Podcast: Taking a Look Forward at 2019

Roger: Use this year to ask those questions and really to lay in your foundations. If you’ve done that properly when things get a little crazy and they will get crazy, you want to be prepared.

Clark: You’re listening to “Retire Happy” with Roger Gainer, President of Gainer Financial and Insurance Services Inc. Thanks for joining us. I’m your host, Clark Buckner. 2018 was the year of volatility in the stock market and that for all the losses in the market last year, the stage has been set for a hopeful bounce back in the economy.

In this episode, we’re looking forward to 2019 and discussing what trends to look for in the market. Along the way, we’ll take a dive into the tax code and how it should affect how you invest this year. For more content like this, be sure to visit gainerfinancial.com to join the conversation. Roger, I’m really excited to be talking with you again today. We’re gonna be talking about 2019, just how to make sense of things, how to sort things out, what we have on the horizon. So first, before we dive into that, you doing well?

Roger: Yeah, doing great, you know. Just, this is a great time of the year to take stock. The way we get a few opportunities through the year that are reminders, it’s always good to sit down, take a little time, appreciate all the wonderful things that we get to enjoy. It’s so easy to get caught up in the day to day and think it’s horrible and sit around and watch the news or maybe your local sports team is doing lousy, and there’s just doesn’t seem to be any sunshine out there. But yeah, I think it’s really important to takes some time on a pretty frequent basis and just remember how many great things you’ve got going. Health, family, friends, opportunities, all of those things because we’re all busy.

Clark: Right. We really should do that more often. That makes sense. And I know previously we’ve recently talked about 2018 and we’ve also been talking about various topics leading up to today, but now we definitely want to be shifting to the future. And at the moment we’re recording this, we’re actually entering in 2019, but the takeaways, I’m sure, are gonna be relevant for the entire year, if not following. So in no particular order, where would you like to kick things off at?

Roger: Well, let’s talk about how crazy it is. If you are somebody who watches the news and listens to talk radio in the car or any of that kind of stuff, or even just picks up a newspaper or opens your web browser to Yahoo! and looks at those headlines, now I noticed that there’s headlines on my iPhone and stuff’s around, and if you’re checking any of it out, it seems to be getting crazier and crazier. We’ve got trade wars and political stuff and indictments and investigations and foreign relations. Weird things happening with supposed allies like Saudi Arabia. We’ve got things happening with supposed enemies like Russia and China. You know, so there’s all this stuff is going on each and every day, and it’s so easy to be overwhelmed and really frozen. What do I do with all this stuff going on?

I mean I’m getting a lot of calls and emails from people who are asking, “Well, what should I be doing now? What does this all mean and what’s it gonna do to me?” And I’d say that looking forward, it’s not gonna get to be less, it’s probably gonna get to be more. There will be more of this noise going forward as these investigations come to a head. There will be more as we get closer to the next presidential election cycle.

Clark: So how does all that translate to you for money, for retirement, all of the above?

Roger: Well, there you go. So there’s…usually when we have this kind of upheaval, you know, it’s hard to see the forest for the trees. It just so easy to get completely in mashed and depressed and, you know, that deer in the headlights kind of feeling, “Where do I go? Which way do I want to move or am I just gonna get run over?”

And so I think getting back to basics is a great reminder. The stuff that works, works just about all the time, the stuff that’s really basic. So making sure your savings is happening on a regular basis, making sure you’re not taking on too much risk. Making sure that you understand what your investments are and that just buying and forgetting stuff, unless it’s wrapped in guarantees, is not an okay strategy. You need to pay attention to where your money is accumulating or resting or investing. But nobody should care. Nobody can care as much as you should. And you know, that sounds so basic, but it’s so often people want somebody else to care and somebody else to take responsibility and somebody else to pay attention to their financial life.

I run into people all the time that say, “Oh, I have an advisor. I never ask him what they’re doing with my money.” Oh, golly gee, who’s going to care more? Your advisor or you? I mean, yeah, the advisor makes a living, but they probably got another 100 or 200 or 500 clients so whether you are there or not isn’t gonna be the difference between whether they eat or not, right? But it’s all of your money is sitting there being invested. So it shocks me sometimes how people just shrug and they go, “Well, I don’t know what’s going on. I just see that person’s always good to me, and so I just trust.”

