Mullooly Asset Management

Fiduciary Fee-Only Financial Planner | Investment Advisor in Wall, NJ

Timothy Mullooly

Charitable Contributions and the CARES Act

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Charitable contributions can be a great thing for everyone involved. In 2017 alone, Americans gave $410.02 billion in charitable donations – accounting for 2.1% of the GDP. Making charitable donations can help fulfill your family’s moral values, but it can also play a significant part in lowering your taxable income.

If you donated to a charity in 2020, charitable contributions can count even more toward lowering tax bills for some. Thanks to the CARES Act, which passed in late March 2020 amidst the coronavirus pandemic, your giving could stretch even further this tax season.

How Is This Year’s Charitable Contributions Exemption Different?

Thanks to the CARES Act, filers will be allowed to take a $300 above-the-line charitable giving deduction. This means you do not need to itemize your taxes this year to use this deduction.  This is significant because following the tax law changes of 2017, most people took the standard deduction.

As a reminder, the standard deduction for 2020 is $12,400 for single and married filing separately, $24,800 for married filing jointly and $18,650 for head of households. 

It’s important to note that the $300 limit is per filing unit, whether your filing single or jointly.

Who Does This Change Benefit?

This CARES Act exemption is not available for those who itemize their deductions, it’s only for those who are using the standard deduction on their 2020 tax returns.

This is significant because, historically, anyone taking a standard deduction has not been able to reduce their adjusted gross income (AGI) by claiming charitable contributions. 

Nearly nine in 10 taxpayers now take the standard deduction and could potentially qualify for this new tax deduction. In tax-year 2018, the most recent year for which complete figures are available, more than 134 million taxpayers claimed the standard deduction, just over 87% of all filers, according to the IRS. 

What Donations Count Toward the CARES Act Deduction?

Just as any other charitable contribution deducted from your taxes, eligible donations must have been made to qualified 501(c)(3) organizations or any other qualified organization as outlined in section 170(c) of the Internal Revenue Code.

What About Regular Charitable Contributions?

In the past, those who itemize their deductions were able to deduct up to 60 percent of their AGI in charitable contributions. Those who are extremely philanthropic may be interested to know that this limit has been raised to 100 percent.

If you were so inclined to do so, you could donate all of your income and deduct 100 percent of it – leaving you with a $0 tax bill.

While this deduction is just $300, it’s another form of tax relief for taxpayers in 2020.  After a year as chaotic as 2020, any little bit of relief helps, no matter how subtle.  You can still take the standard deduction and get a nice above-the-line deduction to your AGI.  If you have questions about your tax situation for 2020, now would be a great time to reach out to your financial planner or tax preparer.  If you don’t have professional assistance, we would be happy to speak with you!  Click here to schedule an initial call with our team today.  There is no cost or obligation!

The Market Rotation of 2020

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2020 was a strange year for the market. In this week’s podcast, we look at the market rotation that took place in the second half of the year that not many people paid attention to. We go through what worked this year, and how things line up for 2021.

Show Notes

‘Updating My Favorite Performance Chart for 2020’ – Ben Carlson – A Wealth of Common Sense

‘Rotation’ – Michael Batnick – The Irrelevant Investor

The Market Rotation of 2020 – Transcript

DISCLAIMER: Tom Mullooly is an investment advisor representative with Mullooly Asset Management. All opinions expressed by Tom and his podcast guests are solely their own opinions and do not necessarily reflect the opinions of Mullooly Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Mullooly Asset Management may maintain positions in securities discussed in this podcast.

Tom Mullooly: Welcome back to the podcast. This is episode number 340. I am Tom Mullooly, and I’m joined today by Brendan Mullooly and Tim Mullooly. Hey, guys.

Tim Mullooly: Hey.

Brendan M: Hello.

Tom Mullooly: So Tim, we have to talk about quilting today.

