Making the Most of Market Opportunities

Key Points – Making the Most of Market Opportunities

How to Make the Most of Market Opportunities
Opportunities Born Out of Disasters, Painful Situations, and Fear
Making Sure You Don’t Miss the Opportunities That Are Right in Front of You
Opportunities Outside of the Market
19 minutes to read | 39 minutes to listen

A financial plan can make a world of difference, especially when you’re making the most of market opportunities. Dean Barber and Bud Kasper look at some of those opportunities, as well as ones outside of the market, to help you live your one best financial life.

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How to Make the Most of Market Opportunities

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. We’re going to talk about making the most of market opportunities, and opportunities in general. Speaking of opportunities, did you buy Tesla stock like 10 years ago and put all your money in it?

Bud Kasper: No. I never had that opportunity.

Dean Barber: You had the opportunity, but you missed it, right?

Bud Kasper: I didn’t do it, but I wish I had.

Market Opportunities in Recent Years

Dean Barber: Neither did I. When you talk about making the most of market opportunities, I think the thing that goes to people’s minds initially is that next hot stock.

It was Bitcoin when it was pennies. Now it’s $60,000-plus. It was Ethereum. Back in the day, it was Apple, Microsoft, or Facebook. People think it’s an opportunity that they’re looking for. They think if they just did that one thing, they could be set.

Bud Kasper: Yeah. And the Robinhood deal. I don’t want to be any part of that. I don’t have any clients that want that kind of risk or exposure. Quite frankly, I never have anybody that even queries me on it from that perspective.

Dean Barber: I have a few people want to know what I think about some of those things, like Bitcoin. The first thing you should know before investing in something is that you should understand what you’re buying. You should understand what the rules are, when you are going to buy it, and what point you should sell it. If you sell it, at what point would you enter back into it again?

With some of these things, there’s been an awful lot of speculation lately in the market. There’s far more speculation in some areas of the market than others, but we’re seeing it. We’re seeing speculation in the housing market, stock market, and even in the fixed income market.

What Market Opportunities Remain?

The buyer’s frenzy is out there right now. The question I think a lot of people have on their minds is what market opportunities remain? What can I do when the markets are as elevated as they are or when they were in the late stages of a fabulous bull market? What do I do now?

Bud Kasper: The one thing I’d say is it’s time to be cautious. We are at those highs. The S&P 500 was 1% away from hitting the Shiller PE of 40 times last week. That means that the index is trading at almost 40 times its 10-year trailing earning power. The only time that we’ve been at such levels since 1872 was during the Dot-Com Bubble in the 1990s.

Dean Barber: Right. The end of ’99.

Bud Kasper: Forward 10-year S&P returns have never been positive when starting with a 40 times Shiller PE. So, there’s a little bit of tech news that tells you that it looks like we’re overvalued at these levels.

Dean Barber: You and I have been talking about the fact that we’ve been overvalued all year long. However, just because we’re overvalued doesn’t mean that we’re in for an imminent market crash.

Bud Kasper: I didn’t say that.

Dean Barber: Right. But that’s what people infer. My point is that when you talk about overvaluations people say, “Should I sell?” Not right now. This is not a sell time.

Remembering Opportunities to Rebalance

This might be a market opportunity to do some rebalancing. If you started the year out with a 60/40 portfolio, you don’t have 60/40 anymore. You probably have more like 70/30 or maybe even 75/25 because of how quickly the equity markets have expanded this year.

Bud Kasper: Here’s the problem with that. If you can rebalance, you’re rebalancing back into bonds, which are struggling right now.

Dean Barber: Some of them are.

Bud Kasper: They will probably be struggling into the future. It’s not that simple where you can say that bonds and stocks are still good investments. Look at the combination of the two. These are the challenges that people hire us for—to make sound decisions associated with how their money should be placed in the market. Should it be placed in the market? Are there other avenues we should be exploring? The whole purpose is to have a successful retirement plan.

