning, Annie Rodgers about estate planning for unmarried couples. How would someone make sure that other assets do in fact go to their partner upon their death?

Annie: So again, it’s leaving assets through a revocable trust to your partner, having a will where they’re designated as the beneficiary of your will. Or as simple as listing them as a payable on death or transfer on death beneficiary on accounts because it would not be automatic.

John: Well, and I have a bias as a wealth manager that’s met with thousands of potential clients and existing clients toward encouraging people to just get it done correctly and go have the full estate plan, get your revocable living trust, it creates so much more clarity. But am I off on that? Do I have a blind spot here as to why someone wouldn’t want to just meet with a law firm like us at Creative Planning or someone similar that can create this entire package that includes a revocable living trust? Why would they not want to do that?

Annie: I really can’t see a downside to it, and we don’t just do a trust. When we go through that process, we ensure they also have those healthcare documents and the financial power of attorney, which is separate from a trust or a will. That’s like who can pay your bills and file your taxes if you’re incapacitated on assets that aren’t in the trust yet. With the trust, we have a lot more flexibility to come up with creative solutions. Like with a home, I have a number of clients even on second marriages, and this would still apply to someone who’s unmarried, where they want their partner to be able to live in the home for the rest of their life, but ultimately want if the house is sold, the proceeds to go to their kids.

John: So we’ve talked about healthcare decisions and managing financial matters for those that are unmarried, what happens to your home? Are there any other items that couples should consider that we haven’t covered yet, Annie?

Annie: There are a couple that I think are important to keep in mind. When you’re leaving assets to your partner, married couples leave assets to each other, and they’re both US citizens because the rules are a little bit different if you have a spouse that’s not a US citizen. They get something called the unlimited marital deduction where they’re never going to pay a state tax on anything that you leave them. When you’re not married, a non-married partner gets treated like anybody else. So that’s something to keep in mind when you’re leaving assets to them. If you leave them more than whatever the estate tax exemption is, they may pay a estate tax.

John: You ever seen anybody Annie on their deathbed sign a marriage document in their final hours just to avoid estate taxes because it would be smart for someone to do that?

Annie: Yeah, I have not, but I can say that I have a couple clients when we walked through this scenario that they’d been together forever, they got married.

John: Oh, how romantic.

Annie: Because of this, because of estate tax and also with retirement accounts. If you’re married and you leave your IRA or 401(K) to your spouse, they can do a spousal rollover and they don’t have to start taking it till they’re this year 73, and then they can stretch it over their life expectancy. If you’re not married and you leave your retirement account to your partner, they get treated like anybody else. And with a few exceptions for minors and people with disabilities, you have to now take those assets out over 10 years and pay the income tax. And so, there are some benefits from being married when it comes to those types of things, also being eligible for their social security.

John: Well, there’s all sorts of different advantages. So the next time I’m in Vegas and I see a couple 90 year olds walking out of one of the Elvis chapels, I’m going to be like, “You’re doing some estate planning. You guys are smart, you’ve listened to Annie. I got it.” Before we went on the air, you were sharing with me a fantastic story about being a working mom and balancing that with your career, and you had a particular situation early on in your days here at Creative Planning, where those worlds collided and I loved it. And if you wouldn’t mind, please share that moment with us.

Annie: Peter Mallouk is the CEO. He’s a great guy.

John: Also, an estate planning attorney. That’s how we started.

Annie: Also, an estate planning. And I previously had worked for small firms, mostly run by men. I was one of a few female attorneys, and I switched gears with my practice in part because I had a toddler and I wanted to be able to have a little bit more work-life balance and not be in court. I had probably been with Creative Planning for about six months, and I was leaving in the afternoon. My daughter was in first or second grade, and I was going to her school party and I was still filling out the culture of Creative Planning and I was leaving and I run into Peter.

John: And you’re like, oh no, it’s like two in the afternoon and I’m leaving. What’s he going to say, right?