Tim Mullooly: Right, so the beginning of every year for the last handful of years, Ben Carlson at Ritholtz Health Management puts out his performance quilt, where he lists a handful of different asset classes and shows how they performed over the years. He just put out his one for 2020, since we have all the data and all the numbers from 2020. And it’s always interesting to see the randomness or the different assortment of where the different asset classes line up. An interesting point to lead off with is that, this is the second year in a row in 2020 that large caps were at the top of the list. But going back to 2011, they hadn’t been number one for the rest of that decade. So it was two in a row and then they weren’t in the top spot at all. It kind of just shows how it’s hard to predict what’s coming next.

Tom Mullooly: It really does look like a patchwork quilt. They do each different style group in color. So when you look at it at first glance, it really does look like a quilt, because there’s different colors all over the place, patches everywhere. But that really does drive the point home that you can’t just say, “I’m just going to buy a blue chip portfolio with dividends and just let it rip.”

Brendan M: Yeah, I think the message is that nobody stays at the top forever. And in most cases, in fact, if you do see a stretch of an asset class at the top of the list for a year, two, or three, it’s normally followed by them being in the basement after that. And so if you’re trying to go all in on what has worked, I think you’re going to be disappointed on a go-forward basis, especially if we’re looking one, two, three years into the future. You can’t just pile into what’s en vogue now. That’s not a strategy for success.

Tom Mullooly: So I know that we’ve talked about this a couple of times over the years, but forgive me for being the broken record in the group. Emerging markets were on fire. Now, I’m dating myself, because this was 2004 and 2005. I received more unsolicited calls from clients asking for us to put money into emerging markets in 2006 than any other time before or since in my career. And 2006, ’07, ’08, ’09, I’ve lost count emerging markets were in the cellar exactly as you just described for the next several years. And so reading, Barron’s and some of these other financial mags that tell you this sector is hot, is almost a cell signal.

Tim Mullooly: It could be also, I think a good point to make is that some years being what we’ve described as in the cellar or last place on this performance quilt, doesn’t necessarily mean that it was a bad place to be. It just means that the other areas performed better. So in 2020, there’s 11, including cash, there’s 11 different groups listed on this quilt. Nine of the 11 were in positive territory. So you could be towards the bottom of the performance quilt in terms of how you did last year, but it doesn’t necessarily mean that you lost money in those investments. It just means that they might not have gone up as much as large caps who were in first place. But it’s interesting to note that in a year like 2020, nine out of 11 areas of the market that he talks about here were positive.

Tom Mullooly: So Brendan, does it make sense to try and move your money around into these sectors as they’re at or approaching the top?

Brendan M: No, I don’t think you should ever allocate money based on recent performance. I think that’s a very bad way to put money to work. I think that if you had something that was towards the bottom of this list last year, or maybe even the last two years, probably a good signal that your patience will be rewarded. And probably sooner rather than later. And you almost certainly regret taking money out of that to pile into whatever was at the top. I think that’s buy high, sell low. That’s the opposite of what we’re trying to do as investors. I also thought it was interesting on the chart that you look at 2020 as a year where like everything worked kind of. Meaning like most of these things were positive to varying degrees, but they were all places that made money last year.

I mean, even government bonds or the aggregate bonded actually made like six or 7%, which is insane considering where we started from and how much of that was comprised of yields, maybe one or 2% capital appreciation.

Tim Mullooly: Considering all talk that we heard throughout the year about how you shouldn’t be in bonds or why own bonds. If interest rates and yields are this low …

Brendan M: It’s been a decade, now people saying bond yields can’t go any lower. Like if you have money in bonds, you’re going to lose money, this is terrible. You can’t do this and it’s been dead wrong for a decade. So I don’t want to hear it anymore. Interest rates are super low. I think you need to understand that. And the dynamic that it creates in your portfolio in terms of how allocate to it. But I’m tired of hearing the doomsday predictions for people who want to have some portion of their money in bonds. There’s probably a good reason for that if they have a financial plan.

Tom Mullooly: And so I think people tend to forget one part of the picture that tends to get overlooked is what kind of inflation is out there in the system. If there’s a lot of inflation, we’re probably going to see rates hopefully at, or above the rate of inflation. If there’s no inflation in the system, which is pretty much what we’ve been working our way through for eight or nine years now. You shouldn’t expect rates to return much of anything. We’ve talked about this now several times on the podcast that we, we don’t necessarily buy bonds for clients for the yield, buy them more as a bumper to help smooth out the volatility in the markets.

