Why You Want Volatility

What is VOLATILITY?

The speed or degree of change in prices is called volatility. Turns out you want volatility. Why?.Volatility is what you want because volatility leads to returns.

3 Reasons

1)To make money in the financial markets, there must be price movement. Fortunately, the stock market obliges everyday because price movement is a constant in the markets. If the markets did not go up and down randomly you wouldn’t have compounding. To get compounding you need volatility. 

2)Taking a long-term view is important

Long term Investors tend to be less concerned with volatility. Why?

They stay invested because Timing the market is impossible

It’s virtually impossible to predict exactly when the top or bottom of a market will be. When investors try to ‘time the market’, they run the risk of buying high and selling low. An investor who missed the 10 Best Days in the Market over the past 112 years-that’s 10 days out of 49,910 days-he or she would have missed 2/3rd’s the Total Gains of the Market. MISS 10 DAYS- LESS 66%

ODDS OF EARNING A POSITIVE RETURN OVER TIME BY HOLDING AN INVESTMENT

Holding Time % Chance of A Positive Return

15 Years 95%

20 Years 100%

30 Years 100%

So by Holding an Investment like the S & P 500 or the Total Stock Market Index over 20 years, there is a 100% chance of a positive return.

3)Why To Stay Invested

Over time, stock values increase. That is not an opinion, it is a simple fact. 

EXAMPLE -Cost of a 8.5 oz. bottle of Coca Cola in 1960-.08 cents. Cost of a 8.5 oz. bottle of Coca Cola in 2023-.86 cents. 

STAYING FULLY INVESTED

From 1963 to 2004 - 40 years ( A period of 10,400 trading days) 

If you stayed fully invested you had an annual average return of 11%.

However if you missed just the 90 Best days (Best Days are when the Stock Market went up the most) , your return would have been 3% a year.  90 Days over 40 years is just over 2 days a year not being perfect. 

If you invested $10,000 in 1963 and stayed fully invested that 11% annual return would be worth $740,000 in 2004. If you missed those 90 Days, that $10,000 turned into $32,000 in 2004! Staying fully invested the WHOLE TIME earned you $708,000 More.

So logically, if stocks will inevitably increase in value over time, those that stay invested will benefit.

Episode #108:Why Smart People Stay Invested

https://www.dadsdaughtersanddollars.com/podcast-financial-independence/episode/26a38e9d/ep-108-why-smart-people-stay-invested

 A QUICK LESSON FROM⁠ W⁠ARREN BUFFETT

If the Dow Jones Industrial Average, at 33,057 as of this date in early November 2023, compounds at 1.47% annually, what will its value be on Dec. of 2099? The end of the century - 76 years from now. 

That would take the Dow to 100,000.

What if the Dow compounds at 4.6% annually?

That would bring the Dow to 1,000,000 by the end of the century. 1,000,000.

Now imagine that the Dow compounds at 7.8% annually. That would push the Dow Jones Industrial Average past 10,000,000 by Dec. 31, 2099.

That is still below its 8.4% average over the past 30 years.If we compound today’s 33,057 Dow at 8.4%, we get a Dow Jones Industrial Average at the end of the century over 15 MILLION. 

Let’s put that in dollars. That means every $100 invested now (today) will turn into $45,943.64 in 76 years. Let’s say your child is 3 years old and you invest $200 a month or $2400 for the year and your child is 3. In 76 years or the end of the century that $2400 turns into $1,102,647.48 for them. 

Those rates of return don’t include any boost from dividends. Also that is below the 9.8% the S & P 500 has returned over the last 30 years. 

Lesson -Even at low to moderate rates of return over long periods of continuous growth turn small amounts into mountains of money. This is important for investors to remember. 

THINGS THAT ARE PREDICTABLE ABOUT PERSONAL FINANCE

 1)The stock market will go up and the stock market will go down. Every year there are rallies and every year there are declines. It is the cost of being in the stock market. Accept it as fact.

