5 Investing Considerations for a Volatile Market
Tim Baker shares five considerations for investing in a volatile market.
Summary
Recent media attention brings to mind the current state of the investing market. In this episode, Tim Ulbrich and Tim Baker discuss five considerations for investors in this volatile market.
Investors should consider and work to understand common biases, including but not limited to overconfidence bias, loss aversion, and others. Investors should also consider their personal goals and personal philosophies relative to building wealth and living a wealthy life. In gaining a better understanding of the personal philosophy, investors should consider their risk tolerance, long-term goals, and asset allocation. As investors approach their goals through investing, targets and strategies should be revisited and revised.
Given the volatile nature of the market and how easily it can be influenced by the news cycle in the short term, investors should be mindful of groupthink, herd mentality, and investing in a silo. While it may be fun to make high-risk investment choices, those boring choices of index funds and long-term strategies are often the best financially. Generally speaking, the market shows growth over the long term despite short-term dips and drops. Being aware of your asset allocation, making safe choices, and not over-extending yourself to the detriment of your financial plan benefits new investors. Tim Baker shares that even professionals in finance benefit from guidance from a coach to help prevent those missteps with exciting but risky investment choices.
Mentioned on the Show
- YFP Planning: Financial Planning for Pharmacists
- YFP 124: The Behavioral Investor with Dr. Daniel Crosby
- The Behavioral Investor by Daniel Crosby
- Seven Figure Pharmacist by Tim Church, PharmD and Tim Ulbrich, PharmD
- Dave Ramsey
- YFP 070: Pre-Planning for Tax Season
- YFP 073: How to Determine the Priority of Investing
- Schedule a free Discovery Call with YFP Planning
Episode Transcript
Tim Ulbrich: Tim Baker, welcome back to the show.
Tim Baker: Hey, Tim. How’s it going? Good to be back again.
Tim Ulbrich: Excited for this episode. Now, call me old school, Tim, but I get the Wall Street Journal delivered to my house every morning. I’ve shared with you before, I hear the car coming in the driveway, it’s a feel-good. But one of the things that I couldn’t help but notice and therefore led to today’s episode is in reading the Journal, the volume of attention that has been given to investing lately, whether that be the stock market, the bond market, inflation, the housing market, crypto, meme stocks such as AMC, GameStop, Wendy’s, and so forth, you know, could be that the market is going to come crashing down or folks that think there’s going to be sustained growth, what will the Fed do or not do? All this really goes on and on. And I think if you read that news any given day and make a decision, the next day you might be kicking yourself. And so I wanted to talk in this episode about how one can have that long-term investing mindset that we have talked about often on this show in the midst of a lot of noise and attention that is out there just in the time period and the volatility that we are in right now. And so we’re going to talk through five considerations for the investor that’s going through this time period. And Tim, this really reminded me of an important philosophy that you and I adhere to and preach when we talk about long-term investing, one of the things that I’ve heard you say before is that a good investing plan should be as about as boring as watching paint dry. And Tim, this is just really hard to do in a time period like this.
Tim Baker: It really is. I mean, even sometimes I like have that moment of pause and I have those doubts. Then I quickly get over that and realize that no, stick to your guns, you know, what the market does over long periods of time is actually sufficient. And it’s that singles and doubles approach to building wealth over a period of time. But it’s easy I think to get distracted because of the news and the news cycle, especially in the times that we’re living in today. When you think about like even in the last downturn, ‘08 and ‘09, the news cycle, even just the social media presence of like what is everyone doing, and then if you go back to the ‘90s where the dot-com, that stuff is not like always in your face like it is now. So it’s like really easy to compare and contrast of what you’re doing versus what everyone else is doing and really kind of derail your long-term plan if you have a long-term plan. So you know, more so than ever before I would say, it’s like really being disciplined and kind of sticking to your guns and allowing the plan to unfold as you’ve outlined. And for a lot of people, like I said, it’s a slog because of water cooler talk, you know, about, hey, crypto, or this stock or buying houses. I just was talking to a couple the other day, and they’re like, “Yeah, we have this timeline of buying a house in the next 3-5 years, but we’re seeing our friends buy a house and them being really happy and excited, and it’s tough not to compare or tough not to get sucked up with kind of that keeping up with the Joneses mentality,” so it’s a challenge.
