Video Posted: February 19, 2025
John: This is John Smallwood, and we are back on Money Isn’t, and I have Rob Marks on again. Welcome back, Rob. Now, for those of you here for the first time, Rob is a wealth advisor at Smallwood Wealth Management. He’s been with me since 2017, came as an intern and joined the firm when he graduated University of Delaware in 2019. He’s a Certified Financial Planner. He’s fully licensed in Series 7, Series 66, and a life and health license, and a Certified Financial Planner. So you wanted to talk today about the impact of being out of the market. What caused you to want to discuss this?
Rob: You have a lot of people who either they’re waiting to invest and they’re scared of the market conditions today, or they see the market took a huge hit, and say “I’m going to go to cash because I need to see it grow again before I can trust it.”
So basically what we’re talking about here is that instead of dipping in and out of the market and trying to be strategic, saying “Oh, I’ll put money back in next month when it looks like things are picking up,” You have the fact of—I don’t want to say set it and forget it—but just when you invest, let the money do what it’s going to do. It’s going to go up, and it’s going to go down. But about not worrying about it saying “The down market hit and I need to go to cash because I’m scared it’s going to go down even more.”
Because now not only are you’re basically tapping out when you’re at a loss. You now, as the individual, have to figure out: “When am I investing? When am I putting back in?” You now need a crystal ball to tell you when this is going up. And if you do it too late, you’re going to miss out on all of that return that can bring you back to where you were.
John: Right. So people have this sense of: “I want to get out of the market. I want to go to cash,” despite having cash already, despite having all the proper balance in a plan. They’re afraid of loss because they’re watching something. They’re seeing some sort of headline. They’re seeing, you know, “The world is over.” It’s the psychology of wanting to go to cash because it feels better. But the reality is, if you truly understand what’s going on in this slide produced by JP Morgan Guide to Retirement, you understand what happens when missing 10, 20, 30, 40, 50, or 60 days. So tell me the story here.
Rob:
We have a 20-year time frame on this graph. So basically what this is saying is that if you just stay fully invested; you’re not going to touch the funds that are in here. I’m just going to let it go up and down. I’m just going to let it do its thing. So it’s a $10,000 investment on January 1, 2004, right? So you leave, you take that $10,000, you put it in in 2004, and you just leave it. And you check the balance in 2023 and you’re seeing that it’s about $63,000. So annual 9.7% return.
Now let’s take this perspective on it. You look at the account every day. You get nervous seeing that the market’s going to go down, or it is going down, and you keep taking out. Now, all you do is stay invested except for the best 10 days in the market during that 20 year period, which you don’t know. No one knows.
John: During that 20-year period, you just missed 10 days, the 10 best days. So every two years or whenever those 10 best days are, which I don’t know, I decide to go to cash. If you look at the headlines over the last 36 months, we’ve had some of the worst days, followed up by some of the best days. Howw many people stopped funding their 401(k)s during the pandemic? Maybe they stopped saving because it was—who knows what’s going to happen.
Rob: Your return is almost cut in half. Instead of having about $63,000 in your account, you have just shy of $30,000. And you missed 10 days out of a 20-year period—10 best days. That’s it.
Even if you look, like, as you go through—miss 20 days or 30 days—it keeps inching down. If you miss the 40 best days in the market for the S&P 500, now you’re actually getting a negative return on here. And if you miss 40 days, it’s down a little over a percent. That doesn’t mean that you didn’t have any positive return any of the other days. But you missed the 40 best-performing days, which were the recovering days.
If you look into the chart further, they say seven of the 10 best days occurred within two weeks of the 10 worst days. So what’s happening is the worst day happens, you say, “Oh my God, I’m going to cash!” and you’re still scared of the market a week or two later. But the recovery already happened. And now, when you go to plug back in, you’ve missed that whole recovery that would have set you back closer to where you were.
John: And I think you got to flip the switch on this too. As a wealth advisor, you have to manage the client expectations, you have to make them comfortable with market volatility. So if you think about this $10,000 for a second, somebody’s going to be nervous about it if it’s their only $10,000. So if you take $2,000, leave it in the cash, and put $8,000 in the market, now I got a $2,000 shock absorber. I have liquidity. I have what I need. You’re pushing now towards that overall return.
