This week on The Money Puzzle Podcast Eric Douglas & Aaron McAndrew discuss some of the questions they are seeing in client appointments. With the market the way it is we cannot stress enough the importance of a financial plan. Having a financial plan in place and not letting the investments dictate what your decisions are, letting the plan dictate what investments you have and what investments to use. That’s the purpose of planning, which is making sure you’re not going to run out of money and retirement, and then you can fund as many of the goals that you have as possible.

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Speaker 1 [00:00:02] Hey, welcome back to another edition of the Money Puzzle podcast. I’m Eric Douglas, joined here by my partner Erin McAndrew. Here, a family wealth planning partner. She’s got the swag on today if you’re watching a song on YouTube. Looks good. I need to get me some of that. I’ve been talking about that all summer and I still haven’t picked me up any of that. So but we appreciate you joining us here. And if you listened last week, you probably heard us talking about giving just kind of a little bit of a snapshot of what the Federal Reserve had done at its Jackson Hole, Wyoming conference. It was on August 26th, I believe, and the stock market in response took a little bit of a nosedive on that Friday heading into the weekend. So that was certainly a fun way to kick things off from the weekend. But what we wanted to talk about today was and it’s almost like a broken record this year, but it’s really hard to to to do these podcasts and talk about, you know, financial planning and not talk about inflation and what we do in response to the record inflation and the record stock market volatility that we’re really seeing this. We have to talk about it. And what we do as a result of it don’t I mean, don’t you think?

Speaker 2 [00:01:07] Yeah, no, absolutely. I mean, we’re getting you know, when when I’m having my client meetings are going through review meetings or whatnot, it’s just you can’t get around the topic of not the way you want to get around topic. You want to hit everything right ahead. But the topic always comes up is, okay, what do we do now? What do we what do we do in a rising interest rate environment? What what are we doing in terms of investments, building out our investment portfolio, our investment strategy, our financial plan? Do we change things? Do we, you know, turn on completely, turn it over, move it all to cash? When you start seeing the market going down, these are all things that come up. And I think, you know, it’s a good idea to kind of talk a little bit in generality in terms of what what what we’re doing and kind of conversations we’re having.

Speaker 1 [00:01:51] Well, the conversations that we’re having and what we’re doing in response and, you know, maybe towards the end of this, we’ll we’ll talk about some of the specific things that we’ve done in response to it this year. But although everyone is going to be a little bit unique, of course, everyone’s situation is is different. But but yeah, you know, you this is kind of your topic today, so I’ll let you maybe kick things off and and get us started. And what are some of the things that that you’re seeing, you know, ideas that.

Speaker 2 [00:02:16] Any time you see the market reacting the way it has this year. So I’m just going to go back to prior to 2020 when COVID was, you know, when COVID happened in the world kind of shutdown. Okay, 2019 double digit up year, right? 2020 was starting out that way. And then all of a sudden the market fell back significantly because the world shut down. We went into a recession, came out of a recession again that point in time. But it was like a flash crash almost. That was the fastest from top to bottom that has ever happened. And it was about six weeks, I believe, from top to bottom, if that.

Speaker 1 [00:02:56] But yeah, it was very, very fast.

Speaker 2 [00:02:57] So the thing is, is, is a lot of people just kind of were like, okay, I want to move that. You know, market went down from top to bottom, I think 36 something percent just in that short period of time. So it felt like every day it was Dow was thousand points down. S&P 500 was 120, 130 down or whatnot.

Speaker 1 [00:03:16] Not not not a fun time to be in our job, by the way. I said, I know.

Speaker 2 [00:03:20] But what do we do? Like what? What? So what do you do? Is it. Hey, just sit it and leave it. Is it just, you know, what kind of investments you have? And I think the answer to that always goes back to what we do, and that’s planning. So having a financial plan in place and not letting the investments dictate what your decisions are, letting the plan dictate what investments you have and what investments to use. So there’s multiple ways that we can position portfolios and not even just position the portfolio, but what type of investment vehicles can we use inside of these financial plans in order to allow someone to reach their goals? That’s the purpose of planning, is making sure you’re not going to run out of money and retirement, and then you can fund as many of the goals, if not all the goals that that you have as possible.