Dean Barber: Right. Think about where we’re at right now and the focus of the people that we serve. The people that we focus on are those planning to retire within the next five to 10 years, people that are already retired, and people that are serious about making sure that they can get to a point in their life where their money can begin to work for them rather than them working for their money.

Dry Powder Opportunities

The opportunities that exist today are what I call dry powder opportunities. When you have markets as elevated as they are right now, you don’t want to dump everything into the market. If you have everything in the market, you should take some of your winnings.

When we look for an equity return, the long-term average is around 10 to 11%. If you’ve done a good job of combining what happened in the last two to three years, you’ve probably made somewhere around six or seven years of equity returns in your portfolio. Why not take some of that and set it aside?

Let’s get the dry powder. We can continue our investment strategy with the balance, but let’s keep some of that money that we’ve made in an ultra-safe position. It’s an opportunity to set aside a bucket of money that’s big enough that they can draw on for two or three years, especially those people that are near retirement, or in retirement.

Bud Kasper: You’re right. One thing that resulted from COVID was a tremendous amount of savings. We’ve got a huge amount of money that is out there looking for a home. Is the home the stock market? It could be. Is that the bond market? It could be. Overall, that’s really telling you that there’s reasons why demand will continue for stocks.

Dean Barber: Right. There are a couple videos I highly recommend watching that fit right in with what we’re talking about. One of them is Retiring at Market Highs. The other one is Retiring with $1 Million, which really shows the importance of applying financial planning techniques. Also, don’t forget to download a copy of our Retirement Plan Checklist. It’s our most requested item out there.

A Santa Clause Rally of Strong Markets

Dean Barber: While we’re talking about making the most of market opportunities, I’m going to make a wild prediction.

Bud Kasper: Go for it.

Dean Barber: I predict that we’re going to have a little bit of a Santa Clause rally to cap off this year strong in the markets.

Opportunities Born Out of Disasters, Painful Situations, and Fear

Bud Kasper: I wouldn’t disagree with that. I think we have a big announcement coming up on the Federal Reserve. Who’s going to remain chairman? Is it Jerome Powell? Is it going to be another candidate? You asked me what I thought the returns would be next year and I just came up with an easy 10%. Well, Goldman Sachs last week came in with 9%. You can find thousands of these with similar projected returns.

Dean Barber: They’ll all be coming out with their predictions. When we talk about making the most of market opportunities, I still believe that there are opportunities in today’s markets. It’s not as easy as what it was a couple of years ago, but a lot of opportunities are born out of disasters or painful situations.

Bud Kasper: And fear.

COVID-19’s Impact on the Markets

Dean Barber: Think about the opportunity that COVID-19 created in late March of last year with the number of individual stocks and a lot of major indexes. Look at what they’ve done since the market lows in March 2020. There were a lot of people that said, “Oh my God, COVID’s here, we’re locking down. We don’t know when this thing’s going to end. This could be the worst thing ever.” They panicked and sold.

That was the wrong thing to do. Rebalancing was the smart thing to do at the end of March 2020. If you had a 60/40 portfolio, you were down to about a 50/50 portfolio. You needed to sell some of those bonds and buy some stocks.

Bud Kasper: When you do that, you’re repositioning with more risk in the portfolio, so that needs to be understood.

Dean Barber: You’re getting back to the same risk that you had before. My point is that if you rebalanced back into equities because it got out whack due to the stock market falling by 30% in three weeks, guess what you did? You took some of the money that preserved itself in fixed income and you bought low.

There’s opportunity there. Most people didn’t do that because they were scared. They didn’t understand, have a plan, or know how that fit into their overall ability to do what they wanted to do. You miss opportunities all the time if you don’t have a plan. The unfortunate thing is that you’re missing opportunities that you don’t even know about.

A Flashback to 1954 and the Creation of the S&P 500

Bud Kasper: Right. If you go back to 1954, that’s when Standard and Poor’s created an index now known as the S&P 500. At that time, there were eight sectors that represented the market. The point of this was give you a real understanding of what the overall market is doing. That’s why they evenly weighted each of those sectors and averaged them out every day.

