2021 EP1204 PLANNING MATTERS RADIO - Identifying Opportunities

We want you to plan for success. Welcome to Planning Matters Radio.

Welcome to another edition of Planning Matters Radio, the show where we try to shed some light on some of those hard financial topics and hopefully have a good time along the way. With me today, my guest is Peter Rochon. He is a author of The Understanding Your Investment Options, the great book, and he's a fiduciary financial investment and retirement planner serving the great state of North Carolina. If you're interested in talking to Peter directly, you can always call him at 919-300-5886. That's 919-350-8886.

Or go to his website, www.RochonPlanning.com. Peter, how are you today? Always a pleasure doing well. Thank you, Scott, and trying to uncomplicate the financial world. It's sometimes a little murky, so we'll try to add some clarity. And today, talking about some opportunities, identifying opportunities for the end of the year and then moving through the future in your planning.

Awesome. So we're going to just discuss both of those things and we're going to focus on maybe some simple steps you can take to stay on that positive financial path. Now, growth opportunities, Peter, you mentioned. Now, even in crisis, there's opportunity. A long-term strategy includes identifying proactive moves for both positive times, which are great, and a strategic approach for the downtimes. There are several moves that proactive planners should keep in the back of their minds for if we ever do see a downturn, even as the markets do continue to move in a positive direction.

Is that right? Yeah, absolutely. And we have seen the markets moving in a positive direction. So we're not in crisis mode right now, thankfully. That doesn't mean that we won't see downturns into the future. And in fact, long-term investors realize that that is part of the economic cycle and the long-term investment experience. So when we invest a dollar today or maybe 20 years ago, we know that that dollar is going to see ups, downs, sideways times in the market.

And we've got to have a plan for all of those. Now, just because the market changes direction does not necessarily mean that you need to drastically alter your plan. But there may be some opportunities in up markets. The opportunities may change and be different in down markets.

And you need to have a long-term approach regardless of what those conditions are. Right. So we're trying to be proactive, not reactive to the market is what I'm hearing. Absolutely. But also, we should not try to time the market with the majority of our planning progress, right?

Because we know we're going to see those different conditions. It should not be something where we're jumping in today, jumping out tomorrow, jumping back in when we see the market going up, jumping back out if we feel like the market is going down with the majority of our savings. Now, because of technology and the ease of access to making trades, there is some amount of day trading going on.

People are playing options. I know people who are invested in the cryptocurrency market, which changes on a moment by moment basis, maybe even faster than the stock market. But that should not be the place for the majority of what you are counting on to make long-term financial progress. So if you want to allocate a very small portion of dollars to your mad money account to do some day trading, I don't necessarily see anything wrong with that.

But that should not be the place where you are making your mark and your fundamental financial progress. That should be more of a time tested long-term investment approach, which, by the way, benefits us even in down markets. If we are dollar cost averaging, if we are putting money into those retirement accounts on an ongoing basis, even those down markets are going to long term be an advantage. Now, that being said, Scott, nobody likes to see the market go down and their account balances fall. But if I am making contributions during that time, I'm buying those shares on sale. Those are going to be the ones that actually give me the most profit long term as the market rebounds and recovers. So the average person who's been in the market in a traditional sense has seen good gains over the past several years, maybe the last 10 years or so.

How can that person take advantage of those gains that they may have made in the past years? Well, we need to rebalance on a regular basis. And so there are a few fundamentals.

I think we covered them maybe in a very recent show last week or the week before. Number one was ongoing contributions, the act of saving and investing on an ongoing basis, dollar cost averaging. That is one of the key fundamentals of long term financial success. Now, we have seen growth in the equities market. So your stocks and your mutual funds and your ETFs, your equity exposure that has benefited maybe more than the more conservative side of your portfolio, your fixed income, your bonds, your bond funds, which means that there is profit there on the table that you have made. Well, rebalancing is financial fundamental number two on a regular basis, probably once every three months, a quarterly basis, you should go in and rebalance your portfolio back to your target allocation.

The target allocation is what you or you and an advisor have decided is the appropriate amount of equity exposure versus the money that you don't really want to see fluctuate in the fixed side of things. So if that for simplicity purposes is 50 50 and over the last 10 years, we have seen the stock market do very, very well. While we appreciate the growth and the gains, it means that you are overexposed to the risk that you decided was appropriate 10 years ago. Not only that, you know, the equity side has grown. So now instead of 50 50, maybe you're 75 25.

