Welcome to another edition of Mr. Stillman's Opus. Walter Storhold here with you this week alongside the man of the hour or maybe the next 10 to 15 minutes, not really the hour.
That's more my speed, 10 to 15 minutes. Never been worthy of being a man of a full hour. Well, that's why they came up with 15 minutes of fame. Exactly. You just get to have it like every other week.
Perfect for your taste. We're talking on this week's podcast about keeping things in context, in particular your accounts, keeping them in context. And the idea behind this podcast is to make sure that we're not kind of getting fooled by what our accounts might be doing, keeping in mind of like why we're doing what we're doing when we're investing. John's going to make that picture clear for you.
Sure. So as an example, a lot of people right now could not be more pleased with their 401k. They check maybe online every couple of days and they get those monthly statements in the mail.
Things could not be going better. I usually check mine once a week. I probably should do it on a consistent day, but I kind of just, you know, whenever I get a couple of free minutes, usually it's once a week, I'll check and just see what they're doing.
But yeah, last couple of months, it's been like, every day, let me just check and see. And so what happens is when the market is doing wonderfully, as it has for the last three months or so, people trick themselves into thinking, oh, you know what? I really have this investing thing figured out.
I'm a genius now. I've really gotten the hang of this at age 61. Well, the problem is two things with your 401k. If you are indeed invested in a way that's sort of mirroring what the market's doing, then yes, your account's way up right now.
You probably are tickled pink. At the same time, also keep in mind, you're putting money into that account. And so a lot of times you're just looking at the total dollar amount growing. But let's say you're maxing out a 401k.
That's $2,000 a month if you're over the age of 50. You can put $24,000 a year into that account. So if you're maxing out, if you've got an account balance of $500,000, let's say, and you're adding $24,000 a year plus getting growth, yeah, it really does look like your account is skyrocketing.
But let's keep in mind what's going on there. If you're really seeing that significant growth and you're tickled pink right now, what that actually indicates to us, and this is kind of counterintuitive, but that could indicate that you have a problem because it could indicate that your account is behaving as the market as a whole is doing. It probably shows that that's how you're invested. And so if you're way up when the market is also way up, if you're in your late 50s, early 60s, let's say, that could be a sign that you have way too much risk in that particular account. And it doesn't have to be your 401k. It can be an IRA or any other investment that you have that could be problematic if you're way up because the market's way up. On the other hand, there are people who come in and they're really unhappy with their account, whether it's their 401k or maybe they're working with some other advisor and they're saying, look, this just isn't getting any good return right now and I don't understand how it's doing poorly when the market's doing great.
Well, again, we have to keep it in context. If you're 63 and you're retiring next year and you need that money for income the day you retire, we don't want that account following the market. So the fact that you only got 3% or 4% on it last year is a good sign because that means it's not correlated to the market. So if and when we have a market crash, and I don't want to be the guy who says it's coming tomorrow. It could. It could come next week. It could come two and a half years from now.
I don't know. But the point is, you need to think less about when is the next market crash going to be and how do I position myself against it. It's more a question of, okay, the market crash could come at any point. Based on the timeline, until I need this money, how should I be invested? If you need the money in a year or even five years, we pretty much want to pretend like there's a market crash coming tomorrow, whether it does or not. And if you need the money in 15 years, who cares what the market does tomorrow? It's okay to kind of be in an account that's behaving that way.
Well, that's where I was going to take this, you know, while we're keeping things in context is let's not view. And I think this would probably be I would identify as a common problem for a lot of people with my vast knowledge of the financial world being your interviewer, of course, each and every week here on the show. But I would identify this and that's people often view their investments, you know, whether you've got a bunch of 401ks or IRAs or lots of both all combined, you view your million dollars saved for retirement all the same. People never are really able to segment out the fact that they should be invested differently.
So one of your accounts, I think this is what you were driving at. You can be jumping up and down excited about maybe that IRA because that's allocated for something you're going to do 15 years from now, whereas your 401k, you're planning to use that money as soon as you retire. So that's the thing that you should be almost disappointed that you're not keeping pace with the market right now.
But you should also be happy with that case. So let's use a real life example. A couple of real life examples, actually. So I had a client about a month ago, who got his end of 2016 end of year performance statement for his IRA that we manage. He got like a 3.2% return for the year on that account. And he's comparing it to his 401k. And he said, I don't understand how you can only get 3.2%. Look what the market did in 2016, especially at the end of the year. He said, you only get 3.2%.