Brendan M: Right, and they’re not an inflation hedge either. That’s the stocks out of the portfolios. So inflation can do whatever. And I still don’t know that that makes bonds a bad investment. But looking like … so 2020 everything worked. And if you look at 2019 on this chart, basically everything worked too, not that past has to be prologue or anything. But in terms of setting expectations, the last time on this chart that we had two years in a row where everything worked, were 2016 and 2017. And then the following year, the top performing asset class on that chart was cash. So just saying that like after two very good years in the market, not without volatility, obviously aware of what happens roughly nine months ago now, the market went berserk and was down 30%.

So you can’t discount that that happened. It didn’t fit neatly into a calendar year. So you don’t see it at the end of year return numbers because of the recovery. But we can’t just continuously have years where everything works and there’s going to be volatility. And it’s not because of anything specific, you’re looking at two years, like 2016 and ’17 that are very different than 2019 and 2020. I mean, what year was like 2020?

Tom Mullooly: I can’t think of one.

Brendan M: Right. And so in 2018, wasn’t a super great year for stocks and the draw down in then happened to happen right at the end of the year. So performance numbers didn’t look great on a year over year basis then. I guess I’m more getting at the idea that like, there wasn’t anything specific in the news or the headlines or politics that made that a bad year to invest.

In fact, it was fine for most of the year. And then at the end of the year, there was a brief draw down, which we recovered in 2019. So I’m just saying like, this year could be a rough year for stocks, it may not be. And if it’s a rough year for stocks, it’s not because of anything specific that we can put our finger on now.

Tim Mullooly: I mean, like if you 2018, these two examples, like last year and then 2018 and put them side by side and compare like, okay, outside of the market, the headlines and everything that was going on. What happened in these two years? And then ask someone, “Which year do you think the market did better?” And people are going to look at the headlines, what happened in 2020 and my guess is the most people will be like, Oh, I think stocks did better in 2018 relative to what happened last year. It seemed pretty calm.

Brendan M: Right, so you’re saying if you like listed out all the news items…

Tim Mullooly: Here what happened in 2020 this, this, this, this. Here’s what happened in 2018, this, this, this.

Brendan M: Which one do you want to invest in?

Tim Mullooly: Exactly.

Brendan M: 2018, for sure. And you would end up losing money as a stock investor that year and making very good money in 2020. So great point Tim.

Tim Mullooly: Yeah, kind of going along with this and like what’s worked versus people’s perception of what’s working. Michael Batnick also at Ritholtz Wealth Management had a post this week titled Rotation. And he was talking about, he calls them the FANMAG, some people call them FAANG, but you add a couple of stocks in there, and it’s a comprised of Facebook, Apple, Netflix, Microsoft, Amazon, Google, just the giant tech names that everyone associates the big tech stocks with. I bet if you were to ask people which stocks did the best in 2020, or over the last handful of months, people would probably anticipate that like Amazon and Google and because of the shutdown-

Tom Mullooly: Everyone stayed home and shopped online. Amazon did great.

Brendan M: Big tech is propping up the market and all of these gains and the recovery. You have to be in large caps and technology to make any money. I mean, that was the narrative coming out of the drop that we saw in February, March of last year. The whole recovery April, May, June was if you weren’t in tech stocks and large cap stocks, then you weren’t making any money.

Tim Mullooly: And we fielded calls from people about wanting to put their entire accounts into Amazon or into like one specific technology stock name. And so Michael took a look at just over the last six months relative to the rest of the stocks in the S&P 500, how have these done? And besides Apple, the other five stocks, Google, Facebook, Microsoft, Netflix, Amazon, they all underperformed the rest of the S&P 500 index. So Amazon was 455th out of the S&P 500. So it’s only 51 stocks or roughly 50 stocks in the S&P 500 did worse than Amazon over the last six months.

Brendan M: So if you took the general narrative over the summer of, hey, I have to be in large cap in tech, if I want to make any money and piled into all that stuff and sold that or whatever you were coming from. That ended up being about the worst time to do that, that you could have picked.

