Alison Southwick: This is Motley Fool Answers! I'm Alison Southwick and I'm joined as always
by Robert Brokamp, personal finance expert here at The Motley Fool. Hey, Bro!
Robert Brokamp: Happy New Year, everybody! Southwick: Happy New Year! In today's episode,
Bro is going to see how the expert predictions for 2018 actually panned out.
And, forget about new year's resolutions, I'm playing the much longer game with advice to help you
avoid having regrets on your deathbed. [laughs] We have fun. All that and more on this week's
episode of Motley Fool Answers. Brokamp: Allison, what's up?
Southwick: Well, Bro, this is the time of year when people start thinking about
new year's resolutions, or, at the very least, they wake up from the fog of the holidays
and realize that they spent way too much money or gained too much weight. So, then,
roughly apparently two-thirds of us make new year's resolutions. Do you make new year's resolutions?
Brokamp: I do. Southwick: What's your what's your batting
average for keeping them? Brokamp: Oh, probably 50-50. [laughs]
Southwick: And let me guess, most of your new year's resolutions have to do with your
health or money. Brokamp: Yes, absolutely!
Southwick: That's not unusual. Most are along the lines of eat healthier, get more exercise,
save more money. And, then of course, we completely abandon them around February.
But, what if we take the longer view and see what people truly regret in their old age?
Then, we'll work backwards with steps we can take to avoid being truly miserable after having lived
a wasted life. Let's head to the research!
Brokamp: Let's do it!
Southwick: We're going to go to the Legacy Project out of Cornell. I feel like you've
mentioned the Legacy Project on the podcast before.
Brokamp: It sounds familiar. Southwick: It's led by some researchers out of Cornell.
Basically, they gathered responses from 1,500 people over the age of 65 about
all kinds of things, including their most common regrets in life. Here are, in no particular order,
the eight most common regrets that the wise elder people in our life have. Ready?
Brokamp: Ready! Southwick: Alright. No. 1: Not being careful
enough when choosing a life partner. Brokamp: Oh, yeah, sure. [laughs]
Southwick: Hopefully, this is getting better as a society. Hopefully, young men and women
feel like they have more options and that your 20s aren't just a big game of musical
chairs where you have to choose the closest one when the music stops. One person that
they talked to for their research said that it was better to not get married than to marry
the wrong person. Brokamp: That's probably true.
I think we are getting better. Isn't the divorce rate going down?
Southwick: Yeah, it is. We talked about that in the past, about how Millennials are better
at marriage then baby boomers. Brokamp: Good job, Millennials!
Southwick: Way to go, Millennials! Alright, No. 2, another regret that people have: not
resolving a family squabble. Some of the unhappiest people in their old age, researchers said,
were those that had a rift with a family member like a child or sibling or a parent and never reconciled.
That's sad. Brokamp: Very sad.
Southwick: No. 3: putting off saying how you feel. Apparently, not expressing love frequently
enough was a common regret of older men. Brokamp: Aww. I wonder if that's a generational thing.
I feel like the today's man is a little more sensitive. Maybe I'm wrong. I don't know.
Southwick: I don't know. Rick Engdahl: I love you guys!
Southwick: Thank you! Brokamp: I love you guys, too!
And you too, listeners! Southwick: I think you guys are pretty OK.
Alright, No. 4: not traveling enough. Some people chose to wait until retirement to travel.
But the researchers said that putting it off means that your health could have already
started failing before you've had a chance to do your lifelong dream of a trip to Italy or whatever.
Many of the older people said that they should have
taken a trip sooner and that travel should have been more important than, say, a kitchen remodel.
Not that travel has to be the cost of a kitchen remodel. The older people they
talked to said you should just get out there more and travel.
Regret No. 5: spending too much time worrying. Apparently, many of the people they talked to regretted
about anxiety from worrying over things that never happened or they didn't have control over.
The general advice was, just stop worrying. But that's so easier said than done!
