Behavioral Finance: Concepts to Remember This Year

Main Points

• Michael and Scott review a report by JP Morgan on consumer savings, showing a decrease in savings over the past few decades.  

• Americans have not been good savers for a long time.

• It is important to know your savings rate, especially if you have time before retirement. 

• Employers can help employees through Financial Wellness programs. 

• Inflation has caused a decrease in take-home pay, leaving less money for saving. 

• Businesses need to be aware of their employees' financial situations and the impact of inflation on their take-home pay.

• Scott and Michael review behavioral finance topics.

Transcript

Michael Sayre

Hey everyone, welcome back to the podcast. This is Michael Sayre with CUI Wealth Management. Today, I have Scott Barry. Scott, why don't you go ahead and introduce yourself? Tell us a little bit about yourself.

Scott Berry

Yeah. Hey, everybody, good afternoon or good whenever you're listening to us. My name is Scott Barry. I'm an advisor and the owner of Abundance Wealth Advisors in the Pacific Northwest. 

We serve a lot of folks, especially business owners, and you know, their key employees a lot more in their personal finance side and focusing more on the behavioral things and the things that we're just hardwired as human beings to get in our way. And how do we overcome those things just to focus on the things that matter to us and create, you know, our best future selves that we're capable of?

Michael Sayre

Thanks, Scott. Appreciate it. It's always a pleasure having you on. 

I wanted to talk about a couple of things for the new year. This will be good because we've got different perspectives. I know Scott, you work with, you work with a lot of business owners. I also work with business owners and spend a lot of time on employer-sponsored retirement plans. 

I'm going to share my screen here; we're in a new year, we've got a lot of new things to look into, the goals we're setting, and all of that. I wanted to talk about some of the economics that are going on and some of the things that we should keep an eye on. Right here, what I'm sharing is a report that JP Morgan put together for their asset management division. They put this together every quarter. And there is a there's a ton of pages. As you can see here, these are all their different categories. And one of the things that caught my eye as I looked at this is the consumer savings. 

This graph shows how people have been saving for the last few decades. And you can see that back in the 60s and the 70s, people saved a lot more than they are today. And there was a bump and savings back in like right right around the pandemic timeframe. A lot of that is due to the checks that people received from the government. But in the last couple of years, you can see that we are not saving as much as we have over the previous few decades. And I know it's not the lowest savings rate. You can see it in the early 2000s. There were some times when people were saving even less than this. But I think this is worthwhile to unpack a little bit. Scott, please give me your thoughts on this.

Scott Berry

Yeah, Mike. So again, first of all, this JPMorgan report, every advisor out there looks forward to getting this. It's got so much helpful information and so many different ways, you know, people need to look at this and take some time to meditate on it without coming away thinking more about this and that. 

First of all, savings rates are fascinating angles to look at things from, and anytime you can get a 60-plus-year history on things, too. You get to skip the full context of things as well. So, there's no secret that Americans are not good savers and have not been good savers for a long time. Suppose you look at the fact that more than half of Americans couldn't afford a $400 emergency without going to some other source, whether that's a credit card, a personal loan, family, a friend, etc.

$400, especially with what inflation has done, that's not a very big emergency. A standard vet appointment can run you more than that these days, right? So. But yes, savings rate in particular. Anybody under 60 years old, I'm a huge advocate for them to know their savings rate. Many people would look at this and not even know what to make of it because they don't know what their savings rate is. But for anybody who's got any time to go before retirement, this is one thing that is squarely in your control as far as impacting your future and your outcomes, as well as your present. 

Obviously, you and I are both huge proponents of people keeping our emergency fund. That's just financial planning 101, your savings rate, your investing rate, how much money you're putting towards your rainy days, as well as, you know, your bright futures. Those are the types of things you can control in a world of things you cannot control. And quite frankly, whether it's 4.6% or even that 8.6% 60-plus year average, those just aren't good enough. 

What does that mean at a household level? Well, if you're a business owner, or if you're in charge of HR, your company, and you're trying to be keyed into what your employees are going through, just know that with it inflation, even if they've gotten raises, those raises haven't kept up with inflation. So, your actual net take-home pay, in real terms as in post-inflated terms, has been shrinking. So there's less meat left on the bone. And then that just means less money going into saving. 

A lot of people could be teetering on the brink of some dire financial times. We don't have an open culture of talking about our money. In my experience working with key employees, execs, and folks who own businesses, we're not always all that much different than the people who work for us. Even if we might have an extra digit in our paychecks or salaries. So, just because you make a high income doesn't mean you're a great saver. 

