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If 2020 has taught us anything, it’s that price targets for the following year are really just guesses.  At best they’re entertainment and at worst they’re harmful nonsense to individual investors.  Nobody could’ve predicted the events of 2020, and surely nobody could’ve predicted the market’s reaction to those events.  Our advice for 2021: stop trying to predict the market future.

Show Notes

‘Tis the Season for 2020 Market Forecasts’ – Mullooly Asset Podcast Ep. 287

‘Who are You Listening To?’ – Josh Brown – The Reformed Broker

2021 Price Targets Don’t Matter – 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.

Tim Mullooly: Welcome back to the podcast. This is episode number 334 of the Mullooly Asset Management podcast. This is Tim Mullooly. Brendan is here with me today. Brendan, how’s it going?

Brendan: Going well. It’s the end of the year. You know what that means?

Tim Mullooly: Tis the Season. Last year, we’ll start off with this. Last year episode 287. If you go back was called Tis the Season for 2020 market forecasts. This one appropriately, we’ll say, Tis the season for 2021 market forecasts.

Brendan: So how many people foresaw in their market forecast for 2020, how this year was going to go?

Tim Mullooly: Approximately zero. There might be some people out there who, their numbers might be somewhat accurate, but the route that we took to get there, literally no one could have predicted what happened throughout this year.

Brendan: And also if you went back to this time last year, and instead of giving a price target, you gave somebody the information about what was going to happen.

Tim Mullooly: Here are the events that’s going to happen over the year of 2020.

Brendan: Right.

Tim Mullooly: What’s your price target now?

Brendan: Right, exactly. So I think even if you had all the information in the playbook, meaning there are the known events, such as we’re going to have an election later in the year and by the way, we’re going to have a pandemic right at the beginning of the year. And that’s going to stretch the entirety of the rest of the year. What do you want to do with stocks as a result?

Tim Mullooly: Yeah.

Brendan: Most people probably would have said sell or be hedge or buy bonds or puts or gold or some other sort of stuff. And that’s been not at all what you would have wanted to do this year, surprisingly.

Tim Mullooly: 2020 has just been a good reminder for price targets since the last month of the year, here in December. Every year you see people coming out with their price targets for the following year. It’s just a good reminder that these price targets are at best entertainment and at worst harmful nonsense if you’re taking action on some of these price targets with your investments.

Brendan: Yeah. You’re going to see people from different banks, investment shops, and they’re going to be making the rounds on their white paper notes or their TV appearances to say that the S&P 500, the Dow Jones, the 10 year yield, or Bitcoin, this is where they’re going to end 2021. And it’s all just nonsense, it’s guesses, but it kind of gets passed off as something more scientific than that. People will give you very precise numbers in these predictions that makes it seem like they’ve done quantum physics behind the scenes to come up with this price target. When in reality, it’s just a guess.

Tim Mullooly: Yeah. Some people tend to rag on the people. Like it might sound like we’re ragging on the people that make these forecasts or these price targets. But the only reason they’re doing it is because people out there in the general public want to hear them, you know? So it’s a two-way street there. They wouldn’t need to make these price targets if people didn’t demand it from them.

Brendan: Yeah.

Tim Mullooly: Stop demanding price targets from people and you won’t have to hear their guesses.

Brendan: Also important to keep in mind too, that folks will make price targets now. We saw this a year ago, so you’ll make a price target now, at the end of 2019, last year at the end of 2019, that says this is where I think things will end up at the end of 2020, and then.

Tim Mullooly: A 12-month price target.

Brendan: Yeah. Yeah. And so then they’ll come back after the market action we saw in February and March and amend their prices for the first quarter. Well, now considering what’s happened in the first quarter, this is where I think the year will end up.

Tim Mullooly: The rest of the year 2020 price targets. The nine month price targets.

Brendan: They’ll amend it lower.

Tim Mullooly: Yeah.

Brendan: And then over the summer, as things start to recover, they come back out and say, well, considering all of this and the progress that we’ve made, here’s where we think the year’s ending up. And so what they ultimately end up doing is they basically shoot an arrow and then walk at the end of the year and draw a bullseye around it and start celebrating as if they called it.

Tim Mullooly: Yeah.

Brendan: See how right we were. And you don’t need that sort of information to invest appropriately. You didn’t need to have a 2020 price target to do well this year. What you actually needed to do was understand your own time horizon and why you’re investing in the first place so that you were set up appropriately to endure the downside volatility of February and March, and then also reap the rewards of the recovery that we’ve seen since March.

Tim Mullooly: Right? Like you said too, a little bit earlier, even if you knew the events, you still don’t know what the market’s going to do. So we always talk about how predicting the future is impossible, but you would have needed to predict two things correctly to be right here in 2020, if you were trying to jump in, jump out, jump in, jump out based on what’s going on.

Brendan: Not only would you have had the unknowable event, but you have to then predict how people are going to react to that event, which is even more impossible than foreseeing something in the first place, because it involves human emotions of millions of people across the face of the earth.

Tim Mullooly: Yeah. So your price target would have had to see COVID-19 coming and then it would have also had to see how people were going to react to that in terms of the market.

Brendan: And also stimulus response from the fed and from Congress.

Tim Mullooly: And what kind of impact they were going to have on the market and how people thought about that.

Brendan: So what they did was, these are things that we’ve never even seen before. So to predict that would have been, wow, you really think they’re going to do that. There’s no precedent for that. This whole year has been unprecedented this, unprecedented that.

Tim Mullooly: Right.

Brendan: And you don’t need to play these games, I guess, is what we’re telling folks. And I think that’s what we told them last year, too, that we didn’t need to have a price target to make an appropriate portfolio for clients.

Tim Mullooly: Yeah. I went back and I re-listened to episode 287 when we were talking about people’s 2020 price targets. And a lot of the conversation in 2019 was about interest rates and the fed. There was no mention of COVID-19. There was no mention of a pandemic. There was no mention of vaccines, stimulus, recessions. At that point, we didn’t even know that Joe Biden was going to be, we didn’t know who was going to be running the democratic nominee. So we didn’t even know what the election was going to look like or what was going to happen from that. But the messages that we had were the same at the end of 2019 as they have been throughout the year and as they still are today going into 2021.

Brendan: Yeah and sometimes it’s a boring message sometimes. Because a lot of the advice we have is evergreen. And sometimes it seems like there’s no way that evergreen advice could be right, considering this. This is totally different. This is something we’ve never seen before. And I think I’d err on the side of saying that’s not the case and that’s a trap. And I think that when it seems like the eat your vegetables kind of boring advice that sometimes we have to give out, when it most seems like that is no longer appropriate, is exactly when you need to do it the most. And it seemed like that in multiple cases this year, not only during the sell-off earlier when the virus first hit, but also in the month or two leading up to the presidential election.

Tim Mullooly: Yeah.

Brendan: We had plenty of discussion about that here on the podcast and in videos and on the blog.

Tim Mullooly: So there’s pretty much two textbook examples of staying the course and our message here, like you said, the boring, eat your vegetables, kind of sit there, do nothing approach. It worked out two times this year so far. Again, we don’t know what’s going to happen in the future, but based on things that have transpired, as time goes on, it seems like that’s usually the thing to do.

Brendan: Our advice is never going to be right because some short term market view of ours has been proven correct or anything like that. It’s never because of that. And so you’re right to say that we don’t know what the short term brings for the market, and we’ll never purport to know that. However, we do purport and understand our clients and what they’re doing and their circumstances and what they’re comfortable with and their goals. We do understand all of that stuff and that’s how we’re building our portfolios. And I think that’s why we can help folks get through a year like this successfully because those are the things that matter even when they don’t seem like they’re the most important things.

Tim Mullooly: Yeah. I agree. And on top of that broader message of how events impact the market. Another message that we talked about in 287 last year was about the benefits of diversification and how big name stocks can come and go. So the benefit of having exposure to different areas, we were talking about the different decades where international was the place to be. Or you did better in bonds than U.S. stocks or different areas of the stock market.

Brendan: And it’s still valid. We just saw that with the returns that we saw in November.

Tim Mullooly: Yeah, exactly.

Brendan: That was a perfect case in point of what you’re describing in terms of, most of the year large cap U.S. stocks and technology stocks did really well through all of the virus. And you obviously realized the value of having bonds in your portfolio during the sell-off in March. But just last month we saw the S&P 500 up 10%, but we saw some other areas of the market, meaning some of this diversification you’re talking about, do even better. Small cap stocks were up 16% in the month of November. That was their best month ever recorded for the S&P 600 index, which is the small cap stocks. And surprisingly enough, or maybe not, the worst ever month for them was March of this year.

Tim Mullooly: Yeah. And I know we’ve said it before, either on podcasts or videos, but you know, the research shows that usually the best and worst months for the market in general or different areas like you’re saying, small caps, those best and worst, the extremes tend to happen really close to each other. So it’s hard to jump in and jump out because you might be jumping out to avoid one of the worst months, but odds are you’re not going to get back in before you potentially miss one of the best months.

Brendan: Yeah. There was absolutely no signal or sign in March to say that small caps are about to get creamed, worst month ever. Just as there was no sign as the calendar turned from October to November that they were about to take off and have their best month ever.

Tim Mullooly: Yeah.

Brendan: And so short of having something like that, which, hint hint, does not exist, short of having something like that, you just need to make sure that you own some of these areas and that you do so in proportions that are appropriate, given what you’re trying to accomplish, which is exactly what we help clients with. We can’t do short term market timing to nail these tops and bottoms, their best and worth worst months, but we can help people to own these things in reasonable proportions, given their goals and what they’re trying to do.

Tim Mullooly: It doesn’t always work out the way that it did in November. Today is December 3rd, it’s one month from election day. There are plenty of people who wanted to kind of wait out the election and see what happens. Should we take some money off the table? We don’t know what’s going to happen either way, depending on who wins.

Brendan: Yeah.

Tim Mullooly: Before the election, leading up to it, once the quote unquote dust settles, we’ll be able to get back in. Right. Exactly. So it doesn’t always work out this way, but it was a clear…

Brendan: Classic example of why you can’t do stuff like that.

Tim Mullooly: Exactly.

Brendan: Because like I just said, small cap stocks up 16% in that month, mid cap up 12. Value stocks, which had been lagging all year, up 14.

Tim Mullooly: Right.

Brendan: The S&P 500, even just the plain old market, up 10. You can’t afford to miss that many 10% months over your investing lifetime. Because if you missed enough of them, they don’t happen that often. And all you’re doing is you’re eroding your returns. And I know that in a lot of cases, it may have seemed like the smarter savvy thing to do, because there’s a lot of uncertainty. There’s this big event that everybody’s worried about. Seems like a great time to just wait and see. But it wasn’t a great time to wait and see.

Tim Mullooly: And there’s still uncertainty.

Brendan: Yeah, yeah.

Tim Mullooly: There are still things up in the air.

Brendan: We don’t have all the answers and we’re never going to. There’s always going to be a crisis de jour on the horizon.

Tim Mullooly: Right.

Brendan: And that’s just something that we have to deal with as investors. That’s why we make money by owning stocks. It’s for bearing that risk.

Tim Mullooly: Right. Yeah.

Brendan: It’s because we don’t know. If we knew for sure how everything was going to play out, there would be no risk involved.

Tim Mullooly: Yeah, exactly. There’s trade offs to wanting to see how things play out versus to just potentially buckle up for whatever’s going to happen.

Brendan: Understand that there’s uncertainty. Try to wrap your mind around what the potential outcomes could be.

Tim Mullooly: Yeah.

Brendan: And then do something based upon your comfort levels of what the possibilities are.

Tim Mullooly: Yeah. And it’s easier said than done to look at what’s going on in the country, whether it’s political or to what’s going on in the stock market and your own personal investments. It feels like everything is intertwined. Like this is going on in the country, or this is going on, or this headline is saying this. So like, I think my stocks are going to go down. It’s really hard to separate everything out from like getting caught up in what’s happening versus your own long-term portfolio. It’s really hard to separate the two.

Brendan: But you have to do your best with it.

Tim Mullooly: Yeah. That’s where you want to get to.

Brendan: So having said all that, where do you think the S&P ends 2021, Tim?

Tim Mullooly: One funny thing actually from episode 287, we were talking about different stocks that were around that are no longer around anymore. And one that Tom said on that podcast was Eastman Kodak. And you guys were talking about how Kodak was once a massive stock and how it’s essentially bankrupt now and out of business. And little did we know Kodak was going to have a quick 15 seconds of fame here in 2020? You remember that?

Brendan: Yeah. Hot second, where we were all talking about them.

Tim Mullooly: Yeah.

Brendan: This year with people buying their stock on Robinhood and things like that. So, yeah, that is funny.