Tim Ulbrich: Yeah, and it is. I mentioned I think it’s really had to stay true to that long-term approach in the midst of a time period such as this. And as we’ll talk about here in a little bit, you know, this isn’t unique. The circumstances may be, but what we’re going through in terms of volatility certainly isn’t unique, certainly is not unique. And so we’re going to talk through five considerations for folks, again, that are investing during this volatile time period in the market. Now I do want to be fair that while we’re going to talk about the long-term approach, you know, I do want to acknowledge the difficulty that is there considering the volatility that has happened. So for this show, I went and pulled the S&P 500 numbers, just as one indication that we can look at. And Tim, check this out: February 14, 2020, so that would take us back to pre-pandemic or at least our recollection of pre-pandemic before life had changed. And at that point, the S&P was 3380 on Valentine’s Day of 2020. Now, one month and one week later, March 20, 2020, it went from 3380 to 2304. And then today, it stands at 4350. So February 2020: 3380, March 2020: 2304, today: 4350. So it saw a 32% decrease in one month and a little bit of change. Then an 89% increase from that dip after the pandemic started to now. We saw an 89% increase. And if you look at the net change over the time period from February 2020 to now, it’s been up 28%. So I think it’s important that it’s perhaps a little bit easier to talk about this long-term investing approach and strategy but like these are real numbers. And you shared with me before you hit record that you individually did a nice job of ignoring some of this noise when the dips happened. I didn’t do as good a job as you did. But you mentioned logging onto that 529 account for the kids and having that “gasp” moment, right?
Tim Baker: Yeah, I mean, I think people think that I’m like joking, but I’m not. Like when the correction came — or not the correction but just the dip because of the pandemic came last year, I did not look at my accounts. I think because I know the reaction. It wasn’t until, I don’t know, maybe like May or June of last year when it hadn’t completely recovered where I logged into the kids’ 529s. And I did get that — I looked at the balance and kind of dip and I was like, I got that like pit in my stomach and I was like, oh my goodness, it actually did fall quite a bit. But the reason for that is that I know that — and we’ll talk about this a little bit more — but you know, investing is such an emotional thing. And oftentimes, what you want to do in investment is the opposite, right? So like let’s go through that roller coaster. When the market declines like it did and you’re seeing, if you’re logging into your account — and I’m sure there’s a lot of people listening that look at their accounts daily — when you’re seeing hey, I had $100,000, now I have $80,000, now I have $65,000, that plays with your emotions, right? So in that moment, the feeling that you have is — and I kind of say you want to take your investment ball and go home. You’re like, ‘Alright, I don’t want to play this game anymore. It’s not fun. I’m going to go home.’ And what happens is that that relates to basically people selling off their investments low and getting into cash where it’s really cozy and safe. And then when it rebounds and it goes back up 60%, 70%, 80%, 90%, you miss that upswing. Right? So then you’re trying to figure out when to get back in. You’ve missed a lot of the returns. So more often than not, if you know your risk tolerance and you set your allocation, less is more. The less that you kind of fiddle with it and look at it, probably the better off you will be. And I know that’s not like an exciting answer, right, because the sizzle that typically is involved in a financial plan if there’s any sizzle at all, but if you’re a financial nerd like us, like it is the investments. They’re interesting. They’re somewhat exciting. You see your wealth compounding as a result of an efficient long-term investment strategy. But typically, the most efficient and I think successful are just really boring. They’re not individual stocks, they’re not cryptos, they’re not all these things that you hear about on the news that may or may not be a fad — I’m not saying crypto is a fad — but it is index funds and buying the market and things that are not necessarily exciting to someone that might be reading the Wall Street Journal every day or in terms of like what is the — what are the things that are making headlines, what’s going to print so people will read that? That’s just the reality of it.
Tim Ulbrich: So since we just proclaimed this as boring, we might as well just send the episode right there and call it a day. So now let’s jump into these five considerations for those that really are trying to reaffirm, Tim, I think much of what you just shared. No. 1 — and I mentioned this a little bit earlier — is recognizing while the circumstances of today’s market are unique, market volatility is not unique. And so what I’m referring to there is of course, we all have lived through firsthand a global pandemic, we know the supply chain issues that has caused, we know that obviously there’s some issues that we see currently happening around inflation and of course with the housing market and lumber prices that were up crazy and now they’re actually going down the other way. And so circumstances may be different, but the volatility and the concept of volatility is not unique. And I think, Tim, this feels relevant because for those that are investing, I would say within the first — I don’t know — 10-15 years of your career, if you have maybe known only this bull market, like this might seem or feel like behaviorally that some of this volatility is unique. So tell us about just historically, the precedence of volatility and why this concept is important.
Tim Baker: Yeah. So you know, the markets are very fickle. And it’s interesting to see that something that a president might tweet or a jobs report or whatever can really swing what is happening on Wall Street. So it can be influenced, I would say rather easily. I think that again, even more so because of the news cycle, but it’s really not a new thing. So I think the status is that since World War II, I think there’s been 12 or 13 economic recessions where you’re seeing these things do come in cycles. You know, it’s very rare to have the expansive bull market that we’ve had, meaning that we haven’t had a major correction. But along the way, it has gone up and gone down. And it’s evident by what happened early last year with a lot of the economy shutting down because of the pandemic. So the long-term investors should know that along that road, it shall be somewhat bumpy. But you know, the more that we zoom out, if we look at an investment portfolio over a month or two months or six months or even a year, very, very volatile. Lots of swings. But the more we zoom back and we go to five, we go to 10, we go to 20 years, it’s actually very predictable. And that’s the comfort that I have when I start to doubt myself is to know that over long periods of time, the market is very predictable. And it takes care of you. It allows us to outpace things like inflation and kind of get ahead of the tax man, so to speak. So that’s the comfort that I have. But — and I try not to get too caught up in the week-to-week, month-to-month, day-to-day stuff because I know, you know, as a human being, it can be — the volatility can be very emotional. And it can lead to things that causes us to do irrational things. So I’m cognizant of that, and that’s what I try to preach to clients. But again, it’s in that moment, you have those feelings and reaction that compels you to do things. And again, most of the things — all of the decisions that we make in life, Tim, are really based on an emotion. And if it’s an emotion like loss, we typically — and we talk about things like loss aversion — we typically do things at the detriment of our long-term plan.