Speaker 1 [00:04:04] And typically our goal is to make those things happen in the safest way possible. Yeah. With the last we say with the least amount of risk instead of with the least amount of risk that we’re taking within your portfolio. Yep.

Speaker 2 [00:04:16] So, so again, a couple of the questions that come up when you see the market going down, you know, as quick, quickly as it has some of these big drops, I guess is what you’re saying. We had it we had we had the market lows, quote unquote lows on June 16th, I believe it was this year that they had that. And then we kind of had a late mid-summer to summer market rally. We’ll figure out that’s a bear market rally or.

Speaker 1 [00:04:43] At this point is looking like it is. But yes.

Speaker 2 [00:04:46] So, you know, we’ll figure that out. But the questions that come up during review meetings or just when you’re meeting with prospects, even, you know, new clients, onboarding new clients or whatnot, is, okay, what do we do? Should we move it all to cash or we move it all to. Safe, you know, investments or whatnot. And again, that goes back it’s not one person that specific, but you should have a plan. So your near-term your short term need for that money should already be in something that’s pretty safe. So you need access, you know, what are you going to use that money from 1 to 5 years or whatnot? Should already be in some type of investment vehicle that’s pretty safe. Probably not subject to a lot of the market volatility, both bond market and stock market. Because when we’re talking about markets here, I mean, it’s all the markets have been hit by what’s going on this year. So and then again the next from six years to ten years or six years to 12 years, whatever that next horizon is, there should be invested is somewhere differently. And then you’ve got your long term investment strategy that may or may not change because of the short term fluctuations that you see right now. So so a lot of that a lot of these questions that come up there is, okay, what should we do? And the one question I always have, I’m not a big proponent. I’m stick to the plan and long term investment, but let’s look and make sure that the investments that are in the plan are actually performing the way that they’re supposed to or the way we would expect them to perform in this in this type of environment and even in the positive environments. But but, you know, that’s the biggest thing is not just taking 100% of that portfolio, moving over to cash and sit on it. Because the the first question I come when I when somebody asked me that question, I say, well, when is that going to be the best time to get back in it?

Speaker 1 [00:06:29] What’s your signal to get.

Speaker 2 [00:06:30] Back in what you’re signaling to get back in? And you know, what most people signal to get back into the market is it’s when they start seeing that thing. So right now, for example, this is a perfect example of it, what just happened. And June the 16th, we were at our quote unquote lows.

Speaker 1 [00:06:47] S&P was down over 20% for the year. Dow Jones was down over 20%. NASDAQ was down over 32% or something. Right.

Speaker 2 [00:06:54] So people are not don’t have good sentiment in terms of what the market is doing. They’re not happy with it. They moved they moved to cash or moved to cash before then came. What has happened now since June 16th is the S&P has had came back about 10%, 12%, something like that made up about got up to where it was, down about 10%. Now it’s down more than that now, but it came back a little bit. The Nasdaq cut his losses in half basically today. You know, the Dow came back quite a bit. So when they start seeing that it’s not one day of coming back or two days of come back, it’s an entire month of green where you see the market going up 7%, 8% in one month. Now it’s time to get back in.

Speaker 1 [00:07:39] And unless you’re paying attention to it on a daily basis, which most people don’t, let’s be real. Unless you’re paying attention to it on a daily basis, you’re not even going to know that it’s happening, especially if you’re waiting for like a quarterly statement or something to come. Oh, it looks like we’re getting some recovery. You have to be pretty diligent and paying attention to this stuff. You’re trying to be very tactical, I should say. Exactly as far as when you’re going to try to move in and out.

Speaker 2 [00:08:01] Yeah. And unfortunately, they say now, well, now, now it’s time to get back in. Now it’s time to get back in. Well, what are we dealing with now? Again, inject some more volatility in the market and it’s only going to take a few of the days like Friday or if even a few for people to say, give me back out. And now you’ve officially lost even more than what you’ve in what you were down before. So again, this is there’s no time better than right now to be thinking, okay, do I have a plan? And having a plan is that first step to take to make sure that you’re in place because there’s going to be years like this. There’s been years like this in the past. There’s going to be years like this in the future where you’re going to have down years and you’re going to be subject to market volatility. There’s also going to be years like last year where you’re up double digits, in the last few years, where you’re up double digits and there’s going to be years in between.