Brokamp: That's why it didn't happen, because I worried about it. If I didn't worry about it,
it would have happened. Southwick: Right. So, for those of you who are like,
"OK, I'm ready to stop worrying," I guess you can go back and listen to our
episode on cognitive behavioral therapy. Literally, the advice was just, "Don't worry so much!"
As if it's that easy. Whatever. Alright, No. 6: not being honest. Apparently,
lying and deceit gnaws away at you, slowly but surely. And then, there you are on your
deathbed, thinking about how you are a lying liar who lied.
Brokamp: [laughs] You're about to be judged. Southwick: Yes. No. 7: not taking enough
career chances. People they talked to were in favor of taking more risk when it comes
to your career. They regretted opportunities that they passed on or weren't brave enough to try.
This one could potentially haunt me. I feel like it's awfully cozy here at
The Motley Fool. And I am actually in a room with two men who have been working at the same
place for... 20 years? Brokamp: 20 years next year, yeah.
Southwick: So, that one might touch a chord here.
Engdahl: When you're in a warm bath, it's really hard to get out.
Southwick: [laughs] It's a really warm bath, it's true. Alright, No. 8, not surprisingly,
of course when you're older and everything hurts, you're going to regret not taking as
good care of your body. When you're young, you're thinking that smoking or eating poorly
or not exercising, OK, fine, whatever, I'll die a little sooner. But the problem is,
you don't get to die. Thanks to the marvels of modern medicine, you get to suffer through
years of chronic disease! Enjoy that! Brokamp: So, none of them were like, "I wish
I had saved more for retirement," or anything like that?
Southwick: No. But I don't know that there's really a definitive study on the area of what
people regret in life. There were lots of books that people wrote after having had a
career in hospice care or something like that. There's probably room for more rigorous research
in the area of regret. Brokamp: I read a recent study that we published
on fool.com about, in terms of money, what are the biggest regrets. And one of them is,
"I wish I had saved more money." One of the biggest determinant -- we've talked about
this before -- of a happy retirement is, No. 1, health, but then financial security.
It's hard to enjoy your golden years if you're wracked with financial anxiety.
Southwick: Right. That falls in line with new year's resolutions, those decisions of,
I want to save more, I want to be healthier, etc. Whereas a lot of the life regrets had
a lot to do with relationships, relationships with family, not being honest, family squabbles
and not choosing the right life partner. A lot of the lifelong regrets actually had to
do more with your relationships with people than your relationships with money or your health.
Although, health is in there, too. Brokamp: Is your recommendation for people,
as you think about your resolutions for this year, think of those things, see if anything
rings a bell, strikes a chord? Southwick: See, I have it here in my notes.
"What's my takeaway?" Because Bro is such a stickler for a takeaway. So, yes! As I was
naming those things, if any one of those single regrets made you catch your breath or your
heart skip a beat, or you were like, "Oh, yeah, OK." Even doing just one thing in the
coming year that could get at that to help you have a happier 2019 and beyond. Is there
someone that you could bury the hatchet with? Is there a trip you could plan? Flossing?
None of these things are necessarily easy, but they aren't all dependent on building
or changing habits, which, as we know, is really, really hard. One well-said "I love you"
could apparently make a difference for the rest of your life. But also, definitely
floss every day. And, Bro, that's what's up. Hey, Bro! Happy New Year!
Brokamp: Happy New Year to you, too! Southwick: At the time of taping this,
things in the world, I would say, are a bit unstable. The markets are unstable. The economy is...
I don't know. Does anyone ever really know? Brokamp: That's a good point.
Southwick: Yes. Does anyone ever really know? Not rhetorical.
Brokamp: But here's the problem. Much of investing and financial planning does rely
on a little bit of knowledge, in fact, a little bit of foreknowledge -- in fact, you have to basically
make a prediction. When you're buying one stock vs. the thousands of others, you are
predicting that that is going to be the better investment. You're deciding to put a little
bit more in international or U.S. stocks. You're trying to make a prediction of which
is going to be the better bet. The whole point of retirement planning is doing something
so that when that time comes, 10, 20, 30 years from now, you're going to have enough money.
