PODCAST EPISODE 230: Re-assess, Re-balance and Re-trench

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Paul 0:08

Hello, and welcome to your business your wealth. My name is Paul Adams. You all know that but I am joined by Mr. Corey Shepherd, man with the wisdom of Solomon, and the face of the Gerber Baby glory day.

Cory 0:26

No, that was actually a really good line because everybody who’s only been listening via podcast is now going to download a video for the first time because this gives

Paul 0:36

me really looks like a Gerber Baby, you should definitely download it, the man, the man has skin that would be the envy of any supermodel. And I say that, with all the love in the world, my friend.

Cory 0:50

Not bad for a 47 year old. That’s all I have to say, right.

Paul 0:57

One side note, by the way, between my wife and I, I got the vanity at the new house. That’s like these terrible LED lights that make me look like 15 years older. And I think people get those to actually expose their flaws. They do their makeup better. I chose the wrong vanity. So I’m waiting for those to burn out. They should burn out in 25 years or so I think those tell the LEDs work. Yeah. But today, you guys, here’s what we wanted to just have a conversation with you about is what is going on in the market. There is a lot going on. I mean, so record, we have Russia invading Ukraine. We have soaring inflation that really started to tick away and people started talking about back in December. We have

Cory 1:44

issues still. So costs are are up across the board. Were already I mean, there were already costs. This is what’s funny about the inflation piece, if you were trying to build a house, if you’re trying to buy a lot of different things. Those costs were already inflated eight, nine months ago, it’s just the media is just catching up to that. There’s mass mandates are dropping everywhere, which has people nervous for all kinds of reasons. I mean, people are saying is COVID getting better, are we going to have a resurgence of something because So all kinds of uncertainty around those issues.

Paul 2:21

Well, and now we’ve got this, the Fed, you know, and most experts are pointing toward this may be a year where we raise rates for different times at the Fed level, which tends to trickle down through society. So along with that we have the Fed experts are pointing to they’re going to raise rates four to five times this year, all coupled with the fact that the market, the s&p 500. And this case is down 11.65% year to date as of the recording of this episode. So with all that going on, a lot of people ask, Well, what should I be doing? And it’s it’s a big question. People get it all the time. We have people say things like, Well, is this the time I should sell? Is this the time I should take every bit of money I haven’t put in the market? Is this the time that I should get rid of that large stock position I’ve been holding? Because it has gone down? It scared the daylights out of me. And now at least I can get out of it with some gains. Still. Those are all

Cory 3:27

as the Chief Compliance Officer of sound financial group, here’s a message for everybody. And by the way, how do you get to be chief compliance officer while you go on vacation right during the deadline when that paperwork is due, and guess who becomes Chief Compliance Officer? Different different story entirely? No one listening should take this as what we’re saying is a specific recommendation for you. We’re going to be giving some some thoughts and ideas, some general directions but even our clients listening, don’t take this as a substitute for a conversation directly with with one of us but a idea that we should bring into our next conversation a reason to reach out to your household financial officer. If you’re listening, do it yourself on do it yourself are listening out there. Do some more research. Really think about how this fits into your overall picture. We can’t know everything about you as we’re talking. We’re just seeing what’s happening out there and talking about some things that have happened over time. Okay, okay. I feel better now. We can continue.

Paul 4:30

Perfect. Now we can turn me loose because we have so the quarter key I’m gonna mute Yeah. All right. So let’s just start with this idea of what the markets done so far. Now you can see that the market this year the s&p 500 has dropped over 10% Now, they consider that being flat out in correction territory that there are that this is where especially the money Media is going to begin piling on in a way that they don’t normally, in, you know when the markets just down a little bit. And we always need to keep in mind that when the media is hammering those messages at us, wait, hang out, watch the commercial. The commercials are going to be from financial institutions who benefit from your money being in motion, because it gets it out of one institutions hands and maybe into the hands of the advertiser. So I would just encourage you guys to just notice that you don’t have to get angry at them. You don’t have to. But just notice that there’s a real reason why they might be ringing the bell saying, right, hey, the market is really, really bad. And you need to be afraid, because for no other reason, it’s a good reason for you to stay through the next commercial breaks, and keep the ratings high.

