Zoom Out or Freak Out

Have you heard!?!? Everything is falling apart!!! The stock market is collapsing!!!! It's the end of the world!!!! Right on cue, countless people are gripped with fear over how bad the stock market is doing. Everyone's posting about it on social media, and I've received no less than 15 questions about it just this week.

After all, the stock market is down 4.6% in just the last 20 days. Considering the stock market is supposed to go up 8-10% per year, losing nearly 5% in a three-week stretch feels like the end of the world.

Things are so bad that the market is down to a level not seen since......well, seven weeks ago.....when it hit yet another all-time 153-year high. And after this white-knuckle three-week stretch and watching our investments get beat to smithereens, the stock market is now up only 21% in the last 12 months. Even worse, it's only up 70% over the last five years! Whatever shall we do!?!?

I hope you picked up the sarcasm, as I was laying it down pretty thick. If we don't have a proper context of what's happening, we can really freak ourselves out. Alternatively, we can simply zoom out. When we do, we see a different picture. Like this chart:

This is what the market looks like over the last five years. That little downward blip on the right-hand side of the image is this scary, nasty, terrifying collapse everyone is on pins and needles about. I'll stress the world "blip." Context matters. Context always matters. And, like with most situations, we need to zoom out to gain a proper context.

I won't claim to know what will happen next. The stock market may hit a new all-time high next week, or it could be on the way to experiencing a 50%+ collapse. Either way, I don't much care. Here's what I do care about, though. I care that history tells us, over a long period of time, the market will provide something in the ballpark of 9% per year. I also care that there has never been a 15-year period in history where the market lost money. Lastly, I care that the worst the stock market has done over a 30-year period of time is end up 4.4x higher than it started.

We can zoom out or freak out. I hope you'll join me on the zoom out side of the line. Life is far more peaceful and meaningful when we do.

What We Don’t Know WILL Hurt Us

According to a recent Northwestern Mutual survey, Americans believe they will need approximately $1.46M in their investment portfolio to comfortably retire.

As I suspected, personal finance social media is abuzz about this. There's a wild debate about whether this average number of $1.46M is enough. Financial experts are quick to use the 4% rule, which I agree is a prudent way to find a quick rule-of-thumb answer. To summarize, there's a principle in the investment world that says when we start to withdraw money from a large block of invested capital, we can take an amount equal to 4% of our total investment portfolio in the first year, then adjust that dollar amount upward for inflation each year after that. If we follow that strategy, statistically speaking, we shouldn't run out of money during our lifetime.

Let's use a real example. If we have $1.46M in our portfolio when we retire, 4% of that number is $58,400. In other words, a family who retires today with a $1.46M portfolio can generate an annual income of $58,400. This decision has more considerations and nuance, but that's a pretty fair back-of-the-envelope rule of thumb.

This is where the experts came unglued. "You can't retire on $58,000/year!!!!!" In short, people focused on what balance is needed to achieve the annual income they deemed acceptable. Many concluded that $2.0M ($80,000/year retirement income) or even $2.5M ($100,000/year retirement income) is adequate.

Through all this discourse about the appropriate level of retirement lifestyle, they failed to consider the most important factor of all: inflation. Let's go back to the above example. As I mentioned, according to the 4% rule, if someone retires today with a $1.46M portfolio, they could generate an annual retirement income of $58,400. There's one key word in my last sentence...."today." Whether you believe $58,400/year is an acceptable number or not, $58,400 today is not the same as $58,400 in 10 years.....or 20 years.....or 30 years.

If you're 50 and want to retire at 60, that $1.46M portfolio will still generate an annual income of $58,400. However, due to inflation, $58,400 in 10 years will feel like $43,500 feels like today.

If you're 40 today, that same $58,400 at age 60 will feel like $32,300 feels like today. Ouch!

If you're 30 today, that same $58,400 at age 60 will feel like $24,000 feels like today. Uh oh!

Can you see the problem here? Millions of people have a belief structure that, even if they actually meet their goals, are unknowingly barreling toward a challenging situation.

What we don't know WILL hurt us. This sentiment applies to this topic, and others. That doesn't mean we need to become experts in all areas, but gaining awareness of the bigger picture is often the gateway to being better and having better. For that reason, I'm grateful you're here. I hope to provide context and perspective in a few of these areas, but we should all seek other places to grow in other areas as well.

What other resources/content (money or not) do you enjoy consuming on a regular basis?

That’s What It’s For!