Speaker 1 [00:08:50] So I’d say something I really appreciate more and I’ve always heard it in this business, but I’ve really appreciated it more over the last couple of years. So much of successful investing is psychological or behavioral. Yeah, if you will. It’s it’s weird because it’s so counterintuitive to be a successful investor. You need to be counterintuitive. When everybody else is scared to invest, that’s usually the best time. And when everybody else is really joyful and happy with the market. You know what? That’s usually the best time to pull out of the market. Yeah, you know, there’s there’s a thing called the Fear Greed Index. When when greed gets too high, that’s the best time to get out because usually it’s a pretense to a market correction or when everyone is most fearful. And actually that Fear Greed Index was most fearful in June when the market was down. We we hit that bear market territory. We are down 20% pretty much in all the major indices. Oh, that was the best time to get in. Everyone seems to everyone inherently knows what’s the name of the game. Buy low, sell high. Right. That that’s the name of the game. Everyone knows it. It’s a lot harder to pull the trigger and actually act on that. So when we think about it from a behavioral perspective, what we want to try to do is remove the behavior component, right? We want to create habits. And that’s where just monthly habits, monthly, weekly and whatever it is, however often it needs to be, whatever you can do to automate your savings, automate your investments so you don’t think about it. Because when you think about it, that’s when your mind gets in trust. When you get in trouble is when you start thinking about things too much, right? It needs to be in sync. You just need to do it whether you like it or not. And if you’re buying the dips in regularity every single month, every single year over time, that’s how you get the power of compounding interest. Right. And you’re going to force yourself to buy the lows. And over time, you’re going to buy more lows than than highs. And you’re buying more shares at depleted prices. And we know how this works, right? No one here listening to anything that I’m saying is this isn’t news to anybody. Everyone knows this. But behaviorally, it’s really hard to pull the trigger and actually do these things when you’re scared.

Speaker 2 [00:11:04] And that’s what makes retirement plan so great. So when I’m working with retirement plans, this is just as recent as two weeks ago, last week and two weeks ago I was doing several account reviews. And you can’t I can’t believe or you probably wouldn’t believe the number of people that I meet with that will say, you know, now’s not a good time to put more money into the market. Now’s not a good time to be putting money into my investments and you’ll break it down. And I’ve been using this analogy that has really hit home with a lot of people. They literally will look at me and they’ll say, Now that makes sense to me. Is now a good time to go out and fill your gas tank up, you know, when it’s $4 a gallon? Do you feel good about that? No, people feel good about it. If it got back down to $2 or under $2 or whatever, nobody was thinking about how much gas cost back when it was that much. So I always use analogy. I’ll say, okay, everybody wants to put into the market when it’s high, when? When it’s green, green, green, green, green. Everybody wants to put in to your point, you’re buying at the highest prices at that point. That’s no different than me going out and saying, I know, I know everybody has to fill up their gas tank. I’m not trying to say only do that once or twice a year, but I’m saying if you’re driving down the street and you saw a gas station, you had a half a tank of gas and you saw a gas station that had $2 a gallon out there, would you pull in and top yours off at $2 a gallon or would you keep driving by and say, you know what, I still got a half a tank left. I’ll I’ll just fill it back up for $4 a gallon. Okay. No, most people are going to pull in and they’re going to top it off at the cheaper gas. Okay. Why? Because it’s low. It’s low. It’s no different in the market, but they don’t do it because of the behavior theory that you just talked about.

Speaker 1 [00:12:49] You get a lot more gas for your money at $2 a gallon than it four, that’s for sure. I mean, I don’t drive anything fancy. I drive a Toyota Camry. But I remember the wakeup call for me when gas was right at about $5 a gallon and I’ll drop in I think it was $67 to fill up my little four door sedan. And I was like, this is just ridiculous. And I didn’t I mean, I talked to plenty of friends that, you know, SUVs and pickups that were feeling a lot more pain than I was in my little Camry. Yeah, but but still, it’s to your point. Yeah. I mean, you know, nobody thinks about, you know, buying. It’s a lot easier to buy when everything else is on sale. Most people, you go into a store, where do you go first? The Clarion track in the back of the store.