Annie: Yeah, for sure. And I was like, “Oh gosh.” Because at my old firm, they had wives who did those things, who went to the school parties. I was just kind of like, I don’t know how this is going to be received. He’s like, “Where are you headed?” “Well, actually my daughter has a school party this afternoon and I’m going to go to that” and I fudged a little bit, sorry Peter. But I was like, “I try to go to at least one,” which wasn’t entirely true. I try to go to all of them if I could make it work with my schedule. But his response was kind of an aha moment for me because he was like, “You should go to all of those.”

And it really was eye-opening because that is the culture at Creative Planning. Family is really important. It’s really important to Peter. He doesn’t miss his kids’ activities, even if he has a really important meeting or client, he works around that. And that truly is the culture here just encouraging me to go and not telling me to come clock back in afterwards. I was surprised by the comments and has really stuck with me all these years.

John: That is such a cool story as a parent to seven myself and I have a few similar examples with Peter where he’s shared things like that and it is really neat to be at a company where we understand that most of our clients, their priority with their money and with their estate planning is because they care about their family and they love their family and they want to do right by them. And it’s neat that we live that out every day here at Creative, within our own lives as well. And that starts absolutely with our leader. So thanks for sharing that. That’s an awesome story. It’s been great talking with you today and look forward to having you back on Rethink Your Money.

Annie: Thanks.

John: That was Annie Rogers estate planning attorney here at Creative Planning. If you do not have a comprehensive estate plan that you’re confident will take care of those whom you love most, knock this out today by visiting creativeplanning.com/radio. When you envision your retirement, are you hiking around the Rocky Mountains? Are you laying on a beach drinking a piña colada? Are you out on the golf course or playing pickleball, volunteering, traveling around to see grandkids? It is this incredible time of freedom and an opportunity for you to create the environment that you have worked hard for. And when you are strategizing from a financial perspective, it’s typical that you focus on when you can retire. That’s certainly important, but sometimes just as important in terms of the impact on your finances is where you plan to retire.

I have one client in particular that I’m thinking of who bought a home that’s right on the sand in Mexico, but because of this specific location in Mexico, the home was approximately $300,000. Their cost of living is incredibly low there. So because they chose to retire there instead of just a couple of 100 miles north on the beach in Orange County or San Diego, they were able to afford it. And I’m going to post an article that details specifically insights for where to retire and the important implications and considerations for where you ultimately end up landing in retirement. But let me highlight a few of these for you. You want to look at the income tax implications. Taxes obviously can have a significant impact on your retirement, and if you are in Washington or Texas or Florida, just to name a few of the states with no state income tax, that’s a lot different than living in California or Hawaii or New Jersey. You want to understand the implications of your retirement income wherever you are retiring as well.

For instance, social security benefits. Most states don’t tax your social security benefits, but there are a few states that impose some form of taxes on them. You’d like to know that before you settle down in one of those states. How about retirement plan distributions? Most Americans own the majority of their retirement assets inside of tax deferred accounts, IRAs, 401(k)s, 403, 457, thrift savings plans. And some states don’t tax retirement plan distributions, which can help maximize your funds available for retirement. How about pension income? Some states differentiate between public and private pensions and may tax only public pensions. Other states tax both while some tax neither. A really big one is estate taxes. In 2023, the federal government allows individuals to pass up to basically $13 million. It’s 12.9 and change without any federal estate tax whatsoever. So if you are married, $25.84 million is exempt federally from estate taxes. And here’s the key, depending on where you live, you may need to pay state estate taxes. I know it’s confusing. Right now, there are about 17 states in DC that may tax you with an estate or inheritance tax.

Look at Maryland, the top estate tax rate is 16% and the exemption threshold is only $5 million. So you retire in Maryland and you die with a $10 million estate. At first glance, you think, well, I’m under the estate tax limits. Of course, you’re thinking federally under that 13 million, but in this loose example, $5 million of your estate would be taxed at 16%. So just because you lived in Maryland, there’d be $800,000 of taxes that would have been avoided had you retired in a different state. Capital gains are another consideration in terms of where you retire. Long-term capital gains are taxed by the federal government at a more favorable rate than ordinary income. However, this isn’t often the case for states that charge state income tax. You want to be careful of that. How about cost of living? I mean, this is an obvious one. I just referenced my client down in Mexico, but if you choose to retire in El Paso, Texas, it’s going to be a lot less expensive than San Francisco, California.