Not only that, but 10 more years have gone by. And so the 50 50 mix that you decided was appropriate 10 years ago might not even be appropriate today. So you need to rebalance quarterly to get it back to that appropriate risk level. And then tactically, about once a year, you should be reviewing that allocation and deciding whether or not that is still appropriate. And it probably should change at least once every five years to help you keep more of what you have saved and earned and have a larger percentage on the more conservative side of your investment ledger.

Right. It's interesting you talk about the rebalancing and the dollar cost averaging. No one's saying that it wouldn't be amazing if someone were able to predict the market properly and jump in and out at the right time.

It'd be absolutely amazing. But the fact is, no one can do that, which is why you need to, you know, kind of spread your assets around in the right way. So here's the thing. Any investment professional that wants to keep their job is going to say that no one can accurately time the market and predict the future of the market accurately 100 percent of the time. Now, there are some indications that we can pay attention to, but we're in a strange world where even some of those strong indicators that have been predictors in the past aren't behaving the same way that they have in the past. Past performance never guarantees future results. And the things that have happened in the past don't necessarily lead to the same results in the future. But more importantly, even if I was the best market timer in the world, there are going to be occurrences, certain events where even if I am somehow able to pay attention to those predictors and accurately move the money, I wouldn't be able to do anything. And for an example, 9-11.

Right. No one saw that coming. No one knew that that was going to occur. And after it occurred, the markets were shut down for about two weeks. So with that in mind, hey, it bounced back typically from events that occur that have major implications, very swift implications.

The recovery is also typically swift and quick. The market came back from 9-11. Now, we were in the midst of a greater downturn with the dot com bubble at that time, but the best market timer in the world would not have been able to react when 9-11 occurred. On the other hand, something like the Corona virus, if somebody is paying attention, they may have been able to be a little proactive there.

Right. We started to see the Corona virus beginning to spread to American soil. We may have taken our investment allocation back a peg or two if we were moderately aggressive beforehand. Maybe we move back to moderate.

Maybe we move back to moderately conservative. The problem with trying to time the market is you have to be right twice. So not only do you have to get out at the right time, but you also have to decide when the right time is to get back in. And a lot of investors were so shell shocked by 2008 and the Great Recession that they had cash sitting in their investment account for years after the fact that really didn't participate in that recovery.

They didn't time it correctly the second time. And so it's really it's fundamentally very difficult, if not close to impossible, to be accurate 100 percent of the time. So it should not be a matter of timing luck in timing that determines your fundamental core of your financial plan. If you want to play with the market and day trade and time things with a very small portion, then you need to be educated about what you're doing. But your progress toward retirement should not be determined by that. Right.

And that's not to put into not even taking into context the amount of time and that it would take to monitor things if one were trying to day trade and the amount of education, to your point, you would need to be able to do it even somewhat effectively. We can get alerts on our cell phones these days, but guess what? Those alerts still happen after the fact. They alert you to something that has already happened. So that's right.

Yeah. We really need to look at the progress that we have made, though, and and assess whether or not it is time to pull some of those gains off the table and be a little bit more conservative with them. And especially if we are within that window of retirement, say five to 10 years before retirement, five to 10 years into retirement, that may be the window that requires the closest and most careful monitoring, consideration and rebalancing out of our entire financial lifespan. When we're young, when we got the paycheck, when we've got lots of working years ahead of us, we could be more aggressive when we're well into retirement.

We probably don't want to risk 20, 30, 40 percent of our life savings disappearing without us having spent it. And we are overdue for a bear market for the last hundred years since the Great Depression. We've had 16 different bear markets.

So about one every six years. We have now been about 13 years since we have seen our last bear market. A bear market is quantified. It is defined as a 20 percent or more loss in the stock market indexes. And most people don't want to see 20 percent of their money disappear. That's why we need to really review and assess how much of our total assets and net worth is exposed to the market. On average, those bear markets are more than 20 percent, usually closer to 40 percent.