Speaker 2 [00:13:29] Yep. And the other thing that I’ve learned is because I ask that question, I say, Well, why is that? Why do you think that is? And they say, Well, because I just see the account balance continue to go down, but they don’t look at it in terms of the shares that they’re buying, like you mentioned earlier, where you said, hey, you put the money in, you’re getting shares, you’re going to get more shares of that investment for for the same amount of money you’re putting in every single week. But when the market’s down or when that investment’s down, you’re actually getting more shares of that. So when it comes back up, you have more shares that will go back up. Helps with that compounding interest and that growth.

Speaker 1 [00:14:02] It’s also worth noting the biggest market rallies occur usually in bear markets or in a recovering from a bear market. So when the market is at its lowest, that’s usually when you see the biggest rallies in the market. That’s when whatever tipping point that is hit, whenever low point is hit, that’s when you see the biggest gains, you know, occur. So if you’re waiting on the sidelines, waiting for the perfect time to to come back in and play the game, you’re going to you’re going to miss out on the best part, which is those huge market rallies.

Speaker 2 [00:14:36] And I saw a statistic when I was doing all these presentations or whatnot, one statistic doing when I was looking at some research here, somebody who would be out the ten best days of the market, and we could have several of them here compared to where they were if they just stayed in at that time. It was a huge, significant difference over over a period of time. But trying to. I’m it. Yeah. You know, timing the market to me is just like somebody that tells you when they tell you that, oh, my gosh, I made this much money or I made this much on this investment or whatnot. They also haven’t told you the amount of times that that they’ve lost that.

Speaker 1 [00:15:14] Oh yeah. Whatnot, yeah. So let’s shift gears here a little bit. So we’ve we’ve kind of been a little more philosophical, right? You know, what to do. And, you know, don’t panic. Basically, everything we’ve just talked about is don’t panic. Right. And you shouldn’t. Then that’s everything we talk about ultimately is going to come back down to that and stick with your plan. And, you know, if our whatever instructions that we laid out. With that being said, from a tactical standpoint, what are some of the things realistically that we are doing and that you can do in your portfolios as well to maybe hedge against if you are feeling a little uncomfortable with with what’s happening in the market, you want to make yourself feel a little bit better. What are some things that you can be doing you can de-risk?

Speaker 2 [00:15:54] I mean, there’s the different things you can do to de-risk if you’re if you’re now is really a good point in time to to self-assess. How much risk should I be taking how much risk you comfortable taking? Because 20, 19, 20, 20 years where you’ve got even 20, 21, you know years that it’s market’s up double digit. Everybody wants to be super aggressive. I want to be as aggressive as I possibly can until they start seeing their portfolios down 20, 22, 23%. That’s a really good idea. If you’re getting uncomfortable with how that’s feeling, you may be biting off too much risk and it could be a time to de-risk your portfolio. Not saying move it all to cash. I’m just saying de-risk the portfolio to take out some of that exposure to that equity exposure that may be causing some of that. You know, the bond market is also down, you know, double digits at this point in time still, I believe. Oh, yeah. So you know that again, we’re in a rising interest rate environment at that point when interest rates rise, bond values fall. You know, obviously when interest rates go down, bond values go up. So they work inversely, but that’s fact in some of the bond market as well. So just looking at the total portfolio and making sure that it’s in line with yourself, risk tolerance risk wise and you’re comfortable with that. Nobody’s I’m not saying anybody’s got to be comfortable with losing 20%. And like, nobody’s nobody’s comfortable being down 20%. But if you’re down 20 plus percent, your portfolio is probably more aggressive than what. And if you know it’s an A portfolio.

