Breaking Down What Wealthy Americans Are Doing in Uncertain Times, Ep. #195

This week, we want to take a step back and focus on planning in times of economic uncertainty. We found a great article from CNBC titled "The Three Money Moves Wealthy Americans are Most Likely to Make in Times of Economic Uncertainty." Let's dive into the key points and expand on what successful people are doing during uncertain times.

According to Northwest Mutual, 84% of the wealthiest Americans have a long-term financial plan that accounts for economic ups and downs, compared to only 52% of the general population. This statistic surprises us because it's rare for someone to walk in with a legitimate financial plan. Planning for the unknown is crucial to alleviate anxiety and ensure a smooth transition into retirement.

When it comes to retirement, people often wonder how they will pay their bills and maintain their lifestyle. Financial planning helps remove this anxiety by providing a roadmap for the future. The more prepared you are, the more confident you'll be in your ability to navigate different scenarios. It's essential to test how the future could play out and understand how you will respond in various situations.

A financial plan is not just about investments; it's about setting goals, developing strategies, and using the right tools. Many people focus solely on their investments without considering the bigger picture. It's crucial to understand why you're saving and what your retirement goals are. Picking the right retirement date and ensuring you have enough savings are essential factors to consider.

Asset allocation is another critical aspect of planning for ups and downs. The stock market doesn't go straight up; there are ups and downs along the way. Taking a long-term perspective and having a diversified portfolio can help weather market volatility. It's important to remember that investing is a marathon, not a sprint.

Seven out of ten wealthy Americans are working with an advisor. While not all advisors are created equal, one of the most significant benefits of working with an advisor is avoiding behavioral finance errors. Emotional investing can lead to poor decision-making, especially during market turbulence. An advisor provides a detached perspective and helps clients make rational choices based on logic and historical data.

An advisor is like a retirement CFO, helping clients make informed financial decisions. They can assist with retirement timing, spending strategies, and even major financial decisions like home renovations. By having a coordinated plan that takes into account investments, taxes, and estate planning, clients can make better financial choices and optimize their long-term outcomes.

It's not enough to have a plan; you must also follow through and execute it. The best time to go through the planning process is when the waters are calm. Crisis planning is not ideal, as it can lead to rushed decisions and poor outcomes. By having a well-mapped-out plan in advance, you can have confidence in its success.

Financial plans should be regularly reviewed and updated to reflect changing circumstances. Factors like inflation, taxes, and health can impact your financial situation. By refreshing your plan annually, you can ensure that it remains aligned with your goals and adjust as needed. Building conservatism into the plan, using future projected rates of return, and considering tax efficiency are all crucial elements of staying committed to the plan.

Remember, financial planning is not a one-time event; it's an ongoing process. Regularly reviewing and updating your plan ensures that it remains aligned with your goals and helps you make informed decisions. By following these three money moves, you can position yourself for financial security and peace of mind in times of economic uncertainty.

A day in the life of a Financial Advisor:
https://www.youtube.com/watch?v=2tfB-SSYL1A