Dean Barber: They’re not evenly weighted anymore.

Bud Kasper: No. Not only that, but there’s 11 sectors that are now part of the index. They’ve added to that, but if you look at technology, it represents about 35% on average of the S&P 500’s total return. That means we are biased in the return with technology. In other words, take technology out of the equation and the S&P 500’s return is going to be maybe 5% to 6% less.

Moore’s Law

This makes me think of Moore’s Law, which says that computer chips are more powerful than they were from the previous three years. We’re 900% greater computer power than what we had back in 2000. My point that I made to clients is that this isn’t going to stop. People want more and more and more. We can see how it’s changing our lives. It’s incredible.

Dean Barber: I agree that innovation in technology is going to continue. It’s going to become more rapid, and it’s already changed the way that we live. Think about how quickly people adapted to technology during COVID and how so many things changed. COVID just sped up change with a lot of technology. It forced a lot of people that were the slow adopters of technology to get on board.

Bud Kasper: In some cases, we almost thought it was an invasion with all the devices that we have in our homes. When you talk to a device like an Apple HomePod Smart Speaker that can play your favorite Willie Nelson song on demand, that’s pretty good technology. It’s phenomenal.

Defining Disruptors

That’s what we refer to in the business as a disruptor. The disruption started back in the late 1990s with the Dot-Com Bubble. People were starting to understand that technology was going to be such a disruptor, not only in returns of the companies that created the technology, but what it was going to do to our homes, our cars. Look at us today when we get in the car. We push a screen to get to a GPS, telephone, radio, or whatever. It’s amazing stuff.

Dean Barber: Let’s look at the NASDAQ 100, for an example—the QQQ. Look at those companies and understand who they are, what they do, and their earnings-to-price ratio. What’s their future look like? If you invest in something like that and understand that, you suddenly start thinking about it a little bit differently.

The Ultimate Goal of Accumulating Long-Term Wealth

You need to look past the day-to-day up-and-down prices and think about it in terms of trying to accumulate long-term wealth. Even retirees should have a bucket of money that is still geared for 15 to 20 years out. That’s the money that you should be holding in equity positions. Then, you have your short-term bucket, which is your very safe money, and your intermediate-term bucket. If you think about it in those ways, you can still take advantage of opportunities that are out there today.

Last year was a good example where the active managers outperformed the indexes because of the opportunities that came about due to COVID. This year, some active managers are doing well, but you’re seeing the indices go because everything’s been pushed higher. What’s the catalyst here?

The Magic of Money Flow

Bud said something earlier about how there’s a lot of money on the sidelines looking for a place to go. One thing that we like to look at is money flow. Where are people putting their money? Just like the housing market, if people keep buying, we’ve got people that are willing to pay more. That can continue to rise until that’s enough.

Bud Kasper: The housing market is a function of lower interest rates. If interest rates were to rise, the selling of houses would slow.

Dean Barber: There’s no question about it. It’s not necessarily the selling of houses, but the increase of prices that would slow. You might even see a reversal of prices if interest rates were to rise substantially.

Bud Kasper: It has caused a constant flow of information that we capture every day. We try to discern that into the best results for our clients. That’s the challenge that’s presented to us.

Dean Barber: One of the partners at Modern Wealth Management, Shane Barber, wrote a great article titled, Let’s Talk About the Current Housing Market. There’s a lot of great information in that article, including charts and graphs to help you understand what’s really happening. It’s another great educational resource to help you make the most of opportunities that are in front of you.

Making Sure You Don’t Miss the Opportunities That Are Right in Front of You

Dean Barber: I want to switch gears a little bit. Instead of just talking about market opportunities, I want to talk about opportunities in general. People often miss opportunities that are right in front of them. One of the areas where they most frequently miss opportunities is in their tax return. When most people visit with us for the first time and start going through our financial planning process, which includes our CPA reviewing tax returns, we see that they are overpaying their taxes and don’t even know it.

