Can I Beat the Market?

By Modern Wealth Management

September 18, 2020

Can I Beat the Market?

Many investors compare their investments to certain indices in an effort to beat the market. But are indices a good benchmark? You may have heard someone say there are two emotions that can drive our investing decisions. 

Fear and Greed

When the stock market is falling, fear takes over. No one wants to be the last person out of a burning room. You may have experienced this emotion yourself earlier this year when the COVID-19 pandemic led to a full-blown stock market crash of more than 30% in a month. 

If you felt the urge to sell out of fear of things getting worse, you weren’t alone. In March of this year, Morningstar reported a record month for money moving into money market funds. We’ve written about how to combat fear in the past, so today, we will focus on the other side of the emotion coin. 

Greed can be an investor’s worst enemy, and it’s something that all of us will likely have to deal with. Specifically, avarice, defined as “an excessive or insatiable desire for wealth or gain.” It’s one of the seven deadly sins, and it’s been plaguing the human mind for thousands of years. This plays out all the time in the financial markets. You can see a visual representation of greed in the charts below, like Bitcoin back in 2017, or technology stocks back in the late 1990s. 

We’ve seen this story, and we know how it ends. Nevertheless, we get caught up in the hype and don’t want to be the only ones not making money in a bull market. It’s a rush trying to beat the market, but as you can see, it’s not always fruitful and can be dangerous. 

Can I Beat the Market - Bitcoin 2017

Can I Beat the Market – Bitcoin 2017 | Source: YCharts

Can I Beat the Market - NASDAQ Late 1990s

Can I Beat the Market – NASDAQ Late 1990s | Source: YCharts 


Can I Beat the Market?
on America’s Wealth Management Show

Click Here to Read the Transcript

Can I Beat the Market?

Links Mentioned on this Episode

Sequence of Returns  7 Most Overlooked Budget Items in Retirement

Complimentary Consultation

Dean Barber: Thanks so much for joining us here on America’s Wealth Management Show. I’m your host Dean Barber, along with Bud Kasper. Bud, how are you doing today?

Bud Kasper: Dean, I’m as good as anybody could be.

Dean Barber: All right. So we’re going to talk a little bit about investing today and specifically, about beating the market.

Bud Kasper: Let me get my bat out of the car.

Dean Barber: You carry a bat in your car?

Bud Kasper: Sure. Don’t you?

Dean Barber: No, I do not. I have a really fast car, so if I have problems, I can get away.

Bud Kasper: All right, good.

Dean Barber: So there’s this idea that people should be able to beat the market, especially people in our industry, but the statistics show that if you look at actively managed mutual funds, about 89% of them fail to beat the index that they are trying to compare to. Well, what does that mean? That means that of the 3,935 actively managed equity mutual funds, that approximately 11% of them will beat the market.

It’s Possible to Beat the Market, but Figuring Out How is a Challenge

Dean Barber: So the answer to the question, “Can you beat the market?” is “Absolutely!” Because active managers have proven that it can be done. Now you’ve got to be able to identify-

Bud Kasper: That 11%.

Dean Barber: -those 433 out of the 3,935 active managers that have had a history of beating the market. Now, just because they beat it in the past doesn’t necessarily mean that they’re going to beat it in the future. In fact, if you’ll remember, Bud, this was somewhere back in the early to mid-90s. So we’re going to stretch your memory a little bit here. They used to do a thing in the Money Magazine, where they would rank the prior year’s top-performing mutual funds.

Then we would take that and say, “Well, let’s find a Money Magazine from five years ago, and look at the top-performing funds from five years ago. And are they still the top-performing funds today?” And the answer was almost always, “No, they were nowhere near the top.” So you have to find fund managers that are beating the market now and understand what they’re doing, what they own, how they’re doing it, how long they’ve been managing that fund, and how big has the fund grown? Because the fund size is going to make a big difference in that fund manager’s ability to be nimble and to beat the market.

Fidelity Magellan

Bud Kasper: You’re so right with that. And you did jog my memory of that date and everything. Remember we had Peter Lynch that was with Fidelity back in the 1980s-

Dean Barber: Yeah, he was running the Fidelity Magellan.

