Paul Winkler: Welcome. This is “The Investor Coaching Show.” I am Paul Winkler. I talk about money, investing, and financial planning.
Preparing for the Future
There’s always a lot to talk about, especially, man, you listen to the news and all you hear is talk about who’s going to win the election. I don’t know about you, but I am tired of polls telling me who’s going to win when they haven’t even gotten the first debate in.
And you go, “Well, what is it about humans?” And this really gets down to where I come from in the financial planning world. One of the things I have told people, and I’ve been doing this show for 23 years, I’ve been telling people that what we desire as humans so much is a prediction about the future.
I just want to know what’s going to happen. How can I prepare for it? And then that way I can just feel comfortable. I’ve made a prediction, I know what’s going to happen, I can prep myself, and I can do what I need.
That is what the investment industry plays upon: Your desire for a prediction about the future.
So there’s a lot of stuff to talk about today when you go into predictions that have been made in the past. And how they simply didn’t even come close, not even near.
Some of the predictions out there right now, I’m going to go through because I think it is helpful to walk through some of these things because it is so easy to get pulled. And what we end up doing, let me just explain this. One of the things we end up doing quite often is we make a prediction about the future and it causes us to forego the rules of investing and walk away from them.
And the rules of investing aren’t that hard really. Diversify, don’t put all your eggs in one basket. You don’t know what calamity will befall the Earth, to quote Solomon.
Make sure that you don’t try to time the market. Don’t try to figure out where things are going to go next. You can be a tremendously successful investor without doing that. More about that in a second.
Protecting Yourself
I got some really interesting data, just something based on what I was reading in this one article. And I was just shaking my head and going, “Oh, man, the stuff people fall for.”
And of course, don’t pick stocks and determine which companies are going to do better than others. That’s actually part of an article that I had. I was looking through some things.
JR, one of the regular listeners to the show, sent me something about regrets that people make. And it was funny because the regrets that people have about retirement, interestingly, JR, if you’re listening, there was one mistake that they pointed out that I often point out. But some of the other ones they didn’t even point out.
But this is the thing that gets me: Investors get pulled in by the news. They get stressed out, they make bad decisions, and they hear commercials for investing in gold.
They get these flyers in the mail. “Go to this steak dinner. You need this annuity. It’s a bonus annuity. It’ll pay you a bonus.”
And I’ve talked about this in past weeks, that if you actually look at where the money’s coming from, it’s coming from you.
Spoiler alert, you’re the one paying the bonus to yourself when you get these bonus annuities.
“Then we’re going to help protect you against the stock market, bond markets and cash and real estate. Oh, wait a minute, we’re the insurance company and we’re taking your money and we’re putting it in stocks, bonds, real estate, and cash. We’re actually investing in the things we’re going to protect you against.”
It’s just absurd. And yet people fall for it because they either want a prediction about the future or they want safety and security.
Now there are things that you can do to protect yourself, no question. But so often what happens is we do something that is the opposite because our instincts and our emotions pull us to those things.
How You Approach the Investing Process
I was actually pulling together, I had some stuff on the printer that I had forgotten to get off the printer on Friday. I walked in the office and I printed a bunch of stuff and I left and I totally forgot to grab it off the printer.
So I went back there to grab it. Well, I had a stack of stuff and I had some things that from previous weeks or months, to be real, that I had printed and that I had in the stack, and somebody in the office just put it all in just one stack.
And I went, “Oh, there’s the stuff I printed.” And I grab it and what do I see at the bottom of the stack? It’s this, it’s Titans of Investing.
Biden messed up on stage once again. Now this is, of course, before we had these big changes. But it says, “Staff is embarrassed and they covered their faces. This time, his mental faculties failed him again.”
What did he do exactly? Biden slipped and named the day the government would dump the US dollar.
Is he a compromised foreign agent? That’s right. He already knows the plan for the BRICS countries to ditch the dollar. I can’t tell you how many people have asked me about BRICS, Brazil, Russia, India, China, right?
It’s now evident Biden is compromised by the Chinese government. China has one goal: Replace the dollar. And then basically what they say in here is, “Oh, there is a really significant date.”
You ready for the date? You ready? Ready? Oh, it already passed and nothing happened.
It was August 6. So you look at that and you go, “Oh, my goodness. You’ve got to be kidding me. You’ve got to be kidding.”
But that is the crux of the biggest issue. People focus on taxes, and with eight financial planning degrees, trust me, I get taxes.
We get into that around here. We get into IRMAA and Roths versus traditional IRAs. We get into taxation of RMDs, required minimum distributions, and how much has to come out, and inheriting IRAs and how you deal with the taxes on inherited IRAs.