Tim Ulbrich: Absolutely. So that’s No. 1. No. 2 is understanding common biases. So Episode 124, I had the opportunity to interview Dr. Daniel Crosby, who wrote “The Behavioral Investor.” And in the book, he actually talked about 117 behavioral biases at the time — perhaps there’s more since he’s done more research and others — 117 behavioral biases in total that he has come across throughout his research. We’re not going to talk through obviously all of those on this show but some that we think are relevant to the time. We also talked about this in Chapter 1 of “Seven Figure Pharmacist,” where we talked about the concept of mind over money. And so Tim, the first one that comes to mind here is overconfidence. And tell us a little bit about what overconfidence bias is and ultimately what it may lead to so that we can be on the lookout for some strategies to prevent this.
Tim Baker: The overconfidence bias is a tendency for people to have just more confidence in their own abilities. So like one of the things I always think back on when I learned about this is that if you were to poll pharmacists out there and you would say, “Hey, how well do you think you’re doing your job?” the overwhelming majority of people would be like, “I’m great,” or “I’m average or a lot better.” But we know that like on a bell curve, you’re going to have people that are really outstanding, people that are average, and people that are kind of below expectations. But the way that we view ourselves is we never really — even though sometimes we are our hardest critic, we’re not saying that when we’re actually taking stock of our abilities. So I see this a lot in pharmacists. And sometimes I see this in pharmacists that we work with in a sense of we get through a portion of the financial plan, and it’s like, “Hey, I got this.” And I’m like, “Well, do you? Because three months ago or six months ago or 12 months ago, you said, ‘I have no idea what I’m doing with my money.’” And you know, I think it’s a good thing we’re making progress, but sometimes there is this feeling that ‘Hey, I’m good to go,’ or ‘I have it all figured out.’ And it’s untrue. It’s an inflation of our own ability to manage the portfolio, manage the taxes, or whatever that might be with regard to the area of life that we are looking at. To me, overconfidence can really come into play with how we react to our financial planner or where we’re placing money. Again, it could be to the detriment of the long-term direction of the financial plan.
Tim Ulbrich: Yeah, and I think this is one, Tim, you know, I kind of put myself in the bucket of guilty as charged here. Like I was looking at one of my 401k statements recently and giving myself the pat on the back, right, of what’s happened over the last year. Like I literally have done nothing except like, you know, the hard work of a plan up front, obviously you played an integral part in that, but doing that and rebalancing — like that is the market doing its thing. And I think it can be in times like this where it has been significant growth — I graduated in 2008, so I started investing after the dip of the financial crisis of 2008. So it’s only been up in my career, for the most part, outside of —
Tim Baker: Only been up, yep.
Tim Ulbrich: Only been up. So you know, again, my comment about newer investors, like history I think is an important lesson to learn in terms of the trends but also that when we think about something like overconfidence, you know, is success in one area, does that necessarily translate to other areas or not? And how much of this is the market doing its thing versus undue credit we may give ourselves for making certain decisions.
Tim Baker: Yeah, and this might be something — you know, I’m just thinking about this now as we’re talking about this. You know, you often hear stories about people that grew up during the Great Depression. And there was almost like this underconfidence bias, right? Not necessarily just in maybe themselves or just even in the system, and maybe it’s the sign of the times, but I just wonder if there was the inverse of that. And sometimes you see that with like, with when people do come out in terms of the job market and things like that, they are more conservative in that part of life that was really kind of down-and-out. So it’s like, ‘Hey, I don’t really want to take this job for granted or do a move because it’s safe here because when I came out, I was $200,000 in debt and I couldn’t find a job.’ So you know, I think we — I do see a lot of overconfidence. And you want to be cognizant of it. Like what you were saying, Tim, is like, you know, you set your asset allocation, and that’s the right thing to do. But for the most part, the right thing to do is probably just to keep on keepin’ on and not overextend yourself or do things that I think will ultimately lead, again, to the detriment of the long term.
Tim Ulbrich: The next bias, Tim, that seems really timely right now is herd mentality/bandwagon effect/groupthink, whatever we want to call it. So tell us about this one, maybe some examples in the moment of what we’re seeing and obviously why this can have some negative impact.