Bud Kasper: And doing an incredible job. He was writing the book for having repeatable success for his clients and beating the market a fair amount of the time in the process. If you look after he left, the new manager came in, and the fund failed for quite a while. Was that guy just plain not as smart as the other one? And the answer is no; he just got a more challenging market at that particular time.

What Are You Looking For?

Dean Barber: Right. Well, yeah. And think about how bloated the Fidelity Magellan fund got back in the day. Why? Because it was getting all the press. All the money was going into the fidelity Magellan fund. I want you to talk about, if you’re going to go out and try to search for those best mutual funds, what are you looking for?

Bud Kasper: Well, I’m looking for consistency. I’m looking for what’s the return versus the risk of the portfolio? Past performance, as you said, is no guarantee of future return. We say that anytime we’re meeting with clients because that’s the true statement. But in the process of that, there’s a lot of different formulas that you can use to find what you think will be the best choice at the time. I think one of the best ones that I always consider first is, what’s the downside? If I understand what the downside has been historically, I can get more comfortable with the upside because if I’m not happy with the downside, then there’s no reason for me even to be doing that process.

Dollar-Cost Averaging

Dean Barber: Well, you talk about downside, and you and I both know that downside is a huge deal, especially if you are nearing retirement or already retired. However, what about the 25 and the 30-year olds out there that are dollar-cost averaging into their 401k? Should they be concerned about the downside? Or should they say, “You know what, give me that index fund.” Or if there’s a fund manager who’s had a track record of beating the market, just put it all there. What should they do?

Bud Kasper: Well, I think, for them, it doesn’t matter as much. If they’re dollar-cost averaging, it means that for whatever period they’re doing that, whether it’s monthly or whatever, they’re averaging in at different price levels. Because when they got the first month, let’s say it’s January and the market was up, you’ve got your average. The next month, let’s say it was down 15%, and you average that in. So in between the two, the pain is not as great. And you’d do that month after month after month, quarter after quarter. And the average actually becomes your friend.

Knowing Your Objective is Key

Dean Barber: Yeah, it does. All right. So we’ve identified the fact that you can beat the market. We use analytical tools that screen all of the active managers out there. We don’t only look for outperformance, but fund managers that have been able to outperform with even less risk or a fund manager that might be able to meet the performance of whatever benchmark we’re looking for, but do that with less risk. So the answer to the question, “Can you beat the market?” Is an absolute 100% yes, but I think an even more important question is, “Should that be your objective?”

Bud Kasper: Right.

Dean Barber: Should that be your objective? And in some cases, the answer is yes, because you don’t have enough time to make up or you don’t have enough money, and you need to try to do something more, but then you can start getting into the old fear and greed type of thing because those emotions are very real.

Dean Barber: Look, if you want to understand how your portfolio should get made to accomplish your objectives, we’d love to offer you a complimentary consultation. Sit down with a CERTIFIED FINANCIAL PLANNER™ we have on staff. Let’s take a look at what you’ve got going on and understand how we do what we do and how we help our existing clients and how we can help you too.

Dean Barber: Next, we’re not going to talk about how you can beat the market? We’re going to talk about how you should construct your portfolio and the real benchmark you should be looking for? 

What’s the Real Benchmark?

Dean Barber: In the first segment, Bud, we said that out of the 3,935 actively managed equity mutual funds out there, approximately 89% of those fail to beat the index. But that leaves 11% that beat the index, and that’s around 433 actively managed mutual funds that have beat their respective index. That’s whether they’re comparing themselves to the S&P 500 or to S&P MidCap or S&P SmallCap, whatever it is, there are a number that have been able to do it.

Dean Barber: So we settled that question. Yes, if you find the right ones, you can do it, but you got to have a pretty good crystal ball. That or you better yet, have some really good technology that combs through all of these managers on a very regular basis so that you’re continually screening them and looking at all the right things.

Bud Kasper: You’re right. But the other part of it, and especially for retirees, we’re looking for a consistency of returns as well. And in my opinion, that’s much more appealing to me than what one person did, let’s say, in one year or two years versus over ten years.

