Why is living on retirement income scarier than usual? How is starting your own business a bit like planning for retirement? In this episode of MarketFoolery, Ross Anderson, certified financial planner and co-founder of Craft Work Capital, answers those questions and shares why selling his car last year may have been a mistake.
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This video was recorded on June 23, 2021.
Chris Hill: It’s Wednesday, June 23. Welcome to MarketFoolery. I’m Chris Hill. Rounding out the week, Ross Anderson, certified financial planner, co-founder of Craft Work Capital. He’s also the co-host of the weekly podcast Check Your Balances, and he joins me now from his home in Northern Virginia. Good to see you, my friend.
Ross Anderson: Great to see you, Chris. Good to be back on the show. It’s been a little while.
Hill: It has been a little while. Why don’t we start there, because this was something you had mentioned to me, which maybe do a little bit of a double-take, because you worked at The Motley Fool for about six years, went off to start your own business, and you made the comment that leaving a company is kind of like retirement. Unpack that for me, please.
Anderson: It is. Well, particularly in the version that we did because a couple of things happened. If you go from one job to another, and not to say that you would completely leave your old community, but you swap your old community for a new one. You go from these people that you used to spend every day with to a new set of people that you spend everyday with and work with, and your income might not change. For what we did, our income went to zero and likely negative for quite a while. We were trying to start a business and we were going to have to put some capital into it. To prepare ourselves for that, that meant having enough cash set aside to deal with a period of short-term needs where I wasn’t expecting to actually earn anything. In a lot of ways, the things that I’ve been talking for years with people about, making sure that you’ve got enough cash set aside for these short-term needs, I got to live through that really for the first time. Certainly, on the social aspect, my partner and I, Dan, it’s just the two of us, so now, that bubble of craziness where we used to operate inside this pretty large organization has shifted to just the two of us staring at each other every day going, “Hey, what’s going on since yesterday?”
Hill: Let me get to a topic that we rarely if ever talk about on this show and that is income during retirement. I was talking yesterday with Malcolm Etherege. One of the things we talked about is just the myriad ways that investing and financial planning has been turned upside down over the past year. Plus, there was a very long stretch of time where the blueprint for what you do with your stocks in your retirement years is pretty clear. You move out of those growth stocks into the blue-chip dividend payers, so you have that steady income. What is the state of retirement income now?
Anderson: Right now, I think it’s actually a little bit scary. I’m not a doomsday, or by any means, but if you look at the landscape, there’s a lot of challenges. No. 1, that shift in the dividend payers doesn’t work like it used to. Dividend yields have been way compressed. Even if you’re in a higher dividend yielding portfolio, if you’re not adding leverage or something, you’re probably talking about two and a half to maybe 3.5% and that’s on the high-end right now. You’ve got bond yields super compressed. Your bonds and cash are likely to give you an effective earnings rate after you factor in inflation of zero if not negative. I think you’ve got a large group of people looking for this income and they’re having trouble finding it. I think, as planners, we need to be in some ways really diligent, in some ways a little bit more creative in terms of where we go to generate some retirement income that’s either going to be sustainable or just make people comfortable enough to be able to deal with it. Because I don’t think the old formula works like it used to.
Hill: Do you think that we’re going to get to a point maybe six months from now or this time next year, where companies that are paying dividends and have been for a while start to boost them in a significant way? Because certainly, a year ago at this time, one of the big stories in the stock market was companies at every end of the spectrum that were paying dividends were coming out and saying either we’re hitting the pause button, we’re cutting it, we’re eliminating it all together, we’ll let you know when it comes back. Obviously, they were all trying to shore up cash. But six, 12 months from now, if things are back to normal, do we start to see an increase?
