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Roger: You\’re going to have to be nimble. A lot of the stuff that used to work probably can\’t work, and I believe very strongly that this coming decade you better know what your purpose is so you can make clear, concise, and full decisions.
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. As we move into a new decade, it\’s important to keep a clear purpose in mind so you have a strong foundation for your financial decisions. So on today\’s episode, we look at some of the trends of the past decade, and discuss some strategies for navigating the 2020s with success and stability. For more content like this head on over to gainerfinancial.com. Enjoy the show. Roger, happy new year. How are you doing?
Roger: I\’m doing great. Happy new year to you, Clark. How was your holiday?
Clark: My holiday was great and I\’m really excited about the upcoming year. I know we\’ve been thinking in the past about maybe doing an episode about the next year, but really you\’re going to aim even bigger. We\’re going to be talking about what the next decade holds. So as we\’re thinking about what the next decade holds, I\’d love to kind of rewind it back to the previous decade, what stood out to you, and what do you think is going to influence this year?
Roger: Well, the last decade has been event packed, shall we say. We saw a big tax cut. We saw a recovery the likes of which we\’ve never seen. We\’ve had 10 years of up markets, actually 10-1/2 coming out of the recession. That\’s never happened before. We saw a significant tax cut as I mentioned before. We\’ve seen an explosion in debt. We\’ve had historically low interest rates, and those interest rates arguably have helped support asset values like real estate, or stocks and bonds, or even artwork, and more speculative asset classes. For example, students who have gone off to college now student debt in the last decade grew 150%. We went from a little over $800 billion in outstanding student debt to about $1.5 trillion in student debt, and that breaks down to over $34,000 on average for each borrower.
Clark: And that\’s borrowers just in the student debt space?
Roger: Student debt space. There\’s a lot of people, only a third of borrowers, I was studying this last month because I really think that this is going to have some significant economic impacts as we look forward. Only about a little over a third of all of that student debt is actually being paid down. The rest of it, about a third is actually the balances are going up because they\’re in forbearance, or people are just being delinquent, and others are standing still. About another third they\’re not reducing the balances because the payments they\’re making are based on their income and it\’s just a subsistence payment. It remains to be seen exactly what\’s going to happen, but if people are paying off this debt, and this is debt that cannot be discharged, you can\’t go bankrupt and get rid of your student loans like you can your mortgage, or a car loan, or credit card debt. This is stuff you have to pay eventually. So people are servicing this debt instead of buying stuff. And you may have heard that 70% of our economic activity in this country is based on consumers buying stuff, right?
Clark: Right.
Roger: Okay. We\’ve seen a tremendous rise in international tensions. We\’ve killed some terrorist leaders. Terrorist activity is growing, especially, in Europe and other parts of the world. That\’s instability. We\’ll see where it goes. There\’s been a tremendous effort on our part, and some of our partners to try to control this. We\’ve seen an unprecedented amount of human movement, refugees. Refugees are happening in the Middle East. They\’re happening here from Central America coming up to our Southern border. It\’s happening in Europe. It\’s happening in Africa. There are literally millions and millions of displaced people, and those displaced populations are going to have to be dealt with, and that kind of lack of roots can be breeding grounds for goodness knows what as I look back that were really impactful large things that we\’re going to watch the ramifications of these events work themselves out in the coming 10 years.
Clark: There\’s a lot of macro trends I\’m hearing you describe. These all have a different impact on someone\’s retirement and how someone\’s planning for the future. Something else I\’m curious to hear you share more about, I\’ve heard you in the past talk a little about how the aging country, how that is different than it ever has been, and so could you talk about that macro trend and what that means for the future?
Roger: Well, just last month, December of last year, for the very first time in our nation\’s history we have more people over the age of 65 than under the age of five.
Clark: Wow.
Roger: That is a very, very strong graphical explanation of the aging of our population. Generally throughout history, when populations get older and more mature, shall we say, economic activity has a tendency to slow down. When the majority of the population is young and aggressive, creative and going out and doing and creating and building economies expand. And then when we have an aging population instead of adding into the economy, now we\’re going to draw from the economy. We\’re going to take pensions. We\’re going to try to cash in stock portfolios. We\’re going to downsize our real estate the Baby Boomers. And we\’re going to draw government benefits through Medicare and Social Security.