Dean Barber: Right.

Sequence of Returns Risk

Bud Kasper: That takes me back to a topic we’ve written an article on. The sequence of returns and the importance of that for retirees. They need to understand that returns at the beginning of your retirement are more critical than at the end of your retirement. We can certainly demonstrate that to you.

Dean Barber: The reason why we wanted to do this show is that people don’t understand, Bud, what should they be benchmarking themselves against. All too often, what winds up happening is they’re benchmarking themselves against a coworker, or they’re benchmarking themselves against a neighbor, or they’re benchmarking themselves against a friend.

Keeping Up with the Joneses

Bud Kasper: Their brother-in-law.

Dean Barber: Yeah, and, “Well, my brother-in-law did 12% this year so far, and you’re only up 6%.” Well, what’s the brother-in-law’s risk. Is the brother-in-law’s portfolio built the way that your portfolio should be? And that becomes the real question. What winds up happening is that there are two genuine emotions regarding investing, and they are fear and greed.

Bud Kasper: Absolutely.

Dean Barber: And they take over. That’s why Warren Buffet says, “When everybody else is fearful, you should be greedy. And when everybody else is greedy, you should be fearful.” Because he understands that those fear and greed emotions drive the market wild because they cause people to make irrational decisions. And those irrational decisions are almost always made at the wrong time.

Bud Kasper: They are. And I think it becomes almost a silly statement, trying to beat the market from that standpoint. From my perspective, I think it is to help people understand the elements associated with having success not just in investing, but in your entire retirement plan. And therefore, we’ve made the statement several times. I believe this wholeheartedly. I know you do as well, Dean, is why take any more risk than is necessary to complete your plan?

PRI – Personal Return/Retirement Index

Dean Barber: Right. So let’s talk about that for a little bit. And we’ve done that a few times here on America’s Wealth Management Show, but when we start working with you, the first thing that we’re going to do is we’re going to determine what your PRI is? And the PRI is your personal return index. In other words, what does your money need to do for you to accomplish all of your goals?

Social Security & Taxes

Well, for us to understand that, we have to lay out what all your long-term goals are. We have to build a comprehensive financial plan that puts all of your future spending objectives, lump-sum goal expenses, healthcare expenses., et cetera. Then, we have to look at all the resources you have, including your Social Security, and understand how to maximize Social Security. 

Next, we have to look at all of the money in your 401(k) plans, IRAs, and joint accounts. We have to understand the taxation of all of those accounts and the tax implications on that money when you’re going to try to take it out? In other words, you get a gross amount coming out in retirement, but there’s a net amount, just like when you get your paycheck at work. You never get your gross pay. You get your net paycheck, which is what’s after taxes.

And in retirement, taxes are different. We’re going to address that in the next segment. But the point is, once we understand all of your objectives and we clearly lay that plan out, and understand all of your resources, then what we do is we identify that PRI. You can call it your personal return index or your personal retirement index. What you have to ask is, “What return do I need on my portfolio to accomplish all of my objectives?”

Your Friend, Family, or Colleague Shouldn’t Impact on Your Decision Making

That’s the index you should be comparing yourself to. Not your brother-in-law, coworker, aunt, uncle, or anything like that. It should be your own personal return index.

Bud Kasper:  I’d tell my brother-in-law to take a hike from that perspective, because look, in retirement, how many years do we have to continue to get returns? And the answer could be 25, 30, 35, maybe 40 years.

If that’s the case, we have to be so reasonable, so calculated, so keen on trying to eliminate things that can hurt the plan, or can even destroy the plan, by going through the planning process and screening and vetting through these different situations that could disrupt your retirement.

Control Your Emotions

If we look at last year, what was the S&P 500 up? 28%.

Dean Barber: It was a great year.

Bud Kasper: And then we go into the new year. It was up 4.81% on February 19th. And it does what? It drops 35%, 30% from January 1st, up 35% from the peak at that time. So if you look at that and you say, “Well, that’s just part of being in the market, and it doesn’t matter that I just lost $200,000, or whatever the case may be. It’ll always come back.” And it did come back. Where are we today? Plus five, somewhere around there?