2)Stock Market indexes are a zero sum game . Poker is an example of a zero-sum game since the sum of the amounts won by some players equals the combined losses of the others. Since the value of an index includes all gains and losses, it is, by definition, a zero sum game. Every outperformance in the market implies an underperformance or loss in the market somewhere else. At any time, half of invested assets must outperform the average market return and the other half must underperform it. Once costs & fees  are subtracted, though, it becomes increasingly difficult to beat the average market return. 

3)You can have a bad low-cost portfolio AND you can have a good low cost portfolio, but you cannot have a good high cost portfolio. 

4)Index funds do so well because their fees are so low. That is the reason over the long term ( 20 years or more) they finish in the top 95% of funds over actively managed funds.

5) People will sell when the stock market is high and sell when it is low. IT IS THE WORST TIME. DON'T DO IT.

6)More money will make you happier, or money will solve all of your problems. USUALLY MORE MONEY MEANS MORE PROBLEMS. 

Link to Bogleheads University. Do yourself a favor and watch these 10 short videos.

https://boglecenter.net/bogleheads-university/

Link to 2 part Episode about Jack Bogle and index funds.

Episode 113

https://podcasts.apple.com/us/podcast/ep-113-follow-the-michael-jordan-of-investing/id1523622122?i=1000492240303

Episode 114

https://podcasts.apple.com/us/podcast/ep-114-follow-the-michael-jordan-of-investing/id1523622122?i=1000493091225

Little Known Social Security Facts

1. Social Security pays benefits to children. Social Security pays benefits to unmarried children whose parents are deceased, disabled, or retired. 

An unmarried child can get benefits if they are: • Younger than age 18. • Between ages 18 and 19 and a full-time student at an elementary or secondary school (grade 12 or below). • Age 18 or older with a disability that began before age 22. 

2. Social Security can pay benefits to parents. Under certain circumstances, SS pays benefits to a surviving parent.. Example-Husband dies at age 44. His wife and 1 child can get Social Security benefits. But also the husband’s parent or parents can get Social Security benefits if the husband was helping to support them and they can prove it. 

3. Widows’ and widowers’ payments can continue if remarriage occurs after age 60. Remarriage ends survivor’s benefits (in general) when it occurs before age 60, but benefits can continue for marriages after age 60.

4. Does Retirement Income Count as Income for Social Security? Retirement income does not count as income for Social Security and won’t affect your benefit amount. Social Security excludes Pension payments, Annuity payments, Interest or dividends from savings and investments. That means that you could collect Social Security benefits while also taking withdrawals from a 401(k) or individual retirement account (IRA) or receiving payments from an annuity. 

5. Does Working in Retirement Reduce Social Security Benefits?. Under Social Security rules, you’re considered to be retired once you begin receiving benefits.  3 other scenarios- below full retirement age but still working, the year you reach your full retirement age and still working ,you're at full retirement age and still working.  

Below full retirement age-Social Security can deduct $1 from your benefit payments for every $2 you earn above the annual limit. For 2023, the limit is $21,240. In the year you reach your full retirement age , the deduction changes to $1 for every $3 earned above a different annual limit. For 2023, the limit is $56,520. Your at full retirement age, your benefits are no longer reduced regardless of how much you earn. You get to keep every penny of social security and 100% of your salary. 

6. If you receive retirement benefits before you reach age 65, you will be automatically enrolled in Medicare.

Medicare Part A (hospital insurance) helps pay for inpatient care in a hospital or skilled nursing facility following a hospital stay. In general Part A will have no premium because most people had no choice but Medicare taxes with every check from your employer.   Medicare Part B pays for doctors.. When you’re already receiving retirement benefits, we automatically sign you up for Medicare Parts A and B when you turn 65. You can then decline Part B if you choose, since it requires a monthly premium.

A Life File is a place for all your important records. I got the idea when I read an article 20 years ago about what you should do if your wallet is stolen. That article said you should make a photocopy of everything in your wallet at least once a year. 

