Deciding on a portfolio allocation is about your willingness and your ability to take risk. But, there is a little more to it than that. On this podcast, Karl explores some things to think about when it comes to building the proper portfolio.
Welcome to the podcast. This is Creating Richer Lives. My name is Karl Eggerss. I am the host of this podcast. Just a reminder this podcast is brought to you by Covenant Lifestyle Legacy philanthropy. If you’d like to know more about what Covenant can do for you go to creatingricherlives.com. We made it nice and simple. We named the podcast the same as the website, creatingricherlives.com. All kinds of things on there, articles, previous podcasts, videos. You can even filter by topics, whether it’s taxes or whether it’s investments or financial planning. So make sure you go check that out. Our telephone number is (210) 526-0057.
Well, in this episode we’re going to talk about a few things. Number one, we’re going to get caught up on really what you guys are thinking about the big picture right now, the environment with taxes, with investments, with inflation. Those are all things that I continue to hear about from you guys as number one concerns. So we’re going to address some of those, but I want to spend some time today talking about really assessing your risk. When you look at the markets and you look at your overall investment portfolio, are you taking the proper risk? In other words, maybe you’re geared to take more risk. You’re an opportunistic person. But do you have to take that risk? So we’re going to talk through what that might look like.
And it’s geared primarily towards folks that, again, have some investment saved up, maybe you’re approaching or in retirement. And remember a few podcast episodes ago, we discussed spending not enough. Maybe you’re saving too much. This is a different conversation. This is about risk assessment. So we’re going to spend some time doing that, but first let’s go over the markets. And again, I continue to hear from you guys as far as concerns about what’s on the horizon. And I want to be clear. There is a lot of murkiness out there and clouds and confusion about what’s on the other side of the horizon. And that’s that’s to be expected because what we have right now are a bunch of proposals about what taxes might look like, what certain people want to get through, versus what the reality is.
And I can tell you that at Covenant, we’re working hard to decipher this information. We are filtering through what things that we might think might be happening going forward. And remember some of this, we don’t know when, and we don’t know how much, and who specifically is affected. So we can’t really predict what’s going to happen. What we can do is as soon as we know certain things are likely to happen we can tell you how that may impact you and what key considerations you should have. And we have reports we’ll probably create, we obviously have some tools available, but mostly over the next few weeks, you’ll probably be hearing from some of the people at Covenant that know these things and can bring this to you and really help you if you’re going to be affected in some form or fashion.
And I think everybody will be affected. I think the things we know are taxes are going up. We know that. We just don’t know to the full extent what that looks like. We don’t know when. We don’t know if things are going to be retroactive, but we do know taxes are going up. We also know that it’s going to require more financial planning. That may be more important going forward than the investment management part of your life. The financial planning, the estate planning, those are things that are going to have to be addressed in almost every situation. And the third thing we know about this is that it’s going to get much more complicated. The taxes are going to get complicated. Your tax prep is going to get more complicated. Your financial planning is going to be more complicated. I mean just an example is if 401K’s aren’t fully deductible. Number two would be, what if, we’ve heard about Social Security. When you get your paycheck, if you’re a W2 employee, you get your paycheck, they withhold some amount for Social Security. Some’s paid by your employer, some’s paid by you, and it goes into the Social Security lockbox. Remember that?
So that’s what happens out of your paycheck, but at a certain dollar level, they stop withholding that. And then what they’re trying to get through though, is it kicks back in again at another level. Well, is payroll software even capable of doing those calculations? That’s the type of logistical confusion we might have in that new environment. So, we know that’s going to happen. But here’s what we can do. We can do is continue to know your situation so that when we see things that you may be affected by, we can fix that and react to it and modify things as we go along.
