On this week’s episode, we unpack the quote, “The windshield is bigger than the rearview mirror for a reason,” and apply it to both your finances and your life, highlighting the importance of a proactive mindset in creating the financial future you desire. In line with our theme of preparing for a successful 2025, we also welcome to the show one of our nearly 250 CPAs to discuss year-end tax strategies. Join us for these insights and more!
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, John Hagensen, and on this week’s show, I’m unpacking the idea that your windshield is bigger than your rearview mirror for a reason.
I’m also welcoming one of our 265 CPAs to discuss tax strategies as well as a conversation between Creative Planning President Peter Mallouk and our Chief Market Strategist, Charlie Bilello, on the markets and what you need to know. Now, join me as I help you rethink your money.
When you sit in the driver’s seat of your vehicle and you look forward, do you notice how large the windshield is and how tiny that rearview mirror is? Yeah, there’s a reason for that and it applies to our lives, because looking forward is more important. It’s more critical to your safety than looking behind. It’s true, the past, sure, it matters for perspective, you want to learn from it. But if you spent all your time looking in the rearview mirror, you’re going to miss what’s ahead, what’s out in front of you.
So here’s the challenge I pose for you today and a question to answer. Are you more focused on the road behind you or the road ahead? Today, we’re going to investigate and apply this principle to yes, of course your finances, but to life, to taxes, to relationships, to career decisions, you name it. And I want to start with life itself. I’m a parent of seven kids and yes, I know, seven. Anyone that I say that to looks at me crazy and said, “What? Did you just say seven? How do you do it? I felt busy with two.” And by the way, if you think that, trust me, I thought I was maxed out at one. Well, actually I thought I was busy before I had kids. Now I find that humorous. And then I was maxed out at one and then maxed out at two, and I couldn’t imagine playing zone defense once we were outnumbered with three. Here’s the thing, somehow you just gain capacity to whatever limit of children you have. So that’s how that works.
But as they’ve grown, especially now with two out of the house, I’ve had to learn to stop holding onto what used to be, which is hard. Some of my kids aren’t little-bitty babies anymore. You know that day you drop off your kid at school and they don’t want to kiss you on the lips anymore, like, “Oh dad, come on, what’s wrong with you? I’ve got friends over there.” And what worked for them when I parented them as toddlers isn’t effective as teenagers. If you’re a parent, you know what I’m talking about. You can’t cling on to what worked when they were younger or what worked in a day and age where technology wasn’t as prevalent or you’re going to miss out on connecting with your kids and with your grandkids where they are actually today now, because life is all about adapting, and that applies to your finances as well.
I see so many people who get hung up on their last tax return or a tax return from four years earlier. They think, “Well, I didn’t owe much last year, so I’m in good shape.” But here’s a fun fact for you, tax laws change and your financial situation is always, even more so if you’re someone with investment accounts, large investment accounts or you’re contributing to investment accounts, you’re withdrawing from investment accounts. So looking backward doesn’t help you prepare for what might be coming down the pipeline. It can be useful for a framework, certainly if not a lot has changed in your life. But you know who really gets this? A guy named Warren Buffett. He famously said, “Predicting rain doesn’t count. Building an arc does.” He wasn’t talking about taxes specifically, but the point holds true. Being prepared for what is coming ahead is key, especially with your taxes.
Oh, and by the way, $35 trillion of national debt, an environment where currently low tax rates are sunsetting at the end of 2025 if nothing changes. There are all sorts of proposals that may or may not happen. But most aren’t predicting taxes will likely go down from where they are today. And that should prompt, again, looking through the windshield, you to ask, “What could I be doing today in light of that?”
Investing is another area where people get really stuck in the past. And we have behavioral biases and we’re humans and money’s emotional, so this makes sense on a lot of levels. But I’ve met with countless clients who were still hung up on the stock they missed out on years ago. One of them actually in particular, a really smart tech guy, was still upset about missing out on Apple back in the early 2000s, he had it. It had a major pullback, he had a lot of gains even with the huge correction so he decided to get out of it. Of course, he’s painfully run the math to see what he would’ve had in the event he had held on all the way until now. But hindsight, as they say, is 2020, of course.
But here’s the thing, investing is about the future. It’s not about the past. It’s certainly not about timing the market perfectly. If you’re looking for someone who can do that, you’ll be looking for the rest of your life. It’s about time in the market. So instead of trying to chase the next Nvidia, focus on diversifying being patient and sticking to a long-term plan.
One of the ways you practically can set yourself up for future success, invest consistently and automatically. Set up automatic contributions to your investment accounts. Automate your giving, and don’t change it whether the market is up or down. I mean, the only thing you might want to do is increase your contributions if you can swing it from a cash flow standpoint when the market is down. It really is like a financial version of set it and forget it.
