Yield Inversions, Recession Worries, RMD Timing, and More!
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The interest rate environment today, as you guys all know, is very, very different than it was 20 or even 10 years ago. So it's really challenging and probably not smart to use this historical data and previous yield curve inversions to try and predict a future outcome.

Welcome to the Stay Wealthy Podcast. I'm your host, Taylor Schulte. And today I'm going to be answering three really awesome questions from you guys, the listeners. But before we do that, I actually want to thank three of you, Scott, Brandon, and Nitin for taking me up on the free investment consultations that I offered a few episodes back. And I'm going to be answering three of those questions.

We completed the portfolio analysis. We had our one hour consultation phone calls. We had a great conversation and it was extremely rewarding for myself. And I know they valued the time as well. So I thank you guys for your support and your trust. And I look forward to offering these again soon. So stay tuned.

Okay. So today I have three questions from you guys that I just thought were too good not to share with the rest of the audience, especially given what the markets are doing lately. We're going to be talking about the recent volatility, the yield curve inversion, the right time during the year to take your RMDs. And then finally, if buying extra insurance through your employer makes sense. First of all,

For all the links and resources mentioned in this episode, visit youstaywealthy.com forward slash 51.

Okay. So Joanne B out in New Jersey. Hey, Joanne. Joanne wrote an email to me recently and she said this, she said, the recent market volatility has me spooked again. Do you think a real recession is around the corner or is this just a short term pullback? Also, I read something in the news about a change in the yield curve and I was wondering what that is and how that was impacting everything.

So really, really good questions here. Obviously really timely given everything that's going on. I don't blame anyone for feeling spooked. It never feels good to see your portfolio lose money. The short answer is, of course, I don't know what's going to happen and nobody really knows. If anyone pretends to know exactly where the market's going from here, it's only because they're trying to sell you something or they're hoping to get lucky and then they can sell you something later. Right?

And remember, it doesn't have to be selling you a service or a product. It could be a media outlet that's selling advertising. So if they get more eyeballs on the screen or on their publication, that means that they can sell more advertising and put more money in their pocket. So just be careful about listening to predictions from people that are out there.

But yes, market volatility is certainly back. I think we're all aware of that by now. On August 13th, the Dow dropped more than 800 points, which obviously made for a great headline in the media, which read something like worst day in 2019. But our stay wealthy listeners are way smarter than to pay attention to headlines like that.

We know that drops in the market are completely normal. The market just doesn't go up every single day, every single week. That's not normal. In fact, this is actually the 307th time since 1920 that the Dow has dropped 3% or more. In other words, as Michael Batnick recently noted, it happens a lot. It

We don't know if markets are going to go down further from here, which is why it's so important. And I know I sound like a broken record, but it's so important to have a diversified portfolio. It's also why I personally believe that our bond portfolio, the bonds that we own in our portfolio should be comprised of U.S. government bonds instead of corporate bonds, low-grade corporate bonds, or even high-yielding junk bonds.

US government bonds historically have gone up when stocks have gone down during catastrophic time periods like 2008, 2009. I advocate and personally would prefer to take my risk in stocks and make sure that the bonds that I own are really safe. I don't want to take risk in the bond portion of my portfolio. That's my safety net.

If you need or if I need a higher rate of return in my portfolio, then I'm just going to add more to stocks instead of increasing my risk in my bond portfolio and chasing yields and junk bonds and high yielding bonds. I don't want to be lured into lower quality bonds. I want to know that my bond portfolio is made up of high grade US government bonds, and that's my safety net.

So if your allocation includes a balanced allocation to government bonds, remember that you can use that part of your portfolio as a war chest if stocks are falling. So if the stocks in your portfolio are falling, hopefully the bonds in your portfolio are doing better. Maybe they're even increasing in value and you can use that war chest to supplement or to feed your income during these really difficult times.