It’s essential to choose a retirement location that you can afford from a day-to-day basis standpoint. The next is healthcare. Not only do costs vary in different geographies, but if you have health considerations, you may want to ensure that you’re retiring in a location that offers you access to high quality healthcare facilities. And my last consideration for where you should retire, and certainly this is not an exhaustive comprehensive list, housing costs. Recently had a client move from Arizona to a ton of acreage outside of Lexington, Kentucky. They’ve got their own pond, driving around on a tractor and part of their calculus and why they made that move was that they could live out on this huge plot of land for about half the cost than their house in Phoenix. The implications of where you live should be factored in to your retirement plan projections.

And if you are within 10 years of retirement or have recently retired and have questions related to your retirement expenses, the taxation of those expenses, maybe you haven’t had your tax return reviewed by your advisor within the last year, we believe here at Creative Planning that your money works harder when it works together. Why not give your wealth a second look by going to creativeplanning.com/radio? Well, it’s time for a new game of rethink or reaffirm where together we’ll break down common wisdom and decide if we should rethink it or reaffirm it. Today’s first piece of common wisdom is that CD ladders are a safe, predictable investment. Well, let’s just start by defining what is a CD ladder. You basically divide the total amount of money that you want to invest and allocate those amounts into various certificates of deposit with different maturity dates. And after one CD matures, you invest that CD’s money into a new longer term CD.

Or in many cases, as that CD matures, you then spend that money if you’re doing more of an asset dedication, retirement income strategy. And a year later when the next CD matures, you do the same. And the benefit to a CD ladder is that you’re combining the best of short and long term CDs. You’re getting a little bit more interest by having some longer term CDs on monies that you don’t need right away, but still having access to liquidity without penalties systematically throughout retirement. Now, the common wisdom though is that it’s safe and predictable. Well, assuming that it’s FDIC insured, like there is some safety there, you’re receiving consistent cash flow. It lowers your interest rate risk, it lowers some of the liquidity risks and you’re getting higher rates in most cases than savings accounts.

But here’s the thing that I’ve never understood about CD ladders that go out any longer than maybe five years, and that is that if you’re going to lock up money, let’s say in a 10-year CD ladder, that means you’re allocating dollars that you’re not going to touch for 10 years into a CD waiting for it to mature. Yes, it removes volatility. Yes, the principle is protected, but if you go all the way back to the 1930s, so we’re talking the last 90 years, if you are in a globally diversified stock portfolio and take every rolling 10 year period over those nine decades, you’ve had more money 10 years later, 98% of the time. And if you’re receiving average rates of return historically speaking, which of course, past performance is no guarantee, you would’ve more than doubled your money over that 10 year period by simply absorbing some of the volatility, shredding your statement, closing your eyes. Because remember, if it’s in a 10-year CD, you weren’t going to touch it for 10 years anyway to receive huge return premiums.

So my takeaway is yes, if you’re a retiree and you need a predictable small source of income, you’re okay with just a little growth and you really want to avoid every bit of volatility, then a CD ladder will certainly work. It will perform predictably. But for a lot of retirees, it’s just not going to be good enough. Consider this, if you bought a two-year CD two years ago, you got 1% and inflation’s been at 7, you’ve lost 12% purchasing power in 24 months by being in this safe, predictable investment. Relative to inflation, let me give you the real rates of return of CDs and the S&P 500 the last five years. In 2018, a CD produced a real rate of return of just under 1%. The S&P 500 that was a bad year in the market was down 7%. 2019, real rate of return on CD, negative one half of a percent, the S&P 500, up 28%. 2020, real rate of return on a CD down 1% S&P 500 up 17%. 2021, a CD’s real rate of return was down 6.4%, the S&P 500 up 20%.

In 2022, the real rate of return on a CD down 1%, S&P down 23%. So you’re having a lot more volatility, but the verdict on our CD ladders safe and predictable? Yeah, I’ll reaffirm that. But with the caveat that it may be a safe and predictable way to go broke slowly. Our second piece of common wisdom is the dollar’s falling apart, and this should be a major concern for my portfolio. Let’s just look at the last eight decades that the dollar’s served as the world’s reserve currency. And to back up, a reserve currency is the currency that the world basically all agrees that they trust. So a lot of business internationally gets done in that currency. Today, about 60% of business is done in US currency. What we get out of it as Americans is very healthy demand for US treasury bonds and a much lower borrowing cost for our national debt because it’s considered to be safer. But here’s why I’m bringing this up.

