WHAT WAS COVERED
- 00:00 – Episode begins Paul welcomes listeners.
- 01:45 – The year by the numbers
- 09:48 – What history tells us by the numbers.
- 12:40 – Volatility and how to buffer.
- 18:08 – Bonds and how they can bring a negative return.
- 22:52 – Inflation and “real” returns
- 28:30 – Episode ends, thank you for listening.
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Full Episode Transcription
Hello, and welcome to sound financial family, to your business, your wealth. I’m Paul Adams joined as almost always by Corey Shepard, despite Fun Beach weekend last night for you in the air last week for you and the family and I was left to my own devices and the sound financial family trusted me pretty well with that. But today, I’m kind of looking forward to Corey, because we get to have a fun conversation actually going over some stuff that dimensional Fund recently went over. So any of you out there, if you haven’t subscribed to dimensional funds channel, I’d highly recommend it. They don’t release that much content, but it’s good when it is. And this is actually some screen grabs basically, we got from that talk that we’re going to share with you guys today.
So there’s a lot going on, out in the world and a lot in the media and
I just like that we can deliver some, like grounded, researched commentary just on what’s going on. It’s not just fear based or reactionary. So that’s why we we do this from time to time to respond directly to things going on out in the world. To give you a little installation against the craziness, installation or installation. Any of the above. We’re happy to give you
I think you said installation, I just said elation.
We’re gonna change the installation of your headphones. That’s probably what we got to do. There’s something to that. So let’s first we have to give some homage to dimensional funds, compliance disclosures. So there you go.
These materials are not legally
French clients. Yeah.
So here we are, we’re partway through the year, as of the end of June this, these are the numbers
down 20% in the s&p 500, down 10% in kind of mid term bonds, and 9.1% in inflation that’s up. So when you
get that’s not a negative number, and, and those things together can really make us feel terrible. Like if you think about inflation in and of itself, plus 20% downturns like you’ve lost almost 30% in the last year. Now technically, the inflation number is a one year number from this time last year to 12 months ending June 30. But it’s real recessionary pressure. And at least the way we defined recessions for the last 40 years or so is two negative quarters in GDP, which is what we hit as of the close of the second quarter. Although the current administration just chose not to call it a recession, decided that some other numbers in the economy are good, but at least for a long period of time. That’s how we’ve always defined recession.
And isn’t it worth mentioning this word recession? There’s nothing like built into the bedrock have are the fundamental components of our universe, like nuclear physicists would all agree there’s a constant recession, like definition, like it’s arbitrary, it’s what we’ve just kind of decided to call it. So
that’s what’s also worth thinking about. Right. I will just politely but strongly disagree with you there because Biden’s main economic adviser, posted in 2018, to Twitter, that period, end of story. Two negative quarters of GDP growth is a recession.
This one of the same people that say we’re not calling it a recession now. So I think it’s purely a political play. And it’s that’s what I mean, Paul, so I don’t disagree with I mean, like, it’s just this thing that some people decide to call it that not everyone is even agreeing on what they’re calling. It’s like, no, no, nobody disagreed until the current administration.
Nobody disagreed about what a recession was, until real recent.
But I but that’s a political thing. That’s not for us with our money is like we make the determination. It’s like yep, two negative quarters of GDP means a recession, at least the way we would have called last 40 years would have started. And we had something similar in the early 1970s. In the early 1970s, the market was down over 20%. Just six months in, kind of like we are now. Right. And now recently, this is in the Wall Street Journal, July 2022. Markets have had the worst first half a year in decades, back to 1970. So we can look at that. Oh my gosh, I heard the Seven News really terrible. What happened with my money will be like, Well, if you’re undiversified, and you were just in the s&p 500
you actually gain 4%. Over that year. We’re going to talk a little more about that about what happens in trigger versus what happens
At the end of the year, and those can we add in very good thanks. We’re trying to, we’re trying to figure out what this slide was actually saying. And it’s 29.1%. To H return. We just we were racking our brain is for financial terms. Oh, yes, second, half, second, second half of the year. You see, if you had gone through the first half of 2019 70, and thought, oh, things are bad, I gotta get out. You’ve been locking in that down loss for the year. And but if you just stay in it, rock it back up, and you end up 4% for the year, not much. Not amazingly high, but definitely not losing money. Yeah, not losing 20% and locking in that loss. Which, you know, something similar happened, it wasn’t too different of a shape during COVID. Like, the one thing that I’m noticing is helping a lot of clients, Cory, I think, get through this market downturn is that literally just back in 2020? Ever, most everybody made it through the Coronavirus, recession without selling.