This is also why I'm a big fan of total return investing, which you've heard me talk about before on the show. And I'll link as always, which I've done before. I'll link to the Vanguard paper on total return investing in the show notes. But

But in addition to total return investing, giving you the ability to constantly rebalance your portfolio, it also gives you the flexibility to adjust your spending downwards, maybe take less money out of your portfolio or stop taking withdrawals entirely if you're able while the markets are going down and then wait for them to recover again before tapping into them. If you have a different income strategy, if you're receiving dividends and spending dividends,

you don't quite have that same type of flexibility all the time. So I like total return investing because you have some flexibility there. You're constantly rebalancing the portfolio, which means you're buying low and selling high. And then you have this flexibility to say, you know what? I just don't need the money right now. I'm going to let the markets do their thing. I know these recessions typically only last 12, 18 months. So I'm going to just sit back, adjust my spending, and then I'll get back in. I'll start taking money again from my portfolio when things recover.

As for the yield curve, yes, the yield curve inverted. And my friend Colin Roche out here in San Diego, I think he summarized it best. So he said, look, there are only two components here that you need to pay attention to. The 10-year treasury yield and the two-year treasury yield.

So for example, if the 10 year treasury yield is yielding 2% and the two year treasury is yielding two and a half percent, then the curve is inverted by one half of a percent. This is kind of odd because you would think that a longer term bond, a 10 year bond should pay a higher yield than a shorter term bond.

Maybe the best way to think about it is thinking about it in terms of buying a CD at the bank. Like, wouldn't it be weird if you went to the bank and the five-year CD was paying less than the one-year CD? So it's the same thing here, but with U.S. treasuries.

I'll link to Colin's full analysis in the show notes. But for now, yes, the curve has inverted. The curve is inverted before just about every post-war recession. And it's a serious indicator to pay attention to. The market is basically telling us that they're softening their economic expectations. Now, it could just be softening and we could just be slowing down for a period of time here before we ramp back up.

or we could be moving closer to a recession. We don't know. Irving Carmel, a blogger, also noted that a recession typically doesn't happen for 19 months after the yield curve inverts. And also historically, the S&P 500 peaks one year after that inversion. Now, it's not a prediction. Again, that doesn't mean just because it's happened before, it's going to happen again, but just some interesting statistics that I wanted to share.

The last thing I want to say is that the interest rate environment today, as you guys all know, is very, very different than it was 20 or even 10 years ago. So

It's really challenging and probably not smart to use this historical data and previous yield curve inversions to try and predict a future outcome. So again, the boring advice here, maintain a diversified portfolio, ignore the noise, focus on those things you can control and stay committed to the financial plan you have in place. If you don't have a financial plan in place, put one in place.

That is the recipe for long-term retirement success. All right, our second question comes from Mark C in Los Angeles. Hey, Mark, thanks so much for listening. Mark wrote in and he said, and I love this question. He said, I've been taking my required minimum distributions out each year at different times. Sometimes I just take it all out in January. Sometimes I take a few distributions throughout the year and sometimes I just forget. And then I quickly take my withdrawal before the end of the year.

And this got me thinking, when really is the best time to be taking my RMDs? So Mark, thanks. This is, like I said, this is a really good question. I really enjoy this one. So the first thing that we want to remember is that from 1926 to now, the stock market has had annual positive returns, had positive annual returns 75% of the time.

In other words, if I put this another way, every three out of four years, historically, the stock market has had a positive return.

one out of every four years, it has a negative return. So 75% of the time stocks have positive returns historically. Those are pretty darn good odds. If those odds were on the blackjack table, you probably wouldn't be listening to this right now and you'd be at the casino all day long. I hate to draw an analogy to gambling here, but I actually think that it's a good argument as to why investing in publicly traded stocks for long periods of time is not gambling. And

If you understand all that and you share that philosophy, then we want to keep as much of our money, of course, outside of our emergency fund. We want to keep as much of our money invested in the markets for as long as possible, especially if that money is in a tax deferred account like a traditional IRA.

Which means that waiting to take your distributions, your required distributions, waiting to take them to the end of the year on average is the right solution for most people.

Now, John Luskin in my office, he's a super nerd. He took this a step further and I'll link to his research in the show notes, but he wanted to also look at 30 year rolling periods instead of just the long-term annual return averages, which can be a little bit deceiving. So he looked at these 30 year rolling periods and what he found, I'll just, I'll save you again. If you want to look into the details, go to the show notes page.

But he found that on a 30-year timeline, that there's not a single data point that makes a case for taking your distributions at the beginning of the year. He also came to the same conclusion we'd looked at 20-year rolling periods.