Bud Kasper: So we’ve had this rollercoaster and then sometimes it’s very difficult! In the planning process, as you will know, Dean, one of the things we show people is, this is your portfolio, this is what your return has been. But if we went into a downward slide, just the way your portfolio is being managed right now, how much of a loss would you have if we had a repeat, let’s say, of the Great Recession?

Dean Barber: Right.

Bud Kasper: Then we show them that number. “In your portfolio, you would have lost 22%, what did that mean to you? You lost,” and I’m just making numbers up here, “$300,000. Could you live with that?” “Oh, I believe so.” Let me tell you, that’s not the way it is. Emotions don’t work that way.

Dean Barber: No, they don’t. Bud, the point is that if you don’t know your return index, what your money needs to do, you’re going to spend your time focusing on the wrong areas.

Having a PRI Can Mitigate Those Emotions

If you have that number and, you know, based on your resources and your future goals, what your money needs to do, you can design the portfolio with the highest probability of achieving that return. And not only the highest probability of achieving that return, but the highest chance of achieving that return with the least amount of risk possible. And that’s what it’s all about.

If you’re reading right now and you’re thinking, “Man, I’d love to know what my personal return index is, what does my money need to do for me to accomplish all of my objectives?” Well, request a complimentary consultation. We’ll walk you through our process and let you know exactly how we figure that out and go through that process with you. 

Bud Kasper: Remember that your investment portfolio is only part of your retirement plan. Don’t let the investments lead you into a situation where your plan might fail if you have a plan. If you don’t have a plan, you’re probably going to fail anyway, because you haven’t considered all the things that can damage the success of retirement in a lifetime.

Dean Barber: Right. Now, once you understand, what your portfolio needs to look like, and what the proper construction is, we can begin asking the question, “How do I find those 433 active managers to put into my portfolio, the right ones, in the right sectors of the market, to build that portfolio?”

The Art of Financial Planning

That’s where the art of financial planning starts to come together. Because now you need to identify what your money needs to do. I know what it needs to do, but the next step is the hardest thing to do. To construct the portfolio correctly, with the right risk tolerance, to accomplish those objectives.

Bud Kasper: And the vast majority of firms out there don’t have that capability. If you’re working with an individual who’s a private practitioner of everything, do you really think that they’ve got all the resources necessary to vet through what we’re talking about now? Probably not.

It’s Tempting to Keep Up with the Joneses

Dean Barber: Everybody has a history or a temptation of trying to keep up with the Joneses. And what we’re talking about here today, can you beat the market? And the answer is, yes, you can beat the market if you have the tools to go out and find the right active managers that have a history of beating the market. But always, you have to say that just because they’ve done it in the past, doesn’t mean they can do it in the future. So you better understand not just why they beat it in the past, but how are they positioned today to keep up with that?

You don’t want to try to keep up with the Joneses, of course, because then you start playing on the old fear and greed, and talking to that coworker, talking to your neighbor and saying, “Well, how’d you do last year in the market, or how’s your portfolio doing this year so far in the market?” You’re comparing yourself to something that you have no business comparing yourself to. The only thing you should compare your performance and your portfolio to is your own personal return index. And the only way you can identify your personal return index is to have a complete financial plan that outlines your future goals and looks at all of your current resources.

Get the Right PRI

Now, I will tell you this, and this is where I’m going to get to the art of financial planning, because there’s a science to financial planning, but there’s also a significant art to it. You can have company A do a financial plan for you, and they will give you a return that they think you need to achieve based on how they’ve constructed the plan. Then you can go to financial planning firm B, and they’re going to give you a different number based on how they constructed the plan. You can go to financial planning firm C, and they’re going to give you a different number based on how they’ve constructed the plan.

So if you don’t understand the complexity of financial planning and what should go into it, there’s a chance that you’re going to wind up in the hands of the wrong firm with the wrong answer. Bud, you and I both know that where people miss it the most, two things, Social Security maximization, and tax reduction strategies.

