Your Financial Plan vs Your Portfolio During Unsettling Economic Times

Mark Elliot: Welcome to The Retirement Income Show. I’m Mark Elliot alongside the CEO and founder of Oak Harvest Financial Group, Troy Sharpe. Troy is also a certified financial planner professional. You can always go to the website to find out more. Great website, a lot of information about the teams at Oak Harvest at different areas. Oakharvestfg.com. It’s oakharvestfinancialgroup.com. Oakharvestfinancialgroup.com. Of course, the office is located at 920 Memorial City Way, right off I-10 and Bunker Hill. You can always stop in to see the team, set an appointment, come in.

They’ll be happy to talk with you. They’re here to help. They just don’t know if they can until they hear from you. The number is 800-822-6434. 800-822-6434. Don’t forget, Troy has almost 200 videos now up on YouTube. Search for Troy Sharpe Oak Harvest on YouTube, you can subscribe, you hit the bell, whenever there’s a new one coming out and there’s new ones all the time. Great opportunity for you to learn about some of the areas maybe you have some concerns about when it comes to retirement, the financial world, the investment world, all kinds of topics covered on the YouTube channel. Just search Troy Sharpe Oak Harvest. Hey Troy, how are you?
Troy Sharpe: Doing well, Mark. Doing very good. How are you?

Mark Elliot: I’m doing well, and we’re going to start the show, we’re going to get into really kind of the Retirement 360 process, if you will, all the different areas that Troy and the team covers today, but we’re going to start current events. You’re going to solve Ukraine-Russia in, what do you think? The first three or four minutes of the show?
Troy: [chuckles] I don’t know about that, but my goal is to really help tie it back to what does it mean for you. When you look at what’s going on, obviously we see a lot of concern, we see a lot of questions, we see a lot of people wanting to know, “Hey Troy, what does this mean for my retirement? What does this mean for my portfolio?” We held our third annual Market Summit. This is where we get the investment team together. This year we also had Jessica who’s one of the co-founders here, myself and Jess, and we had the investment team, we had Jared Kenney who is the Vice President and Head of Advisors.

Troy: Yes, yes they did this past week, and happy birthday to them. We got them some bourbon, and they were pretty happy about that, and we played golf. We played up at Carlton Woods this past weekend. Jared kicked some butt, but that’s all right. I had a really bad day. The day before I played and it was one of those days where everything kind of goes pretty well. I was putting good, was striking the irons good, was driving the ball pretty well. Then the next day I just couldn’t get the club face shut down and everything was– It was pretty bad. That’s about all I’ll say about that.
We had the Investment Summit, and we actually live streamed this one on YouTube. It was pretty cool. We had like a 1,000 people watching kind of throughout the night. We had an average of about 300 or 400 viewers consistently, and then we had 36 clients in the room as well. You can go to YouTube right now. If you search Oak Harvest Market Summit, you’ll be able to watch this. We touched a little bit on Ukraine, Russia, which I’m going to touch on a little bit now.

We touched on inflation, which obviously is front and center for a lot of people in their retirement currently. The Federal Reserve, what they’re doing, the difference between tightening the balance sheet and actually increasing rates. They’re going to be increasing short-term rates, which we talked about how that could impact your retirement. Most importantly, what we do at the summit is we bring it back to your financial plan. We bring it back to what’s important to you, because whether Russia is invading Ukraine, the stock market has uncertainty about interest rates going up.
The big questions are, how does this impact you? Do you have enough? How do you pay less tax? If something happens to you, will your family be okay? All of these current events happening now, that’ll happen in the future, the most important thing is you understand how it relates to your financial plan, because of stocks, bonds, CDs, cash, real estate, annuities, these are financial tools that when used in conjunction with one another create an expected return for a given level of risk, but that return and risk needs to be coordinated with how much income you need with an overall tax strategy.

Of course, with a healthcare plan, if you’re retiring prior to 65, what are you going to do about health insurance premiums? Very easily could be $1,000 per month per spouse, depending on your age and health and state. Then also the estate plan side of things, so what are you doing there? Do you have your basic documents? We’ll talk a little bit about estate planning on today’s show, but we really want to tie all these things back to what does it mean for you and what does it mean for your retirement?

The Market Summit was great. If you haven’t watched the Market Summit, you can go to the YouTube channel, just go to YouTube, search Oak Harvest Financial Group Market Summit. If you go to the homepage there, you’ll be able to find it, click on it. Went very well, much better than I could have anticipated, so really happy about how that turned out. As I said, lots of informative information, and most importantly, it ties back to you and your retirement and how things impact you.

With that said, we’re going to, on today’s show, have a little recap of some of the highlights and also for those who didn’t tune in and don’t have the opportunity to go to the YouTube channel, what it means for you and your retirement today? Found this really, really cool piece from chief market strategist at LPL, Ryan Detrick. What he did is he went back and looked at major financial shocks on the geopolitical stage, wars, invasions, et cetera, and how does that impact the market short and long-term. There’s a lot of data coming out about this at this time given what’s going on in the world, but I’m just going to read an an excerpt from what he said.

He looked at 22 major non-financial shocks. From Pearl Harbor onward, we’re talking about the assassination of JFK, major financial shocks or major shocks to the world but non-financial. He says, “While no two events were the same, the stock market had a way of shaking them off rather quickly. These events, on average, led to a one-day loss of about 1.1%. Total drawdowns from geopolitical events before hitting bottom and climbing back averaged 4.8%.”