Tim Baker: Yeah, this also can be called like mob mentality. So like this is the tendency of like the individual in a group to think or behave in ways that kind of conform with others in that group rather as individuals. And you know, probably I see this more in like things like AMC or GameStop or even crypto. It’s like, it is kind of like that water cooler talk of everyone’s doing it and we were kind of talking about this off-mic of, you know, I might not really be interested in that, Tim, but because I kind of want to be part of the conversation and part of what’s going on, maybe I do invest, right? And we were kind of — the analogy somewhat is fantasy football. Like if my pro football team stinks but I am in a fantasy football league and maybe there’s a little financial incentive there to win it, there’s some sizzle there, right? There’s some incentive for me to kind of be plugged in and pay attention. And I think sometimes that’s true. And I think it’s also because it’s like the new, like at least with crypto, it’s kind of the new thing and it’s not really understood. And I think there is like a lot of promise and upside, but it’s really speculation right now. I think the thing that I get a little frustrated with is that a lot of the people that I see that are investing in crypto don’t really have business investing in crypto. But it’s really easy with some of the apps that are out there and things like that that kind of drive that forward. And it’s exciting, right? We do things that excite us. We’re talking about, hey, keep it boring, don’t do anything that there’s a lot of juice behind it. It’s like ah, it’s so boring, Tim, like I don’t want to do that. I want to do something that I can get excited about. But oftentimes, those are more expensive to the investor and again, not necessarily the best thing from a fee perspective or just in the long run in terms of the swings in the market.
Tim Ulbrich: Yeah, I mean, I think we just take a step back, Tim. Like opening xyz app and making an investment purchase, like there’s an endorphin rush that’s happening, right? Not looking at your account balance for three months, like you ain’t getting any endorphin rush from that. I mean, there’s just one that obviously tends to be a little bit more exciting, might attract us in that direction, and one that’s going to take some discipline behavior, perhaps a coach to kind of help keep us on track in that. And I want to be clear, as we talk about some of the current trends, we’re not saying in any way, shape, or form there’s not a place for cryptocurrency.
Tim Baker: Right.
Tim Ulbrich: I think you made a good point there in terms of like the priority of that or you and I have talked before about for folks that are interested in individual stock picking, we’re not saying nobody should ever think about that. I think what we’re suggesting is looking at the bigger picture, where does that fit? Are we putting the priorities in the right order? And then if we’ve got to scratch that itch, like OK, but let’s make sure we’re doing it within a reasonable way in the context of everything else we’re trying to achieve.
Tim Baker: And just know what you’re getting into. And for a lot of people, people don’t. And again, not investment advice, but we’ve talked about keeping it boring, low-cost, passive index funds. They’re about as boring as they can get. But for the most part, I think it’s kind of that building out a portfolio like that that buys the market, doesn’t try to make strides to beat the market. And you know, what we said about the market is that it takes — it does take care of you. If you can stick to your guns during those volatile markets, it’ll take care of you over the course of the long run. And some of these things that we talk about — and again, it’s not to say that these things don’t — some of these things don’t pan out.
Tim Ulbrich: Sure.
Tim Baker: Sometimes they do. It’s like hey, if you would have bought Amazon at this — you know, you see those clickbait articles: This guy bought Amazon at $x per share and now he’s sitting on a beach somewhere. Like those things do happen. But for the most part, if you’re looking at — if you’re a novice investor and you’re looking at building a robust investment portfolio that is going to see you through to retirement or whatever your goal is, that’s typically the being greedy instead of successful portfolio.
Tim Ulbrich: Tim, let’s talk briefly about loss aversion bias. Again, there’s many biases we could talk about. But I think these three in particular are really relevant right now. Talk to us through about what is loss aversion bias and what are some of the implications here.
