Episode 274

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Published on:

18th Oct 2023

Investment Long Game: Why Staying in Stocks Pays Off

Amy Irvine and Kate Welker discuss whether people should be pulling money out of the stock market and putting it into cash. They explain that while cash may currently be yielding a high rate of return, historically, a stock market-based portfolio will provide a higher rate of return over the long term. They also discuss the concept of the yield curve and how it affects different investment options. Additionally, they provide tips for saving on taxes at the end of the year, such as maximizing contributions to retirement plans and considering Roth conversions.

Key Takeaways:

  • Historically, a stock market-based portfolio will provide a higher rate of return over the long term compared to cash.
  • The yield curve refers to the relationship between short-term and long-term interest rates. A normal yield curve has lower short-term rates and higher long-term rates.
  • Consider maximizing contributions to retirement plans and exploring Roth conversions to save on taxes at the end of the year.

Quotes:

  • "For a long-term investment, staying steady in the market is more successful." - Kate Welker
  • "Run some numbers right now. Once you get to the end of the year, you don't have a lot of options." - Amy Irvine

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Should You Pull Money Out of the Stock Market?

The question of whether to pull money out of the stock market and invest in cash is a common one, especially during periods of market volatility. However, it is important to consider one's long-term goals and objectives before making any decisions based on fear. As Kate Welker, one of the financial planners at Rooted Planning Group, explains:

"If you have one side of your equation allocated to stocks and equities, and the other side allocated to fixed income, such as bonds, CDs, cash, or money market funds, it may be ideal to allocate a portion of your cash to a money market fund that is currently yielding a higher rate of return. While this rate is not guaranteed and may change in the future, it is currently around 5%."

It is crucial to remember that historically, a stock market-based portfolio has provided a higher rate of return over the long term compared to cash investments. As Kate points out, cash investments have historically averaged around 1.2% return, while a stock market-based portfolio can yield a historical rate of return of 7% to 9%. Therefore, staying invested in the stock market is generally more beneficial for long-term investment goals.

Understanding the Yield Curve

To fully grasp the implications of investing in different types of fixed income vehicles, it is important to understand the concept of the yield curve. The yield curve represents the relationship between the interest rates and the time to maturity of bonds of the same credit quality. A flat yield curve occurs when short-term and long-term interest rates are relatively equal, while an inverted yield curve occurs when short-term interest rates are higher than long-term rates.

As Amy Irvine, the CEO and founder of Rooted Planning Group, explains:

"A flat yield curve would mean that a three-month CD, a five-year CD, and a ten-year CD all have the same interest rate, for example, 5%. An inverted yield curve, on the other hand, occurs when shorter-term interest rates are higher than longer-term rates."

In recent years, the yield curve has been inverted, with shorter-term rates being higher than longer-term rates. However, the yield curve is starting to level out, and longer-term rates are beginning to rise. This normalization of the yield curve suggests that investing in longer-term fixed income vehicles may become more attractive in the future.

Last-Minute Tips for Maximizing Tax Savings

As the end of the year approaches, it is essential to consider strategies for maximizing tax savings. One such strategy is to contribute to retirement plans, such as 401(k)s or 403(b)s, before the end of the year. By increasing your deferral rate, you can lower your taxable income for the current year. Kate Welker advises:

"If you have extra cash flow available or have not maximized your employer-sponsored retirement plan, it may be beneficial to increase your deferral rate. This can help lower your taxable income for the current year."

Another strategy to consider is a Roth conversion. A Roth conversion involves transferring funds from a tax-deferred account, such as a traditional IRA, to a Roth IRA. By paying taxes on the converted amount now, you can potentially enjoy tax-free growth in the Roth IRA. Kate explains the importance of timing when considering a Roth conversion:

"If you anticipate being in a higher tax bracket in the future, it may make sense to do a Roth conversion now. By projecting your income for the year and determining your tax bracket, you can assess whether a Roth conversion would be beneficial."