Let’s shift gears and talk about relationships and careers because both of these areas, we tend to get stuck in the rearview mirror, focusing on past mistakes or missed opportunities instead of looking forward. I’ll give you an example. A few years ago, I was working with a woman who was in a high level executive position, been with the same company 20 years, but she just hated it. She was miserable from a career standpoint. And every day she’d tell me how unhappy she was. She felt like she couldn’t lead because she was so focused on the years that she had already put in, been there a long time, don’t want to start over, don’t want to hit the reset button.
But after working together, helping her see her potential for the future, running her financial plan because she was already in phenomenal shape because of what she had accumulated, she took the plunge. She left her company. She found a position that was more aligned with her passions. It didn’t pay quite as well, but it’s still a good paying job. And her career and her personal life improved a ton because she stopped looking backward.
And when you look at financial planning, this is where the windshield versus the rearview mirror analogy is especially critical. It’s really easy to get bogged down by past mistakes. You look at your projections and go, “Ah, if I had just saved a little more 15 years ago when I wasn’t knucklehead and I wasn’t thinking or I made that bad decision,” but every one of us can do that. What matters is just looking forward and focusing on what can I do now and yeah, learning from what I did in the past, but what are the future moves I can make today to improve my situation. And so if that’s you, I want to encourage you, start fresh, get organized, set a budget, create an emergency fund because you are in control of the now.
Now I want to shift into some real world examples of how this windshield rearview mirror concept plays out in the real world. I’m going to share the good, the bad and the ugly. And because I’m in a good mood, let’s start with the positive. A business owner came into my office, this was a couple years ago, he was in his early 50s, had built a wildly successful company. He was making very solid money around a million a year, and that was with investing a lot back into the business. But you know what made him stand out to me? Because I meet with a lot of people like this, but he wasn’t satisfied with what he had achieved. And I don’t mean that in a bad way. It wasn’t that he was discontent, it was just that he was laser-focused on what came next. And I admired that. I was inspired by it thinking, “Oh, this is why he’s been so successful. This is the reason. He’s completely forward-focused.”
He’s a visionary. He’s not resting on what he’s done up to this point, because while he knew his business was thriving, he also knew that things could change. He had that healthy level of paranoia, a blend of extreme optimism with a healthy dose of paranoia that many successful business owners possess. He didn’t want to be the guy caught off guard by market shifts or business changes or structural adjustments within his industry.
And so we worked together, had a comprehensive financial plan that was adjustable and moldable and not only protected his current assets, but set him up for future success. He wanted better diversification of his investments because so much of his net worth, like many successful business owners, was in his business, took more of a barbell approach with aggressive investments that were in the market and then enough cash on hand he could basically weather any sort of storm. We helped him implement a more efficient retirement savings plan for his company and helped him take advantage of some deductions that he wasn’t aware of. But his mindset was a great example of the power of looking through the windshield.
Now on the flip side, I had a family come into my office that was absolutely stuck in the rearview mirror. They had inherited a substantial sum of money from a grandparent about a decade earlier. And to be frank, they didn’t do the best job with it. They weren’t experienced with money, they hadn’t really saved or invested anything on their own. So they had this wealth dropped on them, but they didn’t have a lot of wisdom that had been provided to them while that grandparent was alive of how it was actually accumulated in the first place and what those principles were to build it and grow it and protect it. And so they were flying a little bit blind.
They had been sold some bad investments for high commissions, right? When I looked at them, I’m like, “Okay, I see what they were sold here.” Had a bunch of unnecessary insurance, again, sold for high commissions. And they had spent more than they should have on things that they really didn’t need, just had this windfall of money. And now they’re approaching retirement, and they were kicking themselves for those mistakes they had made because they were wiser now. They had been managing the money for 10 years. They had learned from those mistakes. But here’s the problem, they just couldn’t move past it. They were unable because of the past to feel a lot of confidence in their future decisions.
“What if we bought a second house and then we’d run the plan?”
“Oh, I don’t know.”
“We’ve run all the numbers. You’re more than capable of doing that, and it isn’t appreciating asset. Yeah, it’s going to take money from you because there are a lot of expenses with property taxes and upkeep and property management, landscaping, whatever else it might be, but you can afford this.”
But they were stuck, and it took a while to shift their mindset, continuing to remind them that dwelling on the past wouldn’t change their future. So they started taking small steps, I was really proud of them, and building a realistic retirement plan based on what they had today rather than what they wished they had or should have had had they done things better 10 years earlier. And we did exactly what I shared earlier. We automated things so that they didn’t have to make a million day-to-day decisions. And we restructured their investments to lower cost and to fit their actual time horizons and objectives instead of just chasing gains that they felt like they needed to because they didn’t achieve the returns that they had hoped for in the past.