Tim Baker: It’s a cognitive bias that kind of explains why individuals will act in a way that they avoid pain or they say that the emotions of pain are twice as impactful than the pleasure of a game. So the loss felt from money or an investment or in some type of valuable object or something like that can feel worse than gaining that same thing. So the example is that if you were to lose $20 reaching your hand in your pocket and pulling your keys out and that falls on the side of the road, you feel that a lot more than finding that $20 in your couch. Now, that’s pretty awesome if you find $20 in your couch, but to me — and the movie that I always think about, Tim, when I think about this bias is “Rounders.” And I think I’ve talked about this on the podcast before. But “Rounders” is about — Matt Damon’s character is an amateur poker player who’s studying I believe law. And he is trying to scrape together money to go to Vegas to kind of make a run at the World Series of poker. And his character describes I think early in the movie where it’s like, you don’t remember the huge pots that you rake or the huge hands that you win. What you really remember and what sticks to you are when you go bust and you really lose a terrible hand. And I even see this, even this week, Tim. And I found myself doing this is like, we’ll sign on two, three new clients, but the first thing that comes out of my mouth when the team congratulates me is like, “Well, we lost this one,” or, “This person didn’t show up to that meeting,” and I feel like I’m happy that we are growing YFP and people are coming on and working with us on their financial plan, but it’s almost this unconscious reaction of I feel that loss and I’m like, well what could I have done? What could I have done better? Or what could we have done to kind of win those too? So it is really a thing that drives us is that we will recall those negative losses and that will affect our behavior, and we overweight that more than any gains that we have. And I look at it in this market really from two sides. You know, you see people that look at the market, and they’re like, ‘Tim, this is kind of scary. It’s up and it’s down. It’s like super unpredictable.’ And I’m like yeah. And we look at the risk tolerance, and it’s super conservative. But you’re a 25-, 35-, even 45-year-old pharmacist. There’s a lot of time horizon there. Like there’s a lot of time before — and again, we’re talking about long-term investing for retirement. Over long periods of time, we should be somewhat aggressive because it’s just, again, you’re not going to remember what happened in 2021 when you go to retire in 2051. But we — because of the losses, that dictates our behavior. But the other thing too is from a loss aversion perspective, Tim, and I see this also where it’s like, ‘Hey, Tim, like how’s it going? Like financial plan looking good? A lot of people talking about crypto, a lot of people talking about this stock or that stock.’ Like it’s almost this FOMO, this Fear of Missing Out on this trend or this herd mentality that’s going on of excitement around these things. And this fear of missing out or this kind of the loss of missing out on this opportunity is driving people maybe to be more aggressive or more speculative, I would say, in investments they would not have otherwise thought about or even entertained. So I think it can play on both sides of the loss of if my portfolio does go down but also the loss of like a missed opportunity. And I think that, you know, I look at it, and I try to — I try to look at this with context, Tim. So like, you know, I hear a lot of people say like, “Ah, the country is going down the drain, blah, blah, blah.” And like I’m sure that they said during the hippie and free love movement. Right? Like it’s this bias that we have like right now, it’s — and maybe that goes into the recency bias — but like it’s this bias that we have that everything — and the same is true with things like crypto — is that like when the dot-com crisis was going on, people were insane in terms of what they were doing to take out second mortgages to buy — I always joke — cats.com or whatever or this.com or even in the subprime mortgage crisis where people were doing really aggressive and ill-advised things to buy real estate because the market was just so hot. And again, if you think about it from an emotional perspective, what you’re feeling, Tim, is probably the — what you should be doing is the opposite of what you’re feeling in a lot of ways. So to me, it’s just really interesting to see how these play out in real life. And it’s just, again, part of the value that I bring, even though I’m human and even though I feel a lot of the same things is that check. And you know, Paul has even said this, Paul Eichenberg who is our IRS-enrolled agent, leads the tax work, he’s like, you’re there to kind of be like the stopgap to my portfolio because there are things that he wants to do and he wants to tinker and I’m like that barrier, so to speak. So even people within the profession that are espousing this and talking about this with clients still have those biases or those emotions because we are human. And these are things that just are innate to us.
Tim Ulbrich: Yeah, and I would argue, Tim, just to drill that point home, sometimes the closer you are to it, the harder it is to keep your hands off of it.
Tim Baker: Yep.
Tim Ulbrich: Well, good stuff. No. 2, we could talk about biases certainly probably a whole separate episode and dig into that further. But the whole purpose of that as we think about these five considerations investing in a volatile market, this is all about knowing yourself. Right? So if we can understand the biases that we’re perhaps more tending towards or leaning towards, then we can start to think about some of the strategies to overcome those. No. 3, Tim, is understand your investing philosophy and goals. One of the things I think about often with investing, especially right now, is that we’re talking so much about the x’s and o’s, right, whether it be what stock am I investing in or what am I doing in terms of what account I’m putting money in? All important stuff. However, we might be doing that without taking that important step back to say, what’s the vision? Where are we going? What are we trying to achieve? What’s the purpose? And then from the vision, we start to derive, OK, what’s the plan in terms of how much we need? And then we start to think about the x’s and o’s, right? Where are we going to put the money? What accounts, asset allocations, all those types of things? So I think a time period like this where so much of the attention and noise is on the x’s and o’s, it takes some discipline to take a step back and think about the direction, the vision, where are we trying to go. So Tim, talk to us a little bit about the importance of this. And I’m thinking specifically from the planning perspective, how do we go about this in terms of working with clients to really make sure we’re defining that vision, that purpose, that why, for our investing side of the plan and then ultimately keeping that front and center as we make those decisions of how to execute?