It’s a great idea. If you misplace your wallet or it is stolen, could anyone really know exactly what was in there? Which credit cards were stolen and the phone numbers to cancel those cards? Your driver's license number? Membership cards to gyms or other places. Discount cards to certain businesses -like 20% off because you are a frequent user. A global entry card? Triple A card? A health plan card? Any photos in the wallet? Business cards?

I photocopy the front of every card and then leave a little bit of space under it to write the security code and Customer service phone number under it in case I need to cancel and request a new card. Can usually fit 6 cards on one page on my printer. I put a reminder on my phone to update the wallet every year on a certain date. I find some years I check and I have nothing to update. Meaning everything in my wallet hasn’t changed, so what’s in my life file is up to date. 

What else is contained in the Life file? 

-Insurance records? Car, Home and Life Insurance. The invoices from each insurance company with a note when it was paid and when it expires. Insurance broker phone numbers and addresses. 

-Copies of the certificate of title of any cars we own. Need that to sell the car. 

-Copy of the grant deed to the house. 

-A list of all brokerage accounts.

-A list of all doctors. (Dentist, Chiropractor, Optometrist, etc)

-A list of medical insurance information- Who to contact at health plan to ask questions. 

-A copy of my pension plan.

-A copy of my health plan.

-Social security information. Our numbers and current value of Social Security accounts at various ages. 

- In the event of my death Document. It says if I die, these are my life insurance plans and their value, the Social Security death benefit,($255) , the value you get of my Social Security benefit, the value of my regular IRA, the value of my SEP-IRA, (both accounts would need to be closed). My Roth IRA’s wouldn’t have to be touched. 

-At the end of the In the Event of Death document is the total of the one time lump sums you would get and the monthly amounts you would get.

-Retirement Document

This has all the current Retirement account amounts , pension amounts, and social security amounts. 

-Pension plan documents. 

- A list of passwords.

-A list of email addresses and passwords. 

-A list of  credit cards attached to Auto Pay

-A photocopy of insurance cards for each type of insurance

-Other documents like how to program the garage door openers, How to do RMD’s, how to invest online at our broker. 

Usually all info is in an unmarked binder and put in a  secure spot like a safe. Each time I update the binder it takes 3-4 hours but it is worth it.

Thank you again to my wife Deanne for co hosting this week and to our 35 listening countries. Grateful you are here.

A "Backdoor Roth IRA" is not an account, it is a strategy used by high-income earners who can't contribute to a Roth IRA because their income is too high. Let’s quickly describe the difference BETWEEN a Roth IRA and a regular IRA. A Roth IRA is a tax free retirement account where you make a contribution to your Roth IRA account after you’ve already paid tax on it. So let’s say you get paid $1000 dollars a week and you take home $800 after they take out taxes. So you’ve paid TAXES. You decide to contribute $100 of your $800 take home pay to your Roth IRA every paycheck. Since you already paid tax on the $1000, you are allowed to contribute to a Roth IRA, let it grow tax free and when you retire, you get all of the contributions and all of the compound interest tax free. So that’s a Roth IRA. A Regular IRA is a taxable retirement account where you make a contribution to your Regular IRA account BEFORE you’ve paid taxes on it. So the same example-you get paid $1000 dollars a week and BEFORE any tax deductions are done you set up to have $100 sent to your Regular IRA. You get to take a tax deduction for the $100 contribution to the Regular IRA but when you retire your Regular IRA is taxable. So the difference is with the Roth IRA you pay taxes BEFORE the money goes in your account, with Regular IRA you pay taxes when you retire or take the money out of the account.  At the top of the show, I said is a Backdoor Roth IRA is a strategy used by high-income earners who can't contribute to a Roth IRA because their income is too high. What does their “income is too high" mean? As of 2023, if you’re single you can’t contribute to a Roth IRA and you make over $153,000 for single tax filers, and if you are married and file jointly, you can’t make more than $228,000. So high income earners thought how can we make a Roth IRA contribution EVEN though we make too much money. How? Well with the Roth IRA there are income limits to contribute. With a regular IRA,THERE ARE NO INCOME LIMITS. You could make 50 Million a year and still contribute to a regular IRA.  So the strategy became: let's contribute to a Regular IRA and then convert that to a Roth IRA.   