However, when he looked at 10-year rolling periods, it's actually sometimes better to take the distribution at the beginning of the year if the portfolio has more than 60% in stocks. So if your time horizon is 10 years or less,

It's more of a coin toss and probably just something you shouldn't be even thinking about to begin with. Like if your time horizon is 10 years, spend your time with your family and the things that matter most and stop worrying about the perfect timing for your RMDs.

So in short, waiting to take your distributions until the end of the year is likely the right answer for most people who have diversified portfolios and that are invested for long periods of time. It doesn't need to be on December 31st, maybe just sometime in December, take that withdrawal. You can automate it as well so you don't have to think about it. But waiting to the end of the year is likely the right answer here. So thanks so much, Mark. I appreciate you writing in.

All right. Our last question comes from Robert H in Phoenix. Shout out to Arizona. I actually went to school in Tucson at the University of Arizona. So Robert wrote in and he said, my employer provides me at no cost with a small life insurance policy. I believe it's around $50,000. They also give me the opportunity to buy more life insurance, which I would pay for out of my pocket through them. Is this a good idea or should I be buying life insurance somewhere else?

So first, great question. I think a lot of people don't even think about this. They just move forward and do it. So great question. Good for you for just stopping and thinking about this. This same question can actually be applied to disability insurance. And the answer, unfortunately, is it depends. But let me try to answer it and shed some light on all this. So

Some types of insurance are easy to compare. For instance, term insurance, really, really simple, really easy to compare term insurance policies. Same with something like umbrella insurance, really, really simple and straightforward. You're just shopping for price. You know, $1 million of term insurance means $1 million of term insurance. It's a simple product. Do not confuse it with something more complex like permanent life insurance or whole life insurance.

Disability insurance gets a little bit more complicated. There's a lot of different nuances with disability insurance. If you choose a disability policy based on just the price alone, you might be, or you're probably going to be disappointed in the benefits. As you might know, employer provided disability insurance is usually pretty cheap. However, the benefits are usually lacking. So

Most employer provided disability insurance policies aren't very good because they only offer benefits for two years. I talked about this in depth in episode number 44. So if you want to go back and listen again, you can go check out episode 44. The show notes for that page is you stay wealthy.com forward slash 44.

So in short, if you have an employer provided disability insurance policy, you probably need to supplement it or replace it with a private policy. But back to Robert's question about life insurance. So again,

Term insurance is a simple product. So it's pretty easy to evaluate by looking at the price through your employer versus an outside policy. That would be step one. Robert, what are they offering you? What's the cost? And then compare that to shopping around online or through a trusted broker near you. So looking at the price would be step one. However, you also need to consider the risk of having all of your insurance tied up with one employer.

Remember, you probably also have health insurance, dental insurance, vision, accidental death. Maybe you have other insurance policies through that employer.

Imagine if you switched employers, if you got laid off or fired, or you voluntarily switched employers and you had to set up all new insurance policies. Do you also want to add life insurance to the mix? If you don't have to, if it's cheaper outside of your employer, or even if it's the same cost, maybe it's easier to keep it outside of your employer. So it's one thing less for you to do. If you were to change jobs, just, just think about how busy you are and how much you value your time.

buying a term policy outside of work might not only be cheaper, but it might make your life much easier if you were to change jobs. So I hope that answers your question. Again, really good. Thank you guys so much for emailing in. If you have questions,

I mean, I can't keep up with all the questions you guys are sending. I try to respond to every single one of them and I put them aside for episodes just like this. So if you have a question, please shoot me an email at podcast at youstaywealthy.com. Or if you just want to shoot me a note and say, hi, that's awesome. I love to hear from you guys. Thanks as always for listening. Again, the show notes for this episode can be found at youstaywealthy.com forward slash 51. And I will see you guys back here in two weeks.

Hey, it's me again. I just wanted to say thank you one more time for listening and remind you to please, please, please leave a quick review. If you're on an iPhone, leave a quick review on iTunes. If you're enjoying the show, I'm getting great feedback from listeners just like you. And I really want to keep the momentum going. So if you have a chance on your iPhone, leave a quick review on the Apple podcast app. And thank you so much in advance for all of your help and support.

This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services. ♪