Capital gains taxes, not subjecting your portfolio, that non-qualified portfolio, to too much in short-term capital gains, which are taxed at a higher rate than long-term capital gains, I get it. But I am telling you folks, the biggest, biggest, biggest deal when it comes down to whether you have security in retirement, studies show, isn’t those things. It’s your behavior. It’s how you approach the investing process.
Prioritizing Savings
This one article that JR sent was just talking about the biggest regrets of retirees, according to financial experts. Number one was not prioritizing savings in early years. No question about it.
I tell younger people, historically, every seven years approximately that you delay preparing for retirement, you cut your retirement in half.
Overlooking. And the thing is this, a friend of mine actually sent me this and said, “Oh, I’ll bet this is a client.” She sent me a picture.
And it’s like this really posh house that she had gone to. “It must be a client.”
And I’m laughing going, “You know what?” I said, “Actually, if you read the Millionaire Next Door, most very wealthy people live way, way below their means,” is what I said to her. They live way below their means.
Like the Texas rancher who basically said the interviewer was trying to find the wealthy guy and he said, “Eh, you’re looking for me.” And he said, “Oh, yeah, I’m looking for you. You’re so-and-so.” “Yeah, I want to interview about millionaires.”
And he’s doing this thing about millionaires. And the guy goes, “Yeah, it’s a big hat, no cattle. That’s most of the time what you see.”
People who have these ostentatious lifestyles live really, really luxurious lifestyles. Many of them don’t have a pot or a window because they spend so much trying to impress people with money that they don’t really have.
So often that’s the case. People grow up with an inferiority complex or feeling that they’re not that great. So they’ve got to impress their high school friends with how high they live and the nice house that they have and the nice cars that they drive. They are looking the part but not necessarily being the part.
Overlooking Tax Consequences
The second thing that they look back and regret is overlooking tax consequences.
A lot of times, people don’t necessarily think about the tax consequences of different investment choices that they make.
You look at how most people manage money, for example, buying and trading, and inside the mutual funds, the buying and trading, it goes on. Let’s say you have a non-qualified account, you can end up with significant taxes every time a trade takes place. Whereas you buy to hang on to things, you don’t have those trades, you don’t have those expenses, number one.
Number two, you don’t make the mistake of getting out of the market at the wrong time — I’ll be coming back to that in a second — or moving back and forth or getting rid of one company and buying another company and actually ending up with short-term capital gains taxes. So that’s one thing.
The other thing is just the differential. They don’t really take a focus, and I’ll add to this. They don’t look at the differential between their marginal tax rate, which is if you earn another dollar, what’s it taxed at. So you might be, if you’re really, really low income, 10%, 12%, 22%, then it’s 24%, and you go on up to 37%.
And for some people, you might want to avoid the very, very high tax rates so that when you get into retirement, and you’re pulling the distributions out, you’re taxed at lower average rates. Now that very much depends on a person’s situation.
For some people, Roth IRAs make some sense. But a lot of people, I’m actually having them do pre-tax and then do conversions to Roths in between their time they retire and the time they have to start taking distributions, the time they start taking social security. So there are all kinds of really interesting tax plays that you can do with that.
But recognize you’ve got to focus on tax consequences. Tax deferral, the reason that retirement plans are so popular is that you don’t have to pay the taxes on the buildup in them. It’s a tax deferral.
You take a look at the difference between paying taxes as you go versus putting the money in, it grows without taxation, and pulling it out later. It can be a huge difference in the amount of accumulation that you end up with.
Paying Off Debt Before Retiring
Now, make sure that you follow through and get involved in 401ks — that goes back to number one, starting early. Then it says not paying off the debt before retiring. That can be a big deal.
A lot of times what I’m trying to do is I’m trying to coordinate when you are going to retire with having the mortgage paid down. So I agree with this one as well.
This is a really good one because what ends up happening is you have this way of spending. And when I have a mortgage payment, it’s part of my spending, right? If I actually have it coordinated where my mortgage is paid off at the same time that I retire, all of a sudden my spending drops just as I retire, which is good because I’ve been used to making expenditures like that.
Now I’m used to living on less. So if I have a $1,000 mortgage payment per month, let’s say, and I make those payments, make those payments, then I retire.
Well, my budget is $1,000 per month less when I retire because I don’t have that payment. But I’ve been used to living on a $1,000 less. I hope that makes sense.
Sometimes I’ll have people do that. I’ll have them get close to retirement and they’ll say, “I’m thinking about retiring.” And I go, “Well, here is a withdrawal amount based on your portfolio, based on social security. This is a withdrawal amount that makes sense for your situation.”