But if you don’t have a plan, then you don’t know if you’re affected or not. And you don’t know what tactical things you can do. Some things you may not be able to do anything about. You just going to be in the line of fire of higher taxes. And for those that say, “Well, isn’t this just for people making over 400?” That’s what we heard all throughout the campaign for the Biden administration’s, “Don’t worry. This is only going after the rich. People that make over 400,000.” But if you have a boss, let’s say you work for a company that’s 10, 15, 20 employees, and the boss makes over 400,000, the owner of the company, and they get hit with a bunch of taxes. Do you think they’re more likely to hire more people to increase the profit sharing contribution, to increase the 401K match? Probably not. So then people that don’t make 400,000 are affected as well.
And that’s what I think is likely to happen. So I am a lower tax, pro-growth guy, but things are changing. Things are going to change. We have a tremendous amount of debt out there, tremendous amount of stimulus that’s come down, and now it’s time to pay for it. And it’s going to come in the form of higher taxes. So over the next few weeks, do not miss an episode because we’re going to continue to talk about this and when we see things happen and we’re going to tell you who’s affected and perhaps some strategies to reduce those taxes as much as possible. But it’s too early. It’s too early to really get into the details because there’s multiple versions and plans floating out there. And some things make headlines. The capital gains tax a couple of weeks ago made headlines. 43% you heard, could be higher than the income tax rate. That made headlines, but it’s just a headline so far. Okay?
Number two is the inflation talk. So we have the taxes and the concern about that, and that’s a legitimate concern, but we also have inflation. I mean, you’re seeing lumber prices that are up five, six, think seven, maybe sevenfold from their low during the pandemic in the spring of 2020. We’re seeing dramatic increases in that. We’re seeing a record high for copper. Have you seen corn and wheat and soybean prices lately? You’re probably not watching that as we are on a daily basis. But as I’ve said for some time, make sure you are hedging yourself. What does that mean? That means own the things that you think are going to go up. Commodities are in that arena and they’ve been a serial under-performer, but they are a key part of an asset allocation in my opinion. And they are benefiting from those prices going up, but prices are going up.
I think what we need to think about those is does this persist? Like we get into a 1970s style inflation? Or is this just like dropping a ball and we’re having the first bounce is the biggest one. And part of it is that. The Fed of course is saying, “Hey, we think it’s just temporary. Don’t worry about it. We’re going to keep rates low. Don’t worry about it.” People I talk to and that you talk to are saying, “This is real stuff. These prices are going up and it affects me. I can’t build that deck anymore, perhaps, because it’s too expensive, or I can’t do the remodel, or I can’t build the house we were planning to build for our retirement. It’s too expensive.”
So what happens? Well, at some point, demand pulls back a little bit, supply replenishes, and we get a little pull back in some of those prices. So I do think we’re in an inflationary time, but not necessarily wild inflation. I think what we’re seeing in the last few months is more of a recovery, but again, let’s play it out and see how it goes over the next few months. But the cure for high oil prices is high oil prices. You’ve heard that. Well, I would say the cure for high lumber prices is high lumber prices. And if you’re wondering how hot this housing market can really get? I think after the 2008 financial crisis and the housing crisis we saw, a lot of people that were building two or three homes a year, they kind of disappeared. And the people that could survive survived, but a lot of supply didn’t come back in the housing market. And now post-COVID what you’re seeing is a demand for people maybe wanting to live out into the burbs, and people wanting to expand the house or remodel it because they’re spending more time there. They are maybe building a home office. So the demand for homes is hot and let’s not forget you have people moving from one state to another.
You’re seeing people from the East Coast and the West Coast move south, for example. And so you’re getting this tremendous demand. I don’t know how long that will last. Obviously interest rates are still very low, but we need to watch that. And when people say, “Well, how would we address inflation?” Well, I just told you one way is to actually own the inflation, own the things that are going up in price. The other way is to own stocks. Own equities. They benefit from that. Bonds do not. Stocks do. Hence what we’ve seen in the last six months, stocks zooming higher, bonds really suffering.