So, you have to make some predictions. There's a problem. That is, humans stink at predictions.
I find it interesting. I'm a bit of a collector of predictions. I even
have a folder in my Evernote, because partially, I want to see who's particularly good at predictions,
partially because when people make predictions, they have some interesting points to make
in supporting the predictions. But the bottom line is, generally, people aren't very good at it.
One of my favorite examples I think I've used
on the show before was one of those end-of-the-year articles in Business Week. It was the end of 2007.
They asked six highly paid finely attired Wall Street types how they thought
the Dow would end in 2008. At the point, the Dow was a little over 13,000. Every single
one of these people expected the Dow to go up to about an average to 15,000. What happened in 2008?
Southwick: Not good.
Brokamp: Not good. It dropped to about 8,000. 40% drop. Worst year for the stock market
since the Great Depression. It's one of those glaring examples of how you have people
who have all the resources that you supposedly could ask for to make these predictions, and
they all got it wrong. There are plenty of studies that have looked
over bigger periods of time. One is a study that was done by CXO Advisory, they call it
their Guru Grades. What they did from 2005 to 2012, they collected 6,582 forecasts about
the U.S. stock market from 68 experts. They didn't even just look at the predictions from
that time period, they went back to their archives. The oldest prediction went back
as far as 1998. What was the average guru accuracy?
Southwick: Is that actually what they call it? Guru accuracy?
Brokamp: Guru accuracy. 47.4%. Essentially a coin flip.
Southwick: A little worse than worse than a coin flip!
Brokamp: A little worse than a coin flip. The most accurate person was right 68% of the time.
Still wrong one out of every three times. Worst, by the way, had an accuracy
rate of 20%. Yet this person still has a money management firm and still is in the media
making predictions. [laughs] It's quite remarkable. So, once again, we're here at the end of the year.
You're probably reading all kinds of articles about what 2019 is like.
I always like to take this opportunity to look back at some of the predictions from 2018
to seewhat happened. There were a few that jumped out at me. A couple were highlighted in an
article on Market Watch by Sean Langlois. It highlighted two people in particular.
One is Ray Dalio. He is considered one of the greatest investors of all time.
We talked about that in a previous episode. He runs the biggest hedge fund in the world.
And at that time of the year, he said investors are "going to feel pretty stupid if they sit around
in cash in 2018." He expected a pretty big rally, partially because of the jolt coming
to the economy from the tax cuts. Of course, as we sit here, we are recording this
before the end of the year, and the stock market is down for the year. Now, his fund itself
has actually made money this year. But, again, another really smart guy thinking
things are going to be pretty good this year for the stock market, and it didn't turn out that way.
Another is Bill Miller, who was famous for
beating the S&P 500 15 years in a row. Unheard of. He got undone with the great recession
in that his performance tanked considerably, like, horribly. He recovered a little bit,
and his record has been mixed since then. He predicted at the beginning of 2018 that
we'd have another year like 2013, which is when the stock market went up 30%.
Didn't turn out that way. Now, some folks did get things partially right.
Jeffrey Gundlach, who's considered the bond king, he co-founded DoubleLine Capital,
runs one of the biggest bond funds out there. Very smart fellow. Predicted that stocks would
go up at the beginning of the year and end the year down, which was right. He predicted
that Bitcoin had peaked. He was right. He also predicted that one of the best things
to invest in for 2018 would be commodities. He was wrong. Commodities actually performed
worse than stocks so far this year. You can get some things right, maybe not everything right.
That's part of investing. You're just not going to get it all right.
Recently, CNBC's Thomas Franck published an article in which he reviewed the predictions
of 13 of the biggest firms on Wall Street, what they were saying for 2018, what they're
predicting for 2019. The most accurate for last year was also the most bearish.
That was Morgan Stanley's Michael Wilson. He basically predicted that the S&P 500 would make just
a little bit of money. Actually, it lost money, but he was still the most accurate.
So, you might ask, what are these people expecting for 2019? He's also, again, the most bearish.