But then we had to put it in context. Look at your plan. You're retiring in three years. The first money that we use in retirement is that IRA, where you just got 3.2%.
It's very bond heavy. All we're really trying to do with that account is keep up with inflation. And when we have a 40% downturn in the market, you know what we're going to get in this other account?
Probably about 3.2%. That's how it's structured. That's the point of it, to be slow and steady. On the other hand, when we have that market crash, he's then going to be very unhappy with his 401k. So again, you just have to put it in context. What is the purpose of this money? When do we need this money?
Therefore, how should it be behaving right now? And you just can't get too caught up in what's happening in any given moment. You got to look at the bigger picture. Yup. That's really key, really important to remember. And I think it's a great discussion on keeping things in context with your accounts. And then the other example was a situation where, basically, this was a couple who, they're still about 10 years away from retirement.
Different picture than the other guy. Yeah. And so, still though, the account that we're managing for them is the first money that they're going to use in about a decade. So it's kind of moderately invested.
Not huge risk. It's not following the market. The volatility is muted a bit compared to her 401k that she's managing on her own that is essentially following the market because the way we set up their plan is she needs that money in about 20 years. If she's 52, she doesn't need that money until she's 72.
So, again, it's fine if it follows the market in that case. Well, she was also unhappy with her 2016 performance in the account that we're managing because she was comparing it to her 401k. So, again, we just have to step back and look at the plan. And this is why we map out the plan so we can see the different silos of money, basically. This is our five-year money. This is our 12-year money. This is our 21-year money. Once you remind yourself, okay, when do we need this money, that then clarifies how it should be invested.
But it's just so easy to get caught up in the moment. And just to play devil's advocate here, Jon, the first example that you gave of the guy that's three years away and he's looking at what the market did last year and the fact that he only got 3% in that account and you're kind of miffed at that. Because hindsight's 20-20. And, you know, the contrarian is going to say, well, if you had been invested more aggressively, look at how much more growth there would have been and how that would have changed the lifestyle. But you've got to flip that on its head and say, okay, well, great. Well, now we're faced with the same decision this year. Now you're two years away from retirement.
Sure, we could have another big run up this year. Do you want to take that risk again? You can't look back in those situations. You got to look forward. And that's the thing when we're putting a plan together.
It's based on with the money that you have now and the money that you're going to contribute for the remainder of your working years if you're still working along with the income that you want to have once you retire. What we're trying to do is invest each dollar really with as little risk as possible. Stop playing the what if game.
Yeah. Invest with as little risk as possible to get us to the point that we're trying to get to. So if we can invest it in an account that's not very volatile, that we might get 3% to 5% a year on over the next decade, and that's enough to get us where we're going to go, well, most people are going to want to do that.
Take the known commodity, right? Go ahead and invest in a way that's not very exciting. But again, to go back to the Will Rogers quote that we talk about all the time, at some point in my life, it's not about the return on my money.
It's about the return of my money. I need to get a poster of that in the office. Can't say it enough. It's such an important concept. And so you're exactly right. We can't get too caught up in hindsight because that's really the only way to know the right answer. All we're trying to do is get from point A to point B with as little risk as possible.
And inevitably, somewhere along the way, that probably means some segment of your money, some segment of your portfolio is not doing as well as the market. But that's by design. Will Rogers also said, by the way, that everybody is ignorant only on different subjects.
That's also true. Worthy of printing out as well. Let's get a whole wall full of Will Rogers quotes at the office. We're going to do probably a Will Rogers podcast one of these days. I'm down. I'll throw different quotes at you, and you can tell us what they mean financially. Let's do it.
Because not all of his are related to financial information. I may have done a Will Rogers blog post at some point. I can't remember. And I'm sure it's made an appearance on your radio show. Absolutely. So it's time to come around for the podcast. One last thing Will Rogers said was, even if you're on the right track, you'll get run over if you just sit there. So listen to the information today, and if you realize that you're taking too much risk in your portfolio, don't just sit there.
You're going to get run over. Come in, have a review with John Stillman if that's what you need. Maybe this was our Will Rogers podcast. It looks like it turned into that.
Certainly the tail end. We'll wrap it up, and this has been Mr. Stillman's Opus. Thanks for joining us. For John Stillman, I'm Walter Storrell. We'll talk to you on the next edition.
Whisper: medium.en / 2023-11-26 23:41:26 / 2023-11-26 23:46:45 / 5