You might want to try living off of that level of income for a period of time and see if it’s going to work. And then you go, “No, I don’t want to live that low.” Then maybe you don’t retire quite yet. So for some people that can help out as well.
Really getting that debt paid off is a good idea, especially when you get to that retirement age.
So there are a lot of little things, and I won’t go through all these.
Timing the Market
One of the big ones in here was making sure that you don’t try to time the market. That is something that I find a lot of people do. They try to figure out where markets are going to go. And then they try to go, “Hey, I think the market’s getting, the election’s coming up, and it’s kind of scary and I’m not sure what’s going to happen there.”
So they will try to pull money out of the market before it goes down, before the election occurs. And the thing I point out is that historically, you look at Democrat or Republican, the market’s up, either way.
Now why is that so confusing for people? Because they think, “Well, one party may be bad for the economy.” Let’s say that that’s your belief.
One party is really bad for the economy. And that it’s going to be terrible, and that means the stock market’s going to go down.
The economy and the stock market are not necessarily intertwined quite as closely as you might think.
You can have a bad economy and a rising stock market because companies will reduce expenses. They’ll fire people. They will pick up their toys and leave.
International markets. If you look at recently, you notice something interesting: The dollar has been weakening versus other currencies. Well, that bodes well for international securities, as I’ve been talking about for quite a while. So you might have totally different areas of the market do well.
The other thing it bodes well for is exporters. So you have a U.S. company and they export things, and the dollar is weakening, which may be a sign that the economy’s not that great, or the economy may be bad for some reason going forward.
I mean, think about it. Why does the Fed lower interest rates? They lower interest rates because they’re worried that the economy’s not great.
So people, they’re cheering, “Hey.” And you see the interest rates go down and you see the stock market go up and you go, “What’s going on here?”
Well, you’ve reduced a cost of doing business, interest expenses. So that is a big deal.
But when you reduce interest rates, you think about how a company gets to earnings; they sell things. And so who buys things? Well, a lot of times it’s people borrowing money.
So if the interest costs go down, people might be more inclined to buy things. So that’s one of the things that happens.
Then you’ve got the cost of goods sold and operating expenses and those things, but another part of it is interest expenses. And if you can reduce interest expenses, you can actually increase earnings.
Investing Mistakes
So another thing that they had in here is panicking when the market drops. That’s what a lot of people do. I mean, I talk about 2020 when you had the market drop and how many people just got so scared. They just yanked money out of the markets, and then they came back with a fury, but people weren’t there when it happened.
Same thing in early 2009. Good grief, if you looked at the market bottom in 2009 when all the negative, terrible, scary headlines were coming out. To the end of the year, you had anywhere from a 60, 70 to — depending on how diversified you were — a 90% increase in value in an investment portfolio.
Yeah. I’m not stuttering. That was the number, but a lot of people weren’t there because they panicked.
They got scared. The investment advisors got scared. There was a whole Smart Money article about that.
The investment advisors were yanking people’s money out of the stock market and putting it in cash. The advisors were still making money.
And this is the funny thing. There are advisors out there who say, “We align our interest to yours. If you do well, we do well.”
And yet, if you look at what they were doing, a lot of these firms, I have the data on. There’s one firm, that’s how they advertise.
For 2003, when you had these huge upturns in the market after 9/11, I was looking at the data on the returns and the portfolios. They act as a fiduciary, and 2003 was a huge year in the stock market. Huge.
You have, in some cases, 50% returns if you were diversified, if it were an all-stock portfolio. Yet they lost money.
You’ve got to be right twice when you market time. You’ve got to be right when you get in and when you get out. The problem is people end up being wrong on one or both of those.
Another regret is spending too much money early in retirement. Putting their children’s needs first. I see this one a lot. They pay for their kid’s college education.
I always tell them, “Put the mask on yourself first, then take care of yourself.” The problem is that you don’t have a lot of time before retirement once those kids get to be college age. But they’ve got a lot of time to pay off the debts. So think twice about that.
Some people are going to college that really shouldn’t be there. Maybe there are other things they ought to be doing with their life.
Maybe they shouldn’t or don’t necessarily need a college education. Or maybe they don’t need a college education at the most expensive place in town. A lot of people, they go to colleges and they don’t recognize that there are a lot of scholarships for people that they don’t even know are out there.
Borrowing from 401k IRA accounts. It’s one of the things I see all the time. People borrow from the 401k.
You end up paying yourself back with interest, right? You pay the loan back with interest. You’re paying yourself interest, right?
And you think that’s a good idea, isn’t it? But then when you pull the money back out with a traditional 401k, when you pull the money back out, you have to pay taxes on it.
So you pay the interest to yourself with after-tax dollars, then you pay taxes on the distribution. It’s not a good deal. So there are just a lot of mistakes that people make.