Now, I think the difference there though, is, and this is the caution I give to all of our listeners,
it drops so fast during COVID, they almost didn’t have a chance to be an undisciplined investor.
I remember like, you know, people saying, Hey, I’m going to start, I remember going to my neighbors like, Hey, we’re going to older neighbors and saying, Hey, we’re going to the store, do you guys want to pick up anything? So you don’t have to go out?
People were thinking about those things like, Do I have enough protein in my food stores? And do I have toilet paper? We’re worried about that, and not Should I sell in this market. So it almost forced us to be discipline investors. And it’s no different than the environment we’re in. Now, this is our chance to demonstrate our discipline. No. So now this is that intra year gain versus intra year decline, meaning in almost none of the years. For those of you watching this, we’re looking at a chart that from 1979, shows the highest the market was in a given year, and the lowest it was in any given year. And we’re gonna look at what the like December to December, you know, or January to December calendar year, was in just a second. But it’s fun to just look at these are what happened in between that you wouldn’t really notice if you’re just looking at annual rates of return per year. Exactly every year, there’s some pretty decent swings. It’s actually amazing. For those of you that are that are looking at this online, if you go or listening to it on a podcast, you go back and look at our YouTube video. It’s amazing, like a majority of the years, the market was up over 20% during the year, at some point. And in a majority of the years, the market was down over 10 At some point during the year. Yeah. And so now when we look at that, and now you’re gonna see these little yellow dots have been added. And the yellow dots show where the market actually ended for the year. And other than, like 1233 or four years, I can count. It never ended on its high. There’s only three or four years I see where it ended at a tie. And none of the years did it end at its low.
That was kind of amazing. That is kind of
that is kind of cool. I think I’m now seeing 570 980-595-2000 613 Yeah, and 19. It might have been and 21. It might be they stopped pretty close their all time high that year. But that’s relatively few years, but none of the years ended on their low.
Now when we look at that, you can also kind of see where the year ended, versus where the year was up, if you’re just kind of running a rough average in your head, like it’s a lot of winning.
Like most of these years are pretty significantly up and this is just following the Russell 3000.
So not even a fully diversified portfolio. And yet most years, we turn out good. Now, I thought this was amazing quarry, looking at the years where we had over a 20% Intra year downturn.
And many there aren’t Yes, that’s great point. Yeah. 1234 10 Five, yep. 1010 years. Back tonight. 79. Yeah. And in we know that 100% of those years, none of them ended on their lowest point during the year.
Now, pause here for a second what lesson do we hope people take away from this? Or what is it when Cory and I look at this data, what is it worth thinking for ourselves in our own investments and that is
Like it will never be as good as it seems.
And it will never be as bad as it seems.
I guess, or you could say it might be as good as it seems, because there’s some likelihood it could end at a time point. But odds are, when we’re sitting halfway through the year, there are people who are willing to prognosticate about everything that’s wrong with the market or the ills of the market or you can’t get ahead and all that it’s like,
if you play by their rules, if you’re using things like active management, or your stock, picking a market, speculating is probably not going to work out.
But with a, what you can see here is that with a discipline strategy, the market does its job.
Because all we’re doing is investing in literally the top business minds worldwide, who all had enough of the business mind that they were a company that was able to go public.
So this is the top corporations and entrepreneurs in the world that were just putting some capital bide.
And these people figure out and solve problems, even in the worst of markets.
Now, the next one, I really liked Cory,
this is anytime the market took a 1020 or 30%. downturn.
Oh, yes, I like this one a lot. Yep. Following what did it do one year after that downturn, on average, three years after that downturn, on average. And
after a five year period, the average was 78%. gained.
Or 71.8. Sorry, my apologies. 71.8%. Gained, like that’s tremendous. And that is almost never talked about on your, like money, new shows.
Right there like now that the markets down here’s the stock to buy.
But it’s not if you just held the market, it works out pretty good after downturn.
Yeah, like three? So if you went down 10% Oh, sorry, if you went down 20. Then going up. 40 is about back to even. So if it’s down 20, then on average a year later, you’re not necessarily right back where you were you got to Right, right.