Bud Kasper: That’s exactly right. That’s two major components.

Social Security Planning

Dean Barber: So here’s what I’m talking about. If you have a financial plan built and all the financial plan does is say you want to spend $6,000 a month in retirement, you want to replace a vehicle every so many years, and you want to pay for health insurance, et cetera. They look at the resources you have, and they do the calculation, giving you an inaccurate number. Why? Because they didn’t go through a couple of super important exercises. One exercise that should be done first is a Social Security maximization exercise. Now the Social Security maximization exercise is going to walk you through, for the average couple, that’s 62 years old, the over 600 different iterations of how you can claim your Social Security and then identify the best to the worst strategy.

In most cases, you’re going to see over six figures, that’s a hundred thousand dollars or more, in additional social security benefits that can come in through your lifetime by using the proper social security claiming strategy. So that one thing, if I can maximize social security, and that brings in an extra hundred thousand dollars, well, doesn’t that change my personal return index, what my money actually needs to do in order for me to accomplish the objectives that I want?

Social Security Impact on Taxes

Bud Kasper: Sure. But not only is that the important part, but the other part is how does that Social Security strategy going to impact the taxation that you’re going to have in that given year?

Dean Barber: Right.

Bud Kasper: When you exact that Social Security strategy, when you actually put it in place, you’ve got to go back and say, “If I had just waited another year, I could have had a lower tax bracket that would allow me to do another tax strategy, perhaps, like a Roth conversion, because I’ll stay in the lower tax bracket. When I get into the Social Security that’s going to raise my income, that could possibly put me in a higher bracket. Maybe I should postpone this for a year because I have an advantage for myself.” And by the way, what is that going to do? It’s going to increase the success probabilities on your plan.

The Power of CPAs and Financial Planners Combined

Dean Barber: Right. Again, you’re talking about another art to financial planning, one which almost always goes unchecked. Why does it go unchecked? Because most financial planners don’t have a team of CPAs reviewing the financial plan upon creation. Why are they reviewing it? They’re reviewing it from a tax perspective saying, “How can we make your plan the most tax-efficient plan possible? How can we minimize the amount of taxes that you’re going to pay? Not just in a given year, but over your lifetime?” That is key. That is really key.

Bud, you and I know that we’ve got a team of CPAs that once our financial planners have built the plans, the CPAs then review them and say, “All right, from a tax perspective, what do we need to be thinking about here?” And I’ve seen cases, and it’s common to see $100,000 to $200,000 less in taxes over retirement lifetime by having that CPA create that multi-year tax strategy. So if I can add a hundred thousand in Social Security, I can reduce my tax burden through retirement by another $100,000 to $200,000. Well, isn’t that going to change what my personal return index needs to be on my investment strategy?

It’s a Compound Benefit

Bud Kasper: Yeah. The significance of all that is the fact that it’s a compounded benefit. If you’re able to save it this year, it means you’re not going to be attacked by it in the next year, and the following year, and so on. This is where you really see the power of what comprehensive financial planning can mean in a person’s life.

Dean Barber: I want you to understand the impact of the Social Security maximization strategies and the tax reduction strategies. If you’re thinking about retiring in the next five to ten years, or even if you’re already retired, I want you to request a complimentary consultation. Sit down and talk with one of our financial planners and understand the process we go through, how we do it, and how we can help you just like we’ve helped so many others.

How Successful Can We Make You in Your Retirement Years?

Bud Kasper: So for those of you who’ve been fans of the show for a long time, you know “can I beat the market” was really just a hook, and what I say that because we really aren’t here to give you advice as to how you beat the market. That’s not an important question. The important question is how successful we can make you in your retirement years? And quite frankly, doing it in a way using the magnitude of different ways to save money, whether it’s through taxation or Social Security, or a myriad of strategies that we can alter inside a plan to be more successful, is our underlying goal.

Planning for Inflation

Dean Barber: It is. Bud, we talked earlier about this concept that if you go to three different financial planners, you’re going to get three different numbers. Of that personal return index. Let me tell you another one that we didn’t talk about, but I think it is critical to identify that personal return index. And that is the rate of inflation-

Bud Kasper: I knew it! I knew you were going there.