Tom Mullooly: Well also fielded a few calls from folks late in the summer who questioned, why do we have these small cap and mid cap indices in our portfolio? They haven’t done, I won’t say what they said, but they haven’t done anything. When we got those calls, it was almost within that week when somebody lit the fuse in these other stocks.

Brendan M: I have some numbers to that incorporate international, which I would throw into that bucket as people have complained about international stocks for years on end. Since September, so through the fourth quarter of the year, international develop markets and emerging markets have both outperformed the S&P 500 by six and 9% respectively. So chuck that narrative out the window.

Again, at the time you want to throw in the towel or you’ve had enough of the under-performance from an asset class, it proves you wrong. It’s also interesting to note that since the fourth quarter of 2020, small cap stocks outperformed the S&P 500 by 24% and their mid cap counterparts were not far behind. And so to your point, small caps, mid caps, international, basically everything except US large cap since the end of the summer has been a better place to be than what the narrative at the time would have told you. And interestingly enough, especially with small caps, you saw the US dollar over that same time period, down 2%. And normally people would predict that that would be a negative for small cap stocks, which are supposed to do well when the dollar is strong. So nobody knows nothing, right?

Tom Mullooly: That is the answer.

Brendan M: Take all of the textbook stuff about like what’s supposed to work and when, and Chuck it out the window. Or at least admit that we don’t know for sure, so we have to have some money in all of these different areas, in appropriate amounts. Because we can’t predict, especially over three months, six month periods or year long periods, what’s going to be the best place to be. And by the time we know it’s too late.

Tim Mullooly: Yeah. It doesn’t mean the big tech stocks that we were just talking about. That doesn’t mean sell out of them and pile into small caps or anything like that. But like you said, it just proves why you should have a mix of all of them. I mean, Batnick had similar statistics, the six tech stocks he was talking about were up 7% over that time. SPY, which is the S&P 500 was up 17%. And IWM, which is the Russell 2000, which is small cap stocks is up 45%. So all of them were positive though. It doesn’t mean going back to one of the first things I said, it doesn’t mean that, it was a bad place to be. It just means there was potentially, there were better places to be. But like you said, we don’t know when they’re going to shift.

Tom Mullooly: We have to be aware of, I brought with me into the conference room, the first two pages of this week’s Barrons. Just to kind of show how the news publications surrounding our industry can, they’re not intentionally misleading, but they’re reporting what has happened and not what will happen. So they talk about how game stop is missing the mark. Now, we don’t typically talk about individual stocks, but they said, the run-up in the retailer stock belies a sharp drop in sales and malls where their stores are, are losing appeal. And that stock has just continued to move higher. We’re not recommending game stock, but it’s just to show you the perception that’s out there may be wrong. They also talk about how some of the old stocks are still hanging in there. And they mentioned US steel and general electric, which have not been good investments for fill in the blank period of time, a long time. Then they talk about how the risks are rising for big tech names. Well, we just showed that that would have been a great headline to have in September …

Brendan M: July.

Tom Mullooly: Not necessarily … Yeah, so …

Brendan M: Like your point is, they’re not writing feature articles about what’s going to work there. They’re writing feature articles about what has already happened. That’s the only thing they can do to defend them a little bit. Like you don’t write a feature article about this asset class that sucks and tell people to put their money into it. Why would they listen to you? But you can tell them about what has worked and make a case for why it may continue and who knows. Probably not a great place to be getting your advice, but yeah there’s a focus on what already happened.

Tom Mullooly: Now, Tim, you maintain our score book, so to speak and update us every couple of days on what’s leading, what’s not. And there have been many times where you’ve left my office and I’m unhappy.

Tim Mullooly: Right. So, once a week I go through our research and we have scores of how different sectors are doing at the moment. Looking at some of the numbers that we were just talking about, it kind of aligns with what we saw in the research for the last handful of years. The technology sector has been close to the top of this list in terms of relative performance.

Tom Mullooly: They been driving the bus.