I said we’d talk about how to contribute to a Regular IRA and then convert that to a Roth IRA. I think the best description of how to do it is on the White Coat Investor website. Here is the link to a tutorial from the White Coat Investor of how to do the Backdoor Roth IRA. https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/comment-page-10/ So these are the steps to do the Backdoor Roth IRA if you are above the income limits. You need 2 accounts . You need a Regular IRA account and you need a Roth IRA account. Ideally you have a Regular IRA account with no money in it.   OK. You have the 2 accounts at Schwab, Fidelity, Vanguard-whatever brokerage you use. You now make a non-deductible contribution to a Regular IRA. Meaning pay taxes on the weekly salary and then make a contribution from the take home pay. Let’s say you contribute the max for 2023 of $6500. Once you see the money in the Regular IRA and it is just cash because it hasn’t been invested yet, you transfer the full amount to your Roth IRA. Because the money was in your Regular IRA for 5 minutes before it was converted you don’t owe any taxes BECAUSE it didn’t earn any money in that 5 minutes it was in the account. You then would invest the $6500 that has been transferred to your Roth IRA. So why do you want 0 dollars in your Regular IRA? Because any money that is there is taxable once it comes out. And you need to convert any money that is in taxable retirement accounts. So we’ve never done a Backdoor Roth IRA. My wife and I both had IRA’s and SEP-IRA’s for 24 years before a Backdoor IRA became law in 2010. We would have paid a ton of tax to do a Backdoor IRA.

In this episode we discuss why you should stay the course when it comes to the stock market.

2022 was one of the worst years ever for financial markets. The S&P 500 was down 18%. We are hard-wired to assume big losses will be followed by additional losses , just like we assume big gains will be followed by additional gains. Neither of those are necessarily so because the stock market is so emotional and hard to predict.

Even the pros have no idea what will happen next in the market. A list of S&P 500 year-end price targets from 16 of the biggest Wall Street firms. As of this podcast in August of 2023 the S&P 500 is trading at roughly 4,515 and so far 15 of 16 firms have it wrong.

Wall Street strategists get pessimistic when stocks are falling and optimistic when stocks are rising. Sounds like they jumped on the bandwagon.

The truth is it is really difficult to make predictions about the future, especially as it relates to short-term movements of the stock market. When stocks fall, our emotions make us think they will fall even further. And when stock rise, our emotions make us believe they are going to rise even more.

What can you do? Be a long term investor and stay the course.  

Link to Ben Carlson's great article. Do yourself a favor and read it.

https://awealthofcommonsense.com/2023/06/this-is-why-you-stay-the-course/

We welcome Katelyn back from the 2023 Women's World Cup in New Zealand.

In this episode we compare lump-sum investing vs dollar cost averaging. Let's first define both.Dollar-cost averaging is continuously investing the same amount of money in a security over time, regardless of fluctuating prices.                 

Lump sum investing is investing the full amount all at once.

Example- You are left $12,000 from your Grandparent on January 10th. On January 12th, you invest the full $12,000 in a Total Stock Market index fund. That would be Lump sum investing.You are left $12,000 from your Grandparent on January 10th. On the 12th of every month you invest the $1000 in a Total Stock Market index fund. You do that every month for 12 months in a row. That would be Dollar Cost Averaging.

Which performs better in the long run?

The lump-sum investor who invested the money immediately was the winner. Schwab analyzed 76 rolling 20-year periods dating back to 1926—for example, 1926 to 1945, 1927 to 1946, and so on. In 66 of the 76 periods, the results were the same.The takeaway here is don't procrastinate. Realistically, the best action long-term investors can take is to determine how much exposure to the stock market is appropriate for their goals and risk tolerance and then consider investing as soon as possible.

The best time to start was yesterday. The next best time is today.

LUMP SUM INVESTING beats Dollar Cost Averaging 68% of the time.