He doesn't think the S&P 500 will make much money at all in 2019. On average, these folks
think that the market will earn about 15% in 2019.
Southwick: Oh, that's not bad. Brokamp: It's not bad. We're currently in
the longest bull market in history, and they're predictng that we have another year left of it.
Will it matter? I think we've already established, we don't think anyone can predict that.
What I thought was most interesting,
what I think is most worth paying attention to, is a little bit more pessimism has crept in
to these predictions, these articles. Every firm often will put out some outlook report,
what they see happening in the year ahead. There's much more pessimism in them this year
for a couple of reasons that I think are pretty valid. No. 1: The Fed is still raising rates.
Probably will slow down, not raise them as much in 2019 as people expected, but still, probably,
rates are going to go up. That usually happens. The whole intention is to slow down
the economy, to keep inflation in check. That's probably what will happen.
A couple of other interesting things that are generally indicators of a slowing economy,
if not recession indicators, one of them being the inverted yield curve.
Are you familiar with this at all? Southwick: Oh, it's my favorite yield curve.
Brokamp: It's your favorite thing. Southwick: The inverted yield curve
is the way to go every time. Brokamp: Except that the
yield curve has inverted every time before a recession. Southwick: So, it's a bad thing. It's my favorite bad sign.
Brokamp: There you go. So, basically,
you should get paid more to buy a bond with a longer duration than a shorter duration.
You should get paid more to buy a 10-year bond than a two-year bond, because you're tying up
your money for a longer period of time. That's a normal yield curve. It goes up and
to the right. But sometimes, the yield curve becomes flat, meaning you don't really get
paid much more to go out further. And sometimes, you actually get paid more for a shorter-term
Treasury or bond. Usually, it's looking at treasuries. And that briefly has just started to happen.
Currently, you actually get paid more to invest
in a two-year Treasury than you do for a three or five-year Treasury. That's generally not
a good sign. What people most look at, though, is either the difference between the three-month
Treasury and the 10-year or the two-year Treasury and the 10-year. That's still slightly positive.
But, it's unquestionably a sign that things are slowing down. There had been some false signals
with an inverted yield curve, but every recession in modern times has either been
preceded by an inverted yield curve, or it happened right around the same time.
Another interesting thing that I read in a report from Schwab was that another indication
of a slowing economy is when the unemployment rate and the inflation rate get to be very similar.
After a recession, the unemployment rate is high, because people lost their jobs,
and the inflation rate is low because businesses had to cut their prices to get people to buy stuff.
As the economy recovers, though, the unemployment rate drops, inflation rate ticks up.
And they get to a point where they're very close, that's usually not a great sign.
The difference between the two now is only about 1-1.5%. So, it's certain things like that.
Another signal that I think is interesting
now is that household ownership of stocks is near an all-time high. We're about at the
same amount as 2007 right before the Great Recession. We're only slightly behind where
we were right before the .com crash. The reason it's a bearish signal is because, basically,
households have put in as much as they can in the stock market. They don't have as much
on the sidelines to put into the stock market. It doesn't mean the market's going to crash tomorrow.
It doesn't even mean it's going to crash in a year or two. But it's a sign
that people are highlighting as, "It might be time to be a little bit more cautious,
a little bit more defensive." All that said, given that we don't really
know what's going to happen, but there are some certain signs on the horizon,
here's some predictions that I'm mostly sure I'll be right about.
Southwick: [laughs] Brave man! Brokamp: No. 1 is: you have to make a prediction.
Regardless of whether you're going to be accurate, you have to make some predictions. When that
comes to retirement planning, one of the key predictions you have to make is, what is my
portfolio going to earn? Generally speaking, most people expect below average returns.
I particularly like Vanguard's annual market outlook. Their guidance for a globally diversified portfolio
for stocks over the next decade earns on average 4.5-6.5% per year.