This is the text message I received last night from a client. "Can I give it away?" I suppose some context is in order. This client has done a remarkable job over the last five years. They've budgeted well, lived intentionally, pursued work that matters, given with purpose, and invested patiently. One of the practices they've established in their life is a disciplined commitment to taxable investing. If you're a client, you know I beat this dead horse dead-er. I believe taxable investing is one of the most overlooked, neglected, misunderstood, and whiffed opportunities in personal finance today. This client, however, immediately embraced the concept way back when we started meeting. Each month, a portion of their money automatically gets contributed to their taxable investment account. They don't think much about it. They don't lose sleep over it. They rarely even check it. It just happens.

The stock market had a killer day yesterday. It rose by 1.23% in a single day, to yet another all-time high. This is an eye-catching type of day, which somehow caught the eye of this couple. This is where my text exchange begins. They excitedly and somewhat confusingly texted me, saying their investment account shows they made $9,000 just yesterday. They couldn't believe it. $9,000 in one day!?!? Yes, correct. That's the beauty of investing the right way. It feels like nothing. Then nothing. Still nothing. But one day, off in the future (hello future you!), it's everything.

Astounded by this new development, their gut reaction was, "Can I give it away?" That text made my day. "Yes, of course you can! That's what it's for." Again, this is the beauty of taxable investing. This money gets invested intentionally, but its fate remains in the air. They could use it for retirement, kids college, supplemental income, a new car, a home improvement project, a vacation, starting a company/organization, or outrageous giving. Everything is on the table.

After ripping open the doors for generosity, I revealed to them there's another beautiful nuance to it. If they directly give their investment to a registered 501(c)(3) organization (like a church or non-profit), they don't owe a penny of taxes. That's right. 100% of the investment goes to the organization, they owe zero taxes, and can deduct the entire gift on their taxes (if they itemize).

Here's an example. A $3,000 investment grows to $10,000. Assuming it's been held for at least 365 days, they qualify for long-term capital gain tax rates. For most families, that means they would owe a 15% tax on the $7,000 of growth, or $1,050. Instead of selling this investment, they can just give the entire $10,000 investment directly to the organization, the $1,050 of taxes goes away, and they can even report the $10,000 gift as a deduction on their taxes (if they itemize). Win, win, win. Of course, they could always just sell the investment, pay the taxes, and give that money directly to an organization or someone in need.

They are going to have fun with this.....

Current You vs. Future You

We humans have a fantastic ability to disassociate our current selves from our future selves. Take a recent date night as an example. We're out with a few friends, enjoying dinner and some drinks. We're all having a good time and excited to have kid-free time with other adults. Fast forward a few hours, I ate too much rich food, and I probably didn't need that drink toward the end of our evening together. In those moments, I was focused on my current self while completely disregarding my future (12 hours from now) self. I woke up the next morning feeling pretty blah. Had I been more self-aware, I would have considered what future me would want current me to do.....but I didn't. The problem is that, in due time, future me becomes current me.

That's a more minor and less consequential example of this concept. It's also scary considering how short of a time gap there is between current me and future me in that story.....a measly 12 hours. But yet, even though future me would become current me in less than a day, I still disrespected him.

Now, take that same concept and expand the time gap to 5, 10, or 20+ years. The further out in the future we're looking, the harder it is for us to associate with that person. And when we can't associate with that person, we lose empathy, compassion, and care. They are a stranger to us. It's someone we haven't met yet, nor will we meet for possibly decades. As a result, we don't much care what they think or feel.

Let's replace dinner and drinks with financial decisions. Maybe current you is thinking about taking out a big, fat car loan to acquire that shiny new vehicle you've had your eyes on. Have you considered what future you will think of that? In a few years, that shiny vehicle will be worn, out-of-date, and beat up. At the same time, future you will still be making those ridiculous payments and will have lost out on the opportunity cost of what could have been done with all those monthly payments.

Or maybe it's investing. Let's face it: investing $1,000/month isn't all that fun. I can think of a hundred things I'd rather do with '$1,000 each month. However, what would future me think about current me's decision to spend all that money on myself now? Current me can have a lot of fun with $1,000/month, but future me is relying on current me to step up and think big-picture. After all, someday future me will be current me......and I deserve better than to reap the consequences of my past self's selfishness.

Here's a little trick I often think about. When I'm about to make a decision, financial or otherwise, I ask myself what future me will think of it. If I don't like the answer, I should consider making a different decision.

Treat future you well......they will soon be current you.