And yeah, we want trust, but I like the term trust, but verify. So we have to trust our advisers or otherwise, you should get new advisers. I could make a couple of great Washington jokes right in here but I think I’ll pass. You guys can all fill in the blanks as you’re listening to the trust and advisors, okay, we’ll leave it at that. But you want to have advisors that you trust, and the only way to build that trust is to ask questions and to, you know, listen to the answers and ask more questions if the answers don’t make sense to you. Don’t just blindly accept this. It’s your future we’re talking about.

So let’s talk about the upcoming year as far as investing in the stock market, for example, is concerned. The end of 2018 has been well, crazy volatile. We’ve seen in the last six weeks of the year, the entire year’s worth of gains wiped out. Overall it’ll be a losing year, looks like, for the stock market. In fact, it’ll probably be a losing year for many, many markets, not just domestic stocks here, but you know, we’ve seen bonds take a tremendous hit this year. We’ve seen a lot of commodities take a lot, a big hit this year, so a lot of stuff is down.

Now, what’s the good news on that? We’re approaching the third year of a presidential cycle. And here’s one of those crazy statistics that, you know, remember our past performance is no guarantee of future results. But, since 1946 we’ve had 19 midterm elections. We just experienced the 19th. In the previous 18, the year after the midterm election, 100% of the time the stock market has been up, and the S&P is risen by an average of 17%. So as crazy as things are and as depressing as the market feels right now, historically this has been a very, very good year for stocks. In fact, as depressing as it is, that kind of lays the framework because if everybody thinks it’s going down and everybody’s down on everything, that’s kind of the background that we need for it to go up. I know that seems counterintuitive perhaps. And what do you think, Clark?

Clark: I like that. I like how you had this theme around asking questions, trust, and verify. So what are the kinds of questions, you think, I know you’re talking a little about volatility, but there’s been a lot of questions I know around the tax code changing, there’s some of that stuff can be overwhelming. So as you think about continuing to ask questions around volatility around the market, what comes to mind with other things like tax code?

Roger: Well, first of all, the most important question you should be asking your advisors is, “Why are we doing this?” Because if you’re not clear on your why, then what doesn’t matter, right? George Harrison, I think I mentioned this to you a few years back, but George Harrison once said, “If you don’t know where you’re going, any road will get you there.” And that was a song he wrote for his son many, many years back. But, you know, it’s really a good point. So, you know, why are we doing this and how does what we’re doing serve why we’re doing it, right? Got to know that why first. So that’s an important question. Questions to be looking for opportunities is what’s different about the new tax code. So it really, it’s only in the last few months we’re starting to get some clarification on all these new stuff in the tax code.

So typically, here’s how the cycle goes. The Congress passes the tax law and then treasury comes to interpret the tax law and they publish rules and regulations that comes from the Treasury Department. And then that gets integrated into the tax preparation and planning community, and then think tanks put on their thinking caps and start looking for options and opportunities.

The way this tax law was done a year ago now, towards the middle-end of December last year really didn’t leave a lot of time and then, bam, we were right in a tax season. So a lot of this stuff didn’t get done until after October of this year and a lot of the clarification is still coming out. So you really, really want to talk to your tax and financial advisors about, are there opportunities in this tax code for you? I have a few clients that are just gonna be making out like bandits because they’re business owners or they are consultants or self-employed individuals and we can take advantage of some of these new pass through tax benefits.

Real estate investing. A lot of things have changed for real estate investors. There’s tax breaks on a real estate investments trusts, for example, where the first 20% of the money coming through REIT is tax-free. That’s pretty cool. And it’s not even subject to phase out, so you can be as rich as you want to be and still collect tax-free income off our real estate investment.

We’re just learning about a new thing called opportunity zones. Opportunity zones were part of this tax code and they’ve been identified all over the country. These are regions that they’re giving tremendous tax breaks to, to encourage investment. A lot of that’s just now being clarified and defined and identified. There’s some maps that have come out just in the last really month or so. And so getting with those advisors and figuring out what kind of opportunities are there for me, there’s a great question. “What can I do to lower taxes or gain wealth?” And that’s a very strong distinction because I see a lot of folks who make decisions because they don’t want to pay taxes that cost the money. So yeah, you know, you don’t want to pay a dollar to get 50 cents back, right? So, you know, if I make a move just for the tax benefits, a lot of times it doesn’t work out that great.

But again, you want to keep that in mind as you evaluate opportunities because it’s not how much you earn, right? It’s how much you keep, and ultimately it’s not even how much you keep, it’s how much do I get to spend. So when we look towards retirement, which is probably the number one reason people save and accumulate wealth and invest, right, to give them a secure future financially. “How am I going to get to spend that money?” You know, that’s a great question. “How do I get my money back?” I’d say that anytime you’re looking to invest in anything that’s probably, if not the first, at least the second question that you should be asking, “How do I get my money back?” So yeah, there’s a lot of good questions.