Cory 5:49

It could also be ads from financial institutions or trying to benefit from your money, not being in motion, meaning locked up with them with some extra set of guarantees to get through this time, which are never too good to be true. But they are always too good to be free. So there’s some other costs associated. And some of those tools can be right for the right people the right reasons. But if they’re trying to get us scared as the only reason to do it, then that’s probably a

Paul 6:19

problem. And I think that’s well said. So let’s jump over to something that I think what too often doesn’t get said is what do most people do. If you’ve managed to accumulate any level of net worth and wealth, what you know is most people do the wrong thing. And what I mean by that is they don’t save enough of their income. They don’t sit down to even understand how much money it will take to have financial independence. Even though everybody says one day they want to retire. We’re not even taught to sit down and do the math of how much that takes. And so first just know most people don’t do the right thing. And in the spirit of that. This is a chart from Morningstar, that talks about if you want to dig deeper into this, you can get this link. Right in the description, you’ll see a link to our website, and we put all of our show notes and any backup data that’s important right there. And this is from 2020. Now we all remember, 2020 is the beginning of the pandemic. This is the first time people became aware of the Coronavirus. We were unsure about its lethality. I remember at the beginning where the news was saying this thing has a five to 7% mortality rate. And everybody was amazingly worried. And I don’t just mean about food, water, the lives of themselves and their loved ones. But on top people were very worried about money. And they were saying things like I need to get out of the market, I’m scared, etc. Well, what most people did is took out their money. And what you can see, and you can see these charts over time, if you ever want to look at him, you could see it in the mortgage crisis. You could see it during the tech bubble. These are some of the more recent big drops in the market. But people take out their money at the lowest possible time of the market. I remember, years ago, I was meeting with a guy who worked for a large fund company. And we’re just having breakfast is back when I lived in Las Vegas at a place called the AIG and I don’t think my compliance officers gonna be upset with the fact that I just mentioned what restaurant it was. But at the egg and I were talking about the market pullback and he showed me this chart that was an internal document of theirs. And it showed redemptions of people calling in directly wanting to sell their mutual funds. The bottom of the market in 2008 was literally that same day was the highest number of people calling in to redeem shares to cash and money flew straight out of the market at the exact time that by every academic and historical standard would have been the wrong time to do it. And it was no difference during Coronavirus. Now, the the thing that is difficult to think about with this is like you I don’t want to say those people were dumb or foolish or anything like that. They didn’t have good advice. They didn’t have a conversation like the one that Cory and I are having with you now, which is the idea of you actually have to build a different part of your character to hold during volatile markets. It takes courage. It’s not easy, and those people aren’t dumb for having done what they’ve done. They didn’t know

Cory 10:00

Paul, I’m noticing something on the sheet that I didn’t the first time I looked at so if you see the color coding the orange part of the bar is taxable bonds, yellow part municipal that the two biggest chunks of outflows are people were selling their bonds during that during that time, like there was a slight inflow, very, very slight info in some stocks. So bonds are, in theory supposed to be the safer part of the portfolio anyway, but they were even they were selling everything out to, to cash