All right, let’s move over to the ugly, and this is a tough one. I had a retired school teacher come in. This was about five years ago. She had been living modestly, always sticking to her budget, but she hadn’t really done any planning beyond that. Her pension, while helpful, it wasn’t enough to fully support her. She had relied heavily unfortunately, on credit cards. Here’s where things got ugly. Because she’d been living paycheck to paycheck in her earlier years, she didn’t build up any kind of emergency fund, didn’t contribute to her retirement accounts in any meaningful way. She was really relying on that pension. And so her debt started to balloon. And by the time she came to see me, she was drowning in high interest debt and had almost nothing for retirement.
Her story is one that I think too many of us can relate to in one way or another. Maybe you’re not running up credit cards at this point in your life. Maybe you did in the past. I don’t know your situation specifically, but if you’re like me, you can get stuck in a cycle of reacting to problems instead of proactively planning ahead. In her case, it was just too late to make any big changes, but we had to start small. So we created a debt repayment program focused on the high interest credit card loans. We started small contributions to a Roth IRA and gave her at least a little bit of tax efficiency in her later years. It wasn’t perfect, but it was the best we could do given the situation.
And regardless of where you’re at today, the best time to start planning for your future is right now. The best time to start looking through the windshield is today, and that’s the moral of these stories. Whether you’ve been making phenomenal financial decisions, just threading the needle on everything, and you’re a great example to those around you or you’re not so great, or maybe you’re like most people, you’re somewhere in the middle, you always have the opportunity to start moving forward. The future is where I want you focused. It doesn’t matter what mistakes you’ve made, by the way you’ve made them, and so has everyone else, even the most successful clients that are worth eight and nine figures at Creative Planning, they have regrets. But one of the commonalities I see with those successful people, they don’t let those mistakes define them. They quickly shift their gaze back out the windshield. And this applies, remember not just to your money, but to life, relationships, career, and personal goals.
Keli Wike is a managing tax director here at Creative Planning. She specializes in all things tax when it comes to stock options, high net worth folks, businesses, trusts, estates, you name it. So buckle up, we’re talking taxes. Keli, welcome to the show.
Keli Wike:
Thanks, John.
John: Let’s start with the basics, year-end planning. Why do we care?
Keli: So year-end tax planning is really critical to helping you understand your overall tax picture and potentially take actions to reduce or understand your tax liability when you file your returns in the spring. So it’s something that’s a major point of emphasis with our clients to both educate them in the tax realm and also work towards meeting their financial and tax goals together.
John: So what’s one easy move someone can make right now to avoid the “oh no” moment when tax season rolls around?
Keli: If you’re a wage earner, tax planning is really crucial to ensure that your withholding is covering all or most of your tax liability and working with your CPA to adjust your W-4 if need be. So if you’re underpaid, you’ll not only have a big surprise in the spring with a large tax payment to make, but you could be subject to underpayment interest and penalty with the IRS. Same situation for those who are self-employed or make estimated tax payments, you’ll want to confirm with your advisor that you paid in enough during the year to avoid that underpayment.
John: Stock options, everyone wants them. When you have them, you love them, but few fully understand them. What should folks be thinking about with their stock options before year-end to avoid a tax nightmare or extra complications?
Keli: So first off, having a basic understanding of the type of stock options you have and how that ties in your tax situation is really important. The most common type of stock options that I see are restricted stock units, which are taxes they vest throughout the year similar to regular wages. So a lot of people think that their cover just fine for taxes as those vest. However, the federal withholding rate on RSU vesting is set at 22% for most taxpayers. So if your effective tax rate is higher than that, you want to make sure that you adjust your regular withholding to account for that gap.
Another big stock option nightmare to avoid is exercising stock options during the year and not understanding what the tax implications are of doing so.
John: Yeah, I’ve seen that.
Keli: If you exercise an ISO and don’t sell that position prior to year-end, then you’ll have an AMT tax adjustment that could result in significant surprise taxes. So make sure that if you’ve taken action on options during the year, that you’re working with your advisor to plan around that and understand what the tax consequences are.
John: Yeah, those are great tips. Makes a lot of sense. Let’s talk about high net worth individuals. Keli, they’ve got a whole different set of tax challenges, right? What should they be thinking about here toward year-end?
Keli: Two things that I’m really focusing on this year are charitable planning and Roth conversions. So for a lot of high-income earners, they want to know anything and everything that they can do to reduce their taxable income and pay a lower effective rate. One of the best ways to do this for those who are charitably inclined is looking at charitable planning prior to year-end.
So a couple of different things that I focus on here. First off, a lot of people aren’t aware of the fact that rather than donating cash directly to a charity, most 501(c)(3)s will accept a charitable gift in the form of appreciated stock. So when you give in this manner, not only are you saving the capital gains tax on that appreciation, but you’ll also receive the charitable contribution deduction on your return.