I wouldn't be surprised if we even start to extrapolate on these numbers and look a little bit more. Folks just aren't saving enough; they're not as well prepared for the times to not be good times. We just got a pretty rude awakening back in 2022 as the markets came down. And, again, just don't ever think that things can't happen to you. So keep in mind that this is a source of stress; this is a solution to stress. But whether it's financial literacy, more income, some combination of the two, just better spending habits, etc. This is in everyone's capacity but isn't stressed enough as an essential metric for your personal points.

Michael Sayre

It's really interesting because, in the culture that we live in, it's a taboo topic. People are more inclined to be more open about their love lives than talking about their personal finances. It is just one of those topics that people don't discuss. But as a business owner, you can bet that if employees are concerned about their finances. If they're concerned about how to make ends meet, if they're worried about their long-term finances, it's going to be more challenging for them to focus. It's going to be tough for them to complete their work. 

We want to leave some things at home. But inevitably, we're all human; we all bring stuff to the office, even if we don't intend to. Even the people that can shut out most things, financial concerns can weigh on people's minds. I think it's essential to be aware of this. 

A couple of things I think business owners can do is, I think they can take the time to make sure they have financial wellness programs set up and make sure that alongside their 401k, they have resources that can be utilized for people to understand how to make the most of their financial situation. So those are a couple of things I think are really worth considering. And action items that can be taken into account. 

I will go to another item I think is worth bringing up. This is by lending tree. And for those who can't see the screen, who are listening on a drive or so forth, you can see that we just had the second consecutive quarter where we've hit record highs in credit card usage and credit card balances. Here in America, according to this piece that was put out by Lending Tree, we have over a trillion dollars in credit card debt. I think there are a couple of things to consider when you're looking at this. One thing that I think is important is we're in an environment with a higher interest rate than we've been in for a long time. We'll talk more about that in a few minutes. But, when you look at credit cards, they tend to have higher interest rates and higher costs to have them. You're looking at 17% to the mid-20s in terms of what you're paying for that debt. This is an important topic to talk about. I'd love to hear your thoughts on this, Scott.

Scott Berry

Yeah, this is a good one to look at. It is an excellent statistic to contrast with savings rates. 

People still need to spend money. Here we are talking about just following Christmas time. And that tends to be a time of peak spending a month where there's any month that people tend to spend more than they make. It's that one. Well, how do you spend more than you make? You put it on a credit card more often than not. This is kind of shocking, but at the same time, not really, because, again, it's incredible how quickly we can become accustomed and comfortable and convert what was once a want into a necessity. As we've kind of had this ratchet effect on our lifestyle, and you need to have this home and this car. And then all those things get more expensive simultaneously; you feel the squeeze significantly. And you get a cheap interest rate, and you move to a nicer neighborhood, and your neighbors have nicer cars. And we don't want to be the poor person on our block.

Credit cards are kind of a way of masking some things that can look like wealth. But again, there's a difference between being rich and being wealthy. So these are the types of things where when I see that credit cards are topping this.

I know that with higher interest rates, not higher in terms of historical sense, but higher in terms of where they've been over the past decade, certainly over the last two years, you know, with higher interest rates, some of that's going to be just more interest accruing month by month. It's a pretty sad feeling coming back to, you know, employees and rank and file type folks who may be under a lot of stress financially, you know, it's a pretty depressing place to be where, you know, you're making the same monthly payment, but your balance keeps growing. Even if you've chopped that card up or frozen in a block of ice, you haven't charged anything to it in months, right? So you know, try to be mindful of some of the stress that comes with that, but also try to be aware of how we spend money.

What is a want versus a need? You know, are we doing this to actually please ourselves? How much of joy are we getting out of it? Versus are we trying to impress people who won't even notice and don't care in the first place? You kind of create this foolish arms race. Look at the Christmas decorations in my neighborhood; look at the Halloween decorations in my neighborhood. How many people spend 1,000s of dollars on those types of things? 

Again, credit card debt. Talking about good debt versus bad debt, your mortgage tax deductible interest, these types with lower interest rates, or even student loans? But credit card debt has never been in the context of that good debt category. So, I am trying to think of how to build savings. How do we reduce debt? How do we increase our net worth through the asset side while reducing the liability side? You know, folks just really have to be mindful about making sure that every dollar they earn has a specific home and a specific place for it to go.