And again, I’m not saying to abandon bonds and go buy stocks. I’m saying understand your proper allocation and stick to it and rebalance when you need to. But equities are a great place to hedge against inflation. Again, depends on how fast inflation’s going up, but it is a great place over time because you can own some of those companies that are again benefiting from that inflation.
So we know these risks out there as far as rising taxes, ballooning debt, inflation. Those are out there. So how do we assess risk? And I want to spend some time today really talking about your particular situation when it comes to that. And I’ll give you a kind of an example of a conversation I had this week with somebody. She is a widow that has enough for retirement, but said “Could we take on more risk?” And I said, “Yes, you have the ability to take on more risk. Let’s now talk about the willingness versus the ability.” So the willingness is somebody that says, “I’m opportunistic. I’m a little on the risky side. I can handle some of that volatility.” That’s the willingness. The ability is, “I have the funds there and if it drops a little bit it’s not going to affect my life.” So this person actually checked the box for willingness and ability, but there’s more than that.
What it was with her was talking through, “If you had X today, and it went down by a million dollars versus it gaining another million dollars, that’s a big difference in how you would react. The extra million dollars isn’t worth the risk of losing a million dollars.” And she kind of thought about that. And I said, “Let’s walk through this. If you had an extra million dollars today, would it change your lifestyle in terms of what you spend on, what you want to do in life, how you live your day-to-day life?” And her answer was, “Absolutely not.” On the flip side, “If you lost a million dollars or your account went down by a million dollars, would it?” She said, “Maybe. Perhaps it would. And it would certainly make me more nervous.”
That starts to shape how much extra risk we take. Now, this person was around 50 to 55% of their overall investments were in equities or the stock market. For those that are new equities pretty much are stocks. And so 50 to 55%. So do we move that up? Well, I was encouraging her, “I think we’ve got a good allocation as it sits right now, but could you go up if we had a dramatic sell off in the stock market?” And the answer is yes. She could do that and that would be a viable plan to say, “Hey, if we have a decent correction in the stock market, let’s talk at that point, let’s have a conversation, and maybe we up it because there’s so many good deals.”
Where we are at the end of April 2021, beginning of May 2021, things aren’t as cheap as they were. And so I wouldn’t recommend doing anything for her particular situation today, but it was a bigger conversation. It wasn’t just about the market. It was about, “What are you trying to accomplish? Are you just taking on more risk just because you just want the account to get bigger? What are you going to do with that?” And I think as you accumulate assets, and as you start really thinking about how you want to use those assets for the rest of your life, whether it is on yourself, whether it is giving it down to somebody in the next generation or two generations down, or whether it is given to charity, the lifestyle legacy philanthropy, we always talk about, you need to start having those conversations. And if your goal is to give away as much as possible, let’s say for philanthropic reasons, then yes, maybe she does need to take on more risk to get those higher returns.
That wasn’t necessarily her goal, and she doesn’t have real big legacy goals. So this is about lifestyle. Well, I kind of told her, “You’re going to have to spend a lot of money for this to drain down to really end up with a dollar in your pocket when you are to pass away.” So that made her kind of say, “Well, yeah, why would I want to take on a tremendous amount of more risk with my portfolio?” And the answer is you probably wouldn’t. But see her thought process was, “I want to be opportunistic.” And “Yes, you can. You can do that because you have that mental capacity to accept more volatility, and you certainly have the resources to do it, but why are you doing it? Why are you taking on more risk? Is it just out of habit?”
And so she really kind of paused a little bit and we kind of talked through that. And I want you to do the same. When you look at your portfolio and you get a plan in front of you and you realize that you’re not going to be destitute, you have the money that you want to live on. What are those next buckets? And some people call them goals, but what are those next buckets? Is it a big, expensive trip? Is it funding a grandchild’s college education? Is it maybe paying for a house for a child or helping them with a down payment or a grandchild? Or is it given to charity now or in the future? Those are the things that you should be planning for, and if that’s the goal, then how do we achieve that, because that starts to frame what kind of portfolio you have, not necessarily just how you feel about the market. I think the market’s going to go through some turbulent times. It’s a bigger conversation than that.