Tim Mullooly: Yeah. There was a chart that we have talked about before and it goes back to listening to people on TV or these guys that are making these price targets. And it’s important to remember who they are, where they’re coming from and their incentives, and why they might be saying what they’re saying. The chart and in the show notes, I think we’ve posted it before, but it’s called like the Armageddonist chart, because it’s a handful of guys that for the last decade essentially have been saying, get out of the stock market and go to cash.

Brendan: Yeah. And it shows that if you flipped and you did what they said on the date they said it like what your returns would have been like there.

Tim Mullooly: Right.

Brendan: And it’s the opposite of the chart you’d like to see. It’s from the top left to the bottom, right?. They’re all money losing trades.

Tim Mullooly: Yes.

Brendan: So maybe eventually they’re vindicated, but I think the important point, like you said, Tim, is to just remember that when somebody is giving a price target, there’s something to it. So they’re probably talking their own book or it could even be a veiled commercial for whatever it is that they do. Listen, if you want to watch that sort of stuff and use it as entertainment, that’s great. But don’t go making changes to your investments or even really considering it based on what anybody has to say.

Tim Mullooly: Right? Yeah. It might seem like they’re speaking directly to you, but they’re not your fiduciary advisor. They don’t have your best interests personally.

Brendan: They probably aren’t even doing anything as a result of those guesses with their own money.

Tim Mullooly: Exactly. It would be great to see a graphic on the TV screen of someone who is giving advice about the direction of the market or their price target for the next year. How is their money invested. What are they doing if they manage a hedge fund or client’s money, what are they doing with that? I think there’s something to be said. You mentioned the phrase earlier, not wrong, just early. That doesn’t really apply when the timeframe there is a decade. You’re just wrong at that point. Eventually these guys on the chart and people that make these sort of calls. They may eventually be right. But if you’re wrong for 10 years before that? That’s not the track record that you want. You’re just wrong at that point.

Brendan: You can call for market corrections or drops in stocks as much as you want and eventually you’re going to be right, because eventually markets do go down just like they eventually go up, too. There’s nothing to say that’s useful information to predict the market going down, unless you have an exact date and the amount that it’s going to go down. I’m not sure that’s even helpful to folks, but it certainly gets headlines. It gets you invited back on to talk shows and all that, articles written about what you have to say. So, it accomplishes that but I’m not sure it really helps anybody. And, again, I’m not sure that folks predicting that sort of thing are necessarily going out and shorting stocks or doing anything as a result.

Tim Mullooly: Yeah. And I think these guys who are perpetually bearish in a sense about the market, at least for the last decade, the chart was updated to show this year as well. So the market, we did see an extremely quick bear market, but we went down 35%, and the chart reflects that, but these guys still are net incorrect. So it just goes to show if you told these guys before the year started, too, they’d double down on their predictions and they’d still be wrong.

Brendan: Yeah, it’s a game you don’t have to play.

Tim Mullooly: Yeah.

Brendan: Unless you want to be a guest on financial TV shows and then I guess you do have to play it. But that’s fortunately not something that we have to sign up for.

Tim Mullooly: Right. It feels like it doesn’t need to be said over and over again, but predicting the future is impossible.

Brendan: Right.

Tim Mullooly: And we say it a lot, but it bears repeating because for some reason people out there like to try and convince other people that they can do it. We’re here to say that that is not the case.

Brendan: We can’t, you can’t, nobody can. And it’s totally okay. You don’t need to be a good investor.

Tim Mullooly: So I fully look forward or to having our Tis the Season 2021 podcast next year. One thing that I did want to bring up, this is not market-related, but it had to do with some predictions that we made and it drives the point home that predicting the future is really, really hard. We’re going into week 12, I think, or 13 of the NFL season. And I remember we were sitting here weeks ago at the beginning, right before week one. And I asked you what you thought the Jets were going to do this year.

Brendan: What did I say?

Tim Mullooly: I think you said either five and 11 or six and 10.

Brendan: All right. So I was bearish, but not bearish enough.

Tim Mullooly: I said they were going to go like 500. And if any of you are NFL watchers or Jets fans along with us, I feel your pain. And also, it just shows how very wrong we were.

Brendan: We’ll stick to helping folks with their investments.

Tim Mullooly: Exactly. Yeah. All right. Well, that’s going to wrap up episode 334 of the Mullooly Asset Management podcast. Thanks for tuning in. We’ll catch you next time.

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The stock market and the economy have been almost disorienting this year in 2020.  It’s been a polarizing year, and we still have a few weeks to go.  In this podcast, Tom and Tim discuss the current state of the stock market alongside the economy.  The Dow Jones hit 30,000 for the first time ever yesterday, but what does that mean for the the every day person on Main Street?  What does it mean for your portfolio?  What are some of the key takeaways from this year in the market?

Show Notes

‘The Worst Thing You Could Do to Your Investments’ – Mullooly Asset Show

The State of the Stock Market and the Economy – 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 333. 333. I’m Tom Mullooly and joining me today is Tim Mullooly. Good morning.

Tim Mullooly: Good morning. So we’re recording this the day before Thanksgiving. Ready for some turkey and stuffing tomorrow?

Tom Mullooly: I’m ready.

Tim Mullooly: What’s your favorite Thanksgiving food?

Tom Mullooly: I’m going to go with stuffing.

Tim Mullooly: Okay.

Tom Mullooly: But I’m also going to emphasize, as long as it’s hot, that’s the main… It’s got to be hot. Like cold potatoes, no good.

Tim Mullooly: Yeah, of course.

Tom Mullooly: No good. No good. Yep. So how about you?

Tim Mullooly: Big mashed potato guy. Looking forward to that.

Tom Mullooly: I’m thankful.

Tim Mullooly: Yeah, absolutely. It’s been a wild year as we’ve chronicled in the podcast here in 2020, so definitely a lot to be thankful for as we get into Thanksgiving tomorrow.

Tom Mullooly: You sit here and you think about things that you’re thankful for. In a way I’m thankful for all the volatility that we had this year, because it’s provided a great opportunity to talk with clients and just kind of remind them that most of the money that we manage is long-term in nature. In fact, a lot of it is in retirement accounts. And this is money that really should not be too tactical or traded on a frequent basis.

Tim Mullooly: Yeah, it’s been a really eye-opening year in the market, and it kind of just gave us the opportunity to stress the fact that we need to trust the process that we have here. For us too. Even when the market was going down a lot in February, March, there were some really, really volatile times during this year and it put things to the test, but the process held strong throughout the year. And I think it was a really good opportunity multiple times to kind of reinforce why we do what we do.

And it shows, like you said, with long-term money, the crazy fluctuations that you’re going to see over a couple month span or a couple of weeks, or even just one calendar year, it’s going to send you on a rollercoaster ride sometimes. But keeping an eye on what matters in the long-term, it really benefited you this year in 2020.

Tom Mullooly: I think investors were harmed if they read the news headlines and tried to take action based on that.

Tim Mullooly: It’s tough. I mean, we had every sort of headline thrown at us this year. There was many, many opportunities to get scared. Rightfully so, but it doesn’t necessarily mean that you should make scared decisions about your investments. I mean, you can be frightened about what’s going on with the virus or however you feel about other things going on in the country, in the world, but being able to separate the two things, your emotions from what you’re doing with your investments, it’s crucial.

Tom Mullooly: One of the things that we had heard for nearly 10 years going into 2020 was all of these people who are in the market or many of the people who have been in this market haven’t really been through a bear market. And admittedly, I don’t know if this really qualifies as a bear market. It certainly qualifies as a recession, but I think everybody earned their bear market stripes this year.

Tim Mullooly: It’s funny because now we saw the market go down. It was like 35% in six or seven weeks. But with how fast it came back, people are going to say, “Well, you still haven’t seen a bear market. That wasn’t a real bear market. It was too quick.” It’s like, well, stop moving the goalpost here. That counts.” What happened this year was very scary and it tested a lot of people. Looking back on it, we don’t know what’s going to happen in the future. But looking back on it, it was a good learning opportunity for a lot of young people in the market and the industry, myself included.

Tom Mullooly: Going into 2020, throughout 2019, I heard a lot of forecasters say that we’re due for a recession. I’m going to go back to the same guy I’ve been quoting all year Fed Governor James Bullard. He’s a great guy. If you see his name, he’s a very energetic guy. He gives a lot of interviews, and he always has something upbeat and positive to say, even when times are tough he usually finds a silver lining. I like following him because he usually has the big picture in mind.

In the beginning of the year, when things were really bad, he was one of these folks that came out and said, “This is not a typical recession. It’s a man-made recession. In fact, it’s a shutdown. It’s a manufactured type of economic slow down. Not your typical type of recession that we see.” And that was a message that I carried to a lot of folks on the phone at the beginning of this year that this is a man-made recession. It’s a man-made slow down. We shut down many parts of the economy.

Just last week he came out and said, in his opinion, the recession ended sometime in late May, early June. But the textbook definition of a recession is two quarters with negative GDP, which is gross domestic product. So we did have a negative quarter in the first quarter of this year economy because of the pandemic. Slowed down about four or 5%. And then in the second quarter, we had a massive number like down 35%, and then we had a nice bounce back in the third quarter. We’re still compiling all the numbers. So we’ll see what the fourth quarter brings.

So technically, we had our two quarters of negative GDP. So we do qualify for a recession.

Tim Mullooly: Yeah, I think that the textbook definitions are one thing, but it’s also just like use your eyes. Look out there and see what’s going on in the economy right now. I mean, we had another jobless numbers today that went up from last week, which went up from the week before that. Whether or not it was a man-made… It was a man-made shutdown recession. I think you can label it as that, but it still feels the same as any other recession for the everyday people out there. So that label doesn’t necessarily matter.

I think it’s just the people out of work, I think it’s lasting longer than everyone expected. Who really knows? I mean, we’ve heard news over the last couple of weeks about a handful of vaccines that are on the horizon, which should help in terms of getting things opened up and back to operating relatively normally. But yeah, I think it’s just… You sometimes need to separate the numbers on the chart and just like look out at what’s happening right now.

Tom Mullooly: What’s happening on Main Street.

Tim Mullooly: Right. Exactly. And there’s a huge disconnect even… I mean, it’s been polarizing this year. There’s a catchy phrase that the stock market isn’t the economy, and we’ve seen that to a T, I mean, perfectly this year. Yesterday, the Dow hit 30,000 for the first time ever. And then we get a number today of jobless claims. More and more people are losing their jobs. So it’s been a polarizing year across the board.

Tom Mullooly: And I don’t think we’re out of the woods at all. The stock market is starting to get very disconnected, in my opinion, from what’s happening on Main Street. We continue to see, as you mentioned, increase in jobless claims. That’s first-time filers. I think that the year 2020 has made some permanent damage, permanent damage to the economy. Business isn’t going to be exactly as it was. A lot of times when times are tough, people say, “I just want things to go back to normal.” This is the new normal. We have to get used to things being different than they were even a few months or a year ago.

Tim Mullooly: Yeah. I mean, it’s been this way for eight, nine months now. At this point, this is normal. For me, when you hear about what’s going on in the stock market, market indexes are bumping up on highs it seems like every other week, there’s still a lot of turmoil and pain going on in the regular Main Street economy. What do you think that means for the listeners out there, just everyday people who might have some money in the market, but are worried about the economy in general?

What can we take away from that or lessons or advice for people to operate financially in their everyday life?

Tom Mullooly: Well, you kind of have to take off your stock market hat and put on your financial planner hat. Look at your balance sheet and look at your income statement. We spend a lot of time with clients working on projecting your cash flow and seeing what your balance sheet looks like. And in recessions, no matter what length or time or depth of recessions, if you have a clean balance sheet, don’t have a lot of debt, you have cash, and you have investments, you’re probably going to be okay.

I think the winners that come out of this recessionary period are going to be the ones that have clean balance sheets. They have cash on hand, so they can continue to operate no matter what’s happening. If their cashflow gets temporarily disrupted, they are not servicing a lot of debt, they have some investments, and they know that their long-term, I think they’re going to be okay. Because as I mentioned a moment ago, I don’t know if we’re going to be out of the woods. I think the phrase that we’ll hear in the first quarter of next year will be double dip recession.

We had maybe a brief violent recession in the first and second quarter of this year, stretching into parts of the third quarter. I think that these people who are losing their jobs now in the fourth quarter of 2020, I think that’s going to have a serious impact. We may be talking about a double dip recession. The stock market can take a lot of good news. But after a while, they’re going to get weary.

Tim Mullooly: Right. Yeah. I think for me, it just says you need to be well-rounded in terms of your financial picture. Like you said, take the stock market hat off and put on your financial planner hat. Your investments are only one portion of the financial plan. We say it all time. You can’t invest your way out of other poor financial habits. So it’s great to see the market continue to chug along. But yeah, there’s a need for other areas of your financial life to get some attention as well.