Over the last six months, the US dollar has been somewhat weaker in that foreign exchange market and it’s promoted many people to express this concern. Hey, is the US dollar status? Is the reserve currency? Is that going away? And if it does, what does that mean for our economy? What does that mean for my investments? How should I invest in light of that? The data shows that the US dollar share of foreign currency reserves at central banks around the world, it has gone now, it’s currently at about 58% down from 70% in the 1990s. Create Planning President, Peter Mallouk, addressed this on his most recent episode of his popular podcast, Down the Middle.

Peter Mallouk: Now, what do you need to be a reserve currency? Nobody woke up one day and named the US dollar King. What happens is the world is looking for certain things. One, they’re looking for political stability. They are looking for a currency that’s backed by a big, strong growing economy that’s got very transparent financial markets, a legal system that has some credibility, a country that pays its debts. It’s looking for all those things. Well, guess what? That’s the United States. The United States is more capable of doing that than anywhere else. But the way I look at the dollar, it’s the cleanest shirt and the dirty laundry. Yes, it’s got all its problems. We spend like crazy, we weaponize it. Countries don’t like us for a variety of reasons, but if we’re not going to be the reserve currency, there has to be an alternative.

Well, it’s not going to be the Euro. I mean, a lot of people aren’t sure, the European Union is even going to be a real thing 10 years from now. So I don’t see the world clamoring to have the Euro and we all talk about China. Chinese currency right now is 2.7%, no one trusts it. The system’s not transparent. It’s missing a lot of the pieces that are required of a reserve currency, which is being really able to count on it an open, transparent financial system.

John: Again, that was Creative Planning President and CEO, Peter Mallouk. If you’d like to hear more insights from him, subscribe to his podcast or follow him on Twitter @PeterMallouk. And so, the takeaway is this, yes, the dollar is weakening, but there’s no better alternative and it’s highly unlikely than an alternative will be found in the near future. And there are probably a 100 other things that you could be worried about that are more relevant than the dollar losing its reserve currency. So the verdict for the dollar’s falling apart, and this should be a major concern. That’s a rethink. I’d like to share one more piece of common wisdom that we can rethink or reaffirm and that as you make most of your money in a bull market. Now, it makes sense that that would be conventional wisdom, doesn’t it? It’s in fact when you see your account values increasing.

After all, I want to share with you the story of Shelby Davis. He’s one of the best investors in history. So he started off with $50,000 in 1947 and ended up with, get this, I don’t want you to miss this. $900 million, not 900,000 from 50,900, $900 million at the time of his death in 1994. Now, did Davis accomplish this because he didn’t have to suffer any bear markets or things constantly went up? Well, of course not. He battled eight bear markets throughout his career. He saw his portfolio decline by 60% at one point. But Davis treated those downturns and here’s the lesson for you and I, as buying opportunities. In fact, he once said, “You make most of your money in a bear market. You just don’t realize it at the time.” Because when the market recovers from these bear markets, it often recovers rapidly and significantly.

Look at the one-year returns after the bottom. March of 2003, the S&P was up 39% one year later. March of 2009, the S&P was up 54% one year later. And from the bottom during the pandemic of March of 2020, the S&P was up 79%. Wow, 80% nearly one year later. You can’t time the bottom, but you make your money by the decisions you make during bear markets. And I believe real estate is a perfect example of this. If you own a home or maybe you own a couple of rental properties, let’s use 2008, 2009 as an example. If you had five rental properties and you weren’t over leveraged and you had a renter in those properties, would you think to yourself, this is a great time to sell all of my rentals while they’re down 40% in value? Of course not.