And it typically takes about a year and a half to go from the top to the bottom and then another five years to go from the bottom back up to the top in recovery. So, you know, we've got to look at do we have six and a half years to let our money recover? If we are contributing, they may be an advantage, those downturns. But if we are no longer contributing to accounts, they probably should be on the more conservative side of an investment allocation. Pretty smart stuff.

If you want to talk directly to Peter for Sean, you can call him at 919-300-5886. So, Peter, it seems like either we're in a financial crisis or we're waiting for the next financial crisis. That's kind of the cross we have to bear here. So what are the opportunities to protect our dollars from this possibility of loss, especially as someone kind of gets close to that retirement horizon?

Well, here's the thing. Most people swing the dollars all the way up over to the other side of the spectrum. They go from taking risk, being in mutual funds or stocks, investments in their retirement or brokerage accounts.

And they say, I don't want to take this risk anymore. And they go all the way over to the other end and stick the money in a money market account, in a checking a savings or a mattress. Right.

Yeah. Essentially the same thing with the interest rates that we have today. I mean, you you may be protecting your money more if you can it up and bury it in a hole in the backyard.

Right. Point zero one percent interest is doing nobody any favors. So while the money is safe, yes, the purchasing power is not. And so when we look at kind of the middle ground, where can we get protection but still protect our purchasing power?

There are some alternatives there. There are some opportunities for protection where you don't have to suffer market losses, but you can reasonably have expectations for two, three, four or five percent rates of return based on where you put it. The thing is, where you gain one quality with your money, you're always giving up on something else.

Meaning money can do four things for us. It can grow. It can be safe. It can be liquid or it can provide an income. So if we are changing from growth to safety, that's fine. But we still want liquidity or we want income from it or we still want a reasonable growth rate.

We're going to have to give one of those up. So the most common examples are if you move from a savings account to a CD. Right. Savings accounts you can access within 20 minutes if you need to get that money. A CD generally has a period of time before it matures, whether it be six months or two years or five years. And the longer you go out, the higher the interest rate the bank is going to offer. There are some other alternatives to CDs offered through the insurance world, fixed annuities, where at the end of a period of time, you get all of your money back. Plus, the interest rates are generally a little higher.

However, the penalty for accessing the money early is even stiffer. So you can get a little higher growth rate, but more limited liquidity. And then there are other options. I mean, there are fixed notes. There are short term bonds, real estate.

You know, that's the kind of thing where it's generally not liquid within 24 hours. But you can choose whether you want to take an income or let the income build for growth. There are options in between there, in between the market risk, taking on the full risk of the stock market or sitting your money in a bank that can offer a reasonable rate of return. You just have to understand what you're giving up in order to get that safety and that reasonable rate of return.

Now, there's all these options that you laid out there. Do most investors even understand how much they're positioned to lose if we do see a downturn or just a traditional bear market environment? It does not state it in bold print on the top of your 401k statement or your brokerage statement, right? If we have another 2008, you will lose 40 percent of your life savings.

No, it doesn't. And therefore, I would say that most investors don't understand that. That's why you need to have regular reviews and specifically a risk analysis performed that can be quantified.

I've got some great tools and software that I have access to. We can plug in the positions that you own and we can quantify the amount of risk. How do we do that? Well, a mutual fund, by definition, must stay invested per the prospectus. It lays out how the mutual fund is invested. It lays out the goals and the investment exposure of the mutual fund. Well, if it by law has to stay invested that way, we can just look at previous downturns, previous examples of where the market has been tested and see how that performed during those times. And so we take some of these mutual funds that are in people's 401ks or brokerage or retirement accounts and we say, well, let's look back at the past history.

What is the peak to trough ratio? Where was this previously, say, in 2007? Where did it fall to in 2008? What's the percent of value that it lost in that previous bear market? Well, because it must stay invested per the prospectus. If we saw conditions similar to that or another type of bear market, we would expect to see the same kind of losses.

And so we can actually quantify that for people so that they can make a better decision and look at, well, how much of my life savings am I comfortable losing before I get uncomfortable? Right. These people that operate these mutual funds, you mentioned that their goal is to stick to that prospectus. That's their end of the bargain. How much agility do these people have as market conditions change to react to them? Or are they beholden to stick directly to what they were with in the first place? Well, mutual funds have an internal cost for management. Right. And that management makes those decisions.