Anderson: I certainly think that we could see some increases there. I think a lot of people responded as individuals in the same way for what it’s worth. Plenty of households started hoarding cash and took some money off the table that was there just to protect themselves. They didn’t know if there were going to be long-term periods of unemployment or how bad it was going to be for how long. I don’t think that was a rationale for some of these businesses to worry about that and to worry about what they’re going to do. I think we could see some dividend increases. I think you’re going to have a couple of pressures that put on that. Some of the labor shortages are going to push some wages up and so they might need to spend more of that cash simply on their workforce. Depending on which companies we’re talking about, there may be some pressure there, but I do think you could see some dividend increases. But I think the prices increase right along with it. It continues to be this situation where you can’t necessarily go out and just pick a big fat 4.5%, 5% yield in most cases and still get a company that’s doing well from an appreciation standpoint. That high yield might be indicative of some other problems or maybe the fact that there’s slowing growth elsewhere.
Hill: In terms of the clients that you and Dan are working with, and again, obviously, don’t disclose anything —
Anderson: We won’t name names. Don’t worry.
Hill: But I am curious. What are the types of questions you’re getting? Is there a theme to either the concern or is it just like, “No, this is about what we were hearing from people we were doing financial planning for three years ago “?
Anderson: I think some of the buzz questions have definitely changed. We’re hearing inflation a lot more, which I think is a real one and people are just saying, “Yeah, this is in the news.” You can look at lumber prices and you look at the chart that’s absolutely bonkers and you go, “Wow, what is going to happen in the rest of the market? Do I need to be worried about that?” But those are the things that, as planners, we think about all the time anyway. We’ve been talking about inflation for many years, and clients have said, “Yeah. OK, I understand that.” But I don’t know if it felt that real. I think it’s a little bit of a shift in some of the buzzwords. But the core principles really haven’t shifted, which is, how do you make sure that the money you are going to be relying on is there for you? How do you make sure that your cash flow is secure and that you are continuing to grow your purchasing power with the rest of the money so that you can deal with things like inflation and that you’re not being blindsided by it?
Hill: One of the things when I was talking with Malcolm yesterday, he said that surprised me a little bit was, the degree to which meme stocks have just taken over the conversation from people who are of an age group that you wouldn’t necessarily think they’re spending a lot of time on Reddit. People in their 60s and 70s. One, are you hearing that as well? Two, what goes through your mind when you’re watching CNBC or Bloomberg and you see day-after-day, this coverage of these companies that are completely disconnected from their stock prices?
Anderson: The first thing that comes to mind for me, and I do see this quite a bit. I tend to flip on CNBC from time to time and I’m always just really amused. That’s my first reaction. Not to sound super flippant about it, but you can see the level of frustration in these anchors’ faces when they have to go to talk about AMC again when it’s another day of there’s actual things going on in the markets, and this is what we’re spending our time talking about. As a spectator of that, not somebody that’s a particular fan of any of the core meme stocks, but I’m just super entertained by it. I like that you’re seeing this push from people that aren’t the mainstream Wall Street crowd, that are getting involved, that are having a voice. Whether they are using that voice for good or evil, I think the debate’s still out. But I think that’s my first spot for it. But I’m not hearing as many questions about that as I am things about crypto and maybe some of the Cathie Wood stocks which tend to be a lot more of the, hey, is this stuff we should be in, is what you heard a few months back and then as of this year, it’s been a little, I don’t know, is the party over? But that’s definitely more of the concern there.
Hill: Do you think this calms down at all with respect to the meme stocks? Because when this first started with GameStop, I remember thinking to myself, OK, I think I understand what’s happening specifically with GameStop, but I don’t see how this is repeatable on a consistent basis. That was at the beginning of the year. Here we are, it’s June and we’re talking about it. So clearly, I was wrong about that. But I don’t know, where do you think this goes?
Anderson: Well, what it looks like to me from my cheap-seats perspective, and not somebody that really digs into these Reddit threads or anything. But it looks to me like what they’re running for is a screen of high concentration positions for hedge funds and then really high short interest. If you’re screening for that, I think that that screen continues to work probably for a while and you can find companies where you might be able to find this sort of a play. Does that continue? Probably as long as the story keeps being interesting. I think you could repeat this pattern, but the key is that I don’t think most people in this trade are making money. I think it’s some of the early adopters that are probably making some money and a few people that are having fun being along for the ride, but I don’t think this is consistently profitable for a huge group of people. Maybe I’m wrong there, but I just don’t see how it can be. At some point, people are going to get frustrated with following along on that story if it doesn’t actually start making them some money. I definitely think that’s more of the risk than it is. Can they find more ideas to do this with?