Conclusion and Future Outlook

In conclusion, it is generally advisable to stay invested in the stock market for long-term investment goals, rather than pulling money out and investing in cash. While cash investments may offer a higher rate of return in the short term, historical data shows that stock market-based portfolios provide higher returns over the long term. Additionally, understanding the yield curve can help investors make informed decisions about fixed income investments.

As the end of the year approaches, it is crucial to consider strategies for maximizing tax savings. Contributing to retirement plans and considering Roth conversions can help lower taxable income and potentially provide tax-free growth in the future. By running projections and assessing one's tax bracket, individuals can make informed decisions about their financial future.

Looking ahead, it is important to stay informed about market trends, interest rates, and tax regulations. Consulting with a financial planner can provide valuable insights and guidance in navigating these complex financial decisions. By staying proactive and informed, individuals can make the most of their investments and optimize their financial well-being.

This episode is brought to you by Rooted Planning Group. Rooted Planning Group is a fee-only financial planning firm that specializes in working with women in their 30s and 40s who want to take control of their finances and plan for the future. Whether you're just starting out or you're looking to make a big change, Rooted Planning Group can help.

Visit www.rootedpg.com to learn more.

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About the Podcast

Money Roots
Money Roots with Amy Irvine
Welcome to "Money Roots," the podcast where personal finance becomes personal. Join host Amy Irvine, CEO of Rooted Planning Group, as she demystifies the world of finance and makes it approachable for everyone, from beginners to financial experts.

In each episode, Amy and her guests dig deep into the financial soil, planting the seeds of financial knowledge and helping you nurture your financial future. Whether you're looking to build a solid budget, invest wisely, or plan for retirement, "Money Roots" has you covered.

Get ready to explore practical advice, inspiring stories, and expert insights that will empower you to take control of your financial destiny. It's time to grow your money roots and thrive financially!

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About your host

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Amy Irvine

Uncorking Amy Irvine!!

If any of you have ever met Amy, you know she is passionate about
three things. Family, Finances, and WINE! This comes through in all
that she does and all that she is. When asked to describe herself she first and foremost states, “I am a wife, a daughter, and hopefully a good friend, who happens to also be a financial planner.” Amy holds a Master’s Degree in financial planning and is a Certified Financial Planner TM , Enrolled Agent, Certified College Financial Consultant, and a Financial Wellness Coach with over 25 years of financial planning and industry experience. She is the Founder and owner of Rooted Planning Group, (Formerly known as Irvine Wealth Planning Strategies LLC), which started in 2016 and has grown to include 6 other planners and 2 part-time staff members. Amy is definitely “doing it her way” and has been recognized by her financial planning colleagues as being a “disrupter,” a title she holds close to her heart and is proud of.

Uniquely, at the age of 44, she decided to not only start her only company, but to act on what she defined as her perfect life and she splits her time between Parrish, Florida and Jasper, New York.
On her website it states, “I love what I do, but I also very much enjoy warmth, good
conversation, wine tastings, and volunteering. New York is extraordinary in the summer and fall, but so is Florida in the winter.”
In 2018, she decided it was time to take the stigma out of finances by combining her passion for finances and wine. She started a podcast called “Wine and Dime,” which highlights a different wine and financial topic each week, and she released her book combining those same two passions, titled, “Uncork Your Finances.”
Many of you may know her as one of the co-founders of the Southern Tier Women’s Financial Conference – a day of collaboration and financial education, which will be hosting it’s sixth year!
To round out her volunteering passion, she often provides financial education to the
community through the financial management program of Cornell Cooperative Extension of Steuben County, she serves on the board of Faith-in-Action of Steuben County, volunteers for various Fund For Women of the Southern Tier events, works with the finance committee of the Arts Council of the Southern Finger Lakes, and serves on the board for the Corning Painted Post Historical Society (also known as Heritage Village).
In her downtime, you’re likely to find her with a glass of red wine from one of the many Keuka or Seneca Lake wineries that she highlights in her Wine and Dime Podcast.