Rob: You have that buffer, and you have that little bit of comfort to say that it’s not all gone. If the market’s going down, it’s not a zero-dollar account.
John: So the message that I wanted people to get out of this conversation today and I think the message that you wanted is that market volatility is a normal situation. But in order for you to be successful with it, you have to orchestrate your plan so that you have the confidence to go through these things.
And what’s interesting to me is the reasons to go to cash are historically fear-based. When you look at the history, the history overcomes it. But I’m not looking at that, because it’s different this time and it’s going to get really ugly. And the reality is, there’s that one derivative that basically goes out into the future. And the future is an ugly future, right? There’s that possibility. But if that’s the possibility, it doesn’t really matter what you did. But if things stay as they’ve stayed for the last hundred years in this country—good times followed by bad times, followed by good times, but the trend is always moving forward. We’re growing as a country. We’re growing as a community. Our populations are growing. Our technology is growing. Our life extension is growing.
You need confidence in your plan, and you have to read this chart and ask if the money’s playing the wrong role, then you’re missing the opportunities. Because money has a role. Money isn’t everything. Right? Money Isn’t podcast. But money has a role in your plan. So like how many people have we encountered where they have the majority of their retirement plan, the 401(k), which is money that’s 25 and 30 years out in front—it’s all in cash?
Rob: Oh, a lot. It’s incredible too. If I’m going to store this money in here, and there’s potentially a tax advantage piece of this, depending on how you’re doing it, why not take advantage of the tax for growth?
John: Yeah, or when the role of the money is long term, but the investment is short term, that doesn’t make any sense. You got you’re strategy in the wrong place. So part of what I want people to really gather from this is you have to look at: what’s the role of this money? You hit something that really is a really smart thing. There might be a tax advantage in deferral. And what is that? What might happen? What is the role of tax deferral?
Rob: So when you have a 401(k), you generally have two options. You have what would be a pre-tax contribution, meaning money comes right out of your paycheck. It’s not taxed; it goes in the account, and it can grow tax-deferred, meaning that going in and out of things, there’s no taxation along the way. But when you go to pull the money out is when you get taxed. Now, you also generally have a Roth option, which is basically the same thing kind of in reverse. You pay the tax today, you still don’t pay any taxes on the growth that’s going on in the account, and when you pull it, it’s tax-free.
Now, the problem that a lot of people have is that they don’t want to pay the tax now and feel their taxes are out of control as it is, so they do pre-tax. And they do pre-tax from when they start their 401(k) until they retire. And the problem is that they don’t look at the other side of the math, which is: am I paying more tax today, or do I think when I’m retired and pulling this out, I’m going to be paying more tax?
And what you’ve seen, as well as I have, is people build up these plans. They say, “Great, I have a million dollars in my 401(k),” but they also have a tax liability of $200,000 or $300,000 on this thing. And no one thinks about what the actual value of that is.
John: So the sole purpose of tax deferral is to take money from a high bracket and defer it to a low bracket. If I end up in the same bracket or a higher bracket, I probably didn’t win. And if I use this chart of $10,000 and a 30% tax bracket, and the $10,000 grew to $63,000, the tax today would have been $3,000 at 30%. So if I took that $3,000 and compounded it at 9.7%, and I’m in the same 30% tax bracket, it’s going to be roughly $19,000 of tax. It’s 30% of the account. I didn’t win. The government was investing side by side with me getting their return. If I go to a higher bracket, I lose. The only way I win is by going to a lower bracket. And that’s why the combination of how you approach this has to be unique for the individual.
Rob: And what if I waited until 2010 or 2011? I may not be invested for the downslope, but I’m also not invested for the upside of this. We don’t know when the market will go up or down, but we do know if we’re in the market and we let it be, it should kind of do its thing in the long term and have what we’re seeing here: 9.7% in this case.
John: The message here is: you’ve got to get a plan and know the role of your capital. Anything else you want to add?
Rob: The only thing I would say is that in addition to being in the market, you also want to make sure that people are diversified in their investment allocation. But when it comes to their financial plan, they don’t have as much diversification. And why is that? When you’re saving or you’re putting money toward things, it’s going into all these different silos. Why aren’t you making sure that you’re diversified not only in the allocation, but in the strategies for all those different pieces?
John: Exactly. This was really good. I really appreciate you on today. This was fantastic. Thank you.
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