The Wisdom of Joker

What does Heath Ledger's Joker have to do with investing? Well, I'm glad you asked! In the world of investing, one of the biggest obstacles I have coaching people is helping them get their arms around risk. While it's true the stock market has averaged 9% per year over the last 150+ years, it's also true it frequently looks like a scary rollercoaster. It can be a mess. 

Here's a fun fact. Though we typically view the stock market through the lens of "8-10% per year," the stock market has only produced an outcome in that range three times out of the last 153 years (1912, 1916, and 1993)! In other words, the month-to-month and year-to-year results can vary widely......shockingly so. In fact, it's finished everywhere between -40% and +53%. Again, it's a mess. 

Just this century alone (which spans only 24 years), we've experienced four stock market crashes:

• -46% with a combination of the tech bubble bursting and 9/11

• -54% during the Great Financial Crisis

• -32% (in just five weeks!) when COVID hit us

• -25% in 2022

Once again, it's a mess!

Let's go back to Joker. In The Dark Knight (one of my all-time favorite movies), Joker is in Harvey Dent's hospital room, spouting off crazy. In the middle of this rant, he utters a quote that lives rent-free in my head: "Nobody panics when things go according to plan. Even if the plan is horrifying."

While Joker meant it in a dark and nefarious way, I think there are a lot of parallels with investing. As investors, we need to know bad things will happen. It's part of the plan. The stock market crashes because the stock market crashes. That's just how it works. And if the stock market crashing is part of the plan, and we know it's part of the plan, we don't need to panic. Yes, even when the plan is horrifying. 

Four stock market crashes in just 24 years does indeed sound horrifying....and risky. If you had patiently lived according to the (horrifying) plan and endured whatever the stock market threw at you, you would have lost nearly half your money, just over half your money, a third of your money, and a quarter of your money. Brutal, eh? But here's the fun part. Through all that, you would have received a 6.9% annual return for those 24 years. Put another way, a $1,000 investment made on 1/1/2000 (hello Y2K!) would be worth approximately $5,000 today. That's a 5x multiple on your original investment. Not too shabby for enduring four stock market crashes in the middle of it. 

The stock market will crash. It always does. That's part of the plan. And if you know it's part of the plan, there's no need to panic. In fact, there's not even a need to log into your account or dig into account statements. Let the market do its thing while you live a meaningful life, and then check back in a few decades.

Never Waste a Perfectly Good Mistake

In a sobering coaching moment, I recently explained to a client that their investing decisions have cost them handily. They asked me how much we're talking about, so I did some calculations. Though it's a rough estimation, it's safe to say they've lost at least $25,000 so far. They were livid. Worse, their financial advisor is a family member. What this family member did to them wasn't explicitly immoral, but rather "normal." Normal in the sense it's what most people are doing.....which is terrible. They were sick about it, and rightfully so.

But as I love to say, let's not waste a perfectly good mistake. Yes, they lost out on +/- $25,000. There's no way to reverse that. However, that pales in comparison to what they will potentially lose in the future. By my estimation, they will lose a minimum of $1M in the decades to come if they stay on this same path. It's an expensive mistake, but that singular mistake will ironically be the springboard to them doing so much better. That mistake was transformational......in the best way.

I also think back to my own journey. Specifically, when I received the humbling of a lifetime when the Great Financial Crisis struck us. I was $236,000 in debt, on the verge of losing my job, and had limited options. I was blessed with the opportunity to keep my job (by moving states), which gave me a second chance to do this financial stuff right. That mistake was costly, but it was ironically the springboard to a better life. That mistake was transformational.....in the best way. I still carry some of that pain, but I also carry a ton of gratitude with it.

I don't know what mistakes you've made, are making, or will make in the future, but I know they are coming. Some of them will be mild, but others will be costly. I hope they don't cost you as much as they cost this young couple or the younger version of me, but whatever they are, I hope you use it for good. Learn from it. Be humbled by it. Grow from it. Let it shift your perspective. See it through a different lens. Share it with others. Be better as a result of it. Regardless of how bad the mistake was, more good can come from it than bad......if we allow it.

We can't avoid mistakes altogether, but we can use them as a force for good. Never waste a perfectly good mistake!

You Wouldn’t Pay a Doctor to Hurt You

A friend, who is now a reader of this blog, recently asked me to do a quick assessment of their investments. After reading several posts where I ranted about how most people unknowingly have terrible investment portfolios, he had a growing suspicion that his portfolio probably fell into the same camp. His story is similar to most. In an effort to help their grown children, their parents gave them a referral to the financial advisor they've been using for many years. After all, this is a person they trust. It's a long-standing relationship, and their portfolios have increased over time. And in their parents' defense, when they started investing, this was the ONLY way to invest. It's the traditional way to do it. 