Tom Mullooly: In a lot of conversations that I’ve had lately the last few weeks with clients, we’ve talked about how well the market has been doing, but it seems to me like many folks have short memories. That’s good if you’re a relief pitcher, especially on the Mets, but it can be a little dangerous if you don’t keep tabs on history and what’s going on. I have been reminding folks on several calls lately that let’s just roll the clock back eight or nine months. We were told that two million people in the United States were going to die from this virus.

And right now we’ve got somewhere between 250,000 and 300,000 who have sadly lost their lives because of this. There were folks who were on the phone with us literally panicking, because to many people, if you just go by the headlines, it looked like the end of civilization as we know it. And many of these same people are now calling us back seven months, eight months, nine months later saying, “How can we get more aggressive?” It’s a little bit of a psycho market. You kind of have to keep things in perspective and not get too greedy and not get too fearful.

The best part of being an advisor is that you are the double yellow line going down the middle of the highway. You want to be right down the middle and talk people off the ledge from both sides.

Tim Mullooly: It seems like in a lot of areas, it’s just been extremes on both sides this year in a lot of different ways. We’ve gone from extreme fear to extreme greed, back to extreme fear, back to extreme greed. It’s tough to kind of level yourself off there. It’s nice to have an advisor to bounce questions off of.

Tom Mullooly: Now, you and I do these videos every week, and Tim is behind the camera, I’m in front of the camera most of the time. But for several weeks in October, we were prepping people, telling them we expect the market to be volatile through the election and most likely through the end of the year. And we have had volatility. But I think what a lot of people overlook is if the market goes up, I’m good with volatility.

Tim Mullooly: Right.

Tom Mullooly: We’ve had this week alone in a short week, the market’s up almost a thousand points, like you just mentioned. We went through 30,000 yesterday on the Dow. And I think that people are okay with volatility as long as it’s going up. But when they get volatility on the other side, not so good.

Tim Mullooly: We should always expect volatility. That’s the thing. People were calling about the election or about what’s going to happen with politics in the country and if that’s going to affect their investments or not. You can just take whatever the reason is out and I think we should expect volatility. That’s always the answer. So it’s not like we were saying anything groundbreaking and it’s not like it’s a right or a wrong answer there. That is always the answer. There’s always going to be volatility.

Tom Mullooly: People get hung up on the news headlines about the economy on a short-term basis. We’ve got an election coming. We’re in a recession. We’re doing this. We’re doing that. So on a short-term basis, one day, one week, one month, one quarter, there’s going to be news headlines that are going to trick you into making mistakes with your long-term investments. Long-term five years, 10 years, it is about the economy.

We got a lot of calls in late May, in June, in July, where clients were like, “I can’t believe this. We’re going to give all these gains back. We went down 35%, 40%, and it came back too fast. We’re going to have to give some of this back.” You know what? The fed pumped $7 trillion into the economy over two weekends. Just think about that. That’s 10 times what they did, 10 times what they did in 2008. We can ride that fed pumping for a long time.

Tim Mullooly: Yeah. I think people say, “Oh, we have to give those gains back.” It’s like, why? No, we don’t. We don’t know what’s going to happen in the future. I mean, like you said, making short-term decisions with your money based on economic data, like the economy is one of the slowest moving things out there. You get data on like a quarterly basis or a yearly basis and you’re going to make day-to-day decisions based on that?

Tom Mullooly: There’s this urgency. There’s a lot of people who feel like they have to be first.

Tim Mullooly: Right.

Tom Mullooly: And so when they see a news headline, there’s a lot of people who want to instead of ready, aim, fire, it’s ready, fire, aim. They wind up… That’s the trader’s mentality. Just shoot. Shoot first, ask questions later.

Tim Mullooly: I have a question for you. The Dow hit 30,000 for the first time ever yesterday. Do round numbers matter in the market? If so, in what way do they matter? And if they don’t, why do they not matter?

Tom Mullooly: The answer is they shouldn’t matter.

Tim Mullooly: Right, but they do.

Tom Mullooly: So there’s a little bit of short-term momentum that happens when you get close to one of these round numbers. Now, my very first year in production as a broker, I spent a couple of years as a financial planner at EF Hutton, and then I became a broker. And when I got licensed as a broker at the beginning of ’86, the Dow Jones was at 1500. 1550. It’s 20 times higher now 34 years later. I’ll say that again, 20 times higher over 34 years. And I know that we did a video about that, so I don’t want to belabor the point, but it became a big deal when the Dow hit 2000 at the beginning of 1987.

And like clockwork, it was 2000, 2100, 22, 23, 24, all the way up to 2700. 3000 became a big deal. 5,000 became a big deal. I still have The Wall Street Journal from the day the Dow hit 10,000. That was in the ’90s. And I was like, this is unbelievable to see this kind of growth. 20,000 we went through and then we went back.

Tim Mullooly: We went through it twice this year.

Tom Mullooly: That’s right.

Tim Mullooly: The market got down to 18,000 at the trough.

Tom Mullooly: Yeah. You raise a good point. Let’s talk about this. So in January, the beginning of this year, the Dow Jones started the year at 28,846. We’ve now hit 30,000, which puts us at a 4% increase, not including dividends, for the Dow Jones Industrial Average. Your mileage may vary, but we also spent time this year at 188. I think if the market were to… If today were the last day of the year, this would be one of the only years in history where the market was down 30% and finished up for the year in the same calendar year. That’s insane.

Tim Mullooly: I don’t think round numbers are completely irrelevant. I think from a psychological standpoint too, just looking at, like you said, just chronicling over the years. Like I remember when we hit this. It’s good for putting things into perspective and seeing how quickly things can move and how long it takes to move from one milestone to the next. It’s good to track progress that way.

Tom Mullooly: A few things for folks to keep in mind is that as the index… We talk about the Dow. As the index gets bigger, the numbers, the percentage moves start to really change. So let’s just say we finished the year at 30,000. The market goes up 20% next year. We’re at 36,000.

Tim Mullooly: 6,000, I mean, that’s four times what the entire index was when you started your career.

Tom Mullooly: Right.

Tim Mullooly: 1500.

Tom Mullooly: Right.

Tim Mullooly: I mean, we saw the market drop almost over 1500 points in one day this year. That’s the entire amount of the index back in 1984, ’85.

Tom Mullooly: Right. There’s a lot that’s packed into it. The other thing to remind folks is that the 30 stocks that make up the Dow do not represent what’s in your account, unless your account is exactly invested with the same 30 names only and at the right percentage, the right allocation mix.

Tim Mullooly: And they change over time too.

Tom Mullooly: Well, thanks for bringing that. Good segue because the 30 stocks that were in the Dow Jones in 1986, not there today.

Tim Mullooly: They’re all gone.

Tom Mullooly: I’m going to have to look after we turn off the mics. I think that was the last one. I have to see when Chevron was added to the index, because I think they were added in ’87. In the ’80s, I think there were something like four energy names in there. Now I think Chevron’s the only one left. There were a lot of telecom names in there, Verizon, AT&T. Actually Verizon wasn’t even in it because there was no Verizon in 1986. It was Bell Atlantic.

Tim Mullooly: I think round numbers and the Dow and indexes in general, they’re important, but you need to put it into perspective in terms of what your investments are doing and if they even resemble the Dow Jones at all. So just keep that in mind when you’re looking at these round numbers and the performance numbers from the index. It might not equal one-to-one what your portfolio is doing.

Tom Mullooly: Brendan raised a good point last week where he said, what really matters is not necessarily where the market is or how you’ve performed compared to the market. The main thing is, are you hitting your goals? And your goal maybe I don’t want to have to worry about money in retirement. I just want to make sure that it’s there. That should be your own personal Dow Jones Industrial Average.

Tim Mullooly: Yeah. That ties it back to making sure that your investment portfolio works within the context of your financial plan, like we were talking about before. That’s just one piece of the pie. So one last thing, the Mets have a new owner.

Tom Mullooly: Yes, they do.

Tim Mullooly: What are your hopes for the franchise in terms of how the team is going to be run? And are there any parallels that you can take from how you want them to run the business to how people can run their own personal lives, financial lives?

Tom Mullooly: Oh boy. There’s a lot to unpack there. So as usual, I’ll give the Tom Mullooly too long of an answer. I’ve grown up as a Met fan. Mrs. Payson started the franchise in the ’60s. When she passed away in ’75, it was turned over to the CEO. The chairman at the time was a stockbroker. A guy named M. Donald Grant. Mrs. Payson’s daughter, who really had no interest at all in baseball, became the new owner of the team. They didn’t want to spend money. They didn’t want to get involved in free agency, which was just beginning in the mid ’70s.

Everybody in 1979, I mean, there were 42 people showing up at Shea Stadium for a game. Everybody was praying that the Mets would get new owners who would freely spend money. It’s so funny that 40 years later, we are waiting for old ownership who refuses to spend money. We’re waiting for them to leave and the new owner can come in and spend money.

Tim Mullooly: Old habits die hard.

Tom Mullooly: Yeah, they do. I’m optimistic that Mr. Cohen will do a good job. Make this franchise representative of the market that it’s in. New York City market is huge. I gave up my season tickets in the mid ’90s. Part of it was because we live in Monmouth County, so it’s not easy to get to the ballpark. But I was also ticked off at the team because they wouldn’t spend money and they ran it like a… They ran it poorly. A close friend of mine, when I told him this, he laughed at me. He said, “How many seats are in that ballpark?”

I said 55,000. He goes, “You don’t think 55,000 people in the New York City area are going to want to go to a game?” He was like, “You think the Mets care that you gave up your tickets?” And I felt kind of foolish.

Tim Mullooly: It’s a principal thing though. But I mean, for me, I think it’s nice to hear that one of the first things Steve Cohen said when he bought the team was that he’s immediately going to invest money into the franchise to build up the foundation of what was lacking, the analytics department from top to bottom, going down from low A ball all the way up to the MLB club. He was going to pay his employees that took pay cuts during the pandemic.

He was going to just put a lot of money into building up the bones of this franchise that had been whittled down, not just spending big money on free agents at the MLB level. And I think it’s a good lesson for people to take away. You have to invest in yourself every once in a while and put some money back into your franchise and build up the foundation from the ground up before you can kind of just decorate the top layer with expensive looking things. If there’s nothing under the hood, things are going to fall apart pretty quickly.

Tom Mullooly: Well said. That’s why we spend so much time talking with clients about nuts and bolts. What does your balance sheet look like? What’s your cashflow looking like? These are things that really drive important decisions when it comes investments and financial planning. Good way to end up Thanksgiving podcast episode 333. Thanks for tuning in and we will catch up with you in episode 334.

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It’s been a roller coaster year in the markets here in 2020.  As we wind down the fourth quarter, it’s interesting to look at what areas of the market have performed well and when.  In this episode of the podcast, we discuss why those numbers may surprise some investors.

Show Notes

‘The Worst Thing You Could Do to Your Investments’ – Mullooly Asset Show

‘Not Your Job’ – Robin Powell – Humble Dollar

What’s Worked in 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 332. Thanks for tuning in. I’m Tom Mullooly. And with me today is Tim Mullooly and Brendan Mullooly. Hey, guys.

Tim Mullooly: Hello.

Brendan M: Hey.

Tim Mullooly: So it’s been kind of a weird year here in 2020 with the markets and outside of the markets, as well, as we’re winding closer to Thanksgiving towards the end of the year. It’s been interesting to look back at how the markets have performed and go under the hood and see what’s done well, what hasn’t, at what times, and why potentially.

Brendan M: Yeah, I was just looking over client portfolios and how things have ebbed and flowed this year. And looking on a year-to-date basis, the story has been a lot of the momentum and technology names have done well, and people have talked about that being a result of the pandemic and continuation of trends that we saw in place last year, too. But if you want to break things down even further, though, in the last six months, some things that have lagged behind for a good amount of time now, a year or two, have actually been leading the way, meaning small cap stocks, mid cap stocks, value stocks, international stocks. So it’s been a role reversal if you’re just looking from May until now. Those names have made up a lot of ground and at the expense of the momentum and technology names have actually been lagging since around that period of time. So like a lot of other things, it depends on where you’re measuring from, but just speaks to the idea of why we allocate to these different areas in the first place.

Tom Mullooly: I’ve got to believe that most people would look at the market this year and say, “Well, these work from home stocks are really where it’s at.” So Zoom has done really well. A lot of these technology related stocks have done really well, and they had their shining moment, I think in March, April and May. But what you’re saying doesn’t necessarily match up with that.

Brendan M: No, it doesn’t. And I think the point is less that those names aren’t good any more and more just that you can’t have all of your eggs in one basket, or if you do, it’s going to be a much bumpier ride. That’s the point of why we allocate to these different areas because they zig when the other one zags. Meaning if momentum’s struggling, maybe small caps are making up the ground and the overall portfolio is less volatile than if we just had one or the other, or tried to time when any of these in particular were going to be working, which I think is impossible.

Another thing too, to look at is that from January to May, we just talked about what’s been leadership, but for the first five months of the year, none of those areas did anything. And if you had bonds in your portfolio, they were the only positive performer. So we’ve had different stretches of this entire year where you would have wanted to own one or the other, or maybe a couple of these and not another. But in a perfect world, we would know exactly when these things were going to work and for how long and we would only have our money in them for those periods of time, but-

Tom Mullooly: It doesn’t work that way. It just doesn’t.

Brendan M: No, it doesn’t work that way. And so short of doing that is we can allocate to these areas in proportions that we think make sense based upon how we expect them to not only perform, but interact with one another over longer periods of time. And this year, we’ve gotten that in a microcosm. Not that one year is long-term, it’s not at all, but we’ve seen these different pieces of the portfolios carry each other and take turns leading the way. And that’s what we would expect over longer periods of time, 5, 10, 20 years. They’re going to take different paths to similar results, meaning you’re going to earn your returns in all of them, but it’s not all going to come equally and at the same period of time.

Tom Mullooly: Well, as you like to say, the returns are always lumpy. They never come out in nice, neat, straight lines. It just doesn’t seem to work that way

Tim Mullooly: Over the years, too, not just this year, but we’ve gotten calls from people saying, “Why can’t we just pile everything into this?” Whether it’s a sector or a stock, individual stock, or a fund. This one’s knocking it out of the park, let’s pile into that. And everything that you just said is the counter argument to that.

Brendan M: I would also say that not that we actually invest this way, but the moment you start to feel that way is the moment that you might want to move in the exact opposite direction.

Tom Mullooly: And we’ve had conversations-

Brendan M: We talked to clients over the summer that were like, “Why do we own small caps?” Or, “Why do we own international? It seems like they stink and these other things are doing well. Why don’t we just shift it all to that?” And it’s because by the time you realize that those things have made up ground, meaning like this last month or two, it’s too late. The trend is already in place. So if you’re going to shift back, all you’re going to be doing is buying high and selling low, and that’s not a recipe for success.

Tom Mullooly: Interesting how all of these different investment themes have bubbled up to the surface or bubbled up to the top of the list in one calendar year.

Tim Mullooly: It’s interesting too, especially with, there’s been a lot of discussion about why even own bonds right now when rates are so low. I mean, that was a topic of conversation for it feels like months earlier this year. I mean, interest rates are historically low, but it doesn’t necessarily mean that bonds are a bad place to be. And like you were saying at one point this year, that was the only place that you wanted to be or that you made any sort of money.

Brendan M: Yeah. I mean, you appreciated your bond allocation despite the fact that it wasn’t yielding a lot then either because you’re going to appreciate it for reasons outside of what you’re getting in terms of yield. At no point during the last five years should you have been excited about what yields were, and especially not now. I mean, a year or a year and a half ago, they might’ve been relatively higher based on where they are today, but they weren’t anything to write home about then either. So I don’t think you were buying bonds then for the yield either and you’re probably not now, especially if you’re considering it on a real basis, because after inflation, this is probably not something where you’re going to be earning money. However, the alternative is having more money in stocks and that may or may not be something that you are interested in based on the volatility that that’s going to throw off. And if bond yields are negative on a real basis, then cash certainly is.

Tom Mullooly: You bring up an important point because we’ve also fielded many calls from people who say, “I just want to sit in cash until after fill in the blank event is over.” You talk about real returns, and if, like you said, the real returns on bonds are negative, meaning after inflation, what are you going to get on cash?

Brendan M: Less than that.

Tom Mullooly: Far less than that.

Brendan M: Whatever the difference is in the yield.

Tim Mullooly: Monetarily, less than that.

Brendan M: If your bonds are yielding 1% on a nominal basis and adjusted for that to get to your real return, your negative, then cash earns nothing. And so it’s 1% less than whatever your bonds would get, obviously short of any price fluctuation due to what’s going on with interest rates. But that would be my expectation. So yeah, I mean, if you’re worried about having money in bonds, I don’t think cash is a solution. So your alternative is stocks or collectibles. And I don’t think your allocation is only shaped upon returns because if everybody’s allocation was only based upon maximizing returns, then everybody should just be 100% long stocks. And it’s not the case because people have needs in terms of spending from their portfolios. They have stuff that they can either handle or not in terms of what they have to see their account doing in the interim, because like it or not, investors are checking in on what’s going on. So these are all other things that factor in to make your allocation what it is. It’s not always about just maximizing returns.

Tim Mullooly: From a psychological standpoint, it’s interesting to look at the calendar, and like you were saying, going back six months, a lot of the areas that people didn’t necessarily want to own, that’s when it was time to switch into that. But at the same time, I feel like six months ago it was around May, and that’s after the market bottomed in March and rallied for all of April. May was around one of the first times when people started to get comfortable again, like should we be buying stuff? Like is this recovery for real? But they were asking to buy all of the names that were literally topping, in a sense, in terms of relative performance at that time. So it’s just interesting to see how perfectly that lined up this year for people from a behavioral standpoint.

Brendan M: Right. They were doing what was comfortable, meaning, okay, I’m going to put money back to work if I have cash or if I sold out during the correction, and I’m going to do that into what’s been doing best. And that seems like the right thing to do, but when you make comfortable decisions like that as an investor, you’re usually not setting yourself up for success. And in fact, you should be looking to do the opposite in most cases.

Tom Mullooly: Interesting to note that March was probably one of the worst months in the history of the market. April was one of the best months, if not the best in the history of the market. And as you pointed out, Tim, we started getting a lot of calls from people just starting to sniff around in May. “Gee, is there anything else we ought to be buying?” The market was down in June. Market was down in September. And a lot of people thought, well, we ought to go into hiding before the election. October into the election and beyond the election, market’s been pretty solid. You can’t use the calendar as your predictor tool. It doesn’t really work that way.

Brendan M: Or events, as if we get to the other side of one event and there aren’t more events on the horizon. There always will be.

Tom Mullooly: There’s going to be another one right behind it. Yeah.

Tim Mullooly: The unfortunate thing is that sometimes those feelings could work out for people and that distorts their opinion in their mind and from a behavioral sense, like it could’ve worked out for them. It’s interesting that it’s been like textbook the wrong thing to do at multiple times this year in 2020, just from a calendar point of view. We’ve had a pretty good demonstration of those behavioral aspects that we were just talking about.

Brendan M: Yeah, a good year for diversification and patience, but easier said than done.

Tom Mullooly: A little bit of news. Tesla is being added to the S&P 500. We don’t normally talk about individual names on this podcast, but this is something that I think is worth talking about.

Tim Mullooly: It’s interesting, because I think earlier in the summer, it looked like they weren’t going to be added to the index, but now they are. And just from a calendar point of view, the year that Tesla has had has been incredible, to say the least, and some people are now worried that are they getting added to the index at the top of their market cap or their performance right now? And we don’t know. I mean, I read an article, people said that they had similar feelings with when Facebook got added, and it ended up working out Facebook continued to grow and to go up. But yeah, some people are worried about Tesla getting put into the index and what it might mean for the index overall, since the S&P 500 is cap weighted.

Tom Mullooly: You want to explain what that means?

Tim Mullooly: Yeah. I mean, cap weighted means the largest companies that have the biggest market cap, they account for bigger portions of the index. So they move the index more than the smaller companies of the 500, if you’re looking at the S&P 500.

Brendan M: Right. So, we’re not adding like number 499 when we talk about Tesla going in. This is going to be-

Tim Mullooly: It might be in the top 10.

Brendan M: This is going to be a top 10 holding in the index moving forward. So, it’ll have an impact on what the day-to-day fluctuations look like. And I don’t think there’s a more polarizing company out there these days than Tesla and founder Elon Musk. So, a lot of opinions about whether this is good, bad, or otherwise.

Tom Mullooly: I think the jury is pretty split. There’s a large percentage of people out there that think this entire company is a fraud. And then there’s other people who say, “This is the future.” We don’t know.

Brendan M: It’s probably something in between.

Tom Mullooly: Right.

Brendan M: I think if you’re too far on either end of the spectrum, like most things, you’re-

Tom Mullooly: You’re going to wind up getting burned one way or the other.

Brendan M: Also one of the benefits of an indexing approach is even if this company is one of the largest holdings in the fund, if Tesla does turn out to be super bad or super good, it’s not going to pull the entire index with it. It’s still based on what’s happening with the other companies. So for most folks, having index exposure to companies like this is far more palatable than watching a stock like Tesla ping around. I mean, this year it’s been fun volatility, meaning that it’s up big time, but there have been some absolutely gut-wrenching draw downs in Tesla and other big stocks like this. And if you’re in an index, you don’t necessarily have to deal with the day-to-day dramatics of that while still getting exposure to the company, assuming it does well over time.

Tom Mullooly: I’m not trying to infer anything with what I’m about to say, but when the trouble started at Enron, they were the seventh largest company in the S&P 500. And to your point, that’s a company that over a period of time vanished. And if you’re a holder of the S&P 500, it’s one of 500 names. Yeah, it was one of the largest ones, but it didn’t a material impact on the overall return.

Brendan M: We’ve seen that over the last decade with a stock like GE.

Tom Mullooly: Sure.

Brendan M: That was a huge holding. Performed terribly. And the index marched higher.

Tim Mullooly: I mean, we literally just put out a video … We’re recording this on Wednesday. We put out a video today where Tom, you said how when you started your career in 1986, the Dow was at 1500 and the S&P was-

Tom Mullooly: 205.

Tim Mullooly: At 200. Yeah. And now it’s in the 3000s. So both-

Brendan M: How many big companies have come and gone since then-

Tim Mullooly: Exactly.

Brendan M: … I guess is the point that Tim’s making.

Tim Mullooly: Yeah.

Tom Mullooly: That would make a good video, just going through the 30 names in the Dow. Very few are left.

Tim Mullooly: Yeah. I mean, in the S&P too, like you just said, Enron was the seventh largest company and it went to zero, and over the span of 30 years, the S& P is still up 20 fold.

Tom Mullooly: Right.

Brendan M: So the index exposure can … If you owned one of these companies outright and it went to zero, like an Enron, then you obviously lost everything. I don’t think that you share that same risk if you’re investing and you have 2% or 3% of the portfolio in something like that because you own an index fund. I mean, sure. It’s going to matter, but not to the extremes that it could, if you wanted to own outright.

Tim Mullooly: Yeah.

Tom Mullooly: So Tim, you saw an article that was written by our friend, Robin Powell.

Tim Mullooly: It’s called Not Your Job, and he talked about how there are some misconceptions or myths about what every day investors think that their job is. So we’ll go through the three of them. They’re points that we have touched on before, but they’re always good reminders for people. The first one that he said, the first myth was that your job as an individual investor is to outwit the financial markets.

Tom Mullooly: False.

Tim Mullooly: Right. That is a myth. It’s not your job to outwit the financial markets. It’s your job to, if you want to invest, you participate in the financial markets, but you don’t need to outwit it. You don’t need to think that you’re smarter than the rest of the collective market.

Tom Mullooly: I think the portion that, if there is a portion of your assets that you want to try and outsmart the market, it’s with the tippy top of your financial pyramid. It’s the little, teeny tiny part of your account that you’ll speculate with.

Brendan M: It’s the sprinkle on top of the icing on top of the cake.

Tom Mullooly: Right.

Brendan M: Yeah. And I think that should be in full acknowledgement that you’re probably not going to do it, but that it makes you happy to try and that you want to do it with a piece of the portfolio, because if you actually believed that you were capable of that, I think you’d probably want to do it with all of your money. So, I think you need to not only keep it to a reasonable portion, whatever that means for you, but also acknowledge that it’s for fun and that if you got lucky, that you got lucky and that you’re not George Soros.

Tom Mullooly: It’s Vegas money.

Brendan M: Yeah.

Tim Mullooly: Piggy-backing into the second point. You said like, if you could do with all of your money, you would. The second point was the top fund managers happily share the fruits of their hard work, meaning that if they had the ability to outsmart the markets consistently, they wouldn’t have to sell their funds or their track record to individual people like that. So piling in-

Tom Mullooly: They’d just do it themselves.

Tim Mullooly: Right. Exactly. So just piling your money and with just a star fund manager might not be all it’s cracked up to be.

Brendan M: Right. So, not only can we not reliably do it, but nobody else really can either. And on top of that, if anybody can for a short period of time, we have no way of identifying that beforehand. So how would we know that they’re the person to be allocating to? We wouldn’t.

Tim Mullooly: And then the last point that he brought up, the last myth was that success is hurdling some market benchmark. It goes back to the first one, outwitting the financial markets, trying to just beat the market. I guess that could be a goal for you in terms of defining success, but over the long-term, I don’t think individual success should be measured by whether or not you beat the market.

Brendan M: Yeah. I mean, you could beat the market every year and if the rest of your plan isn’t in place or you’re not saving enough, or your lifestyle is out of control, you could beat the market and still run out of money in retirement. So I think that’s a pretty meaningless goal to be shooting for. I think the goal should be to just achieve the returns that you’re going to need to do what you want with your money in the future. And I think that taking the risk of trying to beat the market often puts what that actual goal should be getting what you need at risk, because you have to do more and try harder and take more risk to try to beat the market. And that may be throwing off the only goal that actually matters, which is getting what you need in the future.

Tom Mullooly: Yeah. He reached a good point in the article where, I think he used the analogy that if 50% of your money is not in the market, if it’s in bonds, or 75%, whatever the ratio is, if you’re trying to keep up with a yardstick that is 100% stocks and you’re 75% in stocks, first of all, it’s going to be very difficult to do and you’re going to have to swing for the fences all the time to try and hit a home run.

Tim Mullooly: Yeah. Trying to do that would just encourage reckless investing or trading or trying to do something to make up for the fact that you’re lagging behind the market, when in the grand scheme of your own personal life, it doesn’t matter.

Brendan M: Yeah. If you’re not 100% stocks, don’t measure yourself that way and understand why you’re not 100% stocks. There’s probably a good reason for it. And the reason for that is more important than whether or not you’re clearing some benchmark each year. If you’re not 100% in the market, then it’s probably because your plan either doesn’t require you to take that much risk or it’s something that you found that you’re not capable of sticking with over the years. I mean, there could be a whole host of reasons for that. So then to after the fact say that you’re a failure because you didn’t beat some apples to oranges benchmark is not doing yourself any favors.

Tom Mullooly: Okay. Let’s going to wrap up episode 332. Thanks again for tuning in and we’ll catch up with you on the next episode.

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2020 has been a chaotic year for people – personally, emotionally, financially, you name it.  Don’t let your 2020 taxes be chaotic too! In this episode of the podcast, we discussed 10 year-end tax tips to consider during the last 6+ weeks of the year.

Show Notes

’10 Tax Planning Steps to Take Before New Year’s Eve’ – Think Advisor

2020 Year-End Tax Tips – 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 and securities discussed in this podcast.

Tom Mullooly: Welcome back to the podcast. This is episode number 331. I am Tom Mullooly and I’m joined today by Tim Mullooly and Brendan Mullooly. Hey guys.

Tim Mullooly: Hey.

Brendan M: How’s the going?

Tim Mullooly: So, there’s an article in Think Advisor and it’s pretty timely since we’re into November now, we’re closing in on Thanksgiving. It’s a good time to talk about all of this, so you have time to accomplish what they’re talking about in the article before the year ends. It’s called 10 tax planning steps to take before New Year’s Eve. There are things that you can do before the end of 2020 to potentially lower your taxable income or just pay less in taxes in general. And they ran through 10 things and we wanted to go through that list and share our thoughts on their list.

Tom Mullooly: The first one that they talked about, and I don’t know if we’ll hit on each of these, but taking advantage of gifting to family members. Just as a reminder, you can gift to anybody $15,000 in a calendar year or if you’re married, that’s $30,000 to any one person. So suppose you have three children and a husband and wife want to gift the maximum, they could actually gift 30,000 to each of the three. That’s $90,000 in gifts, which is really great.

It also talked about doing gifts to 529 plans, which does allow for some expansion on the gifts. Basically you can make a five-year gift all at once. You’re stopped from making future gifts for that period of time, but you can dump it all out in one year.

Brendan M: Yeah. I mean, if you could swing it and you set up a 529 account for a newborn to front-load, the benefit if you can swing it is more compounding. So instead of sending in money periodically over five years, you get it in at the very beginning and that’s five years of extra compounding on every dollar that you front-load into there. It could be really great.

There tends to be a lot of questions that come from clients about gifting and the tax repercussions. And so it’s never taxable income to the recipient of a gift, and it’s not even taxable income to them if you’re over this $15,000 threshold that we’re talking. The $15,000 threshold really only comes into play when we talk about everybody’s lifetime exclusion, which is the same number right now that pertains to a state tax. And so if you go over that $15,000 threshold in a year, let’s say you’re not married and you give somebody 30. So $15,000 of that doesn’t matter. The 15 that you went over your limit counts against your own lifetime exclusion, the person giving the gift.

And so that basically just then lowers what you can exclude from your estate when you pass away. And for a lot of people with estate taxes, the levels where they are now, it’s not actually a big deal. And so you want to be cognizant of these limitations but at the end of the day, if you have a really great reason that you want to give a gift to somebody and it’s not going to fit into that 15 or $30,000 limit for individuals or married couples, it’s not the end of the world.

Tom Mullooly: And the estate tax exclusion that Brendan was referring to at the moment is $11 million.

Brendan M: Per person.

Tom Mullooly: Per person. And so-

Brendan M: And even where it was beforehand was not a huge issue for most people.

Tom Mullooly: Right. And so over the span of my career, this estate tax exclusion has changed quite a bit and it will continue to change. We just have to be aware of where the thresholds are. I just want to spend a moment on the second point that they had about maxing out your contributions to retirement plans and health savings accounts. We don’t talk that much about health savings accounts, but 401ks and other retirement plans, if you are under age 50, the maximum you can do this year is 19,500. If you’re 50 and over, you can actually do the 19 five plus an additional $6,500. So you can do $26,000 for a married couple now that are working and have the income to do it. That’s 52 grand that you can put into a retirement plan that is not small peanuts.

Brendan M: It’s a nice reduction off your income and a great boost to your retirement.

Tom Mullooly: It is.

Tim Mullooly: I think a caveat to that though is making sure that… Or Not just maxing out your contributions just to get the maximum tax benefits. I mean, obviously you need to take into account if it makes sense for you to be putting your money into these accounts. Obviously it’s being tied up for retirement. So if you’re under 50, you foresee needing the money in the future, maybe think twice about how much you’re putting into the account. But if you can swing it, then yeah, maximizing is a good way to take advantage of those tax advantages.

Brendan M: Kind of see the HSA that they noted in there as a similar story in the sense that these accounts they’re supposed to let people defer money pre-tax to then use pre-tax dollars again to pay for medical costs. But if you’re not in a situation where that is going to really be an issue, maybe you have good coverage or you’re a healthy person, you can max this thing out and the money will continue growing tax deferred. And it basically just becomes an extra retirement account for folks who can afford to not use that money for, one, expenses on the front end or, two, even medical expenses. So if you can clear that and you’re comfortable and you have access to one of these things, could be another way to lower your taxable income and compound for the future.

Tom Mullooly: There’s a lot of benefits to these health savings accounts. I think the biggest drawback at the moment is that their dollar thresholds are small compared to 401ks and retirement plans. But if you’re an individual filer, this year, you can put away $3,550 on a pretax basis into a health savings account. For family coverage, that amount has doubled, it’s $7,100. Now, unlike retirement plans where if you’re over 50, you can put more into it, with an HSA, if you’re over 55, you can add an additional $1000. So if you’re 55 and over, you can put in up to $8,100 for family coverage.

Not nothing. You have to be able to do it. I really think that the winning formula for HSAS is put the money away with the idea that you’re not going to touch it for several years, five years or more.

Brendan M: It’s a luxury that many do not have. But if you’re in a position to take advantage of that, it can be really great and a nice boost.

Tim Mullooly: I think, kind of building off of that, going back to making sure that you can swing all of these things. The fifth point jumping ahead a little bit was prepare for unexpected expenses with a liquidity plan. Pretty much what we talk about a lot here, having your cash flow plan in place. And they made the point to say, without disrupting your current investments, which I think is huge.

We talked a lot over the last couple of weeks about disrupting compound interest and taking money out of the market for whatever reason. 2020 was a good example of needing to have a cash flow plan in place, making sure that you can make ends meet without having to completely unravel any progress you’ve made in your investment accounts.

Brendan M: Yeah. I took that as just a reminder. We make one pagers for a lot of our clients, cashflow balance sheet and just take a look at all of that because they are two parts of your financial picture that are super important because within that, you can say, hey, how, how has cashflow done? Can we update these numbers approaching year end? Nothing special about doing it then. You can do it anytime, but as good a time as any to take a look.

And then also balance sheet assets and liabilities, how have those changed over the course of the year? And hey, what if, what if the income number from the cashflow side of here was impacted like what we saw earlier this year for a lot of folks. What could I use on my balance sheet to get myself through? And hopefully that money is not money that’s in stocks. You have a lot of stops along the way there between emergency funds and… The article talked about lines of credit like maybe home equity or even securities based loan. You have all these stops along the way, and then trying to rank them in terms of how much would I want to rely upon these things? Because there are some that I would want to rely upon a lot more than others. In a perfect world, the emergency fund is just cash. But there were probably other stops along the way too.

Tom Mullooly: I think the idea of having a liquidity plan or an emergency stash has never been more evident than this year with the pandemic and the recession. A lot of people who never expected to be out of work were suddenly out of work without warning at different times through the year. So it’s-

Tim Mullooly: And I mean, we saw it affect people across all different types of earning levels too. There’s been articles about how low earning jobs have been hit really hard, but also people that make six figures have been struggling really hard too. And it just goes to cashflow. It doesn’t really matter how much money you’re bringing in if you’re spending all of it. Something like this happens, you stop working, that six-figure salary goes away, you’re going to be in trouble too.

Brendan M: I’d argue that with lifestyle inflation, meaning the more you make, the more you spend. Somebody who’s out of work who is used to living and existing on $50,000 a year could be in a lot better position than somebody who makes $150,000 a year.

Tim Mullooly: They’re more prepared or used to it.

Brendan M: Because bridging the gap when your income is disrupted off of a smaller base, may be easier. It’s going to mean less debt to rack up or less of an emergency fund that you’ll ultimately need. And so it’s all about that gap between what you’re spending and what you bring home that ultimately matters, not necessarily the headline number.

Tom Mullooly: And I would say, correct me if I’m wrong, but one of the most frequent issues that we discuss, especially with new clients is the lack of an emergency fund. We’ve got clients that have retirement accounts and then they’ve got maybe some investment accounts, but nowhere on the balance sheet do we see, this is my emergency stash. And so it’s become a good opening question with a lot of folks is where is, what do you consider on this balance sheet the emergency fund? And it’s eye-popping to hear some of the responses, well, I’ve got a $10,000 credit line on my credit card that I can tap into or I’ve got a home equity line that I could tap into. Those things go away during bad economic periods. They’re not guaranteed. And other folks have money in the market that they say, well, if I need to, I can dip into some of my stocks, but as we found earlier this year, when you go to tap into them, when you need them the most, they may be down 30 or 40%. That’s a problem. Yeah. And so as ugly as it seems, we see a lot of balance sheets that are built upside down where there’s no base, there’s very little of an emergency Bay.

Brendan M: I think it’s a lot of that stems from people and people in our industry shaming people for having money in the bank- With interest rates where they’ve been for the majority of the past decade, people get shamed for keeping too much at the bank. And certainly we’ve seen instances where people have excessive amounts of cash at the bank and that can happen for a multitude of reasons. But I think people in our line of work are so eager to get every dollar folks have invested under their management, that sometimes they tell them to put money into investment accounts or something that shouldn’t actually be there. And it should be kept at the bank. And sometimes they do tell them the right thing and folks just don’t want to listen because they think themselves that it’s a poor decision to leave money at the bank when it’s earning zero or half a percent or something like that. And they see that opportunity costs as just too much to withstand. And I don’t think it is.

Tim Mullooly: Yeah. And I think, people in our industry, you’re not going to get on TV or sell a lot of books if you tell people to have money in the bank. I mean, from a young age, I feel like a lot of people just hear, once you get a career to start investing as soon as you can. Start investing as soon as you can. Make your money work for you. It’s true but there are steps you need to take before you get there. And a lot of people just gloss over those steps. So you can’t really blame some individuals because they were never told to have an emergency fund or have money in the bank.

Tom Mullooly: I know I’ve had some conversations with people this year, not clients, but I’m sure you guys have also gone through the same experience where this year under the CARES Act, you can actually take money out of your retirement plan. Yes, it is going to be taxable. They are waiving the penalty that you would normally have if you’re taking money out of a retirement account before 59 and a half. But some of the reasons that I’ve been hearing are we don’t have an emergency fund or we have too much credit card debt or we have credit card debt that we need to get rid of or… I’m actually encouraged to hear that people did save money and now they’re using this opportunity to rebalance the balance sheet a little bit and hopefully get headed on some better habits.

Brendan M: Yeah. Unfortunately like Tim said, no, nobody wants to read the article about setting up an emergency fund. They want to read the five hot stocks for next week. And I think that that proves itself when we see folk’s balance sheets time after time.

Tim Mullooly: The cashflow and balance sheet really work hand in hand, like you were talking about in the next point that they had was about your balance sheet and how you need to review not just the assets. The article was more talking about people that own their own businesses, their business balance sheets. But I think it can apply to everyone. I feel like people get caught up in counting their assets and what they have and sometimes neglect what they owe, especially when it comes to credit card debt or other types of debt. Maybe the interest rates are really high on them or there are different ways that you could be paying it off or paying off more.

So there’s two sides to that balance sheet. There’s the assets and then there’s the liabilities. So I think it’s important to pay attention to both sides of that.

Tom Mullooly: You can live in a million dollar house and have no equity. And if the value of your house goes down in the future, you will have negative equity.

Brendan M: Another component that we usually build into cashflow and balance sheet for folks would be starting with gross income and then getting all the deductions out of the way to the net income. And the fourth quarter of a year in general, I think is a great time to review your tax situation because things can change over the course of a year. And if you’re doing this in September, October, November, you still have a little time before the end of the year. So if you review your tax situation, see what you’re projected to owe, if there’s a big discrepancy or you’re not on track, you can ride the ship or at least have the heads up that that’s going to be coming come April when you go to file your taxes.

And in fact, after October 15th, I think it’s a great time to touch base with your accountant if they do this kind of tax planning work for you or an advisor if they’re the ones who are doing this sort of work, because they’re less busy filing returns for people in the cases of accountants and tax preparers, and they can give you the attention. And they’ll be happy that you did this too, because I think a lot of them, an aspect of their jobs they don’t enjoy is telling people in April, hey, you have a big tax bill because that’s not necessarily the accountant or preparer’s fault at all.

Tim Mullooly: Even though a lot of people seem to think that it is.

Brendan M: Exactly. So they have to be the messenger of the bad news. And so to discuss this in the fourth quarter, when you have time to change where you’re headed or at least have a heads up that you should start setting aside money, because you’re going to owe X come April. I think this is a great time to look at stuff like that.

Tom Mullooly: How many times have we heard people say, I don’t want to use that accountant anymore, I had to pay too much in taxes. It’s not really their fault.

Tim Mullooly: Especially when, what is it now, like 90% of people take the standard deduction since the 2017?

Brendan M: Yeah. I think it’s really a withholding story or some dramatic income event or life event that changes your filing status or what bracket you’re going to be in. And you never accounted for the changes that… Especially in a year like this where folks have been tapping into things like retirement accounts for CARES Act distributions. I mean, if you did that and you didn’t speak to your accountant or tax preparer beforehand, you can kick the can and find out in April or you could find out now. And it’ll probably be pretty close. We can’t predict what will happen over the next two months either, but we’re pretty close to the end of the year. So you should have a very good idea of where you’re ending up for taxes. So don’t delay, take a look.

Tim Mullooly: Yeah.

Tom Mullooly: Speaking of people taking standard deductions versus itemizing, there is a part of the CARES Act that was rolled out this year due to the virus where they did discuss charitable giving. And this is something that I’ve shared with a couple of organizations and charities that I’m involved in as well. I passed this message along to them recently prior to 2020 under the new tax act. So in 2018 and 2019 taxes. Typically, if you were an itemizer for your taxes, you could deduct somewhere between 20% up to as much as 60% of the gift of your adjusted gross income in charitable contributions, donations that you’re making. And if you were someone who did not itemize last year, well, the CARES Act is opening a window for these folks this year. And I think it’s important that not only individuals are aware of it, but the organizations are also were aware of it.

If you were not an itemizer or last year, this year, you can take a up to $300 deduction without even getting involved in itemizing.

Brendan M: This is above the line.

Tom Mullooly: What they call above the line. Did you make a charitable contribution? You can deduct up to $300 and you don’t have to get involved with itemizing whatsoever. So that’s a nice gift, not only for you to deduct off your taxes, but also for the organization or the charity that you’re giving to. However, for folks that do itemize, this year, because of the CARES Act, they can now deduct up to 100% of their adjusted gross income in charitable contributions. That is eye-popping in terms of the amount of money that can be gifted. And if you’re in that fortunate position, boy, this is a year to do it.

Tim Mullooly: Yeah, definitely. I also think an important point. They made the distinction to say that it needs to be recorded and received your charitable gift by December 31st, which is a Thursday this year. I bring that up because don’t call the make the donation on Monday of that week, you know what I mean?

Tom Mullooly: People do it.

Tim Mullooly: Right. We’ve gotten calls from people to make charitable gifts or contributions to their accounts December 29th for the end of the year. And it’s like-

Tom Mullooly: It won’t happen.

Tim Mullooly: This is why we’re recording this and giving it out to you guys now in the beginning of November. So you have time to do this ahead of time. Don’t leave it to the last minute because it just makes everything stressful.

Tom Mullooly: Yeah. Usually brokerage firms will request that you get all of these requests for gifts in by December 15th. But every year we have folks that reach out to us December 29-

Tim Mullooly: The week in between Christmas and new year’s.

Tom Mullooly: Yeah, December 30th.

Tim Mullooly: Try not to do that.

Tom Mullooly: Yeah. The organization needs to have the money in hand and record it on or before the 31st. While we’re talking about it, it’s always important to remember to select the right kind of gift to give. As a general rule of thumb, give cash to people and give appreciated assets to organizations, to charities.

Brendan M: Bingo.

Tim Mullooly: Not much more to-

Tom Mullooly: Yeah. Give cash to people and then give some kind of securities or assets, something that’s appreciated… Because you can deduct the fair market value of whatever you’re giving, even though you bought a stock years ago, it’s way up, you’re basically turning the tax situation over to a non-profit. They don’t have tax.

Brendan M: Or if you’re giving a stock to somebody that you’ve held forever there and hurting your cost basis, which is not advantageous to them. It still is, but it’s going to be less of one after they net out the capital gains tax they’re going to have to pay on it.

Tom Mullooly: Very true.

Tim Mullooly: So one of the last points that they made in the article was to consider harvesting tax losses. So that’s if you own a stock or a fund that you have losses on, you can sell it and use those towards lowering your taxes

Brendan M: Review everything that’s happened over the course of this year too. And it doesn’t necessarily mean that you want to be done with the investments that you’re discussing that have gains or losses. But if you have taxable investments in a brokerage account or a joint account or something like that, it just makes sense to on a yearly basis, manage those for the fact that taxes are going to be due on them. And so it could mean moving on from something for a brief period of time that you then buy or replace with something similar. It doesn’t mean that you’re done with it, but just to be smart. Ultimately if you have taxable assets, you want to end up with as little a tax bill at the end of the investing period when you’re going to consume as possible, because what you eat at the end of that is the after tax after else number. And so if you’ve got a giant capital gain in something, you can work over the years to slowly chip away at that to make your ultimate liability at the end not as great.

Tom Mullooly: Great. All good tips. If you’ve got questions on these, just reach out to us. We’d be happy to walk you through the finer details of these, but that’s going to wrap up episode 331. Thanks again for tuning in, and we will catch up with you on the next episode.

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When you work with a fee-only fiduciary investment advisor, you know that any recommendation or investment decision is 100% in YOUR best interest.  In Ep. 330, Tom and Tim discuss the value of a fiduciary during volatile markets like what we’ve experienced in 2020.

Show Notes

‘The Stock Market Doesn’t Care Who Wins’ – Josh Brown – The Reformed Broker

‘What Does the Stock Market Do Around Election Day?’ – Nick Maggiulli – Of Dollars and Data

‘Portfolio Tweaks Before the Election’ – Michael Batnick – The Irrelevant Investor

‘The Stock Market & Presidential Elections’ – Mullooly Asset Blog

The Value of a Fiduciary in Volatile Markets – 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 330. Thank you for tuning in. I am Tom Mullooly and joining me today is Tim Mullooly for election day special.

Tim Mullooly: Yes, we are recording this on Tuesday, November 3rd, 2020. The presidential election ends today. It started a while ago.

Tom Mullooly: Well, I hope it ends today.

Tim Mullooly: Well, the casting of votes will end today.

Tom Mullooly: So we’re recording this on Tuesday. It has to go through the editing process. So folks may not be listening to this until…

Tim Mullooly: Probably the end of the week, I think, at the earliest, Thursday. Usually, we put these up on Friday. So if you’re listening to this on Friday, hopefully we have some sort of results or indication of how things are going to shake out.

Tom Mullooly: But we may not know by the time you’re listening to this who has definitively won.

Tim Mullooly: There was a message that we had for people in the video this week and our message this whole time about the markets and the election and what to do in terms of changes to make in your portfolio and things to do, our message has been consistent this whole time. So we’re able to record these podcasts and videos before we know what happens because our message isn’t going to change regardless of the results. So the video we recorded on Monday, the podcast we’re recording today on Tuesday, the message is the same on these days as it’s going to be on Wednesday or Friday, or whenever we get the results.

Tom Mullooly: The message basically is, “Hey, if you have a cash need, if you’ve got money in an investment account that we’re managing and you need that money in the next three months, six months, nine months, it should be nowhere near stocks.” It just shouldn’t be. Even longer periods than that, we’re very confident, unless something’s happening that we don’t know about, we feel totally secure in our recommendations to our clients on the allocation.

Tim Mullooly: We’ve made the point that a lot of the money that we manage for people is long-term in nature. So the results of one presidential election or one headline or one story, because there’s always going to be stories that are moving the market… Earlier this year, we had the pandemic came and rocked everyone’s world. For the long-term, that wasn’t a reason to rip up the script either. Now, the same thing’s happening here in November. In 2021, I’m sure there’s going to be something else that comes along that gets everyone’s attention. These short-term events are not a reason to rip up a long-term game plan, especially when that money needs to get you to and through a retirement.

Tom Mullooly: It’s very true. When we talk about returns and expectations for clients, if we’re talking about long-term returns of 6% or long-term returns of 5%, 7%, whatever the number is, understand that we bake in to those projections numbers that include bad years, that include rocky periods, bumpy periods during the market. We’re very confident in how we’re positioned no matter what the result is going to be this week or for any other event in the future.

Tim Mullooly: There’s going to be up years and down years. That average that you’re talking about, it’s not a straight line, smooth every year, crisp 6% on the button. There’s going to be higher than that, lower than that. There was an article that Josh Brown wrote from Ritholtz that kind of echoes some sentiment that we have been conveying in blog posts and videos and podcasts that the stock market doesn’t care who wins. We talked about it last week, how if a Republican wins or a Democrat wins, companies are going to find ways to continue to make money and continue to grow. So the market doesn’t really care who wins. The market wants to know.

Tom Mullooly: Yeah, and it wants to move past-

Tim Mullooly: Exactly.

Tom Mullooly: … this event and on to the next thing.

Tim Mullooly: Right.

Tom Mullooly: So that’s why we saw last week, this was the last week of October, we saw markets selling off pretty hard. I think the averages were off about 6% in about a week and a half. It turns out that most of the selling was done in some of the real large cap technology names. Maybe that’s people just taking money off the table because they’ve had a good run. We didn’t see too much selling across the board, across the entire sector or the entire averages. We just saw the selling really confined to the large cap tech names.

Now, we’re seeing just the opposite. We had a big up day Monday. We’re having another big update today. As Josh pointed out, this appears to be a reflex rally or the market just exhaling, that we’re finally at the finish line for this event, hopefully, and it doesn’t drag on right past the election day.

Tim Mullooly: Yeah, and there was a post from Nick Maggiulli, also at Ritholtz, talking about what the stock market does around election day. Like we’ve been telling clients, we expect and it’s happened this week, and the last handful of trading days, last week too. You expect markets to be volatile leading up to the election. Nick actually pointed out in his post, you usually see more volatility leading up to the election and it tends to not really continue on after the election. It’s for that reason that you just said, and like what Josh pointed out too. The market just wants to know and exhale afterwards and move on.

Tom Mullooly: The corollary to that is what happened 20 years ago, 2000 when we had Bush and Gore, essentially in a flat-footed tie? This went on for another 33 days after the election. I know I mentioned this in a video a couple of weeks ago, but it was 33 days, but it felt like 33 years because every day you came to the office with this black cloud hanging over, you did not know who the president was and what the game plan, what the agenda was going to be for a new administration and things got held up until the Supreme Court basically told the counters in Florida to stop doing the recount. That ended it. Then we were able to move forward.

But interesting to note that the market hardly moved during that period. In that 33 days, the market was down three and a half percent. Now, the day of the election, the market was down about 3%. So if you were to say, “Okay. From election day until the day that the Supreme stepped in, the market was down six and a half, 7%, something like that,” but just the period of not knowing, the market was down three and a half percent.

Tim Mullooly: On top of that, it might’ve seemed like 33 years, but in the larger picture, it’s just 33 days there. Even if it takes 33 days to find out this time who has won over the span of your investing career, 33 days is nothing. It’s a blip on the radar there.

Tom Mullooly: You’re right. The other point that I’ll add on top of that is nobody, nobody wanted to do anything during those 33 days because they didn’t know who was going to emerge victorious.

Tim Mullooly: Everything is in limbo at that point. Everyone’s kind of collectively holding their breath, waiting to see what happens.

Tom Mullooly: I wouldn’t be surprised if we see a contested election and then we see several days or even several weeks where we don’t know the outcome. No one’s going to want to do anything in either direction, buying or selling, because they don’t want to be on the wrong side of the trade.

Tim Mullooly: Right.

Tom Mullooly: I think what we’re seeing most of the time now in these weeks leading up to the election and people trading immediately after the election, are trades. They’re trading and this is not stuff that our clients normally get mixed up in.

Tim Mullooly: Right. Yeah. I think for anyone listening who might’ve wanted to make preemptive changes or wholesale changes leading up to the election and didn’t and stuck with their plan, I applaud you for doing that because leading up to this whole year in general, every day there are new headlines and new, crazy stories coming out and things trying to wear you down and get you to make these moves that will, in the long-term, end up hurting you. So if you were able to stick to your guns, hats off to you and also use this as something to learn from moving forward when tough obstacles pop up and make you want to make emotional decisions.

Tom Mullooly: I know that Mike Batnick wrote an article talking about portfolio tweaks around election time. He had basically, a survey that showed the percentage of people who increased cash or added protection by buying puts or selling calls against positions, or they made adjustments to their sector allocations.

Tim Mullooly: Yeah. It was a UBS survey and sets of 63% of the people that were surveyed for this said that they made some kind of change to their portfolio ahead of the election. I think 35% increased cash, and I think like 26% or 27%, like you said, added protection.

Tom Mullooly: In just my opinion, that’s way too high, these numbers.

Tim Mullooly: Yeah. I wasn’t surprised by them. We haven’t been recommending people make changes in anticipation of the election. I think Michael had a pretty good point. If making small tweaks or adding a little bit of cash was a way to stop you from making an all in or all out decision, he said, “Do what you got to do.” On the degree of bad decisions, that’s a little bit better than taking all of your money out of your investment.

Tom Mullooly: That is almost always a bad idea. You’ve heard me say this to clients. In 35 years, there’s been exactly one time where that made sense, and that was 2008, to go all in or all out.

Tim Mullooly: Yeah. You could even make a case that even 2008, you didn’t have to do that.

Tom Mullooly: Right. Right.

Tim Mullooly: Yeah. There’s hardly ever a time where that makes sense or where that will be a good idea and it’ll work out for you in the long run.

Tom Mullooly: I wonder sometimes if I were back in production as a broker and working on commission, if clients called up and said, “Hey, I want to make adjustments in my portfolio ahead of the election, and then we can go back in after the election,” I just wonder how tempting it is. I’m sure the answer probably would have been, “Great.”

Tim Mullooly: Yeah, let’s go it. Yeah, because they’re getting paid/ Brokers, you would be getting paid on the way out and then getting paid on the way back in. I think that that for us here, as fiduciaries and fee only, we don’t have that decision to make. There is no commission coming in for us on the way out or the way back in. So any decisions that we make for our client’s money, you know that it’s in your best interest because we’re not gaining anything financially from that.

Tom Mullooly: I just have to share this. The very first presidential election that I was involved in when I was in the business, I remember the elections before getting into the business when I was going through school, but the first election where I worked on Wall Street was the reelection of Ronald Reagan. He was running against Walter Mondale. I’m not a historian, but Walter Mondale in September two months before the election said, “I’m going to raise your taxes if I’m elected.”

To my knowledge, that was the first time a candidate ever said those words out loud. That was pretty much the end of his campaign. In that election, Reagan wound up winning 49 states. So Mondale took Minnesota, his home state, and the District of Columbia. You think about some of these deep, blue states, these Democrat states like California, New York, some of these states have always been Democrat, even those flipped Republican at that point. So I think saying raising taxes can sometimes be a third rail. It’s part of the reason why nothing ever gets solved when it comes to social security problems too. People don’t want to deal with this stuff because it’s political suicide.

Tim Mullooly: Whether the policies that the people enact will or won’t raise taxes, the candidate is always going to say, except for, I guess, in this one situation, the candidate’s always going to say, “I’m not going to raise your taxes,” and the person, their opponent is always going to say, “That person’s going to raise your taxes.”

Tom Mullooly: Right. Also, we’re recording this on election day, and so by the time you hear this, it’s going to be over, but I know that on Tuesday afternoon, people are going to start talking about exit polls, people coming out of the polling centers and saying, “I voted for this guy. I voted for that guy.” Interesting story, when W. Bush ran for reelection, he ran against John Kerry, according to the exit polls, everybody came out of their polling centers saying that they voted for John Kerry and John Kerry was going to be the next president. The market started selling off that afternoon. The market continued to sell off when rumors began in the afternoon, that W. was writing his concession speech. It turned out to be totally wrong. So you can’t go on what the media has been telling. We just have to wait for the dust to settle on this. Now, in this case, we may not know on Wednesday morning. We may not know for the next couple of days.

Tim Mullooly: Yeah, and I think in terms of your portfolio, it doesn’t necessarily matter what the results are anyway because our message to people that wanted to make tweaks ahead of the election was that we think it’s a bad idea and that the stock market doesn’t care who’s in the White House. That’s going to be the message after the fact too. So regardless of who wins, if you thought about making changes ahead of time or are thinking about making changes based on the results, just know that there’s a lot of evidence to support the fact that it’s not going to matter for your investments over the long-term.

Tom Mullooly: So I’ve seen several headlines in just the last few days saying the very same thing that you just echoed and people point out that markets tend to go up over time. I began writing a new blog post this morning, and then I just scrapped it because I could basically sum it up with that line I just said: the markets go up over time. What I wanted to do was show when Mondale was running against Reagan in ’84 where the Dow was, and then where it was in ’88, ’92, ’96, 2000 and go straight through to today. We know the answer. I think in 2008, that was maybe the only time where the market might have been lower than it was in 2004.

Tim Mullooly: Yeah. We put up a blog post on the Mullooly Asset Management website, I think it was last week or the week before, and it outlined, I think, going back to the eighties, the performance of the stock market under whoever was president. I think you’re right, George W. Bush was the only one that it was negative.

Tom Mullooly: I’m not trying to defend him, but I think his number would have been close to flat if we didn’t have this collapse in 2008.

Tim Mullooly: Right. Yeah, that’s not a knock on George W. Bush and it’s not a commentary on any other president, regardless of what party they’re in. We’ve talked about how presidents tend to be the scapegoats when things go bad. They get too much credit when things go really well, and they get too much blame when things go really bad. These things that happened in the country while these people are president, it’s not 100% their fault or 100% not their fault. So to pin all of the stock market performance on George W. Bush or on Bill Clinton or Obama or Trump, it’s not as cut and dry as people like to make it out to be. We always talk about how the market wants one narrative.

The market sold off last week, whether that was because of the election coming up or not. There’s also the point that the market pretty much went straight up from March until September or October. So maybe it just needed a breather. There’s always a handful of different narratives to put on why the market does what it does, and I think assigning the outcome of an election or a political party to one or the other is irresponsible.

Tom Mullooly: It’s weak. Yeah. People don’t buy and people don’t sell all for the same one reason. Everybody’s got different reasons. Okay. That’s going to wrap up episode 330. Thanks again for tuning in, and we will catch up with you on our next podcast.

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There’s an advantage that we all possess, but very few of us rarely use.  In this week’s podcast, the guys discuss the power of compound interest and why hardly anybody gives it the full time it needs to be really effective.  Whether it’s ripping up the script because of an impending Presidential election, or getting scared from volatile markets, interrupting compound interest with emotional decisions is a huge mistake.

Show Notes

‘Stocks Typically Climb, Regardless of Who’s in the White House’ – The Wall Street Journal

‘Warren Buffett and the $300,000 Haircut’ – Jason Zweig – The Wall Street Journal

‘Here’s How to Handle an Unexpected Windfall of Money’ – CNBC

The Advantage We All Have But Throw Away – 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 329. The whole team is at the table today, Brendan Mullooly, Tim Mullooly and myself, Tom Mullooly. Welcome, everyone.

Tim Mullooly: So there was an article in the Wall Street Journal, and it was kind of a similar message to what we’ve been fielding phone calls about from clients, and we’ve written about it and we’ve done videos about it, but the headline in the Wall Street Journal read that stocks typically climb, regardless of who’s in the White House. Like I just said, we’ve written about it. The point bears reminding again that the stock market doesn’t really care if there’s a Republican or a Democrat in the White House. You just need to keep that in mind when you see volatile markets coming up with an election next week.

Brendan M: Or people telling you that you need to brace for impact or to lever up or do whatever. I don’t think any of it’s worthwhile.

Tom Mullooly: Yeah. Let’s not let facts get in the way of a good narrative.

Tim Mullooly: Yeah.

Brendan M: Well, I was just going to say that the stats that they shared in this article, not that stats change anybody’s mind, but this was a pretty good set of them. This is like 90 years of data here that they looked at. They even broke it down to, all right, so there’s a president and do they have their party in control of the House and the Senate, meaning unified White House as well as Congress, or if things were split, because that’s been a part of the discussion recently too. So for 45 years, we’ve had the unified group together, the market has averaged 7.45% a year in those 45 years.

Tom Mullooly: So that’s like a total red wave or a total blue wave.

Brendan M: Yes.

Tom Mullooly: Control of everything.

Brendan M: Yes.

Tom Mullooly: All right.

Brendan M: So, 30 of those were up, 15 were down. Then we’re looking at another 46 years where things were split in some capacity. We didn’t have a unified one party in control. The market, in those 46 years, averaged 7.26% per year, and was up in 29 and down in 16.

Tim Mullooly: Almost identical numbers.

Brendan M: Yeah. If you stripped the heading off the data there, you wouldn’t be able to tell the difference. Some people out there would have you believe that this is do or die.

Tom Mullooly: Oh, there’s people out there who will tell you that the markets are bad when there’s a democratic president, like the market cares. It can’t tell the difference. The market doesn’t go the polling booth and pull the lever.

Brendan M: The president and lawmakers in this country have an impact on what’s going on, but I think the extent to which they have an impact on what goes on, on a day-to-day, month-to-month, year-to-year basis in something like the stock market is limited, and I think that it gets blown out of proportion. It’s like a head coach or a quarterback on a football team probably gets more credit than they deserve when the team wins, and then also becomes the biggest scapegoat when they lose just because they’re the figurehead, but it may not necessarily be an issue with them.

Tim Mullooly: Yeah. Like you said, the President and Congress, they can make policies for the country and businesses that do business in the country, but it’s not like companies that are publicly traded are going to stop trying to find new ways to make money or prosper or grow their business just because a Democrat’s in the White House or the Republican’s in the White House. It’s like, oh, this new policy’s in place, guess we can’t keep doing that. We’ve got to shut down business. They’re going to adapt.

Brendan M: That’s it. We’re closing up shop. Exactly.

Tim Mullooly: Exactly. So companies are going to continue to adapt regardless of what the policies are.
That just speaks to the numbers here. I mean, policies, things have changed a lot over the last 90 years, and businesses continue to make money and stocks do well.

Tom Mullooly: Well, I think a lot of it comes down to, as we’ve said many times, managing expectations, but also keeping the proper perspective. I hate to get down to a micro level, but there was a point today, we’re recording this on Monday, where the market, the Dow was down 950 points. And right before we turned on the microphone, the Dow was down 600 points. So the markets rallied 350 points this afternoon, or you could say, “Wow, it’s down a lot today.” Or you could say, “You know what, six months ago, when we were all freaking out about the pandemic, the Dow was at 18,000 and today we’re at 28,000.” So your perspective really matters. And since most people are investing, not trading, but they’re investing for something in the future, five years out, 10 years out, 25 years out, even if you’re retired, you want this money to last a very long time. Yeah, you may need some of it in the next three months, but the bulk of it is really for the future.

It really comes down, in my opinion, to resetting the perspective that we need to have when it comes to looking at this money.

Brendan M: Yeah. I think, just to piggyback on something you said there, I think that it’s important to keep in mind that even if you’re a retiree drawing down your assets, you likely have a much longer time horizon than any one presidential term can last. So if you’re unconvinced that the president has an impact, I mean, they’re in office for four or eight years. I mean, if your time horizon is only four years, I question how much of that money should be in the market at all.

Tom Mullooly: Close to nothing.

Brendan M: So, if we’re that focused on the near term, if that’s your situation, then sure. And I don’t think, whoever could be president. It could be anybody in the world. I don’t think it would be a great idea to have money that’s needed within four years at risk in the stock market. And even if it’s eight, we’re still talking about not a long period of time when compared to most investors’ time horizons, their true ones, not the ones that we focus on sometimes.

Tom Mullooly: Yeah. I think the perspective part is what really gets mismanaged because people say, “Gee, I want to be smart about this.” It’s like the discussion we have about people who take their emergency fund and they put it into Netflix. Not really a good idea because you want to have that money when you need it most in an emergency. And six months ago during a pandemic, people needed emergency funds. And God bless you, if you had that money sitting in some kind of market invested vehicle, ETF, mutual fund, whatever, or an individual stock. We need to appropriately label, hey, this is money for the short term, intermediate, longer term. So it really comes down to managing people’s perspective about time. Talking about time, interesting article about a certain 90-year-old.

Tim Mullooly: Yeah, I think there was most of the money that people have invested is for the long-term, and one of the most powerful elements out there in the market is compound interest. The easiest way to disrupt your compound interest is to make wholesale changes because of short term events like a presidential election. There was an article from Jason Zweig from a little while ago, it was about Warren Buffett and the “$300,000 haircut”. So the article focused on how Buffett really became successful based on his understanding and ability to realize the power of compound interest.

Brendan M: Yeah. So the stat you always here is that like 90% of this guy’s fortune was amassed after age 65 for him. So, obviously a savvy investor and one who came up analyzing businesses. He certainly has a level of understanding and skill there, as well, but I think that if you read a lot of what Buffett has written and said over the years, he said something along the lines of that he would trade IQ points for temperament and time is going to be our biggest ally when we’re investing in the market. And that’s what you’re getting at here, is you can look at things you’re able to spend money on today and you just have to weigh whether it’s worth it when considered against what that money could be in the future for you.

And that’s the question and thing that we’re always having to consider when choosing to spend or save, and trying to fine tune the right amount to do both of those, because you need to live your life. But on the other hand, if you’re spending money needlessly and you think of it in terms of, hey, what could this be 40 years from now? It could be a lot. It could be quite a bit.

Tom Mullooly: Right. We’re going to link to the article in the show notes. Zweig talked about how Buffett’s $82 billion, most of that was accumulated after age 65. He’s now 90. So in the last 25 years, the numbers have really escalated, but that’s not a free pass for people who are 57 saying, “Well, he’s done all this in the last 25 years.” He had all of these pieces in place, or many of the pieces in place well before he turned 65.

Brendan M: He bought his first stock when he was 10 or 11 or 12 years old. So, that’s more the point is that you could start with small amounts when you’re a teenager, and you’re going to have an advantage over somebody who decides they’re going to start doing this in their 50s or something like that.

Tom Mullooly: But you have to start with certain buckets. I mean, you have to have that cash bucket for your expenses this month-

Tim Mullooly: Yeah, of course.

Tom Mullooly: … or the next couple of months. And then you need to have an emergency cash stash that’s not invested in the market that’s going to be there in the event of some unforeseen emergency. And then beyond that, we want to start talking about what you should be investing, and investing for the long-term.

Brendan M: Just take like the example that gets … You can run the numbers however you want, but it basically looks at, let’s say somebody started investing in their 40s and they were awesome at it. They picked all the best stocks, timed the market perfectly, but you started when you were in your 20s and just put it into low cost index funds and averaged in over time. You’re going to do probably much better being the latter of those two investors, meaning the one who started earlier, even though the other guy is “better at investing” than you. That skill is going to be outweighed by the time advantage that you have. And I think that in 99 out of 100 cases, that’s going to be how it works out. And we’re so focused on how can we be smarter, savvier investors when a lot of these advantages are available to us and you don’t have to absolutely kill it in the market to set yourself up nicely.

Tim Mullooly: There was a cool example that Jason used to illustrate just how much the numbers can move with compounding if you give it time. So when this article was written, the Dow was at 28,500, which is relatively close to where it is today. So he said, if we start at 28,500 and it compounds at 1.6% annually until December 31st of 2099, so that’s about 80 years from now, that would put the Dow at 100,000. So it went from 28,500 to 100,000 when you compound at 1.6%. Over that same time, if it were to compound at 4.6%, the Dow Jones would be at one million by the end of 2099. And if it were to compound at 7.7% annually, the Dow Jones would be at 10 million by the end of 2099. He also pointed out that over the last 30 years, the average annual rate that the Dow returned was 8.4%. Not saying that that’s going to continue definitely for the next 30 years, but I mean, if you just look at the math, over time, the numbers get really big, really quick. It takes time though. So you have to give it time to work.

Tom Mullooly: We’re all saying the same thing, that you have to be patient while the seed is starting to sprout underground and you don’t see it yet.

Brendan M: Patience sounds good though, but this other stuff from the article highlights why this is so difficult. So Jason shared that Apple shares turn over about 211% per year, and that means that the average investor in Apple stock holds that for less than 25 weeks. That is insane. So everybody knows that you’re supposed to be patient and you’re supposed to give investments time to work, but in practice, it seems like there are a lot of people who are not doing that, even though it’s widely available, everybody will tell it to you. The best investors, in fact, like Warren Buffett will tell it to you, but nobody wants to do it. It’s the advantage we all have and just throw away.

Tom Mullooly: Now, when Buffett was 10 years old, he read some book somewhere that showed if you had $1000. If my math is right, he was born in the 1930s, 1930. So he grew up during the depression. At 10 years old, it was 1939, 1940, ’41, something like that, and $1000 was a whole lot of money back then. But if you were to earn a 10% return, in five years, that money is worth 1600. In 10 years at 10%, $2,600. In 25 years, that same $1000 is worth close to 11 grand. It’s crazy when you look at these kind of numbers, but you have to be there at the end to see it. His partner, Charlie Munger, said, “The worst thing that you can do to compounding is interrupt it.” It’s so true. And people get freaked out about who’s the president, or the tax laws are changing or some other silly reason, honestly. And they rip up the script. Please don’t do that.

Brendan M: I think Morgan Housel has said before that people are so happy, a lot of times with their home, their primary residence in terms of how much it appreciates over the years. And he thinks that a large reason for that is because it’s one of the only assets people give enough time to work because you’re living in it, so you don’t notice. But if you stay in your home for two decades, three decades, of course the appreciation is going to seem a lot because you’re getting decades worth of compounding there. And in fact, if you actually roll back the numbers and look at it, it’s probably not as much as it would have earned in the stock market, but you’re still happy with it, because compounding is magic even if it’s at a lower percentage return than might’ve been available elsewhere. It’s just the time advantage.

Tim Mullooly: There articles that we wanted to talk about today was from CNBC, and it had to do with inheriting money that’s unexpected. So, something that comes as a surprise to you. You get a big windfall of inheritance or something, an estate is distributed to you.

Tom Mullooly: Probably one of our most talked about or phoned in topics. Would you agree?

Tim Mullooly: Yeah. We’ll hear a lot from people, “Hey, I just came into some money unexpectedly. I don’t really know what to do with it. What should I do with it?”

Tom Mullooly: Or how does this work?

Tim Mullooly: First off, I’ll say that the people that are calling an advisor or a planner about something like that, they’re doing the right thing. One of the things that they mentioned early in the article that I agree with is that if an inheritance is a surprise or it was unplanned, don’t rush to do anything or don’t make any hasty decisions that could end up costing you money, or it could be irreversible. That was one of the big takeaways for me from this article.

Tom Mullooly: Unfortunately, and Brendan, maybe you’ll agree with this, is sometimes there’ll be an unexpected windfall. People will do something with the money and then come to us and say, “All right, how do we fix this,” or, “How do we clean this up?”

Brendan M: Yeah. I think one of the important points that the article touched on was the idea of when you inherit like a brokerage account from somebody, because you’re going to get a step up in your cost basis, meaning whatever they bought the portfolio of investments for is irrelevant at that point. It’s based on what it was worth on the day that they passed away and it became yours, by nature of whatever their last wills and testaments were.

Tom Mullooly: But that becomes the new cost basis for all of these assets.

Brendan M: So, you have this unique opportunity where you’ve inherited a portfolio of stocks and it’s a taxable account, but you’re not going to have much, if any, tax ramifications, depending on how soon after you’re assessing the situation to reset things. And Tim’s absolutely right that, I think talking to somebody like an advisor makes a ton of sense because what had been working for whoever left you this money is very unlikely to be what you need in your life moving forward. So it’s an opportunity to assess it and you’re not going to have to think of any ramifications of unwinding this portfolio. Think about your own goals and what you might do with this money. And I think in most cases, that’s what who left it to you would want you to do, whether it’s making a new investment portfolio or taking a large chunk of it to cash so you can buy a place or start a business or support your family. I mean, it’s a unique opportunity and you shouldn’t just pass that up or make decisions on a whim.

Tom Mullooly: I know that sometimes even when one spouse passes away, there’s a lot of confusion about this. Some people mistakenly believe that they have to maintain the original cost basis or the whole thing gets stepped up. And the situation for the surviving spouse now changes in the sense that their income needs may change. So now we have to shift from something that may be a growth portfolio into an income only type of portfolio.

Brendan M: Yeah. I mean, if the situation has changed, maybe the portfolio wasn’t set up to support income coming out of it, or maybe it was, and that’s no longer going to be the case anymore because there was a big payout from a life insurance policy or something. So, I mean, you can reassess. And if it was a jointly held asset, then half of the cost basis is going to change on the account, so that actually gets a little trickier than when it’s one person’s asset or the others. And so again, you want to consider what that does in terms of the tax liability of the portfolio and what you could change as a result of that if you need to.

Tim Mullooly: I mean, if it’s a retirement account too, there’s a whole other set of circumstances that come into play. The article talked about the changes that the Secure Act put into place this year, that if you’re a spouse, that there are exceptions to that as well. But if you’re a non-spouse and you inherit an IRA, let’s say, I mean, before the Secure Act, you would have been able to do a stretch IRA and stretch this out over your whole life expectancy, so you have money coming in every year, but the Secure Act got rid of that. And now you have 10 years to empty the account from when you inherited it. So there are a lot of different changes, whether it’s a taxable account, like you were talking about, or a retirement account, like an IRA. There are different things in there that if you don’t know what you’re doing, you could end up making some mistakes that could end up costing you more money.

Brendan M: Yeah, I think either way you want to speak with some professionals, even if your plan is to just straight up liquidate a retirement account or a brokerage account. I mean, you at least want to understand the tax ramifications of that. So if it’s not an investment advisor, you should at least be talking to whoever helps you with your taxes. And if you don’t have somebody, it’s a good time to just pay a professional for a few hours of their time to make sure that you’re not making a mistake or not understanding the situation, like Tim, you alluded to. Like if you’re pulling from inherited IRA, you don’t have to pay those taxes personally. You can have that withheld on your distribution, even if you just want to take the money and run, so to speak.

Whether it’s a financial advisor or an accountant. I mean, there are some different avenues depending on what you want to do, but starting to talk to some sort of professional makes sense. And if they’re not the right one, then if they’re a good, honest professional, they’ll send you to the type of person you need to be speaking with.

Tim Mullooly: They also noted in the article, which I thought was interesting, they said in a sense, keep it close to the vest if you get a significant windfall of money, just because you never know, if people hear that you’ve come into money, you don’t know who’s going to climb out of the woodwork. You hope that you don’t come into a situation like that, where people put you in an uncomfortable situation where they’re asking you for money and stuff like that. But that is something, unfortunately, that you do need to consider as well. So, they said be careful who you tell, if you’re getting a significant amount of money.

Tom Mullooly: You never know. People get weird when it comes to money.

Tim Mullooly: Yeah, definitely.

Brendan M: Definitely don’t go to friends or family members for advice on that. If it’s your situation, I think I’d speak to a professional who, at least your conversation will be confidential with.

Tim Mullooly: Yeah, a non-biased third party.

Brendan M: Yes.

Tim Mullooly: Someone detached from the situation.

Tom Mullooly: Just an observation that I’ve seen over the years is that people who go through these awkward things, where friends or family come out of the woodwork, those people then become super prepared for their own demise. They’ve got everything mapped out, which is, it’s an unfortunate benefit that comes out of it.

Brendan M: It’s a nice thing to do for whoever you’re planning to leave money to, is to just make it as cut and dried as possible so that there’s no drama or as little of it as possible.

Tom Mullooly: Well, that’s going to wrap up episode 329. Thanks again for tuning in, and we will catch up with you on episode 330.

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