I think that's a reasonable assumption. Hopefully it'll do better, but it's better to assume
something like that. For bonds, current interest rate is always
the best indicator of future returns, at least for the next five-10 years. Right now,
that's about 3%. But there's something a little different going on in the bond market now. If you want
your bonds to be particularly safe, you want them to make money when the stock market goes down,
you should stick with Treasuries. The more you go into corporate bonds,
the more you're taking on a risk that they might not hold up quite as well. For example,
during 2008 when the stock market dropped 37%, the Vanguard Intermediate Term Corporate Bond Fund
lost about 7%. Not horrible, but you lost money.
But there's some evidence that corporate bonds are actually even riskier now than they were then.
That's because the bond market is broken up into basically two big segments. Investment grade
means they're rated BBB or above by Moody's and S&P and Fitch and those folks.
BBB and above is investment grade. Below that is speculative grade, called junk.
15, 20 years ago, when you looked at the whole investment grade market, maybe 25-30% of it was BBB,
basically a notch above junk. Today, half the investment grade market is just a
hair away from junk. The corporate bond market nowadays is riskier than it's been in the
last 10, 15, 20 years. As you look at your portfolio, if you're choosing to invest in
bonds or bond funds, you have to take that into account. Take a look at how much exposure
you have to the corporate bonds. If you look at a bond fund, you can look at Morningstar
and see its average credit quality. If it's BBB, close to that, you've got a pretty risky
bond fund. You just have to be prepared that it probably will go down if and when
we do go into a full recession. Southwick: You'd better beware. I need another
B in there. Nuts! Brokamp: That was good!
Southwick: No, it wasn't. Brokamp: As for cash, as we've talked about before,
these days, you should be able to earn 2%, you just have to put in a little effort.
Put that all together. If you have a portfolio
of cash, bonds and stocks, you should only assume you're going to be earning, 4-6% a year
as you do your retirement plan contributions. Or, it could be, also, if you're calculating
whether you're saving up for college or something like that. I think that's a reasonable expectation.
No. 2 prediction: saving more increases your chances of success. I know that's not very exciting.
Southwick: Way to go out on a limb there, Bro.
Controversial hot take from Robert Brokamp. Brokamp: The bottom line is, there's nothing
that will help you through a recession or economic downturn than having more cash in
the bank or more in your portfolio. The good news, as we talked about before, in 2019 retirement,
account contribution limits go up. $19,000 for 401(k)s with another $6,000 if you're
50 or older. IRAs go to $6,000 with another $1,000. Take advantage of those higher contribution
limits and save more. No. 3: your tax bill or your refund will be
very different than the previous year. This was the first year of the new tax law.
If you didn't change anything, you're going to get a bigger refund, chances are.
Though, there is a good 10-15% of people that are actually going to have a higher tax bill.
They're either going to get a smaller refund or they're going to owe some money. It's particularly
important this year to get your taxes done early, to know your situation. If you're getting
a refund, get that money as soon as you can. If you owe money, you don't have to file your
taxes then. You can wait until April 15th. But you have to start building up that money,
so you have that cash on hand. It's also important to know, "This is the tax situation."
Taxes are not going to change very much in 2019 unless you do something different. It's better
to start earlier in the year to adjust your withholding. If you're going to get a refund,
you get that money sooner. If you're going to owe money, you want to make sure you adjust
your withholding, because if you owe too much, you'll have to pay some sort of penalty.
No. 4, another boring one: paying down debt is a guaranteed winner. With interest rates
going up, debt is more expensive. The interest rates on credit cards are at all-time highs now. It's crazy.
Southwick: All-time highs? Like what?
Brokamp: Like 17-18% for a regular card. But then, when you get into store, it's like 25%.
Mortgage rates have also gone up. Auto loan rates have gone up. It's better to pay that off.
It's a guaranteed winner. It also gives you more flexibility. One of the issues
what happens during a recession is, if you're retired, your portfolio goes down. If you're working,
you might lose your job. The less debt you have, the more you could weather that type of storm.
If you're retired and your portfolio goes down, one of the best things you could do
is leave your portfolio alone. And if you don't have a lot of debt, you have a lot more
flexibility with your budget. If, on the other hand, you have a credit card bill, a car bill,
and a mortgage, your portfolio's down, you can't hold off. You have to pay those bills.