Dean Barber: -the rate of inflation assumption in the plan.

Bud Kasper: Absolutely.

Dean Barber: So we’re assuming a 4% rate of inflation on our plans, but that’s only on your base spending.

Bud Kasper: Right.

Dean Barber: Obviously, if you retire with a mortgage, your mortgage will not inflate. So we apply 0% inflation to that. But guess what’s going to inflate faster than the core rate of inflation? Healthcare! So our healthcare costs, we know, are going up by over six and a half percent a year.

Bud Kasper: Yeah. We use 6.8%.

Dean Barber: So, you have to apply the right inflation rate. And I can’t tell you the number of times where we’ve seen people come in, that already had a plan done, and the plan was assuming a two or a two and a half percent inflation rate on everything.

Bud Kasper: Worthless.

Dean Barber: Yeah. It is because it’s not real.

Bud Kasper: It could be a false read.

A False Sense of Security

Dean Barber: It does give you a false read, and it gives you a false sense of security. And the last thing you want to do is be 10 to 15 years in retirement and go, “Oh, my gosh, this plan didn’t take into consideration how much healthcare was going to increase. And it didn’t really take into consideration the right inflation rate.” It has to be done right. 

Once you have the clarity of exactly what your money needs to do, now you’re not making investment decisions based on the emotions of fear and greed. You’re making them based on a mathematical formula that shows you based on your resources and the comprehensiveness of the plan that you’ve created, what does your money need to do?

Bud Kasper: Yeah, let me share with you a story, because just the other day I was with a new couple, and in this business, you get to know human nature in people and how they’re reacting. Some people have done a lot of stuff on their own; they’ve had some success, their confidence is pretty strong with that. We went through the plan, and this gentleman was following perfectly, so was his wife. I could just see that they were impressed with the detail that we had and that we took into the considerations that you just talked about in the last segment, Dean. Yeah, we were doing inflation at 3.9% on the portfolio, but we’re doing healthcare at 6.8%. Now, all the things coming together.

That Value of Thorough Planning

When we finished that, I remember, I said, “When we entered into these conversations, I told you, there was no obligation. We would do this plan for you.” And how many firms would do that in the first place? Because there’s a lot of time engaged in that.

Dean Barber: Absolutely.

Bud Kasper: As he looked at me, he goes, “I wasn’t sure what I was going to do when we came to this decision making,” but he goes, “This is more thorough than I could have ever imagined. It gave me better insight, it told me areas that I needed to work on, and so my conclusion is we’re going to hire you.” And I said, “Well, that’s fine. I just wanted you to know that there was no pressure from us.” I told him, “If you want to go home and think about this and then come back with what your opinion is, we’re totally fine with that.” And that’s the best way to be with people.

Dean Barber: Absolutely. Because at the end of the day, we’re here to help the people that need and want help.

Bud Kasper: Yeah. So they can help themselves, but with the right guidance and we have our Guided Retirement System.

Retirement Planning Pitfalls Like Budgeting

Dean Barber: Yeah. It’s interesting, Bud, and there are other things where I’ve seen plans messed up. And we just recently wrote an article on the seven most overlooked budget items in retirement. If you overlook budget items in your plan, your plan is going to be wrong again. That’s why when we create that plan using our guided retirement system, that it’s live. Right? It’s continually being updated based on what’s happening. And we sit down with you multiple times throughout the year, and we update the plan. We know that there’s changes in your life and things that will change and health situations that are going to change, or maybe kids that need help, or perhaps you want to do something special for a grandchild or something.

Life-Changing Moments Can Fit into Your Plan

You have to have that plan built to understand then how these different things will impact you. I had a great conversation with a long time client last week, and they want to relocate out to the East coast to be closer to their daughter and grandchildren. And so we had to say, “Well, the cost of living’s different where they want to move to.” We had to consider all of that.

Bud Kasper: Right.