Transcript

0:00

Hello and welcome to this week's episode of The Capitalist Investor. As always, you have me and Diamond hands deep. We got Tony the Tiger and Back by popular demand, replacing Luke, who is on assignment this week. Dave about what's up, Dave? It's great to be here. Guys, this is temporary. I don't want to take Luke's spot permanently. Then it sounds like if a spot opened up, you would not be the first to apply with that account. I won't be here, but I will find you. All right. So, yeah. So, you know, I think we took a look at this week's show. You know, there's a kind of a, you know, just a lot of, you know, kind of uncertainty. You know, whether it's, you know, geopolitical or the, you know, kind of here locally with with the economy, all that good stuff. So we thought we kind of take a step back, do a little bit more of a planning focus show because they've actually found a really good article from CNBC titled The Three Money Moves Wealthy Americans are most Likely to Make in Times of Economic Uncertainty. So, you know, there are some good bullet points in here, which we'll hit on and then kind of expand, you know, just to kind of touch on, you know, things that that successful people are doing, you know, in times of uncertainty. You know, there's there's no standard answer, if you will. So I think we can kind of talk through a lot of, you know, the different issues that people are going through right now. So with that, you know, I will say I actually taught my, you know, a little retirement class last night. So a lot of this stuff is fresh in my mind. But I think the first point the article made was what wealthy people are doing in times of uncertainty. Number one is planning for ups and downs. So I'll just kind of read the stat here and let you guys go. But I found this one particularly interesting. 84% of the wealthiest Americans said they have and they have a long term financial plan that accounts for economic ups and downs, according to Northwest Mutual. Only 52% of the general population said the same. So 84% of of the wealthiest Americans said they have a long term financial plan that accounts for UPS and downs. And those numbers sound really high to me. Like when we talk to, you know, prospective clients, there is very rare when someone walks in with a legit financial plan. Cash flow based. So I'm surprised to hear the numbers are actually that high. Yeah. Yeah. I mean, the some of the more sophisticated investments or planning strategies I've seen from some like a do it yourself or things like that is a spreadsheet of collection of the assets and how they go, maybe where they're at, how much is in there. Maybe they even did a budget. You know, that's probably the 10% of the population do budgets. But all those all those things I just mentioned are so important to get the inventory so we can start building a plan. Absolutely. I think, you know, from my takeaway from this is, you know, people people are afraid of the unknown, Right? Literally the definition of anxiety. So as you transition into retirement, people are wondering, like, how is this going to work? How am I going to pay my bills and retirement? Right. Mm hmm. And with financial planning, along with pretty much everything else in life, the connection is like the more you're prepared for that event helps you remove that anxiety. So what are you doing to test how the future could play out so you have more confidence in how you personally will, you know, respond in different scenarios? Well, I mean, the one thing that I see and and Derek, you know, like we do the educational classes and stuff, and I always say that when somebody walks in, there's three things in retirement. There are goals, strategies and tools. And a financial tool would be like their investments, borrow on case mutual funds, ETFs, stocks, you know, NVIDIA stock, whatever that is, that's a tool. But what's the strategy? What's the allocation? Why don't why are we saving for all this stuff to eventually retire? Am I retired? What what? Why is it there? And a lot of people worry about their their tools and and they say they might be planning for, you know, the number one planning for the ups and downs, you know, having a plan as part of the it's the bring the thing that brings everything together. Because when I start seeing tools, I start thinking emotional investing. I start thinking behavioral finance errors. People tend to make the wrong moves with their investments at the wrong time. Same thing with maybe even picking a retirement date. Hey, I'm retiring at 62. Why? I've had enough. I mean, I get that definitely a reason to retire. Is that the right time for you? You know, so is. Could you retire yesterday? Do you need to wait three more years to make sure that you're you're still saving enough? You're getting you maybe debt paid down before you enter retirement, whatever it might look like. So those are some of the things that come to my mind. You know, are they really planning for the ups and downs and what are the ups and downs that they should be aware of or or the blind spots? Yeah, You know, I think planning for the ups and downs, it's that's why we have asset allocation, right? Because not, not all these asset classes are always going to go up. You know, in that class last night I remember throwing up the returns of S&P 500 between 2010 and 2020. Pretty much the biggest, you know, boom we've ever seen. And it doesn't go straight up. Right. There's lots of ups and downs in there. It's up 100%, but not in a straight line, you know, Not a straight line. And lots