Get a high-level overview of what’s happening in the markets, and how market volatility affects your portfolio and your 401K and retirement.

Well hello and welcome to another episode of the 1715 Treasure Coast Financial Wellness Podcast. My name is Thomas Davies and don't forget to like and subscribe. And this week we are going to talk about more about market volatility as we sure saw a ton of it this week and also we are going to talk about 401k and your retirement and what all this means to you. So welcome, I appreciate that you are here and let's just dive right in.

So Jay Powell and the Fed come out, they raised interest rates by 75 basis points. I'm not here to give you the news, you probably already knew that, but what does that mean to you? Well basically he came out and said that we're going to raise unemployment so people are going to lose their jobs, your home values are going to go down because now interest rates on mortgages have gone up. So we've seen them go to as high as 6 and I've heard even 7 and sometimes 8% if your credit is not so good.

So that is the bad news. The good news is in the silver lining of things, that with the raise of interest rates, you know the 2 year treasury, the 5 year, 10 year and 30 year treasury, now you can have a place to put some of your cash if you're not willing to go into the market. The 2 year treasury is over 4%. So that means you can get 4% on your money if you really just don't want to do anything and sit in cash.

You're not beating inflation and I've talked about that in one of the very first episodes is that in order to invest you have to beat inflation with inflation at 8% and if you're making 4% that's right, you're losing 4% on your money. So that's not a great way to protect your investments but certainly it can weather the storm that we're in, that's for sure. So what do you do about market volatility? What can you do to protect yourself?

The first thing you have to do is start to plan. You know the old saying, if you fail to plan, you plan to fail. So you want to make sure that you start writing this stuff down. What are you going to do?

You're going to make a budget. I just told you that unemployment is going higher and your house value is going down which means they're going to, they being the Fed, are intended on slowing the economy down so that may or may not mean to you that you're going to make less money or maybe you work for someone and that company is going to make less money. So how do you prepare? And that is starting with a plan.

That is putting a budget together. That is making sure that you are not overspending and that you either have a surplus or a deficit and if you're in a deficit, you need to go about cutting the ways that you spend. It could be as simple as cutting the cord, maybe taking that fancy car you drive and getting a used car but it's having a plan for things when they're going to slow down. For some of you, it may just mean cutting back on going out to eat or some of those other things that are luxury instead of maybe going once a week, maybe it's once a month.

You know, it's all going into that budget plan that you're going to write down. Now as far as inside your portfolio, things that you can do, well, basically when we look at our client portfolios, we're looking in the long term so we're looking three to five, ten years out. So with a market that seems to be towards the bottom of the range right now or the range that has been in all year, we're looking at opportunities to maybe buy some equities in the portfolios that we've been looking at that have certainly gotten a lot cheaper. We may not necessarily catch the bottom in those markets and those equities but there are companies that certainly we like to think for the long term and going into what looks like it might be a recession going into 23.

They keep talking about, they being the talking heads, they keep talking about a soft landing but the bond market seems to be telling us otherwise with interest rates and the interest rates raise. So inside your portfolio, you really want to look and see where you're invested, how you're invested. You know, maybe some of those things that you invested in have gone down a lot more than you anticipated and I guess the question is, do you think that they're going to rebound once the economy starts to turn around, which is more likely 2024, 2025. Some of the questions I got this week from some people is, when is it going to end?

When's the selling going to stop? Basically Jay Powell came out and said it's not, it's not going to do it until they get that 2% inflation. So we're going to keep, you know, raising interest rates, we're going to make it more expensive to do business. The cost of lending, there was an article today in the journal talking about credit markets starting to tighten.

You know, that is not a good sign. It's never a good sign when lending slows. So going back to your portfolio, you want to look at some of those equities, talk with your advisor, find and do the research on those companies and see where they're leveraged. How much leverage?

What does their cash balance sheets look like? Do they have good cash balance sheets? If they don't, you know, those costs of doing business is going up and it's going up every quarter as they raise interest rates. Borrowing is just that.

It's going into businesses and, you know, the businesses that borrow at, you know, which was basically free money, cannot borrow, you know, that free money. It's now, now there's a cost to that. So I think some of these businesses that were, you know, started maybe in the last 10, 15 years, you know, on free money are going to have an eye-opening event as their margins start to shrink because of the interest rate raise and the cost of doing business. So those are things you want to look at when you're looking at equities inside your portfolio and choosing those companies to, to choose, that you choose to put in the portfolio.

So with that, you know, you think about what are some of the things that, you know, during a recession and when times slow, what companies do well? Well, you know, usually consumer staples do fairly well. People have to eat, they have to drive, you know, these are things that, you know, people have to do. So those typical areas are things that generally do well when things start to slow down.