Yeah. 40% return after a 20% decline ends up being about a 12% positive return roughly. Yeah. Right.
you know, even if you’re say, someone who’s retired and taking money out of your portfolio, if you’ve got a good buffer strategy where you’ve got some cash set aside, so you wait a couple years to take out of the market, then you don’t have to worry, either. And that’s a common misconceptions. Oh, if you’re retired and you’re taking money out, then this is really bad for you? Well, it is if you don’t have a strategy for it, but there’s a great you can build a strategy around these timelines to not have them as adversely impact you as folks would think. Exactly. In fact, you remind me of one of our past episodes, I can’t think of the number right now. Miranda, could you just shoot me a chat with what number our volatility buffer episode was?
And then that way we can let people know about that. So then go back and listen to us since we just kind of referenced that idea of a volatility strategy. And speaking of volatility, volatility is way up. You know, we see the huge volatility in Oh 809, huge volatility in 2020, during COVID. But the average volatility right now is higher than it’s been, say in the five years prior to COVID. Now, that is normal. But volatile markets have something unique. You guys have heard me say this time and time again, volatile markets will separate the discipline investor from the undisciplined investor. And those volatile markets will transfer wealth from the undisciplined investor, to the discipline investor. So as this volatility is going on, that’s actually more of a reason for us to be rewarded well as investors, because the more volatility we have to tolerate, the more the corporations have to pay us as a return, or we’ll just put our money in CDs.
You know, people think that just putting money into the market is like, kind of getting something for nothing, just getting something because their money’s there. We’re always earning it. Yes. And part of how we earn it as an investor is handling volatility. So when the volatility goes up, our earning potential is going up in the in the future. Exactly. And speaking of which, that volatility episode is income invest
stinking retirement. It’s number 239. So if you guys want to find that in the podcast, you want to find it on our YouTube channel, you can grab it. Now, this is my new and most favorite chart, Cory. And we, we had a chance to look at a little bit ago. This is, imagine if you had your money out, like we’ve shown these charts before. What’s like, what if you missed the top five stock performers in any given year? This is covering? What if you just missed the best week from 1996 to 2021. Think about that for a second. It’s like a 25 year period, what if you just missed the best week, you go from your 1 million growing to 10 million to your 1 million only growing to 8.6. Now I put in those huge numbers because if I do it just on $1 invested, it doesn’t sound quite as significant. But that literally, if you had your money out during that 25 period, during just the best six months, you just missed it, that’s when you took your money out, which would probably be after some major volatility probably after a downturn, and you pulled your money out during one of those six month up swings, you missed one in 25 years, and your total return drops from 9.8 to 7.9.
Now, for anyone out there worried about working with an investment advisor, because you’re worried about the cost they are to you. If all they do is keep you invested over 25 years, they might be worth 2% Just on that before they give you a single tax strategy, a single efficiency strategy.
And 2009, though, I mean that November 28 2008, great chance that a ton of people were out for that week, because they we saw the data money fled from the market that led the outflows are huge. September 2009, still very good chance that you’re out. And you know, June 2020, best three months, right, right there. A lot of people were kind of forced to be disciplined investors, but there was a good reason for a lot of folks to feel like they should run. Yes, like, it’s like this pattern I see is the times that give people the most sense of panic are the ones to hold on to. Because those really good returns happen on the back end of those very, very often. We still have clients that thank us for reaching out to them. When the market was way down in COVID. Like to, we’ll just be in a random conversation with them doing a portfolio review six months or a year later, and they’ll go, man, I’m so glad I put that $100,000 in. When I know I remember that day, Paul, when you know, we’re all home, no one’s going anywhere, anyway. And we were like, Let’s just start calling everybody and let them know that, you know, we’re not running for the hills, and they shouldn’t either. And during one of the worst market performances, and just the worst times in our country’s history, I had a day of some of the best conversations with with people that was a really actually a really special day. Yeah, yep. Well, and now let’s just look generally at what’s kind of going on with bonds, because
people feel like, well, if I invest in bonds, I’m just not losing any money. It’s like the Will there are negative returns still in fixed income. Now, right bonds are safer than stocks relatively safer, to say safe wouldn’t be the right term, not in the same way that your savings account is safe.
And for those of you invested with us, you know, we keep our bore bonds relatively short term. This is the Bloomberg us aggregate bond index, that’s going to include short term, mid term and long term bonds. But still 23% of the time, when measured quarterly returns were negative.