of anxiety in there. That's why, you know, you have to take kind of a long term perspective when you're looking at your personal finances. And that's why the the financial plan, which we'll talk about, is really that that's really the step you take to prepare. Right. The more prepared you are, you know, the better your you'll perform, you know, the like the Cleveland Browns obviously not prepared ever. The last one, if I don't get to my canceled section. Yeah, yeah, yeah, yeah. So on that note, you know, when I hear ups and downs, the the actual tests that we're like, we run through the plan, right? To simulate that uncertainty in the future. We're running bear market tests. Like what happens if the market drops in the year that you retire, Right. Sequence of returns. A really tough situation to deal with. We're testing for increased volatility. So, you know what? If we don't? What if our portfolios don't get the historical rates of return? Some people assume that we're going to get forever. And I remember what I mean, because the bear market is a very aggressive test, because I say I always kind of say it this way is that the day you retire, all your assets go down 20%. And that's significant because you're done working. That means you're done earning, you're done saving, and now you're spending and spending in a down market is typically what wrecks a retirement plan investment portfolio because we're locking in losses. Yep. So absolutely. And then the you know, the other tests that we typically run are a long term care scenario, Right. So how does your how does your financial plan respond to a health issue in the future? Mm hmm. The longer we live, the more likely we're going to have that type of an event. And we want to know ahead of time, like other. Are there steps that need to be made to protect us from that situation? So those are some examples. I think that we're running through the scenarios, and I know our clients have told us that simulating that and then seeing, you know, how the plan responds and taking the actions necessary to protect themselves have helped them sleep better at night. And that's the the end goal at the end of the day. Yeah, absolutely. All right. Well, I see Tony staring down number two. So let's let's dive into that one. So, number two, you know, this is an article. We're not just tooting our own horn here, but number two, I think is important, working with an advisor. So, you know, inside of the article basically says seven out of ten wealthy Americans are working with an advisor. You know, lots of reasons to do that. All advisors are certainly not not created equal. But what Tony mentioned already, I think is probably one of the most important things about working with an advisor is not being subject to kind of the behavioral finance errors, which is kind of emotional investing, right? Behavioral finance is, you know, kind of a fascinating subject. You know, we could talk about it for an hour, but basically it's you know, it's the idea is, you know, when people are you know, the markets are going up, everyone's excited. You want to get in on that. You know, you're going to buy on the way up. Right. And then on the opposite side, when the market's selling off, you know, everything's in red and things aren't looking so good emotionally. You know, we want to sell off at that point as well, too. So basically, not giving in to those behavioral finance issues is one of the biggest parts of working with an advisor. Right. The emotional investing part. So one of our research firms had a running tally. They haven't done it in almost a year. I'm curious on what it looks like, but basically from 1995 through September of 2022. And so what is that, almost 30 years, 20 between 25 and 30 years, the market the market average return is 7.8%. And that means you're fully invested every single day, good and bad, in the S&P 500, good rate of return. But there's in those 30 years, there's been, I think, three economic catastrophes or market catastrophes. Right. The tech bubble, the Great Recession, and then COVID. Yeah. So there's three 100 year floods in 30 years. That's, you know, pretty significant. So but what I'm getting at, 7.8% in that 30 years and you're not you had to be there through those sleepless nights in, you know, the days that you can sleep 24 I'm right and then just lay in bed If you missed five of the best days in that 30 years, your average return went from 7.8 to like 6%. It was almost 2% difference. That's five days and 27 years. Yes, that is that is crazy. And dozens I mean, on the surface, that doesn't sound like terrible on the surface. But when you when that's an average annualized average annualized return, look at that over the course of 25 years. And if you calculated the numbers, I would hazard that's up 30 to 40%. I've done the math on that. It's nearly an 80 to 100% change because we use that one slide. I drive that home. The difference between, you know, eight and 10% over 30 years is 100% more money. The 2% rate of the difference between 2% over 30 years, it's 100% compounded out is 100% more money that I that's why my if my math is off holiday that's still a big difference you rest your case I that's so but those five best days of the market typically came within probably 5 to 7 business days of the worst day and that's probably when the people pulled the trigger and got out of the market. So that is just another reason why working with an advisor, they're a sounding board, they're your retirement CFO, is what I would call them, somebody to help you walk through financial