Second thing in that charitable realm is that for clients to have larger than normal incomes in a specific year, oftentimes looking at a donor advised fund to make those gifts make sense. So when you utilize a DAF, you get an upfront charitable tax deduction in the year that you contribute and then can make grants over time out of that fund to the charities of your choice.
John: Keli, let’s transition to small business owners. What should they be doing now to squeeze out every last deduction they possibly can before the calendar flips?
Keli: So for small business owners, the first thing that I touch on, if they don’t already have a separate solo 401(k) set up, they’ll want to look at doing this to maximize on their tax deductions. So these retirement plans that are specifically for self-employed individuals allow you to contribute and receive a tax deduction similar to what an employee working a W-2 job would get contributing to a traditional 401(k).
In the case of a solo 401(k) specifically, you’re able to make both an employee and employer contribution to the plan, which is a really great benefit. Those solo 401(k)s in particular have to be set up prior to year-end in order to utilize it for the current tax year.
Another big tax savings that’s come up in the last couple of years for business owners is making a pass through entity election at the state level. So on an individual tax return, the state and local tax deduction is capped at $10,000. For high income earners or people that live in high tax states, they’re losing out on a lot of money when they pay tax in excess of that $10,000. So to work around this limitation, most states now allow businesses to elect to pay their tax at the entity level and receive a deduction for those state tax payments on the business return. For many small business owners, this is a huge benefit worth looking into with their advisors.
John: What’s a tax deduction or credit that people tend to miss, Keli?
Keli: I think something that people overlook is state tax deductions and credits which are available. Oftentimes there’s significantly more of these than what you see on the federal side. So many states offer a deduction for contributions to a 529 plan. Some states offer large tax credits for donations to specific charities, and others have incentives for things like installing solar panels or purchasing an electric vehicle. So it’s definitely worth keeping up on your current state tax laws and legislation so you’re not missing out on any benefits there.
John: Very good tip. What are three things people should be reviewing with their CPA right now? What are things that you are going through, Keli, with your clients?
Keli: First of all, no matter what, make sure that you’ve paid in enough during the year to avoid underpayment penalty and interest. That’s an easy thing that you need to do every year during tax planning time. Second, especially for high-net worth taxpayers, work with your wealth and tax advisors to see if there’s an opportunity for tax loss harvesting during the year to offset any significant capital gains that you realize. That can really help reduce your tax. And third, see if there’s an opportunity for Roth conversion planning. So with the current tax rates set to sunset at the end of 2025, the next couple of years are a really great opportunity to pay tax at a lower rate versus potentially taking IRA distributions a few years down the road and paying a higher tax rate.
John: All right. For those procrastinators out there, all you know who you are, that wait till the last minute, what’s the one thing that you suggest they absolutely must do before the clock strikes midnight on December 31st?
Keli: So every year I have people emailing me literally on New Year’s Eve, “What can I do? It’s the last second.” Two things that are really easy, donate to your favorite charities and make 529 contributions. You’ll get a tax deduction in most cases for doing that, and those can truly be done at the very last minute.
John: Fantastic tips. Thank you for joining me on Rethink Your Money.
Keli: Appreciate it. Thanks, John.
John: Well, it’s time for this week’s one simple task, and this week I’m focused on something simple but it’s critical as year-end approaches, designing a place to start organizing your tax documents. So here are a few steps to help you get started on organizing your tax documents. I’m going to give you four quick hitters.
Number one, choose a dedicated space. This could be a locked drawer in your home office, a specific folder on your computer or even a tax related folder in your email inbox, assuming that email is secure.
Number two, start gathering documents early. As you receive W-2, 1099s, receipts for the drop-off at Habitat for Humanity last week, place those in your designated space right away.
Next, set calendar reminders. You know that feeling when you forget something really important? I almost did it last week. I’m not on social media, so I do not see friends’ birthdays like I used to and be reminded of them. So if they’re not in the calendar, I don’t remember. Hopefully, my wife goes on social media during the day and says, “Hey, did you know it was so-and-so’s birthday?” So set calendar reminders I think in January and February to check in for any missing documents is great. It is far better to be safe than sorry, and a heck of a lot less costly than forgetting your Valentine’s gift.
So we’ve talked about choosing a dedicated space, gathering documents early, setting calendar reminders, and then finally, go digital. A lot of what I just shared can be solved. You’re tired of having papers pile up like laundry in my house on the weekend. Consider scanning your documents and storing them digitally. A lot of your tax documents you’ll already receive digitally, so you can just save the PDFs. Just make sure everything is in a secure password protected folder because your tax return info is sensitive and many of them have your full social security number on them.
So this week’s task is simple, but it’s not easy like many of the others. Just get organized. You’ll feel more in control. And when tax season comes around, you’ll be the one smiling while everyone else is frantically searching for that elusive 1099.