Roger: Now the outflow is instead of the inflow for the last several decades. We\’ve put money into stocks. We\’ve built our households. We\’ve expanded and grown businesses. We\’ve innovated in technologies, and created new industries and all that kind of stuff, but if history is a guide, and again as we\’ve always said past performance is no guarantee of future results. We\’ve seen empire after empire, civilization after civilization start to wither as it ages. We can see some of that in Europe where we have an aging population and in Japan, and their economic growth has slowed down dramatically from what it was even in the \’80s and \’90s growth was much more substantial in Japan and in Europe.
Clark: So slowing growth the economy. I know we talk a lot about Social Security and what that may or may not look like in the future. How does that fit into this?
Roger: Well, there are several competing bits of legislation to rescue Social Security. There\’s one piece of very encouraging legislation called Social Security 2100 and there is bipartisan support, which is very unusual these days, but both Republican and Democratic representatives have signed on to this bill. Basically, what it will do is the age for full retirement it will increase benefits, and it will add a new tier of taxes on very high earning folks. So as you may be aware today, there\’s a threshold in which you pay Social Security tax. It\’s about $136,000 a year. So on everything you earn up to that, you pay the social security or FICA tax, and then we don\’t pay above that. You only pay the Medicare tax.
Roger: So there\’s talk about having that tax come back in for people whose incomes are over half a million dollars a year, or $1 million a year, and add another tax plus delaying retirement will save money. And if they just pass those little tweaks, it should allow Social Security to stay fully solvent until the year 2100. As you rightly point out, Clark, aging population means you\’re paying out to these folks a lot more for a lot longer, and that definitely needs to be addressed for it to stay economically viable.
Clark: As we\’re talking about some of these macro trends that will impact the economy I\’m curious, also, I\’ve heard you in the past talk about economics and behavioral economics, and I would love to hear your definition of that and why that matters now and this upcoming decade more than ever?
Roger: Well, we\’ve had an unprecedented 30 year run, actually, 40 year run in the stock market since the early \’80s for the most part. Yeah, we\’ve had a few drop-offs, but if you go look at a chart, it looks like you\’re going up the side of a cliff almost, or at least a very steep mountain if you go back to 1982. We\’ve just kind of gotten used to the market always comes right back. The stock market makes 10% a year. We\’ve talked in previous podcasts about the fallacy of some of these things, and some of the best predictors, and there\’s not a lot of good ones I got to admit.
Roger: For example, the Cape-Schiller Index, has been a very good predictor of coming decade\’s performance in the stock market. And that indicator is predicting that the average return in the next decade will be somewhere under 6%. That doesn\’t mean that every year it will be under 6%. It doesn\’t mean that every year it will be up. It just means that the kinds of returns we\’ve come to expect from the stock market are going to be much more difficult to produce going forward. In this format we don\’t have a lot of room to get into depth, but anybody that is listening if you\’re interested give us a call and we\’re happy to sit down, and talk a little bit more in depth about this, but what I want people to understand is this.
Roger: Behavioral economics is we believe that whatever\’s been happening will continue to happen. It\’s just our human nature. So if you can remember back to 2008 when the market was crashing there were all these articles, oh, the Dow Jones is going to 1,000. Oh, the Nasdaq will never ever recover. It\’s doom and gloom and it\’s always going to be doom and gloom from now and forever. Of course, that wasn\’t true. Now I\’m seeing the articles that the Dow Jones is going to 40,000. We\’re only at 29,000. Oh, the S&P is going to go up forever and now it\’s different. And look at all these things that are going to come to play, and the stock market with all this cheap money that people are able to borrow it\’s just going to keep going up and up and up.
Roger: So we believe whatever\’s right in front of us is going to continue forever. We just know that that\’s not true. Life works in cycles and it always has. I\’m pretty sure it always will because humans we tend to because of this behavioral economics effect, we tend to work in crowds, right? We tend to believe what everybody else is believing. And then because of that over optimistic we tend to overshoot what\’s practical. We create a bubble, things get bad. We over anticipate the negative reaction because it\’s always harder to accept that and the fear factor.