decisions that can be irreversible, life changing. And it's not only on the investments. I can't I can't emphasize that enough when to retire, how much to spend what? Hey, if I spend 100 grand renovation on my house, how does that impact my financial plan for the next 20 years? Yeah, I'm talking anything that you can possibly think about spending your money, you know, pre or post-retirement, how does it affect you long term? That is what an advisor should do if they are building a good comprehensive financial plan. And Tony, you know, I'll pile on with this behavioral coaching stuff. It's you know, it comes down to the fact that your advisor has a slightly detached separation from your money. So we're able to provide a more sober and clear thinking thought pattern, know based on logic and, you know, historical records of why you maybe don't want to take the move that your emotions are screaming that you want to. Yeah. Because when in there's emotional like emotional decisions all over the place and that's why having what I refer to as a coordinated plan that takes into account investments, taxes, estate planning and building that financial plan to make sure all three of those other things are coordinated. Just getting everything in there so we can lay it all out and see what's going on. I think the other you other add on that people don't really think about is in our seed. We've seen a lot, right? We've seen a lot of different family situations, a lot of different scenarios. And maybe you're not thinking about one of the pitfalls that are up ahead, but we can leverage our experience and our knowledge to help you maybe test for a scenario you haven't even been thinking about, whether it's runaway inflation or, you know, that long term care event. But there are a lot of common pitfalls that may be a blindspot for you personally. Yep, for sure. And then what's the third? What's the third thing, Derek staying committed to a financial plan. So first you have to have the plan and then you got to run the playbook. So yeah, I think that's the first thing I'll mention here real quick. Yeah, I don't know the exact numbers anymore, but there's pretty much eight out of ten financial advisory firms really aren't putting any effort or little effort into the financial planning process. They're kind of, you know, hyper focused on investments only so that obviously, since we've been talking about it the whole time, about financial planning is very important to have, you know, all these things that we're talking about are making impacts on people's bottom lines, you know, before we even talk about the investments. And then second thing real quick and then let you guys go income planning, if you're pulling money out of your account to pay for your retirement lifestyle from, you know, like equity stocks, you know, on the way down, you know, you're definitely doing it wrong. We want to make sure we have a coordinated income plan. So we know where that income is coming from. You know, for example, you know, we usually have around like three years or so worth of, you know, bonds, cash equivalents, things like that. If we're pulling money out of, you know, the the investment accounts, it has a specific, you know, bucket where the money's going to come out of first. So even if there are tough times, you know, it doesn't impact your situation as much. Yeah. You know, I would say like the active management side of things, you know, and making sure it's a coordinated plan again. But, you know, I think it's one thing to have a financial plan it but I also but some some advisors might just have planning software and say hey I built your financial plan but I mean so does Fidelity's retirement calculator that you can do in 3 minutes right Yeah our plans take 6 to 8 hours. Do you do you buy just knowing the time input into those two softwares, which one would you rather have what you think is more accurate. Right. It's the one that's spending somebody is somebody who happens to be like a CFP, like our planners, right? They're spending six, 8 hours. They they they know a lot of they know exactly what's going on. And they're entering little details on everything that's going on in and what your goals are in your retirement plan. So when we tossed the word financial plan around, there's a lot of different versions of that right? In our world, it's a cash flow based financial plan that literally means like the software's modeling on a year by year basis, the ins and outs of your financial life and seeing how it responds during different economic conditions and different rates of return. The other you know, the other unfortunately, common method of planning is just to crunch the numbers and use a straight line rate of return. So maybe, you know, they even use a historical average number, so somewhere around 8%. But the the problem is that they're using a straight line, constant number. And anyone who's invested for longer than six months knows that's not how the stock market works or the markets work. They're going to be periods of up and down. Tony, you hit on it earlier with the volatility and that, you know, 25 year period where you got a nice average annual return. But there were certainly peaks and valleys that valleys throughout that process. Yeah. And you know, and Derek, you mentioned like income planning, like that's a big deal because not only do you have to generate the income in retirement, you know, whether that's three grand, five grand, ten grand a month to live your lifestyle. Okay, maybe you have half of your money in a non-qualified brokerage