Sometimes getting different viewpoints, it’s like driving with my spouse. You both want to get to the same place, but one of you wants to take a different route, or in my case, park in a slightly different parking space and the other’s convinced, “Oh, there’s a shortcut. Go this way” even if that last shortcut landed you in a dead-end neighborhood. I don’t know who would do that. Husbands, it must be one of you, couldn’t be me. But getting more perspectives helps you see the full picture. That’s why I’m excited to do something a little bit different here for today’s show. You’re about to hear insights from two of the best here at Creative Planning, and really in my opinion, throughout the investment landscape. Creative Planning Chief Market Strategist, Charlie Bilello, and President Peter Mallouk from their popular podcast Signal or Noise.
Charlie Bilello: Peter, you’ve talked about the comparison of investing to a casino and how investing is totally different.
Peter Mallouk: Yeah. In the casino, the longer you play, the more likely you are to lose. That’s why when you’re winning, the casino doesn’t throw you out. They give you free buffet and free hotel room and invite you to come back. Then the longer you play, the more likely you’re to lose. In the stock market, the longer you play, the more likely you’re going to win. The longer you stay in the game, the more likely you’re going to win to the point where it becomes as close to the word as guaranteed as we can use.
Charlie: Yep, never been a 20-year period where stocks haven’t been higher. And more importantly, if you zoom out and stop focusing on the short run, even though you can have big days in the market, the market could be up 5% in a given day or down 5%, and that’s enticing, to the gamblers in us, and if you look at individual stocks, there’s always a stock moving up 20% or down 20%. And that seems like, “Oh, I could get the timing right. Just focus on the short run, get a quick hit and keep compounding that.” No one can do that. But if you zoom out, you don’t have to play that game because the long-term compounding returns are so rewarding, right?
Peter: Right.
Charlie: So no matter how good that short-term period is, it’s not going to be as good as that 20 or 30 year return that you get. Median total return for the S&P 500 over 10 years, 170%. 20 years, 720%. 30 years, 2173%. And you can’t fathom that. You got to put it in a spreadsheet to tell you what that would turn an initial investment into. But playing the long game is something as an investor that should be a resolution for life. Forget about that short run. Think about the long run.
Number three, diversify, diversify, diversify. Diversification in the short run is always a four-letter word. People hate diversification because there’s so something that’s so glaringly obvious in hindsight that’s outperforming everything else. Last year, of course, Peter, that was that Magnificent 7 technology sector of 56%. And if I’m doing a CNBC interview with you right now, I’d say, “Peter Mallouk. We have Peter Mallouk here. He’s going to tell us what’s going to be the best performing sector. Peter, give us your top pick. What’s it going to be?”
Peter: And I get that. So every month when I go on, some stations will just let you talk about the markets, but oftentimes they want your picks and they want them with conviction. And then you go on air and you have to explain why you can’t have conviction around any of the picks. But they really want… I mean, they really want that because obviously they’re in the business of making money for their shareholders. They have a fiduciary duty to make money for their shareholders. To do that, they’ve got to sell ads. To sell ads, they have to have people watching. To get people watching, they’ve got to have a lot of excitement, hyperbole and predictions. And the correct answer is diversify because you don’t know what sector is going to perform the best at any given time. And-
Charlie: It’s so boring.
Peter: Yeah, it’s so boring. It’s so incredibly boring.
Charlie: That’s why I have to keep saying no to these things, but the-
Peter: I think this is very funny by the way, just for our listeners, that I’d say about once every couple weeks, Charlie gets a request to be on CNBC or one of these stations. I think 100% of the time without exception, your answer is, “No, thank you.” It’s just not your thing at all.
Charlie: Yeah. Well, you know what they say, you got to learn how to say no to things that are not enhancing things for you.
Peter: That’s right.
Charlie: That doesn’t mean I’ll never do it again, but I won’t go on there and answer those kind of questions. Definitely not.
So technology sector, 2023, 56%. Peter, here’s an stat, maybe you didn’t know this. It was the best year for technology stocks since in 1999, okay? We all know 1999, that was a pretty good year for technology stocks. So the temptation is, “Hey, why diversify? Why be in any other sector?” We know that biggest technology stocks, we use their products every day, but if we go back to 1999, technology stock’s not always the winner. If we look at 2022, energy stocks were actually the best performing sector. 2021 was energy stocks as well. It goes back and forth from year to year and absolutely nobody can tell you what the best performing sector is going to be this year.