PART 2: SECTOR INVESTING
Paul Winkler: All right, we’re back here on “The Investor Coaching Show.” I am Paul Winkler. Paulwinkler.com is the website.
Now you can go there, and if you just have a desire to go and meet with any of our people at our offices, we have 11 offices around town. I have to count them all the time because I can’t remember. But they’re everywhere.
You can check that out there and you can actually get on a phone call if you just want to just talk to somebody and just kick the tires and see if your situation is something that lines up with what we do. Good shot if it’s financial, it does. But anyway, you can just check that out online, paulwinkler.com.
Overconcentrating in Certain Areas of the Market
I was talking a little bit about how one of the things you don’t want to do is time the market. Don’t try to figure out what’s going to do well next. And people tend to overconcentrate in certain areas. They get nervous and they put money in one area and they think, “I think this area is going to do better than everything else.”
I saw this one thing, it was like a big rectangle and it had lots of boxes in it, different colored boxes. And the idea behind these little charts is to show what areas of markets did better from one year to the next.
One of the big things that I see people trying is what’s called sector investing. Now let’s say if you invest in real estate, that’s a sector. If you decide that you’re going to invest in technology companies, that’s a sector. A lot of index funds, they get overweighted in certain sectors as those areas become dominant in the index.
For example, the S&P 500 is very, very heavy in technology — information technology particularly. So you can end up with a situation where you don’t have diversification, and you don’t even realize it.
Now I’m a big fan of don’t stock pick, don’t market time. So indexing is a valid way of doing things in some areas of the market, like large U.S. stocks, large international. It doesn’t work as well with small and small value and international small value and large value U.S. and emerging markets value. So it doesn’t work in a lot of areas of the market.
But it does work better than active management we see in research when it comes to big U.S. companies, big international companies. Now since most investors are primarily concentrated in those big areas because of the familiarity with them, people like being invested in things they’re familiar with. They like it when they know the companies that they are invested in.
Now, a lot of times you look at that and go, “Well, wait a minute, the companies that I’m invested in, I could go 10, 20 years with no returns in big U.S. companies.” So I would look at that and go, “Eh, that’s a little bit risky. That’s a bit problematic.”
And hence why studies show that investors, the returns that they get investing in the stock market are far below what market returns have been historically. And it’s because of that.
Can you imagine you’re in an investment portfolio, large U.S. stocks, all these companies you’re familiar with, and in 10 years you haven’t had a return. What are you going to do? You’re going, “Well, this is stupid.” Shoot, five years.
You’re going that long and you’re going, “This is stupid. Why am I doing this?” And then people bail out.
Investing in Sector Funds
So investing in sector funds is another thing that people do because they go, “Eh, I’m not going to do that anymore. Now, well I’m going to try investing in this sector because I think this sector is going to do well based on what’s going on.”
And in a year like 2014, you have all these different things that you’re trying to figure out. What’s going to do well? Is it energy and materials and financials, consumer staples? What’s going to do well?
Well, real estate was the number one asset category in 2014. Well, that looks good, let’s keep going with that. No, 2015 it was healthcare. Well, let’s go with healthcare or real estate.
No, next year it was energy. Well, next year after that it was information technology. Then it was healthcare. And then it was to consumer discretionary in 2020.
And then it jumped over to energy in 2021. And it was energy, well, two years in a row, energy had it in those two years. Then it went back to information technology.
And you look at that and go, “Well, who knew what was going to do well from one year to the next?” You don’t. There’s no way to know that.
And yet, that’s what we try to do: Try to figure out what’s going to happen. You look at, for example, from the time that Biden has been in office, and a lot of people before he got in office, were just mightily scared because you had record returns. The S&P 500 had done very, very well under Trump.
And a lot of people go, “Biden’s going to kill the economy, he’s going to kill the stock market, and the S&P 500 has been on a record run for four years in a row. It’s done very, very well. I probably need to bail out of the stock market. I’m a little bit scared.”
Yet the return up to about now has been over 20% per year for small value stocks. That wasn’t on anybody’s radar screen. Microcap stocks, very, very small company, 17% per year.
International value stocks. I’m sure everybody sits around and thinks about international value stocks all day long, right? No, who was thinking about that? The third best performing asset category.
And then large value companies. Have you noticed I haven’t even gotten to large U.S. S&P 500 yet?
So under Biden, these areas in the market have done very, very well, which a lot of people didn’t own. And who knows?
You don’t know what’s going to go and do well going forward.
In fact, I got a story coming up. A person gets mad because the financial advisor puts them in a 10-year double guarantee investment. And wait till you hear what’s happened after 10 years.
Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.