Paul 10:36

and deed. And some of those may have been people doing the right thing like rebalancing their portfolio yet 20% in stocks, the market were 20% in bonds, the market went down. And now you just because stocks went down now you have 30 plus percent in bonds. So if you rebalanced that would trigger it. But you can tell that it didn’t all go into equities, because the equities didn’t offset enough to be rebalanced. Right. But as we do that, what happens so often, Korea’s I think people don’t pause in the moment of being when I say it takes courage, all that it takes something to get away from that little part of our lizard brain that reacts to threats, or reacts to opportunities. That’s the old fear and greed, that we get freaked out, we worry. And we take an action. And that worked really well when we had saber toothed tigers, or we had to worry about, you know, getting eaten by a lion or a bear. Because we didn’t have the same ability to defend ourselves. And not only would we go to that part of our brain to say I need to run or I need to hide, but those things came through time with us. And our like, we literally have not evolved. And and I say that you can think of it culturally evolved to do math. Because if we could have done math, way back when we were hunting and trying to fight bears with spears, for good reason, we would have never gone out. We would have stayed home our our species would have never made it this far. If we could have done math a long, long time ago. And it reminds me of something I read in Ray Dalio, his newest book is that the biggest investment risk that you have is the inability to have the money you require to have financial independence. That’s it. That is the biggest investment risk you have is not having enough money to have the life that you want. And, and it happens for all of us. Like maybe it’s every five or 10 years in your career that something happens. And you’re like, This is why I need to have enough money to be financially independent, because I’m really upset about this thing right here. Yeah, that may have happened for you during Coronavirus. Maybe you’d like would rather have started your own business, but you’re having to work from home, from the laptop with your kids at home from school, all that because of what’s going on in the world. But you couldn’t just say, I’m walking away. I want to encourage everybody that is you’re thinking about this with your investments hold on to that feeling of when you wanted independence. And it’s gonna require that over time, it’s not just this market, you know, people like Well, this one is different. So if you’re in your 50s right now, you know, statistically speaking, if you’re healthy when you reach 65, you’re going to live into your eight, late 80s 90s. This is not going to be the only downmarket bear market market correction, however, you want to look at it, it ain’t going to be the last one. And so each time it’s a chance to test our mettle, build our courage, and put ourselves in a position to hold it for longer, because each time it’s gonna get scarier. And it’s the problem of scale. As you get closer to financial independence, you’re gonna have more assets than you had last time there was a correction. And if you have more assets than last time, there was a correction. It’s going to be more scary.

Cory 14:21

The same percentages, bigger numbers.

Paul 14:24

That’s right. It’s yeah, it’s it’s the scaling problem. It’s the old idea of like, if you give, you’ve just gave out 100 Cell phones to people and one had a malfunction. You know, nobody cares. It doesn’t light up social media or anything like that. If you gave away 100 million phones, and 1 million of them had a problem. You’re going to your society freaks out and says a horrible phone. The same thing happens with the market, that when it goes down and here’s the problem. If you abandon your strategy, when the market is down, it also leaves A deeper emotional wound in the losses you encounter, because as the market marched forward, you weren’t there. And that’s the reason why we have to look at each of these. That’s why I encourage all of you, look, go ahead, look at the news, go ahead and reflect on all of the things going on. Because if you don’t, you’re not going to be able to build the courage, the metal, the fortitude, to get through the next one that’s going to be bigger. So look at it, build that strength, and tilt in to what’s coming next. And let’s talk about what’s happened in the past. Corey, I’m just gonna pull up. What has happened. Man, I don’t know if you guys can hear that. But I’ve got like a freight train outside my studio right now it looks like you’re anything so my word there is an 18. boy have I done a good job as soundproofing, there is literally an 18 Wheeler 10 feet outside my window, they must be delivering something for the remodel I’m doing right now.

Cory 16:02

I can hear what sounds kind of like faintly like, like those wind chimes that might be outside someone’s window. Like it’s really, really saw.

Paul 16:12

I’m pretty sure he’s just an 18 Wheeler backing onto my lawn right now. So let me pull this up. For everybody who’s watching Cory. This is a history of markets. So if you’re just listening, we’re looking at a history of market ups and downs, going back to literally 1926. And it’s assessing what was the positive return in the years following anytime the market went down more than 10% into correction territory, and then came back up. Now one of the more recent ones is, you know, we had a 51% total decline in 2008. Now, that’s from the very beginning of the market slipping to when it turned around and started going back up. People watch that no, of course is just the s&p 500 not an academically allocated globally diversified portfolio. But 51% downturn is no joke. And this would have been a little bit of the worst case scenario, because that would have meant you held only the s&p 500 You had no fixed income. And you just let it ride, close your eyes or look dead at it and had the courage to get back through it. But it went up 385% In the following 115 months, not even two years.