Speaker 1 [00:17:31] Yeah. So yeah, absolutely. And so some things that we’ve done on our end when we’re managing clients portfolios is we moved, we saw very, very early this year we realized what was happening with the Federal Reserve policy and they were going to be raising rates and they announced that they’re going to be raising rates through the end of summer at least, and now we know it’s going to bleed into the fall. And so we knew when when rates increased, bond values decrease, and they’ve decreased significantly this year. So we’ve been sitting on more cash this year than we typically have now. Have we moved 100% to cash? Absolutely not, because that’s you know, that’s over reactionary. Right. And we never want to be over reactionary or overly emotional. But from a purely logical standpoint, we made a rational decision. Okay, we see what’s happening in the fixed income market. We have the fixed income side of our portfolios are designed to be the hedge against equity risk. So we decided that the safest place for a portion of the fixed income portfolios that we manage, we needed a higher allocation in cash. So we’ve been sitting in a little bit more cash. I’m not going to give specific numbers for the world to hear or anything, but we’ve been sitting in higher amounts of cash and pretty much the bulk of our clients portfolios for a good chunk of this year, which is stemmed off some of the loss in the markets. We made some tactical shifts within our equity portfolios as well. So we’ve changed, you know, some allocations away from growth oriented or, you know, tech heavy types of investments. We talk about the Dow Jones being down, you know, at a low point 20%. But the Nasdaq, which is very tech heavy, very innovation oriented, well, those are the companies are going to be hit quite a bit worse in an increasing rate environment, because those are the companies that are using a little bit more debt to fund their growth. More debt means you’re, you know, having to pay interest on your debt when interest rates go up. Hey, guess what happens to your balance sheet? You’re having to spend more money on your profit loss statements every month. So functionally, those are a few things that we did. We shifted our focus and the types of equities that we invested in away from growth and away from innovation types of funds into more value oriented, traditional types of equities. So those are just a couple of things that we did. What are some of the things that you’ve done with some of your clients this year? Well, some.

Speaker 2 [00:19:45] Some of it based on, again, what the plan calls for. There’s other types of investments where you can add some layers of security and meaning that, hey, maybe we still want to try to go after growth, but I want to have some some sort of downside protection on this. For a three year period of time or a five year period of time or whatever, you carve off a portion of that portfolio and you’re putting it into there and it may have a 20% downside protection. Meaning if the market goes down 20%, then then it still gives them a layer of of protection in there, but they still have opportunities for growth. So there’s other types of investments. For, again, short term, this wouldn’t be something that that would be a long term play on it. So there’s other types where you can get certain rates of return. You’ve got to back in to figure out, okay, what rate of return do I need? Do I need to get for a three year period of time or whatnot? Because I know I’m going to be able to need to use this money in three years. So it’s not being subjected to any of the bond market or the stock market losses. So these are some these are some things that we’ve been doing inside of inside of client portfolios.

Speaker 1 [00:20:47] Add tax loss harvesting as well. That’s another big thing that we’ve been taking advantage of this year. You always want to find the positives. And in a negative year like this and one of the things that we are able to do when we’ve had the clients in the market is to take advantage of those losses and do what’s called tax loss harvesting, which is basically realizing the loss, if you will, so selling some of these positions that have a negative return. So we’re able to claim the loss for our clients. So when they go to do taxes in 2023, they have some losses that they’re able to write off on their taxes and maybe even carry some forward over the next few years. So that’s a big, big thing that we’ve been doing this year when when we’re able to it allows us to typically maybe move out of some positions that we were stuck in to some degree, that maybe we were, you know, maybe some especially some newer clients. I should probably be more specific when I say that when we have newer clients that come to us with maybe positions that they’ve been holding on to for a while, this is a an opportunity for us to finally maybe reevaluate those positions, some things that maybe we are holding on to because we didn’t want to have some type of a tax burden. Well, now, if we don’t have that tax liability weighing on us, deciding to move out of a position, we can go ahead and make some changes there. It’s also a fantastic time to be doing Roth conversions. So you were going to get right. So was your until your thunder. Yeah, go ahead. So so this is actually a really, really good time to be doing Roth conversions right now. Why is that? Well, Roth conversions are usually a pretty solid strategy, but especially in a in a deflated or a recessionary environment where markets are down or ultimately, what are you trying to do whenever you’re converting something from a traditional IRA to a Roth IRA while you’re going to you know, let’s say you have $100,000 in an IRA and you want to convert the whole thing to a Roth. Well, you have to realize the $100,000 in gains and pay taxes on the $100,000 in gains, if that $100,000 is now down to, let’s say, 75, well, now you’re only converting 75 instead of 100. You’re only paying taxes on 75 instead of 100. So you have less of a tax liability on the amount that you’re converting. So maybe you’re able to convert more shares at a lower price and you’re getting more money into a tax free vehicle. So you’re able to mitigate your tax savings. So you’re able to mitigate your tax liability, your long term tax liability, I should say, to a much greater degree.