They do have some leeway and discretion. And if you actually look at a particular mutual fund, what you will see as you dig beneath the surface is what's called an internal turnover ratio. That's how many of the positions inside of the mutual fund actually got bought and sold within a given year. Some mutual funds are going to be five percent, some mutual funds I've seen four or five hundred percent, meaning the entire portfolio was turned over multiple times within a year. But 80 percent of the mutual fund must stay invested somewhere by law, by the prospectus. So it's not like the mutual fund company manager is going to go to cash if they see a downturn coming. You can call them proactively, but you're not going to receive a call from them saying, hey, we took your mutual fund to cash.

They cannot by law. But let's say that, for instance, and I'm just going to choose a couple of companies here. Apple has been doing very well and Apple constituted a 10 percent exposure within a mutual fund to the technology sector. But the manager felt that actually Microsoft was going to be a better position to constitute that allocation moving forward. They are capable of selling out of the Apple shares and then buying into the Microsoft shares inside of the mutual fund.

That is their discretion. That is actually what you're paying the internal expense ratio to them to do for you is manage that investment side of it. So that is where mutual funds really showed some value and diversification and having that risk management done to to some level.

But there is still risk. It still is invested. And really what most people have is the mutual funds that are mixed up inside of their portfolio. And then another level of adviser or advice that is helping to manage which mutual funds to be in and when and why they are of value.

Right. So we're hopefully making this money or mitigating our losses. And over the next several years, we're going to hear a lot about taxes, taxation of our money, this money that we've worked so hard or that we've maneuvered so effectively in our investments and retirements. It's going to get taxed at some point. Savers and investors know it's not what you make. It's what you keep. So why should we focus as much or not more on taxation of our money than on the investment rate of return? As much, if not more. You're correct.

Wow. Because it's it's not what you make. It is what you keep. And typically you get to keep more if you are planning strategically, proactively and effectively for taxation than if you are shooting for higher returns. And it comes with much less risk. So I could take a lot of risk to shoot for higher returns. But if I'm doing so inefficiently from a tax standpoint, I still get to keep less of my money.

Right. I could be more conservative, not take as much risk and do so in a manner that is tax efficient and net net. I get more money out of it.

So we do need to pay attention to this bottom line. There is never a dollar that is earned, that is deposited, that is invested, that is grown, that is spent, that is transacted, that the IRS does not have some type of plan for how to tax. I promise you they they have a plan for each and every one of those dollars. You have the decision for how to align with their planning. So when we say for retirement specifically, those are what are called qualified accounts. They are qualified for some specific type of tax planning and provision.

There are a couple of options under that umbrella. You can earn the money and then put it away in the investments before you pay the taxes. You are therefore in a partnership with Uncle Sam, with the IRS.

They get to determine the rules and when you can touch the money and how much is theirs and how much you get to keep. Or you could pay the tax upfront. Option number two, the Roth. Or there are a couple other alternatives there to the Roth.

But the Roth is the best known Roth IRA or 401K. You choose to pay the tax upfront and then you're done with taxes forever. You've paid tax once all of the growth, all of the income forever and ever is yours to keep.

They still had a plan for how to tax it. It was just pay me now or pay me later. The third option is non retirement dollars. You can just have a regular investment account. I have earned the money.

I received the money in my paycheck and Uncle Sam probably already took a bite out of it and saw it beforehand. What I have is a net amount and then I go out and invest it. Well, that is non qualified investment. That's your investment account, your brokerage account. And when you buy investment positions, the growth is then taxable again.

Right. And this is why some of the ultra rich, like Warren Buffett, say they pay a lower tax rate than their secretary. They already paid tax on the money that they earned.

Then they invested the money. The growth on that is going to be taxed at a lower rate than the brand new money that their secretary is earning for the very first time. Hopefully, the secretary is smart enough to save some of their money and invest it so that they can also pay lower taxes into the future. But bottom line, taxes are going to be a factor.

They're not going to go away right now. We have some of the best tax planning and savings opportunities that I think we'll ever see in our lifetimes. So right now is really the time to look at some proactive strategic tax planning.

How do I keep as much of my money as possible? So it's not just that paying your taxes up front as opposed to later with a Roth is always the best move. Maybe it is, maybe it isn't. But this environment that we're in right now in particular is one that folks might want to take advantage of with those opportunities. So what are the realities and possibilities of tax law changes into the future? Of course, like with the legendary investor we mentioned earlier, we can't predict it perfectly.