Cory 17:36

And this is. So we talked about the word correction at the beginning of the episode. And what what occurred to me is this, the question like how how long our corrections, right, meaning the word correction means something was going wrong. And we made it right, we fixed it. And so the idea is, oh, the market was too high that it was overpriced, and it’s being corrected. But look at this sheet 25. Well, the Great Depression was 34 months long. But even 2008 was only 16 months long in that correction in the s&p, so it’s not permanently corrected. So far, it’s never been a permanent correction. It’s been a short term diversion.

Paul 18:31

Oh, not a permanent correction, Cory, but a short term diversion. Yeah. And that is what leads many people to make, make decisions that are not in their long term interest. And, and what you can see, we can go all the way back. Now some of these are going to be before many of your investing careers. Here’s the tech bubble. I’ve been doing this now about 25 years that happened near the beginning of my career. And we watched that and went down 45% Worse than that if you’re overly concentrated in the NASDAQ. And yet it went up 108% Over the following 61 months. Now, this, by the way, is the reason why we always want to be academically allocated and globally diversified. Because Cory if you’re down 45% And your backup 108 You didn’t make much? No, that is the last decade from the beginning of the 2000s to the end of 2010 that people talk about they literally you could have been only the s&p 500 and literally made no money over 10 years, but you had a wild ride over those 10 years. And that’s why our portfolios rebalance, because that rebalancing against other asset classes puts you in a position that when something goes up like the s&p 500 It’s rebalancing against the other asset classes. And when the s&p 500 goes down, we automatically rebalance back in to the s&p 500. And, and I think for all of you, you can look at this past timeline and think about the horrendous things that were happening. When these things happen, you know, the, during the 2008 crisis, I remember sitting around a table of business owners, we were literally discussing banks weren’t lending money, are we going to be in a position that we’re going to all have to borrow money from private equity firms in the US Bank is done as we know it, we’re gonna go off of the US dollar, like these were all things that were floated is very real possibilities by incredibly rational people. And yet, that fear of what the market is doing, can put fear into us. I’m going to slide backward here, because I just want you guys to notice also, this has happened over and over and over again. So let’s say right now, and this is a snapshot, that could give you a really good idea of what it’s going to take for you to build wealth over the next 40 years. So let’s take this is out to 2018. So let’s roll it back to about mid 1980s. And now think of yourself as if this where we’re at the mid 1980s Is today, or even go back to 78. And now you’re gonna see like, wait a second, this is probably what your investing career is going to look like from here going forward, if you’re it kept, by the way, if you’re alive, and you’re building financial independence, you’re going to be an investor the rest of your life. And as a result, that’s what your 40 years might look like, you might have 1234567 markets, that are going to have some kind of significant decline, that you’re gonna have to have the courage to weather. Now, we hope that our clients, and those of you who maybe are not clients of ours, but want to have that conversation, is it’s our opportunity to come alongside you when the current media is throwing tons of things at you. And be able to help you look at and put it in context to what has happened. And how if you weathered it appropriately, which is why we talk about this being the idea of reassessing where we are now might require reallocation, if you have let your portfolio get too much to large cap growth, which is currently taking the biggest hit, you know, our portfolios are down a little bit. Think 6.9% year to date, right? The s&p 500 is down 11.6. Like that is a big differential, easier to weather. But even that downturn has to be held in context of what’s happened across the world and through time as it relates to investing. And that idea of retrenching is putting yourself in the position that you use these times to retrench your beliefs. Because when you slip, and let’s say you sell out, then guess what you’re going to be looking for as a purse, just any human being, you’re just going to be looking for evidence of why you doing that was a good idea. And Cory, I’m just gonna give them one more visual, which is that

that chart that talks about when it drops more than 20% Yeah, so it’s not as bumpy but certainly puts us in a position that it can be scary, but also gives us great look of what’s coming ahead after a market downturn. Now we have less of those black areas below the line, but a ton more above the line in between each of these downturns. Regardless, the market is going to be volatile. That’s why it rewards us the way it does. And one of our little memes that we have floating around out there on the internet is that in times of market volatility is the greatest wealth transfer that’s going to happen but who the wealth is transferred from is from the undisciplined investor to the disciplined investor is it is never in other our stories like you’ll see online i don’t want to ignore it there’s gonna be stories of this guy thought ahead and figured it was gonna the market was gonna explode he sold out at the right time and bought in at the right time and it those dirty Wall Street people whatever it’s like, fine. I mean that I’m sure that does happen. But