Southwick: In the priority of: credit card, car, mortgage.
Brokamp: Right, exactly. No. 5: you're always better off looking for ways to enhance your
human capital. That is basically your value to your customers. Everyone has a customer.
Obviously, if you're self-employed, you have customers. But even if you work for somebody,
you have customers. Your boss, the people who run the company, your colleagues. I think
it's important to always be looking for ways to show that you are valuable to the people
who are your customers. What happens during a recession? No. 1: people either get laid off
or employers aren't as generous with raises. The more value you can demonstrate to the
people you work with or the people who are your customers, the more likely you're going
to be better off. Southwick: What are you intending to do to
improve your human capital in 2019? Brokamp: Honestly?
Southwick: Yes! No, I want you to lie to me. Brokamp: [laughs] I've actually begun a few
discussions with people about how I can increase the engagement in the services I work on at
The Fool, particularly the Rule Your Retirement service. I've had a few meetings about that.
I have another meeting on Friday. What are the things we can do to make it more valuable
to the people who subscribe? Southwick: Cool! I'm glad you had an answer.
It would have been awkward, had you not. So, when you were looking at all these prognosticators,
were there many that were like, a broken clock is right twice a day kind of thing? Where
it's like, "I'm the permabear. I'm the one who always thinks the market is
going to crash at any moment." Brokamp: Right, there's no question.
One guy is Jon Huntsman, who I enjoy reading. Super, super smart guy. Became famous by being
very bearish before the Great Recession. Of course, the market did drop, so he was right.
He's generally -- not always -- been very bearish since then, and that has not gone well.
Southwick: It's been a tough 10 years if you're a bear. Brokamp: Yeah. In November, he predicted that
the S&P 500 during the next downturn is going to drop to below 1,000. Keep in mind, right now,
it's about 2,600. So, he's talking -- Southwick: More than half.
Brokamp: Right. So, I don't know if that's going to be right. But there are those people.
There are people who still think inflation is going to go nuts. I read a few predictions
of where people think gold is going to go to $5,000 an ounce or something like that.
Right now, it's $1,300. But they've been saying that since the Great Recession because,
as you may remember, with all the stimulus from the Fed, they were saying it's going to spark
outrageous inflation, and the best place to be is gold. Actually, gold since 2011,
is down 50%, something like that. So, you certainly come across that.
That's an important distinction as you read these things. But even with Jon Huntsman, he's obviously
been wrong, but so much of his analysis is so enlightening because it brings so much
market history. Even if someone doesn't get the bottom line right, you can still learn
a good bit from reading their analysis. In the end, you have to make some sort of prediction.
And in your mind, there has to be that little bit of possibility. What if he's right?
What if the market goes down? We did have the
Great Recession at one point. We did have the Great Depression,
where stocks went down 80%. There has to be that part in your mind,
that that could happen. Have some portion of your portfolio that will do at least OK in that scenario.
Southwick: Yay! 2019! It's going to be a great year!
Brokamp: It is going to be a great year. Southwick: It is going to be a great year,
even if it's not a great year, because we're all here together. We've got each other.
Something like that? Brokamp: Because I love you guys.
I really love you guys! Southwick: Aww. That's so great, slugger!
Thanks! Well, Happy New Year, Bro! Brokamp: Happy New Year, Alison!
Southwick: That's the show! It's edited prog-rock-sticatingly by Rick Engdahl. Prog rock, get it?
[prog rock guitar riff] [laughs] Our e-mail is answers@fool.com.
If you want, you can also follow us on Twitter, we're @AnswersPodcast and we're also on there individually.
There's also a Facebook group you can join. It's a private Facebook group
to keep out the trolls! Knock and you'll be let in. Motley Fool Podcasts is the group on Facebook.
Alright! That's it, I think.
Brokamp: Happy New Year, everybody! Southwick: We've only said that like 20 times
in the show so far.[laughs] For Robert Brokamp, I'm Alison Southwick. Stay Foolish, everybody!
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