Staying Out Of Your Own Way (Ep 98)
In this episode of Make The Dough Rise, we explore the critical yet often overlooked aspects of retirement planning—sequence of returns, long-term super cycles, and withdrawal rates. Join us as our summer intern, Kayla, shares fresh insights from her research on market efficiencies and investing strategies. Plus, we'll analyze scenarios of retirees facing vastly different financial landscapes based on timing alone, revealing how choices made during major market events like the dot-com bubble and other financial crises can drastically alter one's financial future. Whether it's panic selling or attempting to time the market, learn why staying disciplined with a well-thought-out investment plan is crucial.
Transcript - The following transcript was generated by a robot, so please excuse any typos or inaccuracies.
Brian Doe
It's summertime at Lake Oconee, and we've got a great episode talking about sequence of returns, dealing with long term supercycles and how to manage withdrawal rates in retirement and back by popular demand. Summer Intern Kayla,
Announcer
it's time to make the dough rise. The financial podcast with Brian doe. Thanks
Walter Storholt, co-host
for joining us for another edition of make the dough rise. I'm Walter sterhold alongside Brian doe, of course, of living worth Wealth Advisors, Brian is a certified financial planner serving the lake country and beyond, with an office in Greensboro, Georgia, but wherever you are, visit [email protected] for more information. Past episodes, great resources and much, much more. Brian, happy summer to you. I think we've officially turned the page to that and can now celebrate the warmth and kind of just saw the excitement that summer brings along with it. Now
Brian Doe
we are celebrating the warmth in Georgia. Man, I put down new sod in my front yard, and the summer sun is trying to burn it up, and I can't get any rain. Oh, no.
Walter Storholt, co-host
Time to get those sprinklers into overdrive, huh? Yeah,
Brian Doe
you would think we would have affordable water here as a lake, but they've got some kind of racket where the water company is privately owned or something like that. And it's probably the most expensive water in Georgia, as we live on one of the largest reservoirs in the state. One
Walter Storholt, co-host
of those deals, I suppose. How about the pizza baking? Anything exciting going on in that realm?
Brian Doe
Not so much the pizzas. But next week, we are headed out for the spring hopping trip with my daughter, Natalie. We did a little bit of that last summer, and we got to do a little bit with some cousins. We checked out one new spring down in South Florida last week, but we're gonna go for our week long jaunt, and we have actually found a spring that generates 550 million gallons of water a day and creates a four and a half mile called the silver river. And we're gonna kayak the silver river.
Walter Storholt, co-host
That sounds pretty cool. And where's this? Just outside
Brian Doe
of Ocala, east of Palm Coast. I'm sorry, west of Palm Coast.
Walter Storholt, co-host
Nice. So for these trips typically taken down to Florida, I'm guessing they have kind of the best springs activity. It's
Brian Doe
a whole geological formation all over Florida. They've got these freshwater springs popping up everywhere.
Walter Storholt, co-host
Let's get into today's topic. We're talking about a good one today, a good topic how we can stay out of our own way in doing so, experiencing financial success, retirement success, but lots of different ways that people trip themselves up when it comes to finances. Brian, probably so many ways. We can't cover them all on a single episode, but I know you're going to do your best to put this into context and at least leave us with a couple of good nuggets to take home
Brian Doe
today. Yeah, so Kayla and I have had a lot of discussions about markets, indexes, efficient markets, and we're going to come back with some great material around active versus passive investing and indexes and things like that on our next episode. But as a bit of a trick question, I was asking Kayla, what? What is the one variable that no one can control. Obviously, there's a lot of variables that are outside of our control, but we can adapt to but there's one specifically that no one can control, Walter. Do you know what I'm talking about? All right, let
Walter Storholt, co-host
me see what you're angling at here. Brian,
Brian Doe
the one thing no one can control was the date they were born. Okay? I made Kayla sit in a kind of an awkward silence while she meditated on that. But yes,
Speaker 1
there are many different options coming into my head. And I just sat there for a while pondering, and he finally told me that it was your date of birth, and
Brian Doe
it was, it was meant to be a trick question, because everybody's thinking about diversification, or, you know, asset management, things like that, but, but the date that you're born, I mean, that determines roughly when you're going to go to college, when you get married, when you have kids, and then ultimately, when you retire, and then when you are going to claim Social Security, when you have to start drawing on your portfolio for a supplemental retirement savings. And then, of course, you know how long you live is, is very open ended, but the dates that you experience these things then correlate to the returns of the market as you have these events happening. All right? So we looked at accumulators and people who invested and didn't touch their money, and we had some interesting insights into the math of the sequence of returns for people who were either static investors or dollar cost averaging, and we're not going to get into all that right now. The big one was for those people who are in distribution mode, the sequence of returns that you experience can have a massive and profound impact on on the chances of success and your ability to maintain your portfolio over long time periods. So let me, let me make this real, and I will give you two examples of retirees. Let's say that you had one retiree who a. 65 in 1980 will inflation adjust all these numbers? But if you had, like, a million dollars, or the equivalent of a million dollars in the 1980s for the next 20 years, you were retiring into a very strong economic super cycle. You had 20 years of near uninterrupted bull market. You had four years that had negative returns, and they were very moderate downturns, I think maybe in the low to mid single digits. I