Hill: Obviously, home purchases are a major story for all the obvious reasons. Something that is obviously less expensive than a home, but certainly a big purchase for a lot of people. This is starting to get more attention over the past few weeks, and that is the automotive market. You’ve got this combination of the semiconductor chip shortage, supply chain issues. The major automakers have basically all said, yeah, we’re cranking these things out as fast as we can, but it’s not going to be as many as everybody is hoping for. To what extent is that playing into either your own life or just the lives of your clients?
Anderson: Yeah. What I think is still a funny story on the auto front. May of last year, May of 2020, I was starting to get the feeling that the pandemic and the stay at home, work from home thing was going to last much longer than people were expecting. When we left the office, the first indication was that everybody is going to go home for two weeks. We’re going to wait this thing out and see what happens. Then it was like, wait a minute, this is going to be months. I had a car that still had a car payment on it and I was like, why am I paying for this thing to get a suntan? This is ridiculous, and I sold it, literally, in one day. I went from 10 a.m., I had the idea I was going to sell my car, by two o’clock it was on somebody else’s lot, and it was great and I was so proud of myself for making this decision. Now, I’m starting to think I need a car again and looking and going, wait a minute, I think these used cars have gotten more expensive, not less expensive. Maybe I made a mistake here. I’m definitely feeling a little bit of that pinch. I’m not in a super hurry, so I don’t have to rush out and buy something thankfully, but definitely, yeah, I underestimated that for sure. You’re seeing the chip shortage in all sorts of stuff. You can’t give an Xbox these days, there’s all sorts of products that are affecting it.
On the home side, I think most people that don’t need to move simply aren’t. That’s contributing to the super low supply. I actually got an unsolicited call, this was yesterday, from a real estate broker that said, “Have you thought about selling your home?” I said, “Yes, I’ve thought about it but I would have to move somewhere else, which is my problem and so I’m not going to do that.” [laughs] It turns out I need a home and I’m not going to sell you the one that I’m living in until I could find somewhere else to go. That same problem is going to affect all the buyers. But you’re definitely seeing a lot of discomfort in that market, particularly for first-time buyers that are trying to go out and build that future. That’s really difficult. I feel for those people most. For the rest of us that are enjoying a little bit of appreciation that might feel undeserved at this point, I’m OK with it.
Hill: Last thing and then I’ll let you go. We’re basically at the midpoint of 2021. When you think about the second half of the year, what is something you are curious to see how it plays out? It could be in housing, it could be in stocks, specific industry, but what are you going to be watching over the next six months?
Anderson: I think a couple of things, and tying together a few of the things that we’ve talked about already. I really want to see if some of these inflation fears are a little bit short-term pressures that people are over extrapolating what could happen. You see some short term tightening in a bunch of different markets, from labor to lumber, to all of this stuff. I’m hoping as we get the rest of our processing back online, that you see some of that just normalize and that we’re not really as worried about this huge, booming hyperinflationary environment, which I think would cause the Fed to take much more severe action. The other thing is just continuing to always watch the market. I do think you’ve seen a really big rebound in value stocks, which have basically been getting kicked around for the last decade, and just seeing if the companies that have been growth-oriented and have been so exciting to watch in recent history if that trend can continue. Yeah, we’re super thrilled to be running our practice and working with the folks that we are. It’s been great. I think most of my attention really is there on getting our business off the ground.
Hill: You can listen to the Check Your Balances podcast, new episodes come out every Wednesday. Check it out because Ross and Dan do a great show. Ross Anderson, thanks so much for being here.
Anderson: You’re too kind. Thanks, Chris, great to be here.
Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. That’s going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I’m Chris Hill, we’re off tomorrow, we’ll be back on Monday.