Tim Mullooly: Yeah, but we’ve seen it start to drop down on the list, but this is, like I’ve been saying, this is a relative list. So it doesn’t, and you can see it in the score for the technology sector. It’s not, the score itself for that sector isn’t plummeting. Other things are just moving ahead of it. I mean, when you’re comparing different places in the market, I think it’s important to just remember that it’s all relative to one or the other. And it’s not an absolute statement on buy this, sell this or this is working, this is not working. It’s just which one is, these ones are slightly pulling ahead of the other ones, there’s rotation that happens at all times.

Tom Mullooly: Okay, that’s going to wrap up episode 340. We appreciate you tuning in and catch up with us on the next episode.

If you would like a PDF version of this transcript, please follow this link for a download!

Semper Gumby

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A phrase we’ve adopted here in the office is “Semper Gumby”. It’s taken from the popular US Marine Corps motto “Semper Fi” that means ‘always faithful’, but in this case it means ‘always flexible’.

We don’t know what the world and the market is going to throw at us this year. We need to remain firm with our financial goals, but flexible on how we get there.

Semper Gumby – Transcript

Tom Mullooly: In episode 228, we cover all your concerns, all your fears, all your doubts. You’re certainly not going to want to miss this.

Welcome to the Mullooly Asset Show. I’m your host, Tom Mullooly, and this is episode number 228. Thanks for tuning in. The episode title for this video should be a phrase that I found close to 30 years ago, and the guys have used it as well in conversations with clients and it’s this: Semper Gumby. We stole it from… We merged it from Semper Fi from the Marine Corps, but we also used it from our favorite cartoon, or I guess that’s play-action, clay action, whatever they call that cartoon show from the sixties, Gumby and Pokey.

So the message is Semper Gumby, that means always flexible. And last year we got to see it in action. We had a global pandemic. We had an economic shutdown, not economic slowdown, economic shutdown. We saw the federal reserve take massive action. There’s no playbook when it comes to this stuff. And so we have to be flexible at all times.

When I went through the crash in 1987, a lot of the old brokers sitting around where I sat in the office said, “Oh, this is just like the market correction that we had in 1962.” I was born in 62. There is no playbook. There’s no two markets that are identical. We can have the same set of circumstances that come out that happened in 2020 happened again in 2021, we can see a completely different outcome with the market and with interest rates and that’s going to be important. And so these are things that we talk about here in the office all the time, these are topics that we’re concerned about, that we keep an eye on. We like to say, “We do the worrying for our clients.”

In fact, that’s what you should be paying your investment advisor to do. You’re paying him to worry for you. And so we could go through the same exact sequence of circumstances and get a completely different outcome. We can’t predict what the markets are going to give us from year to year. We can’t predict what the economy is going to give us. There’s a lot of people out there who think we’re going to a very vibrant recovery in 2021. What if it doesn’t happen? What if we trip over into a double-dip recession?

Now, a recession is two quarters of negative GDP growth. A double-dip would be two negative quarters, a recovery, and then we slip again right away back into another recession. So we had negative GDP in the first quarter of last year, negative GDP in the second quarter, third quarter. Very good recovery. We’re getting the fourth quarter GDP soon.

But what if the numbers aren’t that good? What if the first quarter of 2021 isn’t very good? There are fed governors out there who are talking about a possible economic slowdown in the second quarter. We can’t take action on our portfolio on what a fed governor is predicting. We’re not going to do that. And so we have to be flexible with all of these news headlines that come out. We have to be ready for that.

And so that’s why we adopt the phrase here at the office, “Semper Gumby,” because we always want to be flexible in our approach. We want to remain firm in our goals and what we’re trying to accomplish for our clients, but flexible in our approach. That’s the message for episode 228. Semper Gumby.

If you would like a PDF version of this transcript, please follow this link for a download!

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Fixing Bad Financial Behavior

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It’s one thing to know the X’s and O’s of personal finance, and the numbers of making smart money decisions.  It’s a completely different thing to have the financial behavior skills to execute on that knowledge.  Learning formulas and calculations is easy work compared to mastering your own behavioral biases, and emotions when it comes to your own finances.

We’ve said it before, life here at the Jersey shore isn’t cheap.  Making sound financial decisions is crucial to supporting your lifestyle in this area.  Identifying potential costly behavioral mistakes is the first step in building a strong foundation towards positive decision-making.  We discuss a few common money mistakes below.