think there was one year it was down 10% maybe 1981 or something like that. The compound annual return over that 20 year time period was 15.4% Well, if you look at long time periods for the stock market, the average annual return for the S, p5, 100 would be about 1010, and a half, maybe 11% depending on what time period that you looked at. So this particular 20 year time period, you didn't choose it you were when you were born. Determined when you turned if you turned 65 in 1980 and hit retirement, if you had then started withdrawing from your portfolio, let's say you took out maybe 4050, $60,000 per year. Those are four or five and 6% withdrawal rates. How much do you think a million might have grown to over that 20 year time period, while consistently taking out $50,000 a year. Well, the rule of thumb is about a four or 5% with withdrawal rate is sustainable in most market environments. But in this particular scenario, you would have ended up with $6.7 million left over in 1999 all anybody was talking about was what they were going to do with all the extra money. Everybody was estate planning. Everybody was figuring out how to do generation skipping trust and leave money to the grandkids. And it was just a incredible time period. Now, contrast that to, let's say, somebody who retired in 2000 and that wasn't that long ago. And again, this was dictated by, you know, when you were born and when you turned 65 a 2000 retiree over the next 20 years experienced upfront, multiple down years in the market. They had a total of six negative return years, and the compound annual rate over that 20 time 20 year time period was 6.6% so here's two back to back 20 year time periods, totally different behavior, and because when you were born, you had absolutely no control over which of those you experienced. So the the same withdrawal rate. Let's say you did $50,000 per year from the Million Dollar Portfolio from 2020 on, you would have ended up with a negative $178,000 in that scenario. So we're literally talking about an almost $7 million difference in outcome for these two similar withdrawal portfolios. And let me throw a caveat out there. This is assuming that you completely invested in the s, p5, 100 index. You kept 100% of your money invested. You did nothing to diversify or have cash reserves or adjust your withdrawal rate and things like that. But just just on static, linear comparisons. That's the impact that two drastically different super cycles, if you will, can have on your portfolio value. Wow.
Walter Storholt, co-host
This is somebody, I mean, pick any event, right? It could be the, I think about the 2008 financial crisis, retiring right before that, you're in big trouble.
Brian Doe
Same thing, you had a couple of negative years, but then the we'd have to run the numbers on that time period, but
Walter Storholt, co-host
we're also not 20 years out quite yet. Yeah,
Brian Doe
we're not 20 years out yet, right? So get quite calculated. But if you retired on the front end of that, or the back end of that, all these things could have major impacts. But if you think about it, imagine retiring into the.com bubble is busting. September 11 hits the Enron and Worldcom fiascos are falling apart, and have these major corporations falling apart, and then just to turn around and experience the financial crisis, all of these things can lead to bad behaviors on investors part.
Speaker 1
Yeah, so it's been interesting. We've been looking into individual investor behavior, and historically, individual investors have greatly underperformed compared to the markets consistently. For example, we looked at equity returns, and when looking at on average, on a time period of 20 to 30 years, comparing the performance of markets versus an average mutual fund investor returns. There was this great difference in the amount of returns that individual investors would get compared to the index such as the S, p5 100 index. And this gap was called the behavior gap.
Brian Doe
There was a certified financial planner or investment advisor. Out there by the name of Carl Richards. I think he sort of coined the term. And it didn't matter the time period. It was maybe years or a few years, 10 years, 20 years. And it didn't matter which segment you looked at, the individual investor probably experienced 60 to 70% less return than the actual investment products they were using. It's crazy, like they're buying the same funds and indexes, but it was really bad behaviors caused them to miss out on the majority of the of the return. In his
Speaker 1
book, he basically suggests this theory that talks about the difference in returns that individual investors get from investing by themselves. And this is where their emotions kind of kick in, and they're not really focusing on the long term goal, which is just to wait things out. They let their emotions settle in and they think that they should sell their positions or wait things out to see how the market comes back up. But if they were to just stick with the index such as the S, p5 100, their returns would be a lot greater than their decisions that they would be making on their own. So when I was doing my research and looking at the data, on average, it would be about a five to six percentage point difference from the amount of returns an individual investor would get compared to the S, p5, 100 index,
Brian Doe
the concept of behavior gap is, like I said, has been very consistent. What are some of the main behaviors that people do engage in that causes them to get these bad returns?
Speaker 1
A main emotion that people feel is panic selling. So when they see that the markets are down and their money is going away, they freak out and just feel like they should sell and wait things out, just so that they can buy low and sell high. So we
Brian Doe
looked at the 10 year rolling return from 2000 to 2010 didn't we look at I think, I think that was the worst 10 year time period since the Great Depression, and markets were just nominally positive by a small percentage point. So this, this scenario where you've got three years of down market with the.com or you had the financial crisis, the panic selling can be a real thing, like, I can't take it anymore. I need out. And, you know, so people jump out, and then they miss getting back in. When the market comes back up and it's just a it's just a truly emotional, driven thing. There are solutions to it, and we will get into those strategies at another time. But what are some of the other bad behaviors that you see?
Speaker 1
Another one is market timing. So this is basically just trying to predict the market movements, trying to wait things out, or seeing if you should buy and sell accordingly. So market timing is extremely difficult, and it leads to a really bad behavior. And if
Brian Doe
you're prone to panic selling, then are you really going to have the nerve to step in and buy in the middle of covid, in the middle of the financial crisis, in the third year of the.com bubble busting, are you really gonna know exactly when to get back in and to win when to get out? And the answer is, yeah, a few people do get lucky. Or there are some people that are brilliantly smart and and also lucky, like you saw in The Big Short some of these people that predicted the financial crisis, that is not the majority. That is a very, very select few, that is not the individual investor experience. So what's a few things that you could do to avoid these bad behaviors? A
Speaker 1
few things that you could do to avoid these bad behaviors is to stick to a plan. Kind of plan out what you want to have your long term investment goal be, and don't really focus on the short term stick to that long term goal. Second is to always diversify your portfolio. Third, you want a regular rebalance as well, because it will maintain your desired asset allocation. Focus on the fundamentals, avoid emotional decisions. And lastly, I would seek professional advice. Always,
Brian Doe
always seek professional advice.
Walter Storholt, co-host
Always important to do that, and something you can always do with Brian doe and of course, the team at living worth Wealth Advisors and great breakdown. Kayla, thanks for all that great information on the show today. Really appreciate your insight and guidance. And Brian for you setting this up and letting us dive into this. And it's nice when you've got somebody that's able to well research these, these things and bring a different perspective. So I enjoy that,
Brian Doe
yeah, it's kind of fun having the opportunity to teach somebody the new concepts and see it with fresh eyes. Some of these things you get, yeah, I get so. Go far off into other topics, I forget to come back and it's good for clients, I think too, to hear these these concepts, repeated, and know that there are ways other than just investing 100% in the s, p5, 100 to manage these risks, to ensure your retirement income strategy and make sure that we're not leaving this to chance. We're not leaving this to the sequence of returns that we're going to experience. Put the money that needs to be in growth and risk assets where it needs to be, and then for the portion that you do not need to take risk with. Obviously there's other investments and other choices out there, and so there's plenty of strategies you can do to mitigate the risk, to make sure you have the cash flows that you need, and adjust along the way. Just in case, you know whether it's prosperity or an economic a prolonged economic hardship time period, this is what we do all day, every day here.
Walter Storholt, co-host
This is not the first time we've talked about behavior when it comes to planning for retirement and investing. And if it's an interesting topic to you, I definitely want to point you in the direction of two other episodes that we've done on the show in the past. Way back in episode 40, we talked about math versus human behavior, and that behavioral conversation specifically looks at that concept of instant gratification, or the benefit of delayed gratification, and we've served some practical examples up for you in that conversation. So go check that one out. We'll link to it in the description of today's show. We also had a managing behavior conversation in the context of Getting Rich versus staying rich, and talking a little bit about the psychology of money. And so both of those shows would build on or helped establish the foundation, if you look at it the other way around, for today's episode. So if behavioral stuff interests you check out the show notes, and we'll link to those two prior episodes in that description of today's show. In the meantime, if you are looking to take control of your financial future, but you're not sure where to start, but you know that you want to do number six on Kayla's list of strategies to avoid bad investor behavior, and that's to seek professional advice. Let Brian doe, tenured Certified Financial Planner with more than two decades of experience, be your trusted partner as a CERTIFIED FINANCIAL PLANNER professional, Brian meets the highest standards of training ethics and always puts your best interests first, so you can take advantage of a complimentary 15 minute call with Brian to gain clarity on your financial goals and prepare for a more secure tomorrow. Don't miss the opportunity give him a call at 7064. 51 9800 or go to livingworth.com That's livingworth.com and click book a call, and you can schedule your time to visit very easily that way. Well, Brian and Kayla, thank you both for the great information on the episode today. Looking forward to seeing what you cook up for us next month, and in the meantime, keep having a great start to the summer, and we'll talk soon. Sounds great.
Unknown Speaker
Thank you. All right.
Walter Storholt, co-host
Thank you both. We'll see everybody next time, right back here on make the dough rise. You. Music.
Announcer 2
Make the dough rise is brought to you by living worth Wealth Advisors with a central office in Greensboro, Georgia, but serving the lake country and beyond. The podcast is available on Apple podcasts Spotify and all your favorite podcasting apps. Subscribe today and never miss an episode. Just search for make the dough rise with Brian doe You can also visit make the DOE rise.com to listen to recent episodes. If you'd like to contact the show or schedule a complimentary financial review with Brian and the team, just go to make the DOE rise.com and get in touch through the website or call 706-451-9800, thanks for listening to make the dough rise.
Announcer 3
Investment advisory service is offered through Main Street financial solutions LLC. Information provided is for informational purposes only and does not constitute investment tax or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed.