account. Maybe you have half the other half in an IRA, maybe you have a Roth IRA. What is the coordinated effort to take the money out tax efficiently? So I've always noticed that the planning software tends even some of the best planning software tends to spend your money tax efficiently because they're not a human being doing the tax return and figuring out the lowest rate of return. They just they might just get rid of your least tax efficient account first, so they'll spend your cash and then your traditional IRA and leave your Roth for the end. And you know that if you can dip from each one of those buckets through retirement, now we're talking about tax efficiency and depleting each asset in a coordinated basis to keep your taxes low every single year. Because if you spend all your cash and then you hit the traditional IRA, your taxes go up immensely when you're out of the cash, but you can have a coordinated effort to dip from all of these different buckets and keep your effective tax down. Yeah, it makes sense. And going back to that point of just like staying committed to the plan, what my take away take away from that is what we've seen in our offices, the the clients who understand the why it is their situation is set up the way that it is, are more, more likely to stick with the plan because they see and they have the confidence that the results actually work when it's more of a black box and you just give guidance on, hey, you know, finger up in the air, hey, this should work. Like there's less, I think commitment to the the concepts behind the plan of what's driving the results. Yep. One another thing that you know will do to stay committed to the financial plan is that we know things change and maybe they change weekly, monthly, annually, every decade. We like to refresh our client's plans every month or I'm sorry, every year. Every month. Well, better hire some more planners, right. Every year so that we can just reevaluate all the recommendations that were recommended the year before because things change. It could be inflation, taxes, health. You know our moving book. Yeah, moving up, buying a second house, upgrading I'm downgrading you know I want you know I want to go on more vacations, whatever that might look. They're sound like I'm planning on taking the money from my IRA account. But one wants a good laugh. Go go to YouTube and look up Day in the life of a financial advisor. Yeah. You know, I think last thing I'll say, I'm being committed to the plan. I think that's going through this process, getting a plan done, you know, having a good asset allocation, getting education and understanding why, you know, everything is where it is that that really helps with the peace of mind. That's why, you know, I don't want to say like I don't get any phone calls, you know, when when markets are, you know, turbulent, because I do, but certainly not, you know, all of my clients calling in all at once in a panic. You know, I get I get basically no panic phone calls because we've gone through this process and and they're confident in in the plan and in the process. That's a great point, Derek. And it brings me to my, you know, key takeaway that the best time to go through this exercise is when the waters are calm. You don't want to be crisis planning as the bullets are flying. You want to have a well mapped out plan in advance because like Derek said, they're not calling because we've already simulated that they know how things are going to respond and they have confidence in the success of their plan. Yep. And then we build a lot of conservatism into the plan. You know, we're not using historical rates of return. We're using what our CFA feel would be future projected rates of return. So there are a lot lower and obviously we want to overshoot, but if they don't and they come in lower than they have been over the last decade, that's part of the conservatism we built into the financial plans because we're listening to our investment team and the planning team is a coordinated effort with, you know, the investment team and the the the planning team are on the same page. Absolutely. All right. So as we wrap this up, you know, who doesn't like a you know, we got to keep the tradition going canceled. Mm. I think the Brown season is canceled, unfortunately. You know, obviously everyone understands that. Nick Chubb, you know, tore up his knee. The same need did in college. You know, somewhat speculate that could be career ending for him to come back from something like that. And unfortunate because he was you know, they I believe it you know, the America's running back good work ethic, kept his head down, didn't make a theme then. It wasn't showboating. Scores, touchdowns, spike the ball and get back to the sideline to to keep the team, get the next team on the field right than the next, like kicking team and special teams and all that. Like class act of the day. Yeah, but man, Deshaun Watson. Good God, man is Oh, he's the forward pass. He's in, he's in, he's in. He can't throw the ball. He's How many times did he throw it out of bounds by 20 yards when he needed to, when we needed a completion and he wasn't under pressure. I'm like holy cow. And so he's not accurate. He's obviously not very smart because how many personal fouls and turnovers to facemask by a quarterback? Right. That's impressive. Impressive impressive shot the ref he could be suspended they say so off we'll find out And that at the end of the day can we say that hey he got paid and good for him That's so in our like our owner that this like that's.