It’s not because their return was done wrong. It was because they missed opportunities that they didn’t know existed and were working with a tax professional that was solely preparing the return. They didn’t have the fluid conversation that we have when our CPAs sit next to our CERTIFIED FINANCIAL PLANNER™ Professionals and discuss the overall situation and how it impacts the person’s future.

Finding Purpose in Financial Planning

Bud Kasper: A lot of people don’t know when events will come up like sale of a property, possibly getting an inheritance, and things like that. What are the tax consequences of those things? You’re right that most CFP® professionals will simply take the information that’s provided to them, do the best job of making adjustments to mitigate some taxes, but they don’t do anything in terms of mitigating future taxes.

That’s the point of planning. If you think that there are limitations to how we can try to eliminate or at least reduce some of the taxes that you’re experiencing, you’re wrong. You’ve got to see the opportunity. We’re happy to share that with you because it’s significantly meaningful.

Dean Barber: Yeah, it’s interesting. We’re meeting people from all around the country because of America’s Wealth Management Show, which is now a podcast. We’ve also got The Guided Retirement Show™ podcast. It’s a longer form and much more in-depth discussion than America’s Wealth Management Show.

Oh Give Me a Home, Where the Roth Conversions Roam …

A couple of weeks ago, I spoke with a couple that has a cattle and farming operation. They both work, but they’re trying to get to a point where they can retire. As we went through all their information, I noticed from prior tax returns that they lost like $100,000 on their farming and cattle operation.

I told them that in that year they could have converted $100,000 of your traditional IRA to a Roth IRA at a zero-tax base because they farm had that $100,000 loss. They didn’t think about it and their CPA didn’t mention it.

So, there was an opportunity that was missed because they didn’t have a plan. They didn’t understand the complexity of what a full-blown financial plan does. Virtually every financial decision that you make is going to show up on the tax return.

Bud Kasper: If you’re not familiar with what the term Roth conversion is, it’s taking part of your traditional IRA account and moving it over into a Roth account.

It can cause a tax event. However, it’s often worthwhile to pay that tax to get it into a Roth so it will never be taxed again. In the example you used, because of a negative that came out of their cattle operation, they could have utilized that into a positive by doing a Roth conversion If they had the insight and understanding to do.

Dean Barber: All their money was in their 401(k) plans, but they have a Roth option inside the 401(k) plan. Many people don’t even know that you can convert inside the 401k plan from traditional 401(k) to Roth 401(k). There are tons of these little nuances that create opportunities for people all the time.

Where the Advisors and CPAs Play (Work Together)

Bud Kasper: These are all things that are foreign to some people and familiar to others. You don’t know how it’s going to impact you specifically unless you sit down with the advisors who have a background in tax and the CPAs. That’s when the magic happens.

The Before and After Impact of the Tax Cuts and Jobs Act

Dean Barber: I’ve got a lot of really similar stories to this. I had a couple that I worked with in the last couple of years where each spouse was in their second marriage. When they came into this second marriage, that was before the Tax Cuts and Jobs Act changed the amount of the standard deduction.

Before the Tax Cuts and Jobs Act, it made sense for this couple to do married filing separate because he was a big charitable giver, but she really wasn’t. He got more of a benefit by doing the married filing separately. It benefited them as a couple.

After the Tax Cuts and Jobs Act, it no longer made sense to do married filing separate. When I looked at their tax return, I asked questions about why it was being done this way.

The Benefits of Qualified Charitable Distributions

Lo and behold, most of her money was in IRAs and he had no money in IRAs. We had a big pension and some taxable accounts. I said they should be married filing joint be doing all the gifting to charities out of her IRAs through Qualified Charitable Distributions. He can then just give her the cash because they keep things separate.