Those that had money, were thinking the exact opposite. How do I purchase more properties right now while everything’s on sale? Well, their net worth statement didn’t look better in 2009 than it did in 2007. They had lost money. Their investments seemingly weren’t working out, but the decisions they made to not only not sell those rental properties, but in fact buy more in 2009 and then subsequently watch those properties triple or quadruple in value over the next 15 years. Well, they didn’t make their money during the run-up in real estate. Well, sure they did on paper, but rather they made their money through prudent strategic moves during bear markets. Do not fear the bear. Go up and give it a big bear hug because for those who know what they’re doing with their money, these are the greatest opportunities and absolute gifts for your long-term success.

And so, the verdict that you make most of your money in a bull market is a rethink. And if you’re reflecting on your past decisions in bear markets and you feel uncertain as to whether you made the right moves, lean on our experience here at Creative Planning by meeting with a local advisor for a fresh perspective. Visit creativeplanning.com/radio now to schedule your complimentary visit. Let’s transition over to listener questions. Ronald in Wisconsin asks, “My wife and I have made the decision to move forward and get a trust. My older sister’s telling me that an irrevocable trust is the best option, but I’m not sure what the difference is. How do I know which one is right for me?” So a revocable trust Ronald is a trust that as the name suggests, can be revoked or terminated by the grantor. So a revocable living trust allows the grantor, the owner of the trust to designate how assets are passed to designated beneficiaries following his or her death.

And I’ll post an article to the radio page of our website at creativeplanning.com/radio specifically outlining what is a revocable living trust? So if you’d like to find that you can visit the page. It’s important to note that a trust is not a will. So upon death, a will is still going to go through probate and can be challenged by family members, for example. A trust bypasses the probate process allowing assets and property to be passed directly to the named beneficiaries. Why would you choose this? What would be the point of getting a revocable trust? Well, will’s only going to effect after you die, but a trust can be used to manage assets during your lifetime. A will is public record. A trust is private and cannot be accessed by salespeople, or even worse, a con artist. You will still need a pour over will and that serves as a backup for assets or property not owned by your revocable living trust.

But the key distinction of a revocable trust versus an irrevocable, which I’ll explain here in a moment, is that the revocable allows you to maintain complete control. And because your social security number is the trust tax ID number, there is no separate tax return or gifting issues. Now, an irrevocable trust, as your older sister was telling you about, that removes all trust assets from your taxable estate. And so, at that point, you lose all your rights of ownership immediately upon transferring those assets into the trust. I don’t know the details of your situation, but an irrevocable trust would be much less common and much less applicable for the typical situation. Now, if a married couple has over the estate tax exemptions like over $25 million, an irrevocable trust might make a lot of sense for estate tax purposes. An irrevocable trust can also relieve the grantor of tax liabilities from the income generated from the assets in the trust.

Irrevocable trusts are especially useful for people who work in professions where they’re subject to frequent lawsuits, a doctor and attorney, they may hold things in a trust that are protected from legal judgements and creditors. So the advantages are estate tax savings and creditor protection. The disadvantages are a lot more, which is why most people don’t have irrevocable trust. You lose control, they’re expensive. There’s a three-year rule, meaning if you make a gift of life insurance to an irrevocable trust and then you die within three years, the proceeds are clawed back into your estate and could still be subject to tax. There’s a five-year lookback rule if you’re making gifts to an irrevocable trust and then all of a sudden you need Medicaid, no. So you’re gifted out of your estate and then you say, “Well, I’m in long-term care. I’m broke, I need the state and federal government to come help me.” They’ll look and say, “Did you intentionally get money out of your estate to put yourself below these limits to qualify for government benefits?” If you did, they’ll claw those assets back.

And while that’s the federal provision, many states will look back even longer than five years of any gifts to an irrevocable trust. Well, Ronald, on the radio show, obviously it’s far too difficult without knowing your entire situation to tell you which you should or shouldn’t do. We have advisors there in Wisconsin, visit creativeplanning.com/radio to schedule to visit with them for more personalized advice. But in general, for most people, the revocable trust is more appropriate. Let’s go to Kenneth in Phoenix, Arizona. “I feel like Apple, Microsoft and Amazon aren’t going anywhere. Should I buy a few more of these stocks that tend to be the best and biggest? Would you recommend this strategy?” In short, Kenneth, I would say no. The reason for that is the S&P 500 is extraordinarily top-heavy. What I mean is Apple and Microsoft right now make up 14% of the index, and that’s because the S&P 500 is cap weighted. Meaning there’s a huge difference between Apple, the largest company and Dish Network, the lowest weighted company right now within the S&P 500.