But what are some possible realities and possibilities? Well, the reality is the taxes are going to go up. And I know that the language has been it's only going to be on the ultra rich, those making more than four hundred thousand, those with ten million dollar IRA accounts.

The reality is it's going to affect and impact everyone. By the way, that four hundred thousand dollars, that is before deductions on a small business owner's return. So I may have had net revenue in my plumbing or construction business of five hundred thousand dollars. But after I pay for materials, after I pay for overhead, after I pay payroll, I may have only netted one hundred thousand dollars.

Guess what? I am falling into that umbrella of the rich people making more than four hundred thousand dollars. And I'm going to lose some of my ability for tax deductions and proactive planning and fall into those higher tax rates. That trickles down to the price of the products and the services that everybody purchases. So de facto, we're all paying more. We're all incurring that tax. But aside from that, tax rates are going up.

The 12 percent bracket is one of our lowest brackets. And in twenty twenty six already law on the books, the 12 percent bracket becomes the 15 percent bracket. The twenty two becomes the twenty five.

The twenty four becomes the twenty eight. This is already law on the books. And unless this administration turns around and says, oh, no, actually the last administration had this thing right, which is chances are slim to none. The law that's on the books will expire and tax rates will go up in twenty twenty six. So we've got just a few short years here before essentially across the board on everyone taxes do go up. And I think that they could go up even further into the future. So paying a low rate on savings and retirement dollars now generally is a good idea.

Now, there are some exceptions there. If you're making two hundred thousand dollars today, but your true expenses, you can live off of fifty thousand dollars. Then maybe doing a Roth savings or Roth conversions doesn't make sense because you probably will be paying lower taxes in retirement.

But generally, I just see it. Most people are going to stay in about the same tax bracket in retirement. And so it may make sense to look at conversions and contributions, paying taxes up front while you're earning a paycheck, rather than waiting to share your retirement nest egg with Uncle Sam at a yet to be determined tax rate or higher tax rates in the future. Smart stuff, Peter.

Be prepared is kind of the the order of the day. If you want to talk directly to Peter Roshan to talk about that to optimize retirement plan that he's come up with, you can phone him at nine one nine three zero zero five eight eight six or visit his Web site. W w w dot Roshan planning dot com.

That's rich on planning dot com. Peter, thanks so much for shedding some light on the financial situation for us. Yeah, always a pleasure. A lot of information.

I hope that that made sense. But if you've got questions, if you need clarification on any of that, or if you feel like, hey, some of that material that we discussed, some of that information, I want to make sure I'm doing the right things. Come in, give a call. I'll answer questions over the phone. We can we can just have a chat over the phone. I'll try to be specific and direct and help as much as possible. But if there's some higher level planning that needs to be done, come in and let's sit down and do that optimized retirement plan, looking at income, investments, taxes, health care, legacy, and a host of other issues that fall under each of those categories.

Well, thanks so much for that. Peter, again, the numbers nine one nine three hundred five eight eight six. And I want to thank you for listening and join us next time on Planning Matters Radio. This has been Planning Matters Radio. The content of this radio show is provided for informational purposes only and is not a solicitation or recommendation of any investment strategy. You are encouraged to seek investment, tax or legal advice from an independent professional advisor.

Any investment and or investment strategies mentioned involve risk, including the possible loss principle. Advisory services offered through Brooks own Capital Management, a registered investment advisor, fiduciary duty extends solely to investment advisory advice and does not extend to other activities such as insurance or broker dealer services. Advisory clients are charged a quarterly fee for assets under management while insurance products pay a commission, which may result in a conflict of interest regarding compensation.

This has been Planning Matters Radio. The content of this radio show is provided for informational purposes only and is not a solicitation or recommendation of any investment strategy. You are encouraged to seek investment, tax or legal advice from an independent professional advisor. Any investment and or investment strategies mentioned involve risk, including the possible loss principle. Advisory services offered through Brooks own Capital Management, a registered investment advisor, fiduciary duty extends solely to investment advisory advice and does not extend to other activities such as insurance or broker dealer services. Advisory clients are charged a quarterly fee for assets under management while insurance products pay a commission, which may result in a conflict of interest regarding compensation.