I dug into their funds, took into account their weightings, and this is what I found. Over the last ten years, their investment composition had a return of 8.97% per year (we'll call it 9%). Pretty good, eh? After all, the stock market's historical average is around 9% per year for 150+ years. One problem, though. The total US stock market, over the same period of time, had an 11.50% annual return. This means their portfolio underperformed the stock market by 2.5% per year.....wow! Oh yeah, and they paid their financial advisor 1.25% per year for the privilege of getting their butts kicked by the market. 

So after factoring in sub-par returns and the manager fees on top of it, they performed 3.75% less than they could have performed by simply pushing a few buttons on their phones: 7.75% vs. the market's 11.50%. You wouldn't pay a doctor to hurt you, but this is the financial equivalent of doing just that. 

Let me illustrate it for you. This couple is 30 years old and has approximately $20,000 invested. Let's assume these same returns persist between now and age 65. Here's what would happen:

• Their current portfolio would end up at $270,000

• A simple investment in a total stock market index would be $900,000.

That's a $630,000 difference! Their returns would be 3.3x more.....triple!! And this doesn't even account for additional investments into their account between now and 65. This is ONLY the original $20,000 investment. 

Now I doubt these same returns will repeat themselves over 35 years. Let's pretend the market returns 9% per year instead. And let's also assume their financial advisor will pull a rabbit out of his hat and tie the market (but they still have to pay their 1.25% fee for the privilege). Here's what would happen:

• Their current portfolio would end up with $273,000. 

• A simple investment in the total stock market would end up with $408,000.

That one decision made them $135,000....not accounting for additional investments!

Epilogue: After this conversation, the husband independently set up an account to invest in the total stock market index. The entire process took him 15 minutes. Those 15 minutes just made them more than $1M! That's what I call a great return on investment!

The Deceit of Cultural Narratives

A friend recently reached out to ask a few financial questions. During the conversation, he made a comment that stopped me in my tracks: "It's surprising that you're such a big advocate for the stock market when it's doing so poorly." I didn't quite understand where he was going with this thought, so I asked him to explain. He shared that the stock market has been beaten up badly, and it's "only getting worse." He went on to draw into question the practicality of investing in the stock market, and stressed the notion of "too much risk." 

While it's true the stock market dropped by approximately 20% in 2022 (which I would indeed classify as "beaten up"), he doesn't see the whole picture. It's a truth, but a half-truth. Er, a quarter-truth. Please allow me to fill in a few gaps:

• In the first 11 months of 2023, the stock market (S&P 500) is up approximately 19% (not including dividends).

• Over the past five years (including the 20% fall in 2022 and a 32% tanking in early 2020), the stock market has increased by more than 11% per year. 

• The stock market only needs to increase by 4.3% from today's value to hit an all-time 153-year high. 

• Over those 153 years, the market has increased by an average of just over 9% (including the reinvestment of dividends). The average is 11% per year for the past 40 years. 

If all that isn't crazy enough, here's one more fun fact that may blow your mind. The WORST (yes, worst!) the stock market has done over a 30-year period is go up by 4.4x. Crazy, eh? The worst possible outcome during any 30-year window in US stock market history is quadrupling your money (plus a little more). Considering you can't even legally touch your retirement funds (without penalties/taxes) until age 59.5, if you're under the age of 30, you have at least 30 years before you'll even think about withdrawing those funds anyway. Context matters. 

Ok, investment rant over. Here's the bigger takeaway. My friend is the victim of what many of us fall prey to. We're sucked into cultural narratives that feed us enough half-truths until it becomes THE truth. Investing is a big one, but far from the only one. Here are a few others that I frequently see:

• It's impossible to attend college without student loans.

• Buying a house is always a smart financial decision. 

• You need to use a credit card. 

• Groceries must cost your family $1,000+ per month.

• We need to seek out the job with the highest possible income. 

• Having a car payment is inevitable. 

• ____________ (insert yours here).

All of these are cultural narratives woven into the fabric of our society. Also, they are deceitful at best, and destructive at worst. If we just believe the narrative at face value, we concede it is our reality. Then, we casually float downstream toward an impaired reality. 

Always question the narrative. Challenge the narrative. Seek the truth.

Inquiring Minds Want to Know

A few days ago, I wrote about how most of us believe our investments are doing well, but that may not always be true. I used the example of a family who may unknowingly end up with $1.7M LESS. We don't know what we don't know.