Apple makes up over 7% of the index. Dish Network makes up 0.004809 minuscule even after Microsoft, which is over 6% waiting. The next highest is Amazon at 2.73. Consider this, of the 503 companies listed on the S&P 500. Now, by the way, I know you didn’t mishear me. I know it’s weird. There’s 503 companies in the S&P 500, 5 companies make up a quarter of the entire index. The top 37 companies constitute 50% of the index. And so, the hidden risk of the S&P 500 is how it’s constituted. I would certainly not add more Apple and Microsoft and Amazon because you already have those as by far the largest positions inside of your portfolio, even if you’re sitting in an index funds. And so, while technically the S&P 500 represents 503 unique stocks, the vast majority of those carry virtually no impact on the index. And so, I would suggest you’re not as diversified even as you think you are by simply owning the S&P 500.

And so, you wouldn’t want to overlap that concentration risk with more of the largest companies within the index. Kenneth, I work out of the Valley of the Sun, so I’d be happy to sit down and discuss your portfolio with you individually. And if you have questions like Ronald or Kenneth, send your questions to radio@creativeplanning.com. Well, the NBA playoffs are here, and I am enjoying recording games and checking them out once my kids are fast asleep. A few weeks ago, the number one sit, best record in the entire NBA Milwaukee Bucks got bounced in five games by the number eight seated Miami Heat. And when Milwaukee Bucks Superstar and former most valuable player of the entire league, the Greek Freak, Giannis, was sitting in his press conference, he had a great quote. He said, “There are good days, bad days, but that doesn’t mean you’re a failure. You come back, build new habits, and you try to get better.”

And I want to use this as an encouragement for you. I’ve had the opportunity to meet personally with thousands of families. If you look across the landscape at Creative Planning, and we have over 50,000 clients, while some have 500 million and some have 5,000, there is one commonality amongst every single person. They’ve all made mistakes. And so, if you feel sometimes discouraged by the fact that you haven’t saved as much as maybe think you should have. Or I bought that dumb investment that didn’t work out and I lost money, or I worked with that advisor that I found out after the fact was just kind of terrible. They weren’t very good. What a mistake. I sold that investment when I shouldn’t have. I bought that investment when I shouldn’t have. Join the club, we’ve all made mistakes.

And the key is learning from those mistakes. Don’t ever feel like you can’t go talk to a financial advisor because you feel shame or embarrassment because you wish your financial situation were better or, oh, no, I’m going to need to talk about some of these things that I’m not proud of. You’re normal if that’s how you feel. I mean, think about the Bernie Madoff scheme. And a lot of people assume, well, who would fall for a Ponzi scheme? I mean, no one smart. Steven Spielberg, Fred Wilpon, the former New York Mets owner, Larry King, Sandy Koufax, many of the investors that were fooled by Madoff in the ultimate case of, oh, I made a mistake and a really bad decision. I mean, I invested with Bernie Madoff, were otherwise intelligent people, they just made a mistake. Still not convinced? How about Jack Bogle, founder of Vanguard, I mean, one of the absolute titans on the investing Mount Rushmore.

He managed a mutual fund company. He was running in the 1960s, Wellington Management Company with a Go-Go fund management group. It cost him 1 billion in assets and his job, Bogle literally lost his job at the mutual fund company that he was running. And his biggest mistake convinced him that rather than trying to actively beat the market, he should create a passively managed fund that tracked the market, which people thought was insane at the time. He then launched the Vanguard Group, creating the World’s first index fund. That’s learning from a huge mistake and challenge in his career. So I want to encourage you that the financial mistakes that you’ve made in the past are not a referendum on where your future lies. The key is looking forward at how from today and onward, you can make the best decisions with the knowledge that you now possess. And in many cases, you only possess because you’ve learned and are now overcoming those shortfalls. And remember, we’re 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 STC registered investment advisory firm that manages or advises on a combined $210 billion in assets as of December 31st, 2022. 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 for 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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