Another question, first of all, I think, you know, the markets are gonna calm down and I think it’ll tend to be up next year. I think volatility will be much, much higher and it will be much harder to make money. So, it’s a great opportunity. It will be a great opportunity to revisit your strategies, your timelines. You know, if I’m 35 years old, I got a lot more time than if I’m 65 years old before I want to spend this money. Unless if I’m 35 and I have something I want to spend it on, maybe I want to start a business or buy a house or a piece of property or, you know, get married or something like that. That all takes money, so you gotta clarify your timelines.

But a great question to be asking as we get into 2019 is, “What should my investment mix be and how am I gonna protect myself from significant losses?” Now we’re already down over 10%. People call that a correction from the highs of this year, but what if this evolves into another 2008 type year? You know, “What if the markets in 2020 go down 50% so how am I going to protect myself?” That’s a question I always encourage people to ask their financial advisors. I have a planning client this afternoon that I’ll be talking about this exact question because she had her annual review with her investment advisor today, and this is the question. She’s not too many years out from starting to draw on her retirement savings and given that, she cannot suffer a loss of 20% or 30% or more in her accumulated wealth. Not only does she have to not lose money, right, and that’s kind of intuitive, right? But how is she going to take income from that portfolio to finance her lifestyle? Okay?

You can’t just make withdrawals and cross your fingers and hope you don’t run out of money. What’s the strategy? How is this going to translate into income? You know, there’s only about four or five ways really to generate income from a portfolio, and not understanding how those investments are going to transition to providing you income is gonna leave you making some very hard choices without good information and you’ll be making them in a hurry. There’s an old saying that says, “Act in haste, repent at leisure.” So I do encourage people to talk with their advisers or themselves if they’re self-advising and ask, “What am I gonna do when the next big selloff comes? How am I going to protect myself?”

I know I’ve been talking about this for about a year, and as we’ve seen with this year, you know, a lot of people say, “Oh, come on, Roger, you know, it’s just going to keep going up.” Well, it didn’t this year. And people who thought certain things were protecting them like they stuck a bunch of money in bond funds. And given what’s happened in the dramatic increases in interest rates, particularly earlier this year, and over the summer into the fall in 2018, saw bond funds losing a pretty hefty amount of money, in some cases as much as 10 or 12%. Now that’s not what you want from your safe harbor, right?

Clark: Right. Yeah. That took the last line of defense, right?

Roger: Well, that’s the thought process for many people with bonds. You know, a lot of economists and analysts believe that if there is another 2008 style meltdown, it’s going to be as a result of the bond market. One of the things that it has occurred in the last 10 years, you know, since the bottom is we’ve had very, very accommodative money policy out of the Federal Reserve and a lot of companies, big companies, well known, respected companies, borrowed an awful lot of money in the last five, six years. They did it for a whole lot of reasons, but the single biggest reason is they could and that money was cheap.

So for example, right now AT&T, you know who they are, right? They own the phone company and one of the oldest, biggest, most reliable industrial companies that we have. But AT& T owes $181 billion. Yeah, $181 billion. They owe more than any other company in the country, any other publicly traded company. They got the most debt on their books. And the debt service on that is about equal to their profits from last year. So that doesn’t leave a whole lot of money to do other things because you’ve got to pay your debts, right? So if they see a drop in revenue, it’s gonna become very hard for them to make those bond payments. And remember, they also pay out a six and a half percent dividend.

So I would keep an eye on AT&T to see if they’re gonna cut that dividend or, God forbid, default on a bond payment just because of cash flow issues potentially sometime in the next two, three, four years. And you know, people will not be happy if AT&T gets into financial trouble. The point is, it’s a really good time to ask questions. Use that theme of yours. Asking questions in 2019, I think, would be a very good thing, so that you have clarity before things maybe get a little hanky. You know, we are overdue for a recession and it really is that simple.

Clark: Yeah. You’re saying earlier you’re talking about 2008 maybe that potentially returning. What you’re saying is you think it’s the real time that something like that might happen.