And if we look at technology, over the long run, technology versus the S&P 500, boom during the ’90s, then bust. And then a period of kind of sideways relative to the market for over a decade, people forget that. And then the recent boom again. Now, can this continue to go up? Of course it can. Nothing’s impossible. Technology’s not going away. Its share, the S&P could certainly get bigger, but measure those expectations. As an investor, the advantage you have is you don’t have to pick, you don’t have to play the CNBC game. You don’t have to pick any one of these sectors. You can get them all right, buying the index. And by buying them all, you don’t have to predict. You’ll get whatever that average is at the end of the year. If something does well, you’ll benefit from that. If something doesn’t do well, well, it won’t be 100% concentrated in that.
Peter: Right. For your large cap US position, you have the S&P 500, well, 25% of your money, 30 something percent of your money is already in these big tech stocks, just a handful of them. So you’re already dramatically and substantively overweighted towards big US tech. Almost every Creative Planning client is overweighted in big US tech. And so the good news is they participate in that rally, but they would feel it if that rally turns too. Oftentimes people see a position like the S&P 500 and go, “Well, okay, I’ve got that. Now I’ve got to go buy my big tech.’ Well, you’ve got your big tech. It’s the biggest part of that. The Apple, Microsoft, Google. They’re bigger than the bottom 100, 200, 300 companies than the S&P 500 combined. So you’ve got that waiting that you need already.
Charlie: It’s there. And so hopefully, it does continue to do well, but risk management requires you to say, “Maybe it won’t do it. Maybe there’ll be another 2022.” We don’t know, but it’s coming at some point, and then you’ll be thankful you had something else in your portfolio. So diversify, diversify, diversify. Even though it’s going to be painful, there’s going to be something out there that’s outperforming. That’s just the nature of markets.
Number four, focus on what you can control. And what you can control as an investor, Peter, are the returns. As much as you will the S&P to be up 20% again, that doesn’t mean anything. That doesn’t mean it’s going to happen. What you can control are your habits and your behavior. And investors tend to behave pretty badly when they’re reacting to their emotions, when they’re buying high because they have greed or they’re selling low because they have fear. The difference between investor returns and fund returns, that gap, that behavior gap is something you can control simply by not performance chasing.
Peter: Yeah, I mean, absolutely. My favorite chart’s the one before this, I have it at the front of the Five Mistakes Every Investor Makes book, which was the first book I put out. And to me, this chart resonates with me because it’s basically looks as if the market is flipping you off. It just looks like it’s basically saying, “Just try to guess where next year is going to land.” The distribution is unpredictable. So your theme, I couldn’t agree with it more, and it’s basically the thesis of everything we talk about with all of investing, focus on what you can control.
Charlie: And I know investors are feeling better about the future because stocks have run up a lot. But don’t forget, the reason why you have that 10% longterm return is because every single year there’s risk. And even if you can’t see it, it’s still there.
Peter: Yeah. One thing you can almost always count on is every 12 to 15 months, a double-digit percentage drawdown, it’s just going to happen.
Charlie: It’s not an impediment to that return, that drawdown. It’s the reason why you actually get it at the end of the day.
The easy money has been made. And we hear this every year, if you Google, the easy money has been made 2009, 2010, 2011. Every year there’s been a different article where someone along the way is saying this at some point during the year. This is a quote from the great Howard Marks, love his memos, read them all back from July 2017, so seven years ago, this is what he wrote. “Finally, while my observations are uncertain and should be taken with a grain of salt, what I am sure of is that valuations and markets are elevated and the easy money in this cycle has been made.” Howard Marks, Oak Tree Capital, July 2017. What’s your reaction?
Peter: So I’m a Howard Marks fan because I love like you reading his letters, but his predictions, I mean, twofold here. Number one, his predictions have always been off or meaningless. I don’t know anyone that is cautiously defensive or cautiously optimistic or very tentative positioning. But many, many times he said things like this, the easy money has been made, and he is almost always been wrong as he was here, completely wrong in his prediction. I think if you read the letters, but continue on an investing course, ignoring the general directive advice he gives, you’d be better off.
Charlie: Yeah, for sure. He’s a credit manager first and foremost. And as we know in the equity markets, it’s much, much harder to make any type of prediction because you not only have to predict what’s going to happen with earnings and other things, you have to predict where valuations are going to be in the future. So yes, we’re valuations above average in 2017, no question as I’ll show you in a little bit. But today they’re even higher, which was not obviously one of his expectations.
But I want to attack this notion, this concept of easy money and the idea that it’s sometimes it’s really easy for investors and other times it’s more difficult. In my view, there’s always risk even if you can’t see it. And if we look at the last seven years here, I’m showing you July 2017 to July 2024, it looks somewhat easy in terms of S&P’s up 152%. 14% annualized, Peter, so well above the historical average of around 10%. And if we look very closely and we dig in here, what we’ll find is it wasn’t that easy. So he was right in respect to, it wasn’t a straight line hire, it almost never is, but we had three-
Peter: Right. Yeah. And it never is. I mean, I think what he meant was the bigger returns are behind us.