I told them that they probably overpaid their taxes by about $7,500 per year for the last two years because of this. I asked for their CPA’s phone number and for their permission to speak with the CPA. In five minutes on the phone with the CPA, I laid out what I was thinking. The CPA goes, “Well, yes. That would work. I didn’t think of that.”

So, again, the problem is when you’re just taking your data to a CPA and saying, “Here’s what I have; here’s what I did. What’s the result?” all that CPA can do at that point is tax compliance. Tax compliance isn’t the important part; it’s the tax planning.

It’s understanding that all the financial decisions that you make are going to wind up on your tax return. The things that you do throughout the year are the opportunities that get missed and cause people to overpay their taxes without even knowing.

Bud Kasper: You better explain Qualified Charitable Distributions.

Dean Barber: If you’ve reached age 70 and a half, you can take any amount—I think it’s up to a $100,000—out of your IRA and that money can go directly to charity. That means it doesn’t show up on your tax return.

The Difference Between QCDs and Required Minimum Distributions

Normally if you’re taking a Required Minimum Distribution, it shows up on your tax return. That can cause more Social Security and dividends that may have been tax free before to become taxed to become. It could cause capital gains that may have been tax free before to become taxed. There are all kinds of things that it can do. It could cause higher Medicare premiums, etc.

But it never shows up on your return if it goes direct to charity. You also still get over $25,000 of standard deduction as a married couple. It’s almost like you get the benefit of the deduction and you get the standard deduction on top of it by using the QCD.

Bud Kasper: It used to be that we’d take a distribution out and then they’d pay the tax on it, give to the charity, and take the deduction. By doing this, you have no tax on the charitable contribution because it goes directly to the charity. It’s one of the better things that the IRS has ever allowed.

Dean Barber: It became super popular and has been around for a long time. We’ve used it for a long time, but it became super popular after the Tax Cuts and Jobs Act. More people are doing it today than ever before. Speaking of taxes, make sure to check out our Year-End Tax Planning for 2021. It features one of our CPAs and CERTIFIED FINANCIAL PLANNER™ Professionals, JoAnn Huber, and I.

Opportunities Outside of the Market

Dean Barber: Let’s continue talking about making the most of opportunities that can sometimes be missed. We started by talking about market opportunities, which are still there today. There are opportunities that exist through just about every economic and market cycle. It’s identifying what those opportunities are and then having the fortitude to go for those opportunities.

Finding the Right Opportunities and Levels of Risk

Bud Kasper: It’s always such an evolving industry that we’re in regarding opportunities—first from planning and then with investment options. Through economic downturns or upturns, there are opportunities that will always exist. It’s our job to find the right one at the right level of risk for our clients.

We’re constantly reading and watching special programs or educational pieces to try to bring ourselves up to speed. We’re required as CERTIFIED FINANCIAL PLANNER™ Professionals to do education every year. If you don’t do it, you lose your license to call yourself a CFP® professional. So, what’s all this mean? It means that we are trying to stay on top of every possible angle that could help our clients make money, save money, and plan for the future.

Maximizing Social Security

Dean Barber: We talked about the abundant tax opportunities, but there’s an opportunity that most people have that they pretty much ignore. It’s the opportunity to maximize their Social Security. Bud and I have been talking about that since 2008 before anybody else was really talking about it.

The idea is that a couple age 62 will have somewhere north of 600 different iterations on how they can claim their Social Security. The difference between the best of decision and the worst decision oftentimes will amount to $100,000 or more of additional Social Security income over the same life expectancy. That’s real opportunity that only takes a little bit of time to plug into our Social Security system.

Basically, what we need is a copy of your Social Security statement with your earnings history. We enter all that data for you and your spouse to see all the different iterations. Then, we can apply that to your retirement date and other resources you have.

We can pinpoint the best Social Security claiming strategy for you as a couple and how much additional income it will provide you during your retirement years. That’s just planning, but that opportunity is in front of most Americans today.

Bud Kasper: It is. I don’t think most people know that about 10 years ago, you co-authored Social Security Essentials. At the time, it was acclaimed as the best source for Social Security information. It was for other advisors, which was incredibly significant.