Tim Baker: Oftentimes, this is something that’s like way overlooked, right? So with philosophy, a lot of people, they don’t necessarily know what their philosophy is or know enough to kind of verbalize what that is. But in terms of goals, I think people that do have goals, a lot of times what I find is that they’re very singular in nature or what I’m trying to say is like, ‘Hey, we’re just trying to pay off this credit card debt,’ ‘We’re just trying to get through the student loans,’ ‘We’re just trying to save $30,000 for our emergency fund,’ or, ‘We’re just trying to save 10-20% for a down payment on our house,’ or whatever that is. But — and it’s almost like when I think about fitness, it’s like the person that’s trying just to get like six-pack abs. Right? But we know that just like the financial plan and kind of like systems of the body, they’re all interconnected, right? So to me, I think those things are good. But I really want to look at when we’re talking about understanding where you’re at in the universe, at least financially, is what does the balance sheet look like? Because a lot of this stuff in investments — actually, we just signed on a client that were very really big into Dave Ramsey. And one of his big tenets is like, don’t invest even with a match, don’t invest until the debt is gone. And I’m paraphrasing here, but like, that’s what they were doing. And they recently just switched gears a bit because there was a pretty healthy match, and they wanted to get that going and they kind of stumbled upon the FIRE movement and x, y, z. So I think it’s really looking at that balance sheet because there are going to be some people — again, we see it. We see people that have massive amounts of credit card debt but they have a Robinhood account that’s investing in crypto. Like those things necessarily don’t compute. So I think it’s looking at, again, like what are the — we’re always talking about the baby steps. What does the emergency fund look like? What’s the consumer debt? Is there a plan for the other types of debt, whether it’s a mortgage or student loan? So really understanding where we’re at on the balance sheet, on the net worth statement, and then from there, you know, I think the big thing that people talk about a lot these days is like self-care. And I think sitting down — my wife and I, Shea and I, we did this last night. We went out, kind of an impromptu date night, got a babysitter, and it was just talking about where are we at and kind of where do we want to go and really kind of looking at, you know, the next couple years and what’s really driving us — and Tim, we’ve talked about this a bunch — is our daughter Olivia is 7 this year. And that means we have about seven or eight years before she no longer wants to hang out with Mom and Dad. So we’re cool. So like we really want to capitalize on those years. And that’s really what’s driving that emotion, that loss, is really what’s driving what we want to do today. And I think really taking that time to reflect yourself, reflect with your partner, I think it’s about as good as you can do from a self-care perspective. And unfortunately, because we’re so busy, we have all these screens in our face all the time, we don’t do that ourselves. And sometimes I even see this with clients just talking out loud or I just did this this week with a client that we reviewed their goals that they made 2.5 years ago, and they’re like, ‘Wow. We’ve done a lot of these things. There’s some things we’ve got to tweak, right, we’ve got to work on. But it’s amazing how well we’ve done, and yeah, and the numbers are looking good too.’ So I think once you get there and then we start diving into different pieces of the financial plan, a la investments, that’s when you’re really looking at what is your risk tolerance or what’s your risk capacity, how much risk can you take, what are the long-term goals, Tim? So for you, it’s maybe you want to retire at 50. Maybe you’re like, I just want to retire at 70. Maybe it’s I want to relocate. What are the things that are really driving you? And then I think that really sets things like the asset allocation — so the asset allocation is just how you divide up your portfolio into different percentages. And again, we’re going to be super boring with that. And then rebalance it over the course of time and then adjust it as you get closer to whatever that time horizon is. So it is a lot of moving pieces. Again, we haven’t really even talked about things like tax. But there’s a lot of things that we see that are not being fully fulfilled on the tax side — and Paul could probably come on here and he’s probably shared it — where it’s these are real dollars that we can save that we’re not realizing but we’re focused on speculating over here or doing that. And I get it because again, taxes are also super boring.
Tim Ulbrich: Boring.
Tim Baker: There’s no sizzle there, Tim. So yeah, so like but in terms of like real dollars and things like that, there’s a lot of things that are typically not uncovered or captured before we start doing some of these other things that, again, kind of catch all the headlines.
Tim Ulbrich: I know we’ve got some nerds out there listening because I’ve talked to them that got super excited when we started talking about tax strategy.
Tim Baker: Oh yeah.
Tim Ulbrich: But for the other 99% of the people, we lost them for a moment. Yeah, you know, Tim, I think what you’re saying here is a good reminder. You and I talked recently about why net worth matters. And we talked about the importance of the balance sheet, taking care of our future self, but it’s not just about that, right? And I think this is a good reminder that the balance sheet matters, right? But ultimately, like what’s the purpose? What’s the goal? Where are we trying to go? And I’m encouraging folks because I’m encouraging myself when I say in real time is that the balance sheet and what’s in your accounts and your net worth shouldn’t be the finish line and the measuring stick. Right? It’s an important thing that we’re going for, but ultimately, we’ve got to look at what else is of greatest priority and ultimately the concept that we talk about often, which is living a rich life along the way. Tim, No. 4, you know, you talked about the analogy of the financial plan being interconnected just like the body and the systems of the body. And I think that is a nice segue into No. 4, which is avoid investing in a silo. So you’ve said it many times, I believe it firmly as well, that investing is one, albeit an important one, one part of the financial plan. And so here we’re talking, again, in this time period of volatility, that we’ve got to take a step back. And you alluded to a couple things of the baby steps in terms of thinking about the emergency fund and paying off that high interest consumer debt, but give us that reminder, Tim, that investing is one part of the financial plan, an important one, but it’s just one part.