Michael Sayre

One thing that I think is interesting is that television transformed the middle class back in the day. People started to see TV shows and aspire to a particular lifestyle. That transformed the way that people spent there, you know, the, what they aspired to be; the icons of television at the time. And now we live in a world where there's tons of stuff to look at. We've got all kinds of forces showing all the wealth that people have and the things that they're spending their money on. 

On social media, people are always posting about what they've done, the vacations they've gone on, and the things that they bought. I think that also influences our behaviors and how and what we think we need to have to have a happy life. I think we need to take a step back and realize that it's essential to look at what's important to us and what will make us happy. When it comes to finances, financial planning, and financial advice, people look at it the wrong way. They look at it as if it's all about the returns. Did we beat the market? And are we are we down when we should be up? And all of that. And those are important discussions. But when it comes down to it, it's really about what your goals in life are. What do you want to fund? How are we going to fund it? It can become distorted with all the noise that's around us. I think that's something to keep in mind and consider as you're looking at your finances. 

If you look at the last decade, I also think the interest rates seem high right now. But in the long term, if you look at the past two decades, interest rates have been higher at other points. Still, right now, we're just at a high point compared to the last decade or compared to the previous two decades. People have forgotten what higher interest rates look like; look at the 80s and how people had double-digit mortgage rates. And one thing I think is fascinating is that as the interest rates have gone up, compared to the last two decades, the sound financial decisions that we make, or the wrong financial decisions that we make, I think they kind of get accentuated in different ways. Because of the changes that have happened, there are more opportunities. But there are also more challenges. And there are pros and cons to everything. But look at it like this. If you have variable interest rates and a high-interest rate type of debt, that will be accentuated by the rising interest rates.

On the other hand, if you have extra savings, this is an excellent opportunity because interest rates in banks and CDs are paying higher than in the last decade. I feel like today's decisions kind of get accentuated in this type of environment. 

I am going to jump to the next section that I wanted to go over. Scott, why don't you do a walkthrough for those who are listening in? We have a chart here that shows the winners and the losers of the different asset classes over time since 2008. Scott, why don't you walkthrough for those who are listening?

Scott Berry

Yeah, definitely. You can call something like this quilt chart because it's color-coded based on different asset classes and investments and shows their year by year again, calendar year performance, ranked at the top, and the best performers ranked at the bottom, showing the worst performers. And this is basically kind of taking, like, if you were to log in and look at your investments in that pie chart, deconstructing that pie chart, pulling out specific pieces, no kind of weighting based on how much you have in one asset class versus another. 

But just that pure asset class as represented by, you know, such and such index, that all is in the fine print, if you guys want to take a look at this, or, you know, we could put this in the show notes for you. But all the way to the left, we've got historic averages going back to 2009 through 2023. And then on the side of, you know, each side, after that, we've got year-by-year returns going through, going back through 2008. So, there are some interesting years in there. But you know, when you take some time to actually kind of sit down, again, because Mike, you, and I've been looking at these for over a decade. You know, you start to notice some patterns in these things; you begin to notice that large caps had a great run in this period, even if you know only two times in that period, were they the top performing asset class. It's human nature to want to do the best and be the best. Any competitive person out there wants to do the best. What's interesting about investing is just how little is actually in your control. What do you control? You can tell your exposure to these types of things.

Again, going back to ancient history, here, in January of 2023, all of one year ago. We're coming out of 2022, which has finished down since 2018. And one of only two and basically that entire decade and one of the best bull runs in markets; people are licking their wounds; folks who had been accustomed to their accounts only going up or kind of shocked to see what they saw in their statements. And then we're listening to folks like JP Morgan and all the smartest, greatest investment folks out there giving their predictions and outlooks for how 2023 will go. Again, we can see large cap stocks; US stocks were up 26 plus percent for 2023. About three-quarters of the folks we listened to, the most brilliant folks with the most resources in our industry were calling for a recession in 2023. So we do need to be mindful of even, you know if you had all the data in the world, our predictive powers are still, you know, frequently wrong.

And on top of that, you know, you need to be reminded of your actual goal here if your goal is to just say that you have a better rate of return than your buddy. I mean, that's kind of a dumb thing to brag about. I'm sorry, what it is is you didn't have anything to do with that.