Dean Barber: The cost of real estate, the house, will be more than what they’re going to be able to get from their current home here in the Midwest. So we had to reconstruct that plan, but you know what? We were able to do that within about a 45-minute conversation through a Zoom meeting and update everything and we said, “You know what? Here’s what you can afford, get out there now, look for the right house, make an offer, and get it done.” And the wife was just… She was so happy.

Bud Kasper: I’m so glad you said that Dean, because really what you’re saying is a financial plan, a retirement plan, is a living, breathing, ever-changing, ever-evolving thing because life has different changes. Sometimes very positive, sometimes it works in the other direction, but that comes back to one of the things we were talking about; going back to the investment picture. 

Step-Up in Basis

If the plan’s working out and we get into what we call a good sequence of returns, and we’re making money, and we’re building up additional cash in separate accounts and everything, what are we doing at that time? Well, maybe we’re refocusing the plan to have more of a legacy benefit, meaning after the people pass away, how do we efficiently get there? We have the issue coming up, which scares the dickens out of me.

If they come in and they say they’re going to take the stepped-up cost basis away from planning.

Dean Barber: We talked about that. That’s scary.

Bud Kasper: Yeah, it is because these are game-changers, folks. Let’s look at it this way. The government has us in a situation where taxes will have to increase one way, shape, or form, whether it comes directly, in personal taxes, corporate taxes, or wherever it is. What are we? $26 trillion in debt? Is that right?

Dean Barber: Yeah. And it’s growing fast.

Bud Kasper: Yeah. Stepped-up in basis is something our parents, and our grandparents had. It’s the ability to getting to stepped-up cost basis on an asset, which means that they didn’t have to pay the tax on it. That allowed their beneficiaries a considerable benefit of being able to use that to have a successful life. That’s what we want. We want that because that makes them self-reliant and keeps the government out of their pockets where they shouldn’t be in the first place.

Spending Buckets

Dean Barber: Yeah, it does. All right. So let’s get back, Bud. Away from our political discussion, and let’s go back to the portfolio. Because we started the show talking about, can you beat the market? Now, let’s assume that what you did was you identified that personal return index. 

Then you identified the asset allocation that has the history of showing that that allocation gives you the best probability of achieving that return over time. The question then becomes, how do you position that? And you and I both believe that you should use a bucketed approach.

You have a bucket of money you’re going to spend from over the next five years. And then you have a bucket of money that you’re going to spend from years five through 15, and then a bucket that’s going to be 15 plus. Well, what happens then is that you put the most conservative part of that portfolio in the bucket that you’re going to spend from in the first five years. And you know what that does? That eliminates the destruction that the sequence of returns can do to a plan in the early years of retirement because you know what? You don’t have anything that you’re going to plan to spend from in that first five years, that’s going to destroy your ability to retire.

Spending from Accounts Deliberately

Bud Kasper: Right. Because you can’t control the sequence of returns. That’s just the market’s cycle from that perspective.

Dean Barber: But if you have a good return rate on that second bucket, say the five to 15-year money or a good return on that bucket, that’s 15-year plus money. Well, what do you do? You refill that five-year bucket.

Bud Kasper: Right, right.

Dean Barber: You refill that thing, and you keep refilling it.

Bud Kasper: You harvest.

Dean Barber: That way, the money you’re spending is always coming out of your most conservative pieces. Then you can handle some fluctuations in the market value of those longer-term pieces.

Bud Kasper: Let’s say the sequence is positive, the plan’s working well, and that first bucket has now actually created instead of three years worth of income or five years, now you’ve got seven years. Well, you don’t need seven years’ worth of income. Now it’s time to redeploy that money into another strategy, further out where we have a chance of even maximizing the results for our legacy for our next generation.

The Plan is Always Changing to Accommodate Your Desires

Dean Barber: Bud, that just goes back to the point you made a minute ago, that your financial plan becomes a living, breathing part of who you are, what you are, and it’s connecting your money to your life in a meaningful way. We want you to understand what that feels like by getting a complimentary consultation from our financial planners. 