Tim Baker: I’ll say this caveat here, like I was going to say, the thing that’s capturing all the ink right now, it is the market. It’s the investments. And you’re not really seeing a lot of front page stories about life insurance or tax. I mean, you’re seeing a little bit more because like we’re looking at what does a Biden tax code look like versus what’s currently there in Trump and how is that going to affect everything? And I know we talk about the child tax credit, so that’s getting a little bit of press. Debt is getting a little bit of press, especially student loan debt, because of things like the PSLF shakeup and FedLoan servicing basically waving the white flag here. But for the most part, what you’re reading about are the markets. And you’re driven by the fact that you’re looking at your balances and you’re logging into your 401k and that’s affecting you. So again, it is a piece of the financial plan. But it is just that. And I will say that one of the big drivers of building wealth over long periods of time, over the course of a pharmacist’s career, is I look at it as really three main things. And there are other pieces of the financial plan. But it’s going to be the thing that really I think gets you to an inflection point where you really start to build wealth is that you have an efficient debt strategy, right? So I think the two big buckets for pharmacists are going to be student loans and your mortgage. You know, a lot of people are very willy-nilly, especially with the student loans — now we’re seeing a lot more people have a heightened degree of attention toward student loans, and I think we probably should take some credit for some of that, definitely the mindset and the knowledge of people that we talk to is completely different than when we started, when I started working with pharmacists years ago. So efficient debt payoff strategies, efficient investment strategies, and efficient tax strategies, which kind of overlay everything. And I think those are the big drivers that build wealth over time. So it is — those are ongoing things, but again, those things are not really worth anything, Tim, if your financial plan is not protected. So those are things like insurance and estate planning or if you don’t have the proper health insurance and you have a catastrophe or whatever that is. So these are all interconnected just like systems of the body that you are only as strong as your weakest link, to use a phrasing that people can relate to. So one client that I met with, they surpassed $1 million in net worth, but they still didn’t sign their — still didn’t get their life insurance stuff. It can be sometimes, ‘Oh, that’s not going to happen to me. I don’t need to worry about that.’ But that’s a big weakness of their financial plan. So investing is important. It’s not not important. It is part of the plan. And it is one of those things that’s going to drive your wealth-building over the course of your career. But you’ve got to make sure that all the other things line up and they’re kind of working in rhythm with driving your balance sheet forward, your net worth up, and allowing you to align the resources you have to execute to the goals — so these are the qualitative things, the things that are less about the 1s and 0s and more about what is a wealthy life to you, Tim? What is a wealthy life for Jess? And if you’re not doing those things, who cares? Like what’s the point? What’s the point of all of this stuff? What’s the point of paying down the debt or earning the salary or whatever? To me, it has to be this feeling of taking care of you today but then the future version of yourself. And for a lot of us because we’re not really introspective because of the busyness of life, we kind of fail to do that. And then we wake up 10 years later, and we’re like, ‘Oh. A lot of time went by, and I’m still exactly where I’m at with this goal that I want to achieve.’ So yeah, it’s definitely — it’s an integral part to the rest of the financial plan and important to recognize that.
Tim Ulbrich: Yeah, and I bring this one forward, Tim, not to suppress the importance of investing but rather to elevate the importance of the others that I think may get overlooked out of the exciting aspects that come with investing. We see this firsthand, right? If we run a webinar at YFP on investing, bam! People are excited. If I run a webinar on like long-term disability and life insurance, like nobody is coming to listen to me talk about that or, you know, few people will be there. So you know, I think it’s just a good reminder that we look at the financial plan in a holistic manner. And that’s why we talk adamantly about the importance of comprehensive financial planning and making sure that we’re getting advice and input across the spectrum of the plan because at the end of the day, they are very much interconnected. Tim, No. 5 — and you’ve highlighted this a little bit already, and we’ve talked about it on the show before on Episode 073 — and that’s to re-evaluate the priority for investing. And you know, on that episode, Episode 073, we talked extensively about thinking of the different buckets, of course that’s not investment advice but just some general considerations around the priority of investing. And we’ll link to that in the show notes as we’ve got a really great visual that people can look at as a way to further educate themselves on this. But Tim, you mentioned tax-advantaged opportunities and seeing some of that in tax season as one example of this. But this time, again, I think is another example when we’re seeing ourselves perhaps because of something we’re hearing about or what other folks are doing is we’re losing sight of that priority of how we might be want to be investing the limited dollars that we do have to invest.