You know, when we look at municipal bonds, we look at the general obligation bonds or go bonds, you know, because people need water, they need schooling, you know, and things, they need roads, you know, good roads to drive on. So those are some of the things that we look, when we look at municipal bonds, you know, we look to go bonds and, you know, those bond prices have certainly decreased and as interest rates continue to rise, they're going to get more attractive here. So those are a couple things that you might be able to do in your portfolio is, you know, look at the cash balance sheets on equities. Maybe look at some go bonds in your portfolio.

You know, talk them over with your advisor or call myself and we can talk about some of those things to, you know, add into your portfolio. You know, it's always a tough decision when something you purchased is down and, you know, in the fishing world, we say you got to cut bait, but sometimes you have to do that. And that's where, you know, knowing what it is that you own inside your portfolio and doing that deep dive to say, well, you know, is this company going to be able to survive this slowdown and how are they going to perform, you know, under their current management and how have they performed in the past when markets, when the economy has slowed down? You know, some of the other questions I got this week, you know, is this 2008, this is going to be worse than 2008?

In my opinion, I don't think so. 2008 was a much different animal that was being tackled. You know, we had the banks that were leveraged, some of them 40 to 1. You know, it's a much, much different world that we live in today.

The banks are, you know, for the most part, fully funded. And if you haven't seen the movie Too Big to Fail, I'm not going to go back to the museum here about 2008, but you know, it's on HBO, check it out. It's called Too Big to Fail. It's a good history lesson of what happened, where we were, what was going on.

And you'll see that it's very different from where we are today and a little bit of irony back in 2008, we had too much housing. There were too many houses, hence the mortgage crisis. And today, it's just the opposite. We seem that we're, you know, we don't have enough homes.

So in that short amount of time, we went from having way too many houses to now we don't have enough individual housing. But you know, the Fed came out this week and said, you know, your home prices are going to go down. In not so many words, but he basically said that the housing needs to correct a little bit. So you know, that's most people's biggest investment is their home.

Hopefully people like 2008 did not use their home like an ATM. I have to imagine that banks lending criteria were certainly a little more stringent. I know that in a lot of my clients' cases that they took some home equity lines of credit. And it certainly wasn't like 2008.

But the free money, it's still out there for the most part. We're still seeing a lot of the auto manufacturers finance at 0% financing. A lot of the credit card companies still have that 0%. That's going to change.

And as the credit markets tighten, those things are going to go away. And that free money is going to go away. So you know, some things that you can do regarding market volatility and interest rate raises. Hopefully you find that helpful.

So I'm going to move along here and we're going to talk a little bit about 401Ks and retirement. Certainly you know, the old adage, you want to buy low and sell high. Well, as the market has decreased and if you currently have a 401K, you're dollar cost averaging. That's the silver lining.

You're buying more shares at a lower price. And that's a great thing because you know, it's in your retirement account. And you know, if you have to retire in the next 5, 10, 15 years, then that's a good thing. But if you are currently at retirement, you know, this is going to be tough.

Hopefully your financial advisor that handles that 401K, you know who that is. I'm getting a little snarky that most 401K participants do not know the financial advisor that handles their 401K plan. My suggestion is reach out to them. And if you don't know who it is, go to your human resources department and find out.

They work for you. You are a participant in that plan. You know, and so if you are retiring this year and you've been managing things on your own, hopefully your plan has become more conservative as you are getting closer to retirement. That is what you do in a retirement plan.

As you get closer to that date where your income is going to stop, you want your portfolio to be more conservative. Now if you've gone into bonds this year, your bond portfolio is down 10 to maybe 15%, which does not feel good. It is not great. And the bonds certainly are not going to rebound like the equities.

So if you can delay retiring for the next year or two, or maybe three, and you find yourself in a conservative portfolio, and you think the timing is right, you may be able to take out of that conservative portfolio and be a little more aggressive in it. Certainly contact, once again, your financial advisor, or you can call me and we can discuss your options and look at the portfolio. It never ceases to amaze me how clients in their 401k portfolios, it's sitting in cash. The money is just sitting there in cash.

And for some people, that's great. They'll miss the whole downturn. And they're able to invest towards the bottom of the market. But for most people, it's allocated in some type of S&P index.

I will talk about some of the things that I've seen in some of the 401k portfolios, which is the target date funds. And I'm going to reference 2008 again. Those target date funds did not work. And once again, as you get closer to that date, the portfolio should be more conservative.

And some of those target date portfolio funds just did not do that. They did not become, those managers did not make those portfolios become more conservative. So I'm very hesitant on those. I don't like them, especially if you have someone managing, you know, maybe another portfolio for you.

You know, once again, get with your advisor, discuss it, give me a call. We can talk about it. If you are in a target date fund, please talk with your advisor or an advisor, period. They're not, I'm just not a big fan.

I think that you could do a lot better inside your 401k than, you know, a fund that, you know, ends in 2030, 2040, 2050, whatever it may be. You know, in your 401k, you always want to do the match. So let's say your company is matching you at 3%, 4%, maybe even upwards of 6%. You want to make sure you are at least going all the way to that full match.

That is free money from your employer. They are matching what you are putting in. Anything above that free match, you want to look at it from a tax liability standpoint and see that maybe contributing into a Roth IRA or an individual IRA may make more tax sense for you rather than putting that money into a 401k plan. The great thing about a 401k plan is that money inside grows tax deferred and you will not pay any taxes on that money until you take it out.

So that is one of the great things about a 401k plan. Any gains that are made inside of that while you are buying and selling all stays in there tax deferred. And you don't pay on any of those gains until you take that money out and it is taxed at your regular income tax rate. Now if you are under 59.5% and you want to take money out, you will pay a 10% penalty.

I am sorry to say, but that is the rule. Under 59.5% you will pay a 10% penalty plus that income tax rate that you are at. So that could be 10% plus 15% plus 20% could be a third of the money you take out is going to be lost to tax. So that is something really to think about when you are looking to take money out of your IRA or your 401k plan.

Now some 401k plans do offer loans and paybacks. I generally don't recommend them. It's a last resort, but if that is the only monies that you have saved and the only place you can go, maybe you can take a loan outside of your 401k. As far as investments inside your 401k, I always like to kind of draw a picture of depending on the plan that you have and the investment choices you have is dependent upon the advisor that chose those investments inside that plan.

So it's kind of like a sandbox and the toys that are inside that sandbox have been chosen for you. You don't have a choice. Now some 401k's do have an option for third party advisors to manage those plans. That's great for myself because I can help clients with those 401k plans and help them choose their investments outside of that sandbox.

Now some clients I will help them with their 401k plan and help them manage the investment choices that are inside of it. And I do this generally as an ancillary product of managing other investments for my clients. It's not something I do just to do it. Generally we manage other assets for our clients.

They have other portfolios but we certainly want to make sure that all their financial needs including their 401k plans are taken care of. So with that hopefully that helps a little bit inside your 401k. If you're a younger person and you've got 20-30 years, you generally want to be aggressive inside those plans. Your time horizon is 20-30 years before retirement so you want to take the maximum risk generally you can inside those portfolios.

Once again discuss that with your financial advisor. That is not financial advice, it is just merely my observation of what you want to do when you have a long term goal of 20-30 years. So hopefully that gives you a little insight into 401k plans. There is a lot of different type of retirement plans that are out there.

If you're a small business owner, a 401k may not be best for you. There are certainly other plans that are out there. Costs have come down considerably in 401k plans. The advent of going online and managing those plans, there are some great companies out there.

Some that we use that really have taken a cost of a 401k plan that was $2, $3, $4, $5,000 a year down to $500 to $1,000 a year on those plans. So look into it, it may be right for your business, it may not be right for your business, but certainly reach out and give us a call and we can make sure that you have the appropriate retirement plan either inside your business, as an individual, and we look at all the aspects, especially from a tax standpoint and try to be tax advantageous with you and your plans and how you invest. So that's pretty much most of it for this week. Next week brings a new week and we head into October.

Wow, we're almost through September, we've got to get through October, notoriously some of the most volatile times in the markets. I said all summer we're going to see something happen here as we go into September, October, when people come back from vacation and school starts and certainly the market is not disappointed. We'll look for the Fed, what they're going to do, and once again I'm not here to deliver you the news, that's the Wall Street Journal, that's what they do. But if you have questions on your investment portfolios, please give me a call, we can take a look at them, see what you're doing, we can analyze them for you and I can give you an opinion, is it right, wrong, maybe you're doing everything right and it's just the market, it's just going down right now and it's just part of it, it's part of investing.

Markets do go down and they go up and timing and time is certainly the most important aspects in the market. People always ask me when's the right time to invest, well the right time to invest is depending upon your time horizon and there's kind of the old saying, it's not timing the market, it's time in the market. And so if you have a short term window, I mentioned two year treasuries, they're over four percent, maybe you can look at I-bonds, I-bonds are going to be probably over twelve percent when they turn over here, they're at nine percent now on a yearly basis. You can purchase up to ten thousand dollars, go to UStreasury.gov and you can purchase them right there.

You can purchase all your treasury bonds right there. So once again, hopefully you enjoyed this week's podcast, don't forget to like and subscribe and let me know, send me some comments, I'm curious to see how I'm doing, maybe some things I can improve upon and I appreciate your feedback. So thanks again and have a great week.