Cory 24:45

but also does happen is the person that did the opposite thing during that time and lost it all right there. We don’t see the 1000s of people who tried the wrong thing. Going all in That’s not a very kind of American heroic narrative that we get to hear as much in the in the media.

Paul 25:06

Yep, they, you’re right, they never talk about those that lost while doing it in less, it’s a story of an evil villain. And you’re gonna see those as we go through this. There’ll be the evil villain of this hedge fund or the evil villain of this wall street head or the evil villain of this dictator. And all we need to do, I mean, not to not pay attention those things, but focus on your aims, what’s important to your life today and where you and your family going financially, because we have great things going on. And, and one of the best things we can do, especially in this inflationary environment is owning assets. Like leaving money in savings right now has been considered one of the largest wealth destroyers we can get our hands on. Because that fear of putting the money aside, just racks up lost opportunity cost. And the the sinister thing about those lost opportunity cost is we never know how big they were. Because they don’t show up anywhere. Like our credit card statement shows, you know, the mistake I made it Cabela’s last month. But but it doesn’t show investing mistakes.

Cory 26:19

Now, we’re not talking about taking every bit of cash that you can find your hands on and just piling it into the market, that that’s there’s a very appropriate amount of cash to have in savings that in fact, gives us a better return on our portfolios because that cash being there can let us weather those storms and not have to draw from those portfolios in the in the wrong time. But if there’s money you’ve been waiting to get in the market for some reason, or that you had a plan to get into the market over the next few months, this could be a time to accelerate that. So there’s the cash for cash and sake on your balance sheet and the money that is available for investing. Those are two different things. We’re talking about the investing pots here.

Paul 27:06

And this might be the best place for us to leave you with today’s let’s say we had a crystal ball, we don’t mean, but if you’ve used say the past 3040 years is our crystal ball. And we said hey, you’re going to go through all kinds of volatility. We’re gonna think about it. Ray Dalio is where the biggest risk isn’t the volatility. It’s the not having enough money. And we went back over that period of time, Cory and said, you’re definitely going to get an 8% rate of return. But you’re gonna have a lot of bumps along the way. You could hold strategy, if the rest of your balance sheet was set up appropriately. And the rest of your balance sheet put in the position that you still had your emergency fund, you still had the ability to pay the bills if you were unable to work due to sickness or injury. You know, so you got things like disability insurance through your work or you’ve acquired it individually, you’ve got life insurance to protect your family, if something happened, you as an income earner you are unable to provide for them. Then what doesn’t matter, the what the dots on a paper changed on a month to month basis. It only matters that we held strategy to march through time to get an opportunity to gain the returns that eluded all of the people who reacted. So, guys, we were working to keep these episodes right around 30 minutes to make them more digestible for everybody. So even though Cory and I could probably talk about this the rest of the day, and we do most days with clients, to help them re assess, rebalance what they’re doing and retrench their courage and philosophy, so that they can avoid some of these problems of the world are sending at us every day. I feel like the problems coming out of the media today are a little bit like Lucy in the Chocolate Factory. And we’re just trying to deal with each one as it comes off the conveyor belt. And we can’t deal with all of them. But what we can deal with is our aims and our goals for the future and then asking the question, how much is that really going to affect me personally? Be aware of the rest but you don’t need to stress out about it. Yeah. Anything else? Cory?

Cory 29:25

No, not this is a lot of fun today.

Paul 29:28

Right on? Well, we hope as always for me from Cory from Jeff from Miranda from Kwame, Jackie and Trisha. We hope that this has been a contribution to you guys. Being able to design and build a good life.

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