Roger: And so that\’s why we create these cycles is people get into this crowd mentality. And that\’s what pushes markets anyways. I mean, I think I\’ve told you before, Clark, that markets are essentially all Ponzi schemes, right? You need more buyers to push prices up and you need more sellers to push prices down. If you run out of buyers then prices stop going up. It\’s really that simple and then prices have to adjust downward to find people that are willing to buy.
Clark: What an interesting way to think about it. The big message I\’m hearing from you is how much behavior plays a role in this, and how if you fall in that crowd mentality there can be fear, there can be unknown, and it can go into a state of panic. I can\’t imagine what it must have seemed like with the crashes happening, and all of those doom and gloom messaging was everywhere around you. Earlier you mentioned an invitation to connect with you and this is a great way, a great moment, I think, to mention the Thought Organizer. What is a Thought Organizer and how can someone fill that out for free?
Roger: Well, the Thought Organizer is designed to help you figure out what you\’re trying to accomplish. It makes decision-making much easier if you know how you feel about stuff, and what\’s keeping you up at night. I had a meeting last week with a husband and wife who said they\’re having sleepless nights. That\’s not something people aspire to. So if you\’re having sleepless nights we want to find out why and what is it about your economic situation that\’s creating that because really accumulating capital and building portfolios and income streams should help you to sleep better at night, not keep you awake. So the Thought Organizer is really designed to help you prioritize, get in touch with what\’s important about money, about your lifestyle, about what you aspire to in the future. And once you have that context it\’s easier to make decisions.
Roger: I believe very strongly that this coming decade, you better know what your purpose is so you can make clear, concise and full committed decisions. You\’re going to have to be nimble. I think the strategies, things like asset allocation are going to have to be modified going forward. A lot of the stuff that used to work probably can\’t, or, for example, switching to bonds because interest rates are so low right now probably won\’t be the same kind of safety net it used to be. That\’s just one example. Certain real estate asset classes look like they\’re very highly valued, very richly valued, and I don\’t know how much higher prices can go because people have to be able to afford to buy, right?
Roger: So that kind of nimble management monitoring cash flows. We\’ve been implementing strategies with clients for the last several years that are very nimble. They\’re multi-asset and we\’re not trying to just have a static asset allocation where we have 30% in bonds, 40% in large cap stocks, 20% small cap stocks, and 10% in commodities, or something like that, and then we rebalance every year. Now this is more about figuring out where money flows are going because money flows much faster than it ever has in history, and positioning yourself there to let the money come to you and being able to monitor valuations, and really to be able to reallocate accordingly a frequent basis than we have in the past. I really think that this is going to be important going forward.
Clark: I love that message. Knowing what you want as you go into this next year, as you go into this next decade, because what I\’m hearing from you is if you can find that anchor that\’s built in your values, built in your beliefs that will be how you don\’t get blown away in the wind when the opportunity to change all of a sudden based on emotion or behavior, or seeing what other people are doing so finding that anchor seems to be what I\’m hearing from you.
Roger: Well, anchor kind of as a symbol weighs you down, right? That foundation, that foundational base that you building everything on top of that\’s what I know. That\’s kind of how I think about it.
Clark: You\’re not going to get blown away in the wind.
Roger: No. If I\’ve got a good foundation it\’s like the nursery story about the three little pigs.
Clark: I was thinking of this, yes. Build your house with bricks.
Roger: Build your house with bricks, exactly. Once you build your house with bricks then you\’ve got that stable, that shelter, that foundation to work from, and you can build and then you can take some risks. You can expose yourself to grander ideas because if it doesn\’t work out you\’re not wiped out. We have a tendency to want it now, to want it quickly. That\’s part of our consumer mentality. Oh, look at how nice that car looks. I can just walk in and borrow money to buy it, right? Because I can afford the payment even though it may upset our entire budget, and cost me opportunities for other things because I don\’t have that anchor, what you call an anchor. I don\’t have that foundational place that I\’m coming from to make a good decision. I\’m just emotionally jumping from one thing to another and that notion might resonate with some of our listeners.
Clark: Good stuff. Roger. I enjoyed it as always. Thanks for taking the time to share your thoughts, and your perspective. I\’m looking forward to not only the next year, but the next decade.
Roger: There you go. All right. You take care, Clark.
Clark: Roger L. Gainer, RICP, ChFC, California Insurance License number 0754849 is licensed to sell insurance and annuity products in California, Illinois, Arizona, and Nevada. 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.
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