Roger: Well, you know, I’m not going to get into all the boring economics of why it’s likely to happen in the next two or three years. But even just if you think back over the last 50, 60 years, you can even go back farther than that. We usually get a pretty healthy correction every 8 to 10 years at the outside. Sometimes, more frequently. And we haven’t really done that in the last 10 years. Yeah, we’ve had some, you know, some pullbacks, but they’ve been very short. And again, without getting too deep in the weeds, there are accesses that are not being dealt with. And if they don’t get dealt with, they ultimately will get dealt with one way or the other, and that’s usually what triggers a recession, is inefficiencies or inconsistencies in the economy and just trying to ignore him or postpone having to deal with them. Deficits, tax revenues, politics, all kinds of things can fall into that category.

And if you try to ignore them because you know, “What the heck it ain’t broke, don’t fix it, you know, don’t fix it and all that stuff,” eventually, it’s gonna break and it’s going to demand attention. So if people aren’t proactive and we tend to be procrastinators as a people, ultimately the markets will demand that kind of attention to fix those issues.

Clark: Well, I know some of this might seem to be overwhelming and it’s easy to get your thoughts and your plans a little bit tangled up. However, I think this is a good place as we’re starting to wrap up to definitely mention the thought organizer and why that’s an important tool for your listeners, Roger, to consider filling out. And it’s a free tool designed to help someone get their thoughts organized in this context.

Roger: Amen to that. Yes, in fact, if you’re gonna ask questions, probably the first step is organizing your thoughts so that you know what the right questions are. If you’re gonna go in and see the doc and you’re contemplating shoulder surgery, you’re not gonna talk to them about your little finger, right? You’re gonna ask pertinent questions about, “What do you want to do to my shoulder, doc, to take advantage of the time?” So the thought organizer is really there. They are qualitative and subjective questions. So there’s no right or wrong answer, but it is designed if there are thoughts that you have that are inconsistent, then it will help you start on that path to clarity, which will help you ask better questions. Great example, one of the big end consistencies I see are people who describe themselves as very, very conservative, and yet their expectation is to make 10% or 15% on their investments.

Besides the fact that I don’t think there’s ever been a time where somebody made 10% to 15% regularly on their investments. Hey, there’s years, 2017, I did more than that, right? But we’re talking about consistently. So getting those expectations in alignment with your values, that’s what this tool’s designed to help you do to clarify. And if you’re married or you have a partner or in your financial life, it’s great to have you both fill one of these out separately and then sit down and have a great discussion by comparing your answers so that you can respect each other’s priorities, and you can also identify what you guys want to work on together. And it tends to create better harmony. And, you know, one of the great things that kills marriages is couples that don’t talk about money, about their money, and ask each other questions. You know, gee, we just, you know, maybe it’ll go away if we don’t say anything.

But use this year to ask those questions and really to lay in your foundations so that if you’ve done that properly when things get a little crazy, and they will get crazy probably in 2020 or 2021, but one never knows, you want to be prepared. You want to have that all weather foundation underneath your financial life so that if stuff happens, interest rates go crazy, markets tank, taxes go up, interest rates go wild, you can just make adjustments. And this is gonna be a great year to make that preparation because upheaval equals opportunity. That’s the other thing. I mean, think about it. Wouldn’t it have been great to buy stocks at the end of 2008, looking back?

Clark: Definitely, without a doubt.

Roger: Yeah. Probably one of the best buying opportunities we’ve had a long, long time. But you know, a lot of people were busy trying to survive then because this whole thing caught them by surprise or offguard or, gee, you know, it seemed really strange, but I just figured it was different this time. So the great thing about this particular time in the cycle is, we’re getting a little bit of a warning. It’s not like it’s going to sneak up on us. We have these issues. We have an access of corporate debt. We have some strange things going on in international trade. You know this, the markets have been getting more and more volatile. So it’s your choice. You can ignore it or you can start asking questions and taking advantage. Because I’ll tell you what, those that are prepared, they will prosper out of this. They always do.

Clark: That’s a great place, I think, to wrap right there, Roger. Thank you so much as always for taking the time, sharing your insights, and I’m excited for our future conversations in throughout 2019.

Roger: All right, Clark. Well, I would definitely get excited about 2019 and I hope all of our listeners have a fantastic year for them.

Clark: Roger L. Gainer, RICP CHFC, California Insurance License Number 0754849, is licensed to sell insurance and annuity products in California, Illinois, Arizona, Nevada, and Oregon. Roger L. Gainer is an investment advisor representative, providing advisory services through HFIS Inc., a registered investment advisor. Gainer Financial and Insurance Services Inc. is not owned by or affiliated with HFIS Inc., and operates independently.