Mistake #1: Playing Victim to Your Debt

Feeling sorry for yourself isn’t going to help you pay off your debt any quicker.  Telling yourself “I’ll never get out of debt. This is pointless” is a great way to stay in debt forever. 

Digging yourself out of debt takes hard work and focus.  If you’re convinced the task is insurmountable, you’re likely to put less effort into accomplishing it.  We simply cannot allow that to happen when it comes to debt.

Mistake #2: You Don’t Plan for the Future

The earlier you start saving, the harder your money will work for you in preparing for retirement. It can be tough to think about retirement in your 20s and 30s, but putting a small amount in retirement savings every month through your early adult years could mean thousands more you’ll have to withdraw in your 60s and 70s.

We say it here all the time, “future you” will be glad “present you” made these decisions and took a little bit of time to plan things out. 

Mistake #3: You Aren’t Prioritizing Properly

Taking the last point in a different direction, prioritizing financial decisions is a huge part of financial success.  Finding that balance between putting a little away for retirement versus having a substantial enough cash flow each month to survive now is so important.

When you’ve got your own retirement to think about, aging parents and kids headed off to college – how do you know what to spend and where?

Working with a financial planner can really help you prioritize things properly.  As basic as it may sound, staying organized with your finances is half the battle.

Mistake #4: You Don’t Have a Distribution Strategy

Saving enough for retirement is really half the battle. The other half? Spending your money in retirement AND spending it the right way.  Figuring out what money to draw down first, and what the most effective tax strategies are is more complex than some would like to believe.  It’s not overwhelmingly difficult, but it does require a good amount of thought and planning ahead of time. Heading toward retirement with no distribution strategy in place could create unnecessary tax burdens and financial distress.

Fixing Bad Financial Behavior

Now that we have identified some bad behaviors a lot of people have, how do we fix them?

Conquering bad financial behaviors takes focus and hard work. There’s no quick fix, and you should expect changes to be gradual. Below are a few of our tips for conquering bad behaviors that may be affecting your financial wellness.

Tip #1: Be Intentional with Spending

In today’s day, it’s become easier and easier to spend money without even thinking about it.  Online shopping and electronic payments make overspending very easy.  Being intentional with every dollar you spend is the key to success. 

Knowing where every dollar goes is the best way to get yourself started on the right path.  It makes keeping track of your financial goals that much easier.

Tip #2: Don’t Let Financial Paperwork Pile Up

Avoiding a bill or bank statement doesn’t make it go away – but it does increase the chance of incurring late fees and penalty charges. If you aren’t already, get organized with your statements and other financial paperwork.

Especially in 2021, there are plenty of organizational apps and programs you can use to organize your bills each month.  Statements and bills can be easily paid online, and cuts down the hassle of physically writing checks.

Tip #3: Create an Emergency Fund

This is ALWAYS good advice.  As we’ve discussed countless times before, if you don’t have an emergency fund established – START RIGHT NOW.  If 2020 wiped your emergency fund clean, start again!  There is never a bad time to fund your emergency savings.

Tip #4: Make a To-Do List

The truth is, there’s almost always something you could be working on when it comes to boosting your financial wellness. If it feels overwhelming, start writing down everything on your financial to-do list. Breaking it down and crossing one thing off your list at a time can help make financial wellness much more manageable.  (A little mental trick to use is to put some SUPER easy things on the list, so you can feel motivated about crossing things off!)

It’s not easy to break habits, and it takes time to form new, better ones.  But there is no better time to start than right now!  2021 is the year to get things on track.  If you’re feeling overwhelmed about your finances, give us a call.  We would be happy to help you organize everything and build a plan to tackle your financial goals.  You can click here to schedule an initial call with one of our team members.  There is no cost or obligation!

The Market Doesn’t Have Feelings

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In the first episode of 2021, the guys discuss the changing landscape in Washington and how it could potentially impact folks financially. If 2020 taught us anything, it’s that we don’t know how the market will react to any headline story. Focus on what we can control, and let’s make 2021 a great year!

Show Notes

‘All At Once’ – Brendan Mullooly – Your Brain On Stocks

‘Forecasting Follies’ – Bob Seawright – The Better Letter

The Market Doesn’t Have Feelings – Transcript

** The full transcript for Ep. 339 will be available shortly. Please check back! **

What Can You Control?

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In Ep. 227 of the Mullooly Asset Show, Tom gives viewers a strong message for 2021: focus on what you can control financially. There is PLENTY that goes on each day out of our control, but we can control a few VERY important things in our own financial lives.

Show Notes

‘Keeping Your Cool When Markets are Hot’ – Mullooly Asset Show Ep. 202

‘All At Once’ – Brendan Mullooly – Your Brain On Stocks

What Can You Control? – Transcript

Tom Mullooly: We’ve got a lot to cover in episode 227 so let’s hop right into it. Stick around.

Welcome to the Mullooly Asset show. I’m your host, Tom Mullooly. This is episode number 227. Thanks for tuning in.

Imagine that you and I have a DeLorean, we have a time machine. This was the topic of an article by Jason Zweig of the Wall Street Journal, and it echoes a video that we did back in August just a few months ago, episode 205. But imagine that you use this time machine to go back one year, to January of 2020, and you learn that there’s going to be a virus that spreads around the entire world, that it’s projected two million people in the United States are going to die from this virus, and the U.S. economy is going to stop for an unknown period of time. Now, also presume that you and I are the only ones who know about this. What would you do?

Most people would say, “Well, given that kind of information, I would probably sell all of my stocks or I would short the market”. But wait, let’s layer on top of that, a contentious presidential election. Understand that we can know everything about the future and we can know what certain events are going to do, but what we don’t know, whether we’re talking about the election, a pandemic, an economic slowdown, what we don’t know is how the market is going to react to these things. So you have to stay in the game. People saying that they want to just get out for, “I just want to sit this out until the election is over,” you’re making a huge mistake. Look at how much money you’ve left on the table. We calculated for a client the other day that we left a house for this guy on the sidelines because he wanted to get out.

We started getting calls about the election back in July. We’re recording this in January, we are still getting phone calls of this week about this. And we’ve talked about this contentious election in August in episode 205, in September, episode 212. We put multiple posts and podcasts up throughout October and into November about this. Look, the message is that the media and the news headlines are going to knock you off your game. They’re going to take the focus away from what you really need to be doing. They’re going to distract you and they’re going to tempt you into making the wrong moves. Don’t let that happen.

Look, I’m going to sound like my old man, focus on what you can control. And as far as what I can see, there are three things you can control as we’re talking about this. Number one, you can control your savings rate. In the past year, the CARES Act allowed people to dip into their retirement plan at work and take money out. I am astonished at the amount of money that came roaring out of these plans in 2020. That tells me that people were getting the message about long-term retirement, but their balance sheet at home, their cashflow situation, upside down. Needs repair. Control your savings rate or at least know what you can comfortably put away.

The second thing that you can control is having a proper allocation. We started getting calls over the summer, people asking us, “Why do we have all these small caps and mid caps? They’re not doing anything. We should just get out of them and go into the large cap stocks. They’re really moving.” Well sure enough, as soon as we started getting those calls, that’s when small caps started to wake up. Small caps had a good year in the fourth quarter. One of the small cap indices was up 33% in the fourth quarter of this year. It’s going bonkers. Brendan wrote a great piece about it, we’ll link to it in the show notes so you can read it. But you got to have a proper allocation because we don’t know when these things are going to catch fire and start to move.

So the first two things that you can control are your savings rate and your proper allocation. The third thing that you can control is, famous line from Charlie Munger, don’t interrupt the compounding. Look, if you want to have a day trading account, if you want to trade stocks at Robin Hood, go crazy. Do your thing. But do it in a proper amount that is relative to the size of your net worth. But for most of the money that we manage for our clients, it’s retirement, and so we have to make sure that we don’t interrupt the compounding. The worst thing you can do is try to be tactical with retirement money and zooming in and out of the market for whatever the news headlines are telling you to do.

Three things to focus on in episode 227. We appreciate you tuning in. If you’re watching this on YouTube, don’t forget to hit that red subscribe button. Thank you very much.

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