Again, even if we look at what rose the most in that large-cap category, it was eight companies. They call it the S&P 500. But it was the S&P Eight that did all the heavy lifting for the market for the entire year. Right. So it's one of these things where we're we get reminded from time after time, time again, that the best thing to do as far as your wealth is concerned is usually one of the less exciting, less, you know, sexy things to do so even though we've got stocks, bonds, international big companies, small companies, commodities, real estate, everything represented in this chart, the most consistent performer never the best. Far from the worst, though. It's just an asset alligator portfolio with a little bit of everything in there and just in some sensible percentages that make sense for somebody who's in it for the long term. So that thing averages just over 8% over this time period. That's a pretty good return; you shouldn't be happy with that, even if it's not the very best return out of there. And Mike, I know you've got some thoughts on what it takes just to get the best return out there.

Michael Sayre

Here's what I tend to see. People come to us and say, "I'm concerned about this," or "I'm worried about that," or "Have you heard about this in the news?" or "Have you thought about what's going on here." And people tend to think it's an all-in or all-out type of thing. It's like going to Vegas; it's all in black. You may be correct, but if you're wrong, then that will be painful. 

People tend to go back to behavioral finance. We tend to feel the pain of loss far more significant than the pleasure of the gains we make. And that's the case with finance. When looking at your statement, if it's down, you're like, oh, that's not fun. You know, nobody likes to see their statement down. But on the other hand, if it's done well, sometimes we don't notice it. 

Over time, it's done super well. I've had people look at the statement or say, “Hey, have we done okay?” it seems like everything's doom and gloom. And then you look at the statement, and you're like, “Oh, things have gone well.” So I think it's important to keep in mind that, don't, don't get so fixated on a specific asset class that you throw all the rest out the window because we forget that sometimes it might seem boring to have a diversified portfolio and to focus on, on having the type of portfolio that's tuned to the risk that we are willing to take, or that's appropriate for our age and our financial goals.

The goal is to have a happy, successful life and to fund that happy, successful life efficiently. And to do that, sometimes it's not as exciting as following all the trends that may be going on on your social media feed or, you know, the doom and gloom of different news organizations. And so, just keep things in perspective. And I think that's a really good note that we can end this discussion. This has gone quickly. But I think there's, there's always going to be opportunities, and there's always going to be risks, and with the changing economics, that that come about, because of say, you know, raising interest rates, we're, you know, there's always something to worry about, there's always opportunities. So take a prudent approach and look at the whole picture. What final thoughts do you have, Scott? I'd love to hear your final thoughts before we close up,

Scott Berry

I think I just want to double down on what you said there about what we know about human nature. So it's just like, losses hurt worse than gains feel good. So maybe it's not the most eloquent way to state it. But, like, you know, when it comes to hiring an advisor, and this is a misconception that I had moving into this career, it was like, Okay, we're going to help people get into the secret parts of the market that they can't get into without us. And it's like, no, you know, you've got Robin Hood on your phone now telling you to put money into this or that now turning all this stuff into a game and doing it like dirt cheap. It's like the market is democratized; you can personally get into just about all these things without us.  

What does an advisor do? It kind of helps you get out of your way; I don't know how to explain to somebody that, you know, mistakes are more costly than it is to just stay on the right track. And that's kind of where, you know, this is one of the most valuable things that we do for folks. And so I just want to point out that next to that, on the far left side, it shows the annual average rate of return on these different asset classes. So next to that is the volatility, aka the range of outcomes. So even though an asset-allocation portfolio finished just above average, the only things less volatile than that asset-allocated portfolio were fixed income and cash, and cash didn't have volatility, right? Didn't earn anything either. So there are so many different ways to get money but get, you know, increase your wealth over time. But again, sometimes it's just about avoiding mistakes, being patient, and letting wealth grow. So, Mike, I do appreciate the conversation; I appreciate the opportunity to kind of put these things into context. And again, I think context is critical, looking at the big picture and reminding yourself why you're doing this in the first place. It kind of checks out of just the tunnel vision we tend to have as busy professionals moving through a world with many different pressures and things trying to tell us something's more important than it is.

Michael Sayre

Yeah, very well put. Thank you, Scott. Appreciate you joining. And let me thank you to everyone who's tuned in. I hope you've gotten something out of this. Stay tuned for the next time for the next podcast, and Happy Investing in the meantime; once again, Michael Sayre, CUI Wealth Management, I appreciate the time.

References

J.P.Morgan Asset Management. (2024, January 1). Guide to the Markets. Retrieved from jpmorgan.com: https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/

Lendingtree. (2023, December 14). 2024 Credit Card Debt Statistics. Retrieved from www.lendingtree.com: https://www.lendingtree.com/credit-cards/credit-card-debt-statistics/