Charlie: Correct.
Peter: Just do nothing and get big returns. Yeah, it was volatile, but definitely still easy in the sense that much higher returns than expected, than historical norms.
Charlie: 14%, right? Versus 10% historically. And I just want to highlight here a few of the instances that were pretty difficult over this period. Of course, 2018 we had that 20% bear market. 2020, the covid crash, 35% fastest bear market in history. And then of course 2022 with inflation, Fed tightening, 27.5% on the S&P 500. So it wasn’t easy. We had three bear markets in four years, so he was right about that. The part that he was wrong about was that the market would be this resilient and come back.
Peter: Right. And I think that, again, bear markets, as you know, probably better than anybody, they happen every four or five years. Anyways, you make a prediction, “Yeah, we got a couple of them in there,” I would call these pretty benign bear markets though even, because a typical bear market, think of ’08, 9/11, the tech bubble, it takes half a year or multiple years to recover from. These bear markets were snap markets like Covid but everything’s better. You get the full recovery in just a matter of months. Or the tariff, or you get a full recovery in a matter of weeks. Most people didn’t even see the bear market by the time they got their quarterly statement.
So I mean, look, they wanted an epic period of time to be invested in equities. And look, Howard Marks is one of the greatest credit investors of all time and was dead wrong about this. Just another example that focus on your long-term goals, hold equities for the long run, credit for the short run, and ignore the noise, ignore the predictions.
Charlie: Yeah, he’s a risk manager first and foremost as he’ll tell you. And so he’s always identifying risks. And certainly there was a risk seven years ago that things were elevated, markets were hitting all time highs. 2017 was a year where the market was just running like crazy every single month. Higher valuations were considered to be high. And like you said, that was expected to mean revert. It didn’t happen.
Now here’s the question here, Peter, fast-forward today, we could kind of make a similar statement, right? So what he didn’t anticipate, I think the CAPE ratio back in 2017 was a little bit under 30, I think it was around 29. Today, 35. And with the exception of 2021 and the tech bubble in 2000, it’s the highest valuations we’ve seen for US equities in history. So has the easy money been made? Should he say it again now or should someone say it again and maybe they’ll be right this time?
Peter: Well, we’ve gone a long time without a bear market, haven’t we? I mean, look, it’s easy to-
Charlie: You’re saying without a painful punishing bear market.
Peter: Right. Right. Right.
Charlie: Right. Okay.
Peter: And I think even without a painful correction, it’s been quite a while. So I think it’s a pretty safe bet to say we’re probably going to have one in a year or two, but I think if you zoom out, as you always do with your charts, they always look very different when you zoom out. The best recipe is just to invest and move on, invest and move on. Don’t try to outsmart the market. It’s hard to know what to overlay on these charts, the money supply, interest rate. I mean, there’s all kinds of things that are different about any given period of time that make it just too versatile, too dynamic to make a short-term prediction.
Charlie: Right. We can’t predict where this CAPE ratio is going to be essentially seven years from now. That’s the challenge. If it’s the same, then we’re just talking about what’s the earnings growth for the market. If it’s higher, okay, we’re going to have above average returns. If it’s lower, the odds seem to favor that, then we’ll have below average returns, but we don’t know where this is going to end up, which makes predicting the future possible.
John: I hope you found that conversation with Peter Mallouk and Charlie Bilello helpful. If you’d like more of their insights, be sure to check out their podcast, Signal or Noise, where they break down everything from market trends to financial myths and much more. If you like Rethink Your Money, I’m confident you will enjoy their podcast as well. You can find it at creativeplanning.com on YouTube or wherever you listen and subscribe to podcasts.
Well, it’s time for listener questions, and I believe we have one queued up for today. Britt, one of my producers, is here to help out. Hey, Britt, how’s it going? Who do we have today?
Britt Von Roden: Our question today, John, is from Melissa in Vermont. She wrote in that her income has changed this past year and wants to know if there is a place that she can easily access the 2024 tax brackets and Federal income tax rates to see how she is impacted due to this change.
John: Well, this is a timely question for sure, Melissa. Tax planning is so important, especially if you’ve had changes to your income. And first off, you can find those 2024 tax brackets on our website at creativeplanning.com/radio. We post them there for easy access. But beyond just knowing where you fall in the new tax brackets, I would be thinking about your broader tax strategy. For example, if your income’s jumped, are you contributing enough to your 401(k) or IRA to maximize your tax savings? Sometimes you fall just above a higher marginal bracket. And by deferring a little bit more income, it gets you below those higher rates and can make your effective rate a lot lower. Maybe it makes sense to do more charitable giving. Maybe if your income’s lower, it makes sense to do Roth conversions.