Speaker 2 [00:23:13] And that goes back to that same shares that we talked about earlier. So the value of the account was down.

Speaker 1 [00:23:20] The number the number of shares in general.

Speaker 2 [00:23:22] Shares didn’t change. So you’re taking the same that you’re taking the same number of shares, converting it to the B, the Roth, paying less taxes than what you would have paid because the value of it is down. And that same number of shares has the opportunity to grow back the way that it does when the markets are the investments come back. So that’s another great example of the difference in looking at the investment accounts as the number of shares that you own, not just what the value of it is. Yeah.

Speaker 1 [00:23:50] So, so functionally, do you have anything else, any other tactical strategies that you’ve implemented or talked to your clients about that you want to make sure that we discuss.

Speaker 2 [00:23:57] The only other one that I have used and it’s not oh, it doesn’t always make the most sense to use it, but in some situations it does is when you get it, when you have a client that comes either in to some money or they are retiring and they’ve got a lump sum of money, they’re trying to roll over or transfer over to an IRA. Instead of not being able to predict this market right now and the volatility of it being up and down and not thinking it’s going to continue to go down or whatnot. Again, not trying to time and is using that same dollar cost average strategy that we’re talking about with retirement plans, but with that lump sum of money and putting it in weekly or monthly or whatnot as that goes, because they always had the ability to pull the trigger and say, hey, let’s put it, let’s dump it all in at this point. But starting out and putting it into investment strategy over time to try to take advantage of if the markets continue to go down, buying at lower cost. So again, that’s something that I’ve been talking about with two clients with and several clients like that idea. And if they, you know, they’re on board with that idea, will implement that, too.

Speaker 1 [00:24:56] Yeah, for sure. Absolutely. So. With that being said, do you have questions around your portfolio? Are you making any changes? Do you have questions about what changes maybe you should be making right now? Do you have a plan put together? Is that something you could help with? Please give us a call. 502 205 210 You can visit our website, WP Partners Dotcom. You can schedule a meeting directly from the home page of our website if that’s easiest for you. Even schedule a just a free 15 minute consultation and we’ll be more than happy to start chatting with you and making sure any of the questions and concerns you have about your personal financial situation are properly addressed. We’d love to have you come in. If you have any more questions, please come in to see us as well. We’d love to address those. And if anything that we had to say today resonates with you or resonates with any friends or family that you think might benefit to hear it, we welcome you to please share our content. We would greatly appreciate that. With that being said, thanks for joining us and we’ll see you next time. The information given herein is taken from sources at IFP Advisors LLC, doing businesses, independent financial partners, IFP, IFP Securities, doing business. This IFP and its advisors believe to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and or legal advisor before implementing any tax and or legal related strategies mentioned in this publication, as IFP does not provide tax and or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. This report may not be reproduced, distributed or published by any person for any purpose without IFP express prior written consent. Securities offered through IFP Securities LLC Doing Business as independent financial partners. IFP Member of FINRA and SIPC. Investment advice offered through IFP advisors doing business as IFP a registered investment advisor. IFP and Family Wealth Planning Partners are not affiliated. The information given herein is taken from sources that IFP Advisors LLC. Doing business as IFP, IFP Securities LLC, doing business as IFP and its advisor is believed to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and or legal advisor before implementing any tax and or legal related strategies mentioned in this publication, as IFP does not provide tax and or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors.