#128 Why “Buy and Hold” Doesn’t Always Work?

Micah Shilanski 00:00
Welcome back to the Plan Your Federal Retirement podcast. I’m your host, Micah Shilanski, and we got a little fun episode we’re gonna talk about today. We have finished up our planning season for the year. We always like to do that when we just kind of first start off the year, going through a lot of planning with a lot of our clients, and as we walk through that with so many of them, and yet, we had so much of the year left to do, there’s a lot of themes that kind of came up, and we want to debrief some of those and get through some misconceptions, and one of the big misconceptions, a little clickbaity title, is why buy and hold does not work. Now, there’s some good strategies inside of buy and hold, but you got to do it the right way, and we don’t really talk too much about investments, but given everything that’s going on, some volatility we’re seeing, I thought it’d be a really good thing to talk about, so I made sure we invited another advisor in our office, Christian Sakamoto, on the call, so we could go through this together. Christian, thanks for joining us, bud.

Christian Sakamoto 00:51
Hey, Micah, yeah, I’m excited. It’s been a lot of fun going through helping hundreds of families and and households plan and so now we get to reflect a little bit lot of common themes as you said, this year has been pretty interesting so far, so I’m excited to jump into it today.

Micah Shilanski 01:08
Yeah, so I want to talk a lot about today is the two sides that are part of investing. Now, why are we talking about investing on the federal retirement podcast? Because your TSP, your investments, is supposed to be at least a third, if not more, of your retirement planning. Remember, you got that three legged stool, right? We have a great pension. I got Social Security, and yes, I still think Social Security is going to be there for most of us, that could be a future episode we could talk about, but Social Security is going to be there, and then you have your investments, your TSP, your IRAs, your Roth, etc. Now, Christian, as we go through this, right? And I know you know the answer to this out of that three legged stool, which two things do not keep up with inflation, almost by definition, they will not keep up by with inflation.

Christian Sakamoto 01:53
It really would be the pension and Social Security, right? Because the COLAs are not always adjusted at the same level that every single year that they they’ve released those numbers, right? Got the diet cola that’s coming in?

Micah Shilanski 02:06
Yeah, so for our FERS retirees, right? Law enforcement, you guys get a little something, a little different, but for our FERS retirees, you don’t even get a cost of living adjustment until you’re 62 so if you went out on MRA at 57 or you took the fork, or you went out on a Vera even before then, that means even longer before you get your increase, and it doesn’t happen the year you turn 60, that’s when you’re eligible for right? So just because you turn 62 doesn’t mean you get it then you get in the cycle of the next adjustment, and no, it’s not, you’re not caught up for those missing years. But Christian, it’s a little bit it’s a little bit more complicated than that, right? Because it’s not just that when you retire, let’s say you retire and your pension is $3,000 a month, makes my math super easy, we net that down, let’s just say, for discussion, you’re going to net that down to 2000 a month, again, making my math really, really easy, right here, that 2000 a month, it’s not that that stays level for that point in time till 62 something else happens with it, correct?

Christian Sakamoto 03:04
Yeah, and then it’s really the health insurance or any of the other deductions that are coming out, but mainly the health insurance, right? Every year, typically, the health insurance costs go up for FEHB, and so as a result, your 2000 that purchasing power that you have goes down because, well, every year your health insurance costs go up, the deductions are higher.

Micah Shilanski 03:29
Yeah, the purchasing power goes down because we had inflation, more than likely, and your net pension goes down, Christian to what you just said, right? The 2000 Okay, health insurance goes up, let’s say 10% it’s an extra 60 bucks a month, just for easy math, we’ll get 60 bucks a month down, okay, now instead of 2000 I’m minus 60, what’s that? 1940 bucks, right? And then you multiply that over several years, your pension starts decreasing. Now, does this make your pension bad? No, you have a great federal pension. We love it, we look at it with envy, but we got to know how it works. So if Social Security doesn’t keep up with inflation, if your pension doesn’t keep up with inflation, Christian, what do we got left to outpace this inflation beast.

Christian Sakamoto 04:09
The good old TSP, the Thrift Savings Plan. And super important, right? That we want to make sure that we’re looking at a long term lens with this portion of your three legged stool, and all too often it’s it’s easy to get wrapped in the emotions of the market and the economy and just world news that we might get a little bit antsy and we might make possibly some poor decisions, or think about making poor decisions, and we’ll talk about why a little bit later, maybe it’s just a lack of education or understanding on how things work, but really, that TSP is going to be that tool that you use to keep up with inflation.

Micah Shilanski 04:54
So Christian, as we’re kind of going through this, right, I know I’m going to get some YouTube love for the aspect that buy and hold doesn’t work, but you could hear me out before I get all the comments, kind of coming in, buy and hold is an awesome concept, until it hits reality, because hold until when? Right, like I get the I get the long term, I do like, I’m a market believer. Over time, the market has always gone up. Question is, how long a time are we looking at, right? But I get the concept of over time it goes up, but hold till when? When do you have permission, when does it make sense to make changes in your investments? Again, you got three stages of your life, right? We have the accumulation stage, which is, you know, we’re young, we’re funneling money into that TSP to those IRAs, we need them to grow. Those are mid careers, we’re really ramping that stuff up so that money can grow, that’s our accumulation. Second stage is preservation. I got enough now, I need to keep it right. Micah, I don’t I can’t afford to go through 2008 lose half my money, how do I preserve it? And that’s a shorter stage, because then we pretty quickly transition into distribution stage, which happens to be my favorite stage, right? Accumulation is fun, but distribution is a blast, because now we get to use all those hard earned money that you saved, but you got to have a plan to do it, and this is when buy and hold forever isn’t going to work out, we need to be intentional about what we’re doing with our money and how we’re going to have access to it.

Christian Sakamoto 06:19
Exactly, right, you can’t hold forever, especially if you need this money as part of your cash flow, needs to start, you need to start spending it. So we need to come up with a plan on when do we actually get out and sell because we can’t hold it forever, especially, you know, if we need those distributions.

Micah Shilanski 06:36
So we have the practical side, Christian, just like you’re talking about, right, which I fully agree with, and we got a bit of emotional side too, right? Sometimes we’re tired of being the tail on the fly, on the tail at the end of the dog, which is the stock market being whipped around, up and down, and we’re like, you know what? This is too much volatility for me, there’s too much uncertainty, I need a little bit more control. And so there’s things that we can do, there’s things that we’re there’s a lot of things outside of our control, but I don’t want to focus on those, I want to move this into things that we can do. And so Christian, let’s talk about this in two concepts, what do you think? We talked about it from an advisor standpoint, right? What are the things we’re looking at behind the scenes we’re working with clients, but let’s make sure we’re talking about it from the client, from our listeners perspective as well. What are things that you can do regardless of market conditions, especially when it’s volatile, to make sure we’re making the right decisions, the last decision I want you to make is the wrong one right? A lot of times that’s when it comes to an emotional decision. When our emotions get flared, maybe it’s just me, but when my emotions are high, for whatever reason, I’m not always making the best decision. So when it comes to something so important as your investments, as your retirement, how do you make dispassionate investments more focused on the long term?

Christian Sakamoto 07:48
I think that’s great, yeah. Well, let’s start with then what the advisor is thinking about, more or less the macro lens, what do you think?

Micah Shilanski 07:56
Yeah, yeah, let’s absolutely do it. So Christian, I know you know these answers, right? But it’d be a little fun, kind of, going back and forth. So I would say, kind of, you know, what is the thing that this is very macro, right? Very big picture, a lot of other things that can get into this, but what is the main thing that drives our economy?

Christian Sakamoto 08:13
It would be spending, right? Everybody earns income, and we have different needs in our life, whether they’re essentials, food, groceries, toilet paper, right? We saw that back in 2020 when even there was scarcity, and knowing when things were going to turn around, back in 2020 with COVID, and then there’s going to be those luxury items that we have, right, and things that we might not need but want, but really, what drives the economy is going to be spending, people spending their money,

Micah Shilanski 08:47
Yeah, and like most Americans, when money hits our bank account, what do we do? We spend it, right? And if we’re spending money, we’re buying things, the economy kind of chugs along, and it keeps going up. When we see that spending get affected, then we got to start picking our head up, are we in the right strategy when spending changes? So one of the things that we look at is jobs right now, by the way, not any one of these indicators is the ultimate solution, unfortunately, it’s a bit more of an art than it is a science, but these are things that we want to look at. But one of these is jobs, right? Not just the unemployment rate, I find that really good, but I want to look at payroll records as well. Payroll records are great, are more people being paid or not being paid, unemployment just kind of shows how many people are receiving unemployment. So that’s a neat factor. Also looking at payroll records, if people have jobs, they have money coming in, more than likely, we’re going to keep spending. Your retirement should be the most exciting next chapter of your life, but that doesn’t happen by accident, that happens with you taking the careful time consideration and planning to make sure you get all of your retirement and I gotta say, that’s one of the things I love about my job, is being able to sit down with federal employees, we want to look out in the future with them, find out what that ideal life is going to look like, and then how do we plan for that today? What are the tweaks we need to make in your life to make sure you’re getting the most out of your benefits, whether it’s understanding your federal pension and making sure you get paid for all the years you’re supposed to when do we turn on Social Security, 62, FRA, 70 and change? How do RMDs affect our taxes? What’s the best way to maximize our TSP so we never outlive our money, but enjoy a great lifestyle along the way? These are just but a handful of the questions that you need to make sure you’re answering as you’re preparing for your retirement, our team specializes in helping one on one, federal employees achieve their retirement goals and answering those questions and so much more. So if you’ve ever wondered what the answers those questions are, then now is the time to make your appointment to meet with one of our specialists today. The best way to do that is go to planyourfederalretirement.com/call, that’s planyourfederalretirement.com backslash call, and you can book your consultation to sit down with one of our specialists in your federal employed benefits and financial planning to make sure you’re getting the most out of your benefits. This is the time that you have to make sure you’re dotting the I’s and crossing the t’s to get all of the money that you’ve earned for your retirement. So take that action today. Sit down with someone that understands what you need, what you want, and can help you achieve those goals. Until then Happy Planning!

Christian Sakamoto 11:30
Another good one would be corporate profits. Big companies that we’re tracking, let’s say on the S&P 500, they come out with their quarterly, you know, statements every every quarter that you can review, but even down to the smaller companies as well, just understanding as a whole with the economy, like, what are businesses making money right now?

Micah Shilanski 11:50
You know, Christian, that’s a solid point, right? I think corporate profits is a fun leading indicator as to what’s potentially going to happen, right? Unemployment, payroll workers are a lagging indicator, they told us what, what’s already happened. Why we like corporate profits is every business has two big expenses, right? Most businesses, real estate and employees. Real Estate, you’re locked up with owning a building, leases, contracts, agreement, etc, a little harder to get out of. Employees, unfortunately, are a little bit easier to terminate. And so one of the things that happens is, when corporate profits drop, when companies aren’t making money, what do they start to do? They start doing layoffs. When they start doing layoffs, people jobs go down, payroll goes down, people have less money, when they have less money, they what they spend less, and when you spend less, that’s probably not driving the economy as much.

Christian Sakamoto 12:41
Right, right? It’s kind of the circle or a chain reaction there.

Micah Shilanski 12:46
Yeah, so again, as we’re looking at these in the background as advisors, you see all things we want to take in context of what’s happening right now and then, that kind of helps us in that decision about saying, all right, you know, are we kind of bullish, are we kind of bearish and short term, man, everybody’s virtually wrong on that, so it’s more of a longer term question, what longer term trends do we see going and again, another thing, I like to geek out on this stuff, so guys, forgive me, but I always like to look at M1, M2, and M3, money supplies, where’s the money flowing at? Is money flowing internationally, is it flowing domestically? Are countries putting money in the United States is the US putting money in other countries, this all helps us get a better idea of what’s happening. Is the Americans consumer taking money out of their accounts and spending it, are they saying, oh, crap, I think I’m a little worried about the future, they’re going to put more money in their accounts and build up savings. These all are help little hints as to what’s happening with spending, which we can then kind of formulate a strategy of an investment plan around that.

Christian Sakamoto 13:41
Exactly, and you just have to take the data and understand it, but then use experience of wisdom, especially if you’re working with an advisor, and one of the things that we’re doing is reviewing those data points, looking at what you know history has shown, and then making those little tweaks on the on the back end as well. We don’t know what’s going to happen, especially on the short term. We can kind of guess where it might go in the long term, but at the end of the day, no one really knows what’s going to happen, but we can try to make some tweaks to the portfolio and to how a client might be invested between their buckets to make that work.

Micah Shilanski 14:21
Yeah, and Christian, I know you say we don’t know, right? But we can make our best educated guess, because you’re 100% correct, right? But we can take the history, we can take these other things, and we could say, hey, let’s stack the deck in your favor. Let’s put all of these things together while we may not know the future outcome, let’s give you the best potential, now again, these are things that we geek out, I geek out on in the background right of advisors and look into stuff. But let’s pivot this just a little bit to our listeners as well. What are things that if you don’t geek out about this stuff as much as we do, what are things that you can be looking at when we’re building an investment plan and Christian I think the first one really comes down to the heartbeat of retirement, doesn’t it?

Christian Sakamoto 15:01
Cash flow, yeah, exactly, exactly. So if you don’t mind, I’ll take this one over. Cash flow is so important, not only as you’re preparing your retirement, understanding what income is now, tracking how much your take home pay is and how you’re spending and how you’re spending it today, but then trying to plan what it will be in retirement, and simply put, if you’re spending, let’s say, $8,000 a month, now, probably a good chance would probably be spending that in retirement as well, and then there could be some exceptions to that, or some changes there, but oftentimes we’re helping our clients transition to retirement, they’re spending very similar to what they’re making now it’s not even a little bit more, and so that is your day to day cash flow, month to month, cash flow needs that you want to track and make sure that you have a plan to replace that income, whether it be combination of your pension, maybe a FERS supplement, Social Security, spouse’s income, TSP, distributions, rental income, whatever, whatever, all those sources of income are. But then at the same time, you might have additional cash flow needs that go above and beyond what your spending habits are typically, and maybe that’s a, you know, planning a big family vacation because you’re retired and you want to go celebrate. Maybe you’ve got some kids that are getting married, and you’re gonna have some big wedding expenses coming up. Maybe you have a project on the house that you’ve been waiting to do, or maybe you’re moving right? So we have to look at what are your cash flow needs, not just on the replacing income side, but what are maybe some of those bigger ticket items that might be coming up in the next five years or so?

Micah Shilanski 16:38
Christian, I agree the 100% right? Then it gets into our basic investment rule, right? Once we know what the cash flow is, any money we’re going to spend the next three to five years probably shouldn’t be invested in the stock market, right? There’s always exceptions to the rules, but that’s a good rule of thumb. And why do we say that? Our listeners already know this to us, an, 8, 9, 10, 11, 12, right? Took about five years to get back to even so. Christian, I love your point there. Now, quick note on the cash flow, if you’re spending my fingers wrong, you’re doing $8,000 a month in retirement income, right? But you’re getting 4000 from your pension, that means we need 4000 coming from investments, maybe five because of taxes, right? So that’s the money that we need to make sure gets protected, because that pension or Social Security income is pretty guaranteed, is that fair to say?

Christian Sakamoto 17:23
Yes, yes, that’s that’s exactly how we’re looking at it.

Micah Shilanski 17:27
I Love it. So Christian, I love the fact that you’re bringing up cash flow, right? But let’s tie cash flow into a lever that we get a pull when, not if, when the market goes down. So one of the things you need in your plan, right, whether you work with us, work with us, work with another advisor, you want to do this yourself, right? Of course, my favorite option is you guys work with us, but if you even want to do this yourself, you need to have a written plan that when the market gets to a certain level, your portfolio goes to a certain level, what is your action plan? When the market falls 20% you go from a million to 800,000 is this an oh crap moment, is this a stop distribution moment, is this I’m okay moment? What happens when it goes to 30% decline, what happens right? Now why is this important to plan for? Boy, I like doing all my emergency planning when I’m not in the middle of emergency, right? It’s easier, right? I’m not emotionally tied to it, etc. But now I know I have a plan, and so when something bad happens, instead of me trying to figure out, oh, crap, what do we do? We go back and say, hey, we figured this out when we had calm minds, we have a lot of evidence behind us, what’s our action plan going to be? And generally, when you follow that process, you get a pretty good outcome.

Christian Sakamoto 18:38
Yeah, developing it when you’re not in that thick of it or scrambling, you really want to come up with the plan, you know, before, ideally that that would be the case, and that way it’s kind of your North Star, your guiding decision makers, kind of, okay, we’ve already kind of developed that written plan I like that a lot.

Micah Shilanski 18:56
You know, Christian, I kind of take it a little bit with, you know, kids and I especially outside in Alaska, we do a lot of outdoor stuff and hiking, and hiking, and we go places that there’s no sell signal and do fun stuff, but we have a lost plan, right? If we’re lost, you get separated from the group, and we do not have communications, we all know what the plan is going to be, right? We know what frequencies we’re going to be on on the radio, we’re not just randomly dialing things on the radio to see if maybe that works better, because now we’re on different frequencies, we have written frequency plans, we have a time interval of when it can change and when it can’t change, and we have destinations that are all set up that when we get separated, great news, are we’re all going to make it to this next point, and here’s going to be the check in. So we’re going to do that from a hiking perspective, which is like a day hike, etc, and we’re going to make sure we’re all okay. Boy, why wouldn’t you take that time, energy and effort and put it into your entire life savings so you make sure that this money is always here for you?

Christian Sakamoto 19:51
Yeah, exactly. Well, what’s another lever that our listeners can pull, any ideas Micah?

Micah Shilanski 19:59
Boy, I’d say another great lever Christian is going to be tax planning, right? While we may feel again, where the fly on the tail at the end of the dog when it comes to taxes, we do have a little bit of control in our planning method, whether it’s how we’re saving money, how we’re taking money out, what we’re converting what our charitable activities are going to be or not going to be, or how we’re going to fund those charitable things, right? We can have a little bit of impact in our taxes, and again, your taxes is probably the largest bill you’re going to have in retirement. So if you could lower that by 10% or maybe even 15% that could be a massive savings over the life of your entire retirement.

Christian Sakamoto 20:39
Oh, 100% and when the economy’s, you know, in question, or when it’s down, it does create a pretty good opportunity if we’re looking at some of those tax planning things, because maybe, maybe you are doing a Roth conversion, and maybe you do see your accounts go down in value, but then you could take advantage of that and essentially convert more for less dollar you can convert that price per share is down, so now you’re you’re converting more of those shares at a lower dollar amount, moving that over, so that’s just one example, and of course, there’s others, especially as tax laws change, and we’re seeing that that you want to understand some of those rules and some of those laws, and just making sure you’re aware of those new changes, with tax laws.

Micah Shilanski 21:25
100% Christian. And then another thing that you can think of inside of this is, how do you know when you’ve you’ve pulled the right levers? How do you know when you have this right balance right? But number one, there’s, there’s a financial way to look at it. We can say again, are we stacking the deck in your favor, are we using the buckets approach, do we have the right asset allocation, do we have the right tax optimization? Do we have all of these right technical pieces that Christian and I are going to geek out on? Do you have all of those right pieces, right but Christian, at the end of the day, what we ask our clients all the time is, when you go home and you lay your head on the pillow at night, we call this the pillow test, can you go to sleep? And if you’re staying up and you’re worried about X and my investments X in my retirement, something that’s there, then you don’t have the right leverage bolt. You don’t have the right combination of things, right? Maybe it’s a misunderstanding of where you should be with your advisor, maybe it’s your you need a different plan, but if you can’t pass the pillow test, we need to go back, and you need to start over on this.

Christian Sakamoto 22:24
Yeah, I mean, that’s just a fact, and sometimes we’ll have those clients that are concerned, and we’ll ask them that question in a meeting, just like that, and if they are concerned, we just have to go back to the plan that we put together when they weren’t as concerned to remind them that this is what we’ve put together, and we know that there’s going to be turmoil, and when turmoil comes up, this is kind of what we designed, is that change, and oftentimes that reminder that that plan was already put in place is enough for them to say, you’re right, you’re right, you did tell me when this happens, when the market does this, we are going to do X, Y, Z, it’s just, I needed that reminder from you, so that might just go back to the, you know, that education, or maybe the misunderstanding, but if you’re still not feeling good, or if you just maybe don’t have a plan, that’s when we need to make a change, right?

Micah Shilanski 23:15
Yeah, maybe it’s a re-education of the plan to understand it, maybe you make a change in the plan, but that’s not something just to push through. So if you or your spouse can’t sleep at night because your retirement plan, because your investments, things are going on, then you got to bring it up, it has to be addressed, you have to work through this stuff, really, really important, definitely from our perspective. All right Christian, this podcast is all about our listeners being able to talk action, I know we talked a lot about maybe different concepts they need to think about things we normally don’t talk about on the channel, but especially with everything going on, this is really important. But what’s an action item that our listeners could take and move forward on this week?

Christian Sakamoto 23:53
You know, coming back to that planning piece, really coming up with that written plan, especially when it comes to when the markets go down, you know, how are you going to continue taking money out when the markets go down? And what buckets, what type of accounts between cash income growth and again, which accounts is it going to come from, need to have that written.

Micah Shilanski 24:15
Yeah, and Chris, I’m just going to echo what you said, the the the importance of a written plan is so imperative, not a 600 page plan or 100 page plan that’s nicely bound with your logo on it, or your financial advisors logo on it and your name on it that you put on a shelf and you never pick up again, right? That’s not helpful. We need to simplify down to one page plan, a one page action item that you know what the basics are. You know what it is at a high level, and you know what happens when the market goes down, what you’re going to do? You know what, sometimes the market goes down, and it’s like, you know what? You’re in the right stuff, you’re in the right place, and buy and hold makes sense, it’s the whole time. Sometimes the market goes down and it’s time to make a change, right? It’s time to update some things, it’s time to move some levers around here to make sure you’re ensuring your retirement for the long term, but you need to know what that is, I absolutely love it. Other thing I’m just going to add to that Christian make sure your spouse is on the same page. This is really important, right? Generally, one spouse is going to take primary on finances, and the second spouse is kind of along for the ride, quasi interested in etc, but imperative that both spouses at least know what the action plan is going to be. Don’t have to know all the details, one’s still going to know more than the other, and that’s 100% okay, but God forbid if something happens to you and it goes to your spouse and they’re not on top of the finances, what happens? Do they know what to do or when the market goes down now, all of a sudden, your spouse is emotionally committed to this, do they know what the plan is really important?

Christian Sakamoto 25:48
Yeah, now I like that.

Micah Shilanski 25:49
Well, again, this podcast is all about ash times. Make sure you’re going out and you’re doing these things. Also share this podcast, sending out our goals of another 1 million federal employees plan their retirement, and one thing you guys know, especially this year, there’s a lot of information going on, there’s a lot of misinformation going on about how your benefits work, so we’re here to provide you, hopefully, as a good guide, a great resource for you. Share this so we can help more federal employees. Christian again, thanks so much for being on here.

Christian Sakamoto 26:15
Oh yeah, it was great, thank you.

Micah Shilanski 26:17
Until next time, Happy Planning!

Christian Sakamoto 26:19
Happy Planning!