Do you harvest losses? Do you trigger capital gains that you’ve been looking to get out of because you’re in a lower bracket? Have you adjusted your withholdings? I mean, there are so many different factors to consider. But anytime your income changes, especially considering that the current tax rates are likely to sunset at the end of next year, and we have $35 trillion of national debt, where do we think taxes are headed?
We’re in a historically low tax rate environment, so this is a fantastic time to be considering this, not just for you, but anyone listening. When’s the last time your financial advisor reviewed your tax return? Do you have any sort of proactive tax strategy? Do they review your return? Do they talk with your CPA? If the answer is no, what might you be missing? We all have an incredible opportunity for lower tax rates that we simply might not see again the rest of our lives.
Appreciate that question. If you have similar ones, email them to [email protected].
I want to talk about something deeper. Let’s face it, it’s not about how much money you have that determines your path in life. I think sometimes we think of that, but that’s not the case. And as I’ve said many times before on the show, we are the wealthiest society in the history of planet Earth, and yet so many of us don’t feel wealthy at times in our life, maybe at all. Why is that? I think we should lean into that a bit.
Norman Vincent Peale said, “Empty pockets never held anyone back. Only empty heads and empty hearts can do that.” That quote resonates deeply with me because I’ve seen it in action time and time again. One client in particular stands out. He came into my office with a tattered briefcase, papers falling out everywhere, just not much in terms of financial resources. His situation was kind of a mess. He didn’t have a high paying job or a big retirement account. He hadn’t done a great job saving, but what he did have was heart and he had resourcefulness. He had a commitment in that moment. It’s time to turn the corner. It’s time to do things better. And despite his “empty pockets,” he wasn’t defeated. He showed up to our meetings with a determination to learn and to improve.
Over time, his story wasn’t just about building wealth financially, but about building wealth through knowledge, building wealth through resilience. And that man went on to create a plan, stick to it, and eventually put himself in a great financial spot. He was financially independent. He was never going to be on a list of the hundred wealthiest Americans, but that didn’t matter. What held him back at the start was never the empty briefcase. It was just that he needed the right mindset and the willingness to fill in the gaps where knowledge and guidance were missing, and I think there’s a lot you and I can learn from that.
Let me briefly share four ideas with you regarding traits that are more important than how full your pockets are. The first is that your mindset matters. A positive growth-oriented mindset helps you find opportunities even when it seems like everything’s working against you. I have met so many people, I’m sure you have as well, that are in challenging situations, supporting their family on modest incomes or tackling medical bills, and they still managed to make it work because they never let their empty pockets define them.
As a father to seven kids, trust me, I mean, sometimes I just have to laugh in the midst of chaos and keep moving forward. I mean, I’ve seen things on my ceiling, food and other items where I’m going, “You have to laugh or you’re going to cry.” I mean, how is that up there? But you focus on the bigger picture. Even when things get a bit messy in the moment, you stay positive. You keep pushing forward and you trust the process.
A great depiction of how your perspective and your mindset matters more than your circumstance relates to Thomas Edison. When his factory burned down, it lost him millions of dollars in today’s money. He didn’t panic. Instead, he grabbed his son famously and said, “Go get your mother and her friends. They’re never going to see a fire like this ever again.” Let we talk about mindset. He saw an opportunity to rebuild, and that’s exactly what he did.
This leads me to emotional resilience. So we’ve talked about mindset, but positive emotions can push us through tough times as well. When you’re emotionally engaged in your own success, you’re far more likely to push through setbacks and disappointments. Again, that client with the tattered briefcase, he had a reason to throw in the towel, but he had resilience and it kept him going, and he just kept putting one foot in front of the other.
Resourcefulness is more important than wealth. It outweighs it almost every time. So many people have started with very little money, but leveraged their creativity and their ingenuity to get ahead. It reminds me of when we first adopted our boys from Ethiopia. They were 11 and 9, and they were incredibly resourceful. Anytime something was broken in the garage, they’d remove a battery, they’d wire it together with something else, and they’d be pulling each other down the street on what I thought was a broken skateboard and ride-on toy that they had got somehow to work. And Jimmy rigged the whole thing together. Now, it often wasn’t safe. But my wife and I were amazed at what they would take out of our donation pile or out of our trash pile and make something out of it. That resourcefulness is often built by having empty pockets. This is the challenge with John McEnroe saying why his kids didn’t play tennis. He said they suffer from affluenza. They just grew up with money.
And finally, there’s the value of knowledge. Without constantly seeking to learn and improve, you limit yourself no matter what is in your pocket. And that’s why I say empty pockets never held anyone back. Only empty heads and empty hearts can do that. Focus on your mindset, your emotional resilience, your resourcefulness, and the value of continual knowledge.
If today’s show has you thinking about your own financial plan, you can head on over to creativeplanning.com/radio for more resources or to connect with one of our certified financial planners just like myself. 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 this 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.
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