This means from where the market was, we had the geopolitical shock, the average drawdown was about 4.8% and 1.1% the very next day after that event happening. Here’s what was really interesting and what I think a lot of people need to know, is on average, it took 19.7 days to complete the drop and 43.2 days to bounce back. Even the US entry into World War II, following the Pearl Harbor attack, took the market only a year and a half to recover. The worst war in human history, and US equities needed 143 days to bottom and were higher 307 days later. What does this mean for you? What does this mean for your retirement?

One, when you look at the stock market and your investments in stocks or funds and equities as a tool to accomplish the growth you need inside a retirement plan, they’re just one aspect. Here, we call the Oak Harvest Retirement 360 Plan. It’s really a five-piece tool. It’s a five-piece process, but it creates five different parts of your retirement plan all working together in one. The first one is really identify your portfolio’s ability to take on risk but then also your emotional willingness to take on risk. We look at risk as two components in retirement. It’s capacity and willingness.

The capacity side of things, in simple terms, is if you have $1 million and you need to pull out $10,000 per year, that’s a 1% portfolio distribution rate. That means your portfolio has a high capacity for risk, because if the market goes down and you’re only pulling out 1%, your lifestyle, your security isn’t impacted.

Contrast that with someone who maybe needs 5% or 6% annual portfolio distributions, that portfolio has a much lower capacity for risk, because when you start to look at the sequence of returns risk, that is multiple or consecutive years of losses, combined with those higher distributions, you start to get into this negative spiral where compound interest is actually working against you, and it can deteriorate a portfolio’s value rather quickly and either, one, sends you back to work, or two, puts you on the fast track to running out of money. That’s the capacity component.
We have to identify that in the financial planning process, but then we also need to identify your willingness to take risk. This is where most people focus on, whenever they think about risk and portfolio allocation and investment strategies, most people don’t look at the first part, the capacity portion, because that can dictate at least from an academic standpoint how much risk you should be taking versus how much risk you’re willing to take, but at the end of the day, we’re emotional beings, and if we’re simply not willing to see our accounts fluctuate in value, you shouldn’t have more at risk than you can afford to see fluctuate.

My point here, tying it back to Ukraine and Russia, is that when we have these major non-financial shocks, we shouldn’t be going to cash, we shouldn’t be selling our positions and getting out of the market because when you miss the best days in the market, you significantly lower your return expectations over time. Here’s another chart from JPMorgan. I’m going to look at from January 2nd, 2001, to December 31st, 2020. Now, I have another one from Fidelity and I have another one from a company called DFA out of Austin.

They all basically tell the same story. They’re simply looking at different time periods in the market. This one looks at the returns of the S&P 500 from January 2nd, 2001, to December 31st, 2020. If you were fully invested during that entire time frame, you average 7.47% per year.

If you missed the best 10 days over that 20-year period, your annual average returns dropped to 3.35%. If you missed the best 20 days out of that 20-year period, your returns dropped to 0.69% per year, and then these numbers actually shock me because this is the lowest I’ve seen these numbers. I’ll go through the Fidelity study as well. If you missed the best 30 days, your annual returns since 2001 dropped to negative 1.49% per year.

The best 40 days, if you miss those, negative 3.44% per year. Missed the best 50, negative 5.21, and if you missed the best 60 days, $10,000 invested in 2001, January 2nd ’01, your $10,000 at the end of 2020 was worth 2,441 or a negative 6.81% per year. Seven of the best 10 days, looking at this study, occurred within two weeks of the 10 worst days. We see Putin invade Ukraine, we start to panic, we start to say, “Oh my goodness, the market is going to collapse, what am I going to do?” We panic, you get out of the market. Absolute worst mistake because the best days are followed.
Typically, if we look at the past 20 years, 7 of the best 10 days in the market were within two weeks of the worst day, the 10 worst days in the market, so we start to see how timing the market can impact that retirement plan, because we don’t want to miss the best days in the market and of course we want to have an appropriate allocation to investments, to stocks, to things that fluctuate in value and have risk that we’re not in a position to where we feel like, “Oh my goodness, if I don’t get out the market, I’m not going to have enough. I’m going to run out of money. My family is not going to be okay.”

That means you didn’t look at the risk capacity issue correctly and also analyze the willingness to take risk and most likely you allocated too much to equities because of that, so that’s why, when we look at the Oak Harvest Retirement 360 process, looking at risk management, an investment allocation is the first step before we move into income planning and tax planning, and we’ll touch on those once we come back after this break, but to reach out to us if you have a question, if you want to have a conversation about your retirement, give us a call, 1-800-822-6434. Visit the website oakharvestfinancialgroup.com, and I encourage you, go to the YouTube channel.

We have hundreds of videos out there to help you stay more connected to your money, and you’ll become more educated, you’ll understand tax planning strategies, income planning strategies. Chris Perras, our chief investment officer, does a weekly stock market update but also does a News or Noise? Podcast, which we put on YouTube, where he helps you understand, hey, these current events, what’s happening out there in the marketplace, the headline risk that we see, is that news that you should be concerned about or is it just noise that you should set to the side and try not to have any type of emotional reaction to.

That’s YouTube, Oak Harvest Financial Group, tons of videos out there. We’re trying to help you become a better investor, so visit the channel, and if you want to have a conversation, just give us a call at 1-800-822-6434.

Speaker: Here’s a quote from the Oracle of Omaha, Warren Buffett. He says this, “The stock market is a device to transfer money from the impatient to the patient.” That’s kind of what Troy was just talking about. We’re just getting started. It’s kind of today if you look at it as the 2022 guide to retirement. Courtesy of Troy Sharpe of Oak Harvest Financial Group. We’re just getting started. The Retirement Income Show back right after this.