In the last few days, I received dozens of messages from people asking what's actually good. Most of them perceive their investments as "doing good," but doubt started to creep in after reading that post. To figure it out, they dug into their investments in one of two ways: 1) look at what the trailing annual returns were for the last 5, 10, 15, or 20 years (which you can often find on your statements.....especially if you've been investing for a while), or 2) look at each fund in their portfolio to see what that specific fund has done over those periods (and use the proportions to run some averages). 

Results were all across the board. Examples include 6% per year, 7% per year, and even 8% per year (and everywhere in between). There was even a 9%ish number in there! Most people felt these numbers were solid. But the question attached to each inquiry was what to compare it to. Was it actually good? Were these numbers up to par? Were they unknowingly underperforming?

Here are a few numbers to consider. The following is the performance of a popular total stock market index fund containing approximately 3,800 U.S. companies of all shapes and sizes, wrapped up in one inexpensive and accessible investment. We can view this as the barometer for the entirety of the U.S. stock market. These numbers represent an average annual return over the designated period:

• Last 5 years: 10.2% per year

• Last 10 years: 10.7% per year

• Last 15 years: 12.7% per year

Through the lens of these numbers, the results submitted to me by readers look really sad. As a reminder, in the illustration I ran the other day, a 2% difference resulted in a $1.7M worse result for the family in the example. Based on our reader's numbers, we're talking about 3%, 4%, 5%, and even 6% difference between what they are getting and what the market is getting. This can be the make or break between having enough down the road....or not. This discrepancy gets magnified the younger the investor is. 

Ouch! Here's the good news. What's in front of us is more important than what's behind us. Let's say we're 40 years old and have been investing for 15 years. Sure, it would have been nice to have better returns for the first 15 years. However, you still have 40+ years ahead of you......with a higher base to start with. 

Let me end with this. Yes, it feels scary. Nobody wants to take risks. In the 153-year history of the U.S. stock market, there's never been a 15-year period where the market lost money Ever. The worst was +1.15% per year from 1929-1943. While past performance never dictates future results, that doesn't feel overly risky.

This post is a lot more about money than meaning, but it’s important we handle our finances with confidence. When we do, we worry a lot less and can focus on what’s really important….the meaning!

*This post does not constitute formal financial advice. It is meant to provide general insight without the full context of each person's financial situation. 

Sometimes, "Pretty Good" Sucks

I recently had a conversation that I repeat multiple times per week. I was meeting with a friend, and the topic of investing came up. They mentioned they use a financial planner who does a "pretty good job." This comment always sets off my red flag and warning sirens. What is the definition of a pretty good job? How do we know our investments are performing well? Because they are going up? Because they are being watched? Because they are spread across a few dozen funds that sound like some sort of twisted alphabet soup? Because they are being managed by someone we know and trust? 

I asked them what company they use for their investments. In my head, all I could think was, "please don't say xyz, please don't say xyz, please don't say xyz." "We work with xyz." Nooooooo! That's the moment I knew they were in a tough spot. For what it's worth, xyz is a very prominent, highly respected, broadly welcomed financial advising company. Before I go on, please let me clarify that nothing this company does is inherently immoral, illegal, or ill-intentioned. Rather, they do things the old way. By "the old way," I mean the way things used to be done before they didn't need to be done that way anymore. In today's world, we have access to the very best funds in the world, at the tip of our fingers (er, screen), at little to no cost. 

Knowing what company they are working with, I know the general lay of the land. They are most likely paying around 1.25% for management fees and have a portfolio that will, over a long period of time, perform at least 0.75% worse than the overall stock market. Therefore, this person is likely invested in a portfolio that will perpetually perform 2% less than the overall stock market. If the stock market performs at a long-term 9% (just below its historical average), this person may receive 7%. This doesn't seem like a meaningful difference, but let's look at the math:

Here are the assumptions:

• Current age: 42

• Ending age: 65

• Current balance: $500,000

• Annual contributions: $25,000

• These are very simple, rough numbers for illustrative purposes.

At age 65, their current strategy would result in a balance of approximately $3,700,000. See, that's pretty good! That's a lot of money! Their person did a great job! 

But wait, what about the other way? If this person were to simply invest in the overall market (readily accessible to each of us at practically no cost), they would have approximately $5,400,000 instead. That's a $1,700,000 difference!!! I don't know the definition of "pretty good," but in my book, ending up $1,700,000 worse off fails my smell test. 

This isn't my friend's fault. After all, nobody teaches us this stuff! Here's the beautiful part, though. All it takes is one simple tweak. It seems too good to be true, but it's not.