DOLLAR COST AVERAGING beats Cash 69% of the time. 

LUMP SUM INVESTING beats Cash 70 % of the time. 

What if You Only Invested at Market Peaks? I link to a great article about what if you only invested at the height of the market-the worst time. Guy invests $2000 a year during 1970’s, $4000 a year during the 1980’s, $6000 a year during the 1990’s, $8000 a year during the 2000’s . He retires in 2013 with 1.1 million dollars. Why? He never sold. 

⁠https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/

A Regular CD

A certificate of deposit, or CD, is a type of savings account offered by banks and credit unions. You generally agree to keep your money in the CD without taking a withdrawal for a specified length of time. In general, in the past, the longer time frame of the CD, the more interest you would make.   5 year CD's would pay more than 1 year and 2 year CD's in general. Things have changed.

How a Callable Certificate of Deposit (CD) Works

A callable certificate of deposit (CD) is an investment that pays more interest and presents more risk than a traditional CD. When you purchase a callable CD, you are guaranteed a higher interest rate in exchange for the option to return the principal and interest to you before the CD matures.. The CD issuer can call a CD on its call dates. You know the call dates by looking at the coupon frequency. The coupon frequency could be semi-annually(every 6 months), monthly, or at maturity.

Why Banks and Credit Unions Do Callable CD’s?

Let’s say your callable CD is semi-annually or every 6 months. Thus, every six months, the bank decides whether or not to return the principal and interest of your CD to you or allow it to stay for another six months and earn you more interest. The call option exists in case market interest rates decrease, allowing the bank to close the CD early and avoid paying investors as high an interest rate.

Callable CD Example

Let’s say you buy a 3 yr. CD with a bank for $1000.  The interest rate is 5%. It is callable. In one year that $1000 would earn $50 and after 3 years if the CD is not called you make $150. The CD will mature in three years, and the call date or coupon frequency occurs every six months. 

Interest Rates go Down

Six months pass and interest rates don’t change significantly, so the bank decides to continue holding your CD. After nine months, interest rates have fallen 2% to 3%, but the next call date is still three months away, so the bank has to wait to call your CD. At the twelve-month mark, interest rates remain lower, so the bank calls the CD. It returns the $1000 principal and the $50 interest of your CD earned in one year. Now interest rates are 3% and you have to decide how to reinvest your money sooner than you may have expected.

Interest Rates Go Up

Let's look at a $1000 three year callable CD again. It's paying you five percent. This time, assume that nine months later interest rates have jumped to six percent by the time the callable date hits. You'll continue to get your $500 per year, even though newly-issued callable CDs earn more. But what if you'd like to get your money out and reinvest at the new, higher rates? "Sorry," your banker says. "Only we can decide if you'll get your money early.

Bottom Line

Know that the bank holds all the cards. Should rates go down, they are going to want to stop paying interest and call the CD. Should rates go up, they won’t allow you to cash in your CD without a penalty. Should you buy a callable CD make sure it is insured by FDIC for $250,000 by your bank. 

In this episode we talk about a recent great article I read from Clark Howard about making your digital accounts accessible should you have an accident or die. Here is the link

https://clark.com/family-lifestyle/wills-funerals/online-accounts-accessible-when-you-die/?utm_source=Clark.com&utm_campaign=4d5b36bff3-EMAIL_CAMPAIGN_2023_08_06_06_49&utm_medium=email&utm_term=0_-4d5b36bff3-%5BLIST_EMAIL_ID%5D

What Are Your Digital Assets?

Your digital assets include any digital record you own, license, or control. Here are just a few common examples:

Inventory Your Digital Accounts

The first thing you should do is to make sure you have a complete list of all of your digital accounts that someone else may need to access when you die, including instructions on how to access them. This list should include all of your financial activities such as bank, investment, loan and insurance accounts. If you’re active on social media, you’ll probably want to include those accounts as well. And don’t forget about email! You can make your list on a physical piece of paper or keep it in a file on your computer. Sean recommends a physical piece of paper.

Good Luck and Thanks for Listening!!!