I think what that bears out is the commitment that the company has made with individuals inside our firm to constantly stay on top of what can benefit our clients the most at any given time in the financial planning experience.

How to Assess Each Opportunity

Dean Barber: A lot of these opportunities don’t pertain to everybody at every stage of life, but it’s the idea that you start to craft that plan five to 10 years prior to retirement. Then, that’s when the opportunities start presenting themselves and become very visible to us. We can educate you on what that opportunity is, why it’s there, how to take advantage of it, and what to do. What difference is it going to make in your ability to retire?

Bud Kasper: We recently came across an enjoyable case with a gentleman who had worked for a company for a long time. He’s probably getting close to $4 million that’s going to be distributed over a couple of years. It was tied to shares of the company that are not publicly traded, but there was a position in there for fixed income at a 3% guarantee.

That’s very attractive from that position. So, we designed the plan for him to receive the money, but to keep a certain percentage of it in that 3% for two years to fund the income he was going use, utilize what was available on the company’s platform, and integrate into what we were doing from the investment perspective.

Dean Barber: That’s looking at the whole picture.

Bud Kasper: The planning—that’s all it was. We’re taking advantage of the opportunities and understanding what our clients are trying to achieve. They want to have growth and safety. Sometimes those are difficult to have side by side, but it always will be our endeavor.

Is 3.3% the New Safe Withdrawal Rate?

Dean Barber: The other thing is that there are so many rules of thumb. We’re going to do a show here in a couple of weeks on a new rule of thumb that came out from Morningstar. We talked about this last week where there was an article from Morningstar that the 3.3% Safe Withdrawal Rate Is the New 4%.

Back in the ’90s, people were saying 6% to 7% was a safe withdrawal rate. Suddenly, we go through the Dot-Com Bubble and the lost decade of the 2000s and it moves to 5%. Then, it got down to 4%. Now Morningstar is saying the safe withdrawal rate is 3.3%.

Bud and I both know that that’s one of those rules of thumbs that we can throw out the window because the withdrawal rate is not how you calculate how much income you can have in retirement. How can you calculate how much income you are going to spend in retirement goes into the entire financial planning process?

It’s looking at everything, taking deep dives on taxes, Social Security, inflation, and where you’re spending the money. How do you apply different inflation rates to different things that you’re spending? It’s a different picture than just that 3.3% withdrawal rate. We’re going to get into a lot of detail on that here in two or three weeks.

Mitigating the Fear of Market Volatility

Bud Kasper: When you look at history of withdrawal rates, you see market volatility. That’s the greatest fear. What if I lose money in my portfolio while I’m taking distributions? From a simple planning perspective, let’s bank in three years’ worth of income and put it in a special bucket. That gives us the freedom to invest in a normal way, if there’s such a thing, for the rest of the money.

When you look at bear markets, they generally last 12 to 14 months. We can live through that. You can still have the amount of income that you need and not have to make any rash decisions with the remaining amount of the money that you require for the completion of your retirement.

Dean Barber: That’s what you should be looking for. In the 38 years you’ve been doing this and 35 years I’ve been doing this, there has been maybe a handful of times where clients have had everything covered when we first meet them.

A Firm with a Fiduciary-First Standard

Most of the time, what people think is a plan doesn’t even resemble the type of planning that do we do with our Guided Retirement System™. I encourage you to check out the two videos I mentioned earlier, Retiring at Market Highs and Retiring with $1 Million our Retirement Plan Checklist, Tax Reduction Strategies Guide, and Social Security Decisions Guide.

Bud Kasper: Every Modern Wealth Management advisor works under a fiduciary standard, which legally means that the client’s interest must always be ahead of the firm’s.

Dean Barber: That’s exactly right. We appreciate everyone who listens to America’s Wealth Management Show. Thanksgiving is coming up. We hope everybody has a good time with their families. We’ll be back with you next week, same time, same place.

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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.