And so as we think about the inflation and we think about taxes and so forth, that’s more strategy. That’s more investment allocation and strategy in terms of how to title things and where to move them around and those types of things. But as far as risk assessment, it’s really more about what are you trying to do? What are you really trying to do? And I don’t think a lot of people have answered that question. I think a lot of people just invest, and his may be you, you invest, you kind of put your head down and you invest and save and save and grow and grow because you don’t ever think you quite have enough. But that’s what the financial plan does. It tells you, “Yes, I do have enough.” Now it’s about optimizing and really doing the things you want to do with your money.
And that’s what we’re here to do is try to help you create a richer life. And that’s not just about your money, but it’s talking through some of these things. What do you really want to do? Do you want to have an impact on your neighborhood, your city, whatever it might be? And we want help you do those types of things. And really after that is where we start building portfolios and assessing risk. And listen, I have not been a real fan of some of the risk assessment tools out there, because I do think the risk assessment tools are more of a mood check. If I was to ask you how aggressive you wanted to be in March of 2020, most people probably would have not felt great about getting aggressive and so forth. And you fast forward to when the market’s at an all time high a year later, and everything feels better, then your risk goes up, and so essentially it’s a mood meter, and that’s not helpful.
So what we have to do is build an allocation that can kind of be proper for both of those environments. And that only starts with discovery of what your goals are and really what you’re trying to do with this money. And again, I’m not blaming anybody, but I don’t think a lot of people have really sat back and thought, “:What do I really want to do with this money?” When you have a widow who is in retirement and has enough money to do the things she wants to do in life, what’s next? What’s next? And it’s up to us to really force that conversation and think about exploring those things. Because, again, most people just don’t sit around thinking about, “What do I really want this to look like?”
And so I’d encourage you to start that process, start thinking about if you have enough. If you don’t know if you have enough for retirement or in retirement for your basic living needs and so forth, reach out to us, we can help you assess that, figure it out, build a plan for you. And the important thing is continue to monitor the plan. The plan is not a stagnant piece of paper or a big notebook. A plan as a evolving conversation back and forth between advisor and you to make sure that as these things pop out in the middle of the road, we can avoid them. And what we have ahead of us right now is inflation. And we have some taxes. And we have taxes going up. And so for us, it’s like, “Uh oh we see in the road what’s happening. We can’t quite make out exactly what it looks like, but it’s going to get more and more clear.”
And that’s our job to assess that. So, over the next few weeks you will hear me with some guests giving you some specific things that we see happening and the tax structure changing, and it’s going to change. It’s going to change. And how much it changes could impact the market. But what I would encourage you not to do is do not predict because taxes are going up the stock market has to go down and we have to abandon everything. There’s been years and years on this podcast where many of you have been concerned about all kinds of things that were legitimate concerns, but they ended up not impacting your portfolio over the long-term.
So, again, let’s always go back to the plan, to the goal of what you’re trying to do. So I hope that’s helpful. I know it’s a little, little vague in terms of quantifying it, but everybody’s situation is different. So I don’t know what yours is until I talk to you and say, “Oh, I see what you’re trying to do here. Here’s the best to tackle this. Of all of our years of experience at Covenant, with all the advisors, this is what we typically recommend in these situations.” That can be extremely helpful. So if you’d like to have that conversation, give us a call, (210) 526-0057. You can always reach out on our website at creatingricherlives.com. And again, if you just want to have a real brief 15 minute conversation to kind of see what we do, tell us a little bit about what question you are trying to get answered, there’s a place that says start now. You do that on there, and we can schedule that time to talk.
All right, you guys have a wonderful weekend. Always appreciate you listening. Don’t forget to share this with friends and family, and we will see you back here on another episode of Creating Richer Lives, the podcast.
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