Bud Kasper: If you can tell, Dean and I are pretty excited when we talk about this, because we know the promise that is out there. People will take that ball, and as the Chiefs did a week ago, run to that goal line because it’s an exciting opportunity, exciting time of your life. We want you to have success. We want you to get that Super Bowl ring.

Dean Barber: Just win the game and win it with confidence and clarity.

Bud Kasper: Yep. Right.

Dean Barber: You got to get to know the rules, though. That’s what our complimentary consultation will help you understand. We appreciate you as always spending time with us here on America’s Wealth Management Show. I’m Dean Barber, along with Bud Kasper. We’ll be back with you next week. Same time, same place. We hope you all have a wonderful day. Stay healthy and stay safe.


Trying to Beat the Market by Comparing it to Benchmarks

Greed also manifests itself in our desire to outperform. People are constantly comparing themselves to others in just about all facets of life. So, it makes sense why we would try to find a benchmark to compare our investment portfolios to try to beat the market. Benchmarking your investments is essential. It allows you to identify areas where you are outperforming, or more importantly, underperforming. 

Choosing a Benchmark

Choosing the right benchmark, however, comes with a lot of nuances. On the evening news, usually, it’s just the Dow Jones Industrial Average or the S&P 500 that gets any airtime. Most will recognize these indices as an indicator of how the stock market as a whole is doing. 

The Dow Jones Industrial Average consists of 30 companies. The combined market capitalization, or market value, of those thirty companies, was more than $8 trillion at the start of this year. The total market capitalization of all publicly-traded US companies is more than four times that amount at more than $35 trillion

While it’s good to stay informed on what’s happening in the US stock market, the Dow Jones Industrial Average should probably not be the only benchmark you use to compare your investment portfolio. Chances are that if you look at the investments in your accounts, you own a lot more than 30 stocks.

You’re Likely More Diversified Than Some Indices

In fact, if you own multiple mutual funds or exchange-traded funds, you likely own hundreds, maybe thousands, of stock positions inside those funds. Also, you may hold stocks in international companies based outside of the United States. The Dow Jones Industrial Average only tracks 30 US-based companies. Further still, you could own investments in bonds, commodities, or real estate, none of which are in the Dow Jones Industrial Average performance. 

Most investors should have a diversified portfolio, consisting of many different types of investments. If that’s the case, then the Dow Jones Industrial Average is probably not the best index to benchmark performance against. 

So How Should I Benchmark My Investments?

A better benchmark for your US stock investments might be Russell 3000, representing approximately 98% of the publicly traded stock market. If you own an international stock mutual fund, you will want to compare its performance to an index that tracks foreign stocks’ performance, like the MSCI EAFE index. 

If you own a bond mutual fund, you may want to know how it performs against an index like the Bloomberg Barclays Aggregate US Bond Index. Getting granular like this may give you some new insight into how well your portfolio is performing, and whether you’re beating the markets in which you have investments. 

There are thousands of stocks, bonds, and funds to invest in, and thousands of indices to compare them. This can be overwhelming. If you are up to the task of benchmarking, monitoring, and comparing your investments, make sure you aren’t taking your eye off the ball of what’s most important – whether or not you are on track to meet your financial goals. 

Does it Really Matter if You Beat the Market?

For instance, while it would be nice to outperform your investing benchmark by one or two percentage points, does it matter if you are on pace to run out of money ten years into your retirement? Is your investment allocation in alignment with both your risk tolerance as well as your long-term financial needs? Is your investment portfolio structured to minimize taxes? These are the questions that should be asked, as opposed to whether or not you beat the returns of the S&P 500 last year. 

Beating the Market Isn’t as Important as Achieving Your Goals in Retirement

Your money should have a purpose, and it should be tied to a goal. Whether that goal is saving for retirement, a future home, or a child’s education expenses. The purpose of investing is to delay gratification for a future need or desire. The purpose of investing isn’t to brag to your coworker about how you made 0.5% more than the Dow last quarter.

If you haven’t yet identified what your financial goals are, that’s okay. A CERTIFIED FINANCIAL PLANNER™ professional can sit down with you and have that discussion. If you want to find out how to build a personalized benchmark, get in touch with us below.

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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.