Tim Baker: Again, a lot of this is influence of even growing up, my mom was like, “Hey, there’s this new thing, a Roth IRA, we need to open those and get money into that.” You know, there’s these things that are kind of impressed upon us even growing up or not, or not impressed upon us at all. But I think it’s because, again, the ease of what is in people’s face in terms of like what they should be doing. But again, I think if you have kind of the basics in place with you can pay your bills, you have some 3-6 month reserve set aside in an emergency fund, the debt kind of is in check and is manageable, and there is a surplus for you to work with, that’s really when — or if not even before things like a 401k match or retirement plan match is really the first place that you look at because, again, you know, what we always say, it’s free money. So if you have a — if you make $100,000 and your employer matches 5%, and you’re not putting 5% to get that match, so to speak, if that’s the way it rolls out, then guess what? You just got a 5% raise essentially. That is typically step one is that if there is free money available in a match, you definitely should do that. From there, it gets a little bit more muddied because people — and even if you don’t have the match, it’s a little bit more money — from there, it’s things like an HSA if you have a high-deductible health plan that allows you to open up to an HSA, you know, you want to look at that because of the triple tax benefit that we’ve talked about in past episodes. It’s one of the big things that regardless of how much money you make, you can escape tax and allow that money to grow tax-free similar to an IRA, which is unheard of. You know, from there, you kind of have to do a little bit of digging and it depends on the strategy that you have with things like students loans and what your 401k might look like. But it might be to go back to the 401k, it might be look at things like IRAs, Roth IRAs, that type of thing. A lot of times, not all the time, money in a 401k can be more expensive, meaning there’s a lot of fees and things attached to those accounts that are very opaque or just not transparent to you. Not always the case, but a lot of times the smaller the employer, the more — you know, that’s a good rule of thumb — the more expensive it can be. So you kind of have to do a little bit of research, does it make sense for me to go back into the 401k and try to max that out to that $19,500? Or do I look at trying to max out an IRA, Roth IRA, which is $6,000? And then from there, we kind of talk about this in visual, like if you have access to a SEP IRA, a lot of people, especially a SEP IRA is typically for a small business or things like that. But that’s another avenue that you could potentially sock away some money for long-term investment that has a tax break. But then it’s things like a brokerage account where you can put as much money into there. A lot of people use brokerage accounts when they exhaust all of these accounts that we just mentioned or there is more of a near-term, so not necessarily a long-term, a near-term need. So my wife and I, we use a brokerage account that has a more conservative allocation because it’s just not as much time for like a car purchase, right? So we’re not being done any favors in the interest rates in terms of a saver, so right now it’s .5% in a high yield, so we’re trying to get a little bit more than that in a brokerage account, but that’s a slippery slope, right, because we don’t necessarily know how long we’re going to have that money invested, and the market could turn south tomorrow. But then I know some people get into real estate and other things, but the thing that we typically see here, Tim, when we talk about the priority is that these priorities aren’t necessarily what would be advisable when we actually look at the balance sheet and we actually talk about what the goals are for that particular — sometimes, they are out of order just because of curiosity or ease of use. “Hey, I can sit on the couch and see a commercial on Robinhood and open that and put money into crypto or this stock or that stock.” It’s just that’s how it is. And again, it’s more exciting than doing some of these boring things of like — it’s not exciting, Tim, to put money into an HSA. It’s just not. Even though us nerds are like, ah, triple tax benefit, it’s awesome. It’s not exciting. It just isn’t. I get it. But again, that’s why I think having a coach or an advocate to kind of help ask good questions and line up are these the things that are important to you and let’s line up the resources in a way that maximize or give you the most efficient outcomes? That’s what we’re trying to do.
Tim Ulbrich: So Tim, have you officially relabeled yet your brokerage accounts for the Swagger Wagon? Because it’s going to happen, the minivan, right? I mean…
Tim Baker: Oh, man.
Tim Ulbrich: If Shea’s listening, she’s like, “Heck no!”
Tim Baker: Yeah, well, she’s not listening. She’s not impressed with me at all. But no, it is not labeled. It needs to be. I’m on the wagon. I just don’t think she is yet. But maybe eventually.
Tim Ulbrich: Great stuff. So we talked about five considerations for investing in a volatile market. And you know, one of the themes I think of throughout this topic, Tim, is the obvious value that can come from accountability. You know, you mentioned in the form of coach, obviously we’re biased and firmly believe in the value of one-on-one comprehensive financial planning and coaching that we do with our team at YFP Planning. So for folks that have been thinking about that for some time and are listening and want to see if that’s a good fit for them and their financial goals and their plan going forward, you can book a free discovery call with us if you go to YFPPlanning.com, you can book that call right there. We’d be happy to talk with you further about our one-on-one planning service. As always, thank you for joining us on this week’s episode of the Your Financial Pharmacist podcast. And we could use your help in getting other pharmacists to find this show as well. And you can do that by leaving a rating and review on Apple Podcasts or wherever you listen to the show each week. Thanks for joining, as always, and have a great rest of your day.
Current Student Loan Refinance Offers
[wptb id="15454" not found ]Recent Posts
[pt_view id=”f651872qnv”]