But if you measured it quarterly on equities, it’s 27% of times or negative, it’s just not always the same times. Right. That’s why they’re considered non correlated assets, they can interact with each other and mitigate the downside of one another. Nicely, something like 9% of the time going back to the Great Depression, bonds and stocks have been down at the same time. So it can happen, but just not just not a lot. But this so quarterly, then if you look at your portfolio once every three months or so, about 25% of the time you’re seeing one or both of them down
your stocks in your in your bonds. Yep, and then but now this is kind of funny if we just took stocks.
And instead of assessing a quarterly if we only looked at it annually, all the way back to 1976. We would have only had 1234567878 bad years if you will,
versus 23 times if we looked quarterly
It just gets a little less often, the more often you look at your portfolio, the better chance of seeing bad news, the less often you look, the better chance you only see good news. This is why I recommend every client look just once every decade at their portfolio. No, I’m just kidding.
But to your point, we do tell people, you should look at the downturns when they happen. And you guys have heard this ton of times, if you’re listening to the podcast on the regular is that each time the market goes down, that’s why we need a rebound to add more money, if we can look, look at dead in the eye the downturn, because that’s what’s gonna give us courage for the next downturn. Because if you weather this downturn properly, and you keep saving some amount of money toward your financial independence goals, you’re gonna just have more money, and I guarantee it will be scarier. The next time we hit one of these, the people that put their head in the sand and just fortunately, don’t sell simply because their head was buried in the sand. They’re not doing themselves any favors. They build no courage, they build no strength, they build no grit for these markets, and they will and mark my words, how many people do we know during the tech bubble? Or during the 2008 crisis? I guarantee we’re going to find some in this environment, where
what we’re going to find is that people
like, oh, like put their head in the sand. Let’s say they did a good job. They’re making 150 grand a year they save 3 million, probably enough to be able to retire with some social security. Right? Right. But they’ve had their head in the sand the whole time. And then when do they start actually looking at their investments, all that is there like 62.
And then they freak out.
And they freak out because they never built the courage during all the cyclical markets we had up until then. And now it’s the first time they’re looking down the barrel of that gun and they freak the heck out. Yeah, and fold. And they fold during one of those down markets where they lock in like a 20% negative return and never get back in. And that person is now just relegated to fixed income returns for the next 20 plus years of their life. Would you have to worry about them being relegated fixed income returns because they will run out of money inflation will eat their lunch. And it will all be because some well intentioned financial adviser told them 30 years ago that they shouldn’t look when the markets down. Instead of having the opportunity to a built courage. When the markets down. Speaking of courage, we need a little bit of courage, Cory when we flesh, flesh, flesh, flesh, flesh, inflation.
And you taste inflation. When you tempt fate Leyshon, I don’t know. There’s a saying in there somewhere. I’ll work on it between now and our next workshop. But yeah, workshop it and get back to us. Yeah, yep. So this is the real return for those of you looking at the real return of the s&p 500, which is after you’ve taken inflation away, versus what the reported inflation was that year. And what people will get hung up on is like, oh, my gosh, inflation is going to destroy my portfolio returns.
But if you notice, Microsoft raised office 365, Amazon raised prime, like, everybody’s prices are going up these major corporations not hurting their profit margin because the inflation you’re facing.
They’re just maintaining it with inflation also, which will bleed through after the volatility to the stock returns.
And so even though inflation is going on, sometimes bigger, sometimes lesser in any given year, but it is not correlated to the performance that you see in the market or not in any direct way.
I only see 10 years, going back to 91, where inflation might have been.
No, no the other way. The other way around the stock. Yeah, it’s, yeah. When inflation 10 years where inflation might have been higher. But then all the years where inflation is not higher, the rate of return is much, much higher. Indeed, yeah. Well, and when you look at it, like people will try to say, well, I’ll just go to fixed income, it’s like, well, you get to Treasury bills. And over that same period of time, 27 to 21. Treasury bills, on average have lost almost 1% to inflation.
Long term government bonds barely outperformed inflation, equity markets, 5.1, large cap growth, 4.4 and small cap value,
which is one of the things we tilt our portfolio toward is one of the best
actual inflation adjusted returns out there. And so that all leads us back to one of the things we have to do is be patient, because here was our global financial crisis, worst market we’ve seen in 40 years. And yet, even if what you did is just owned the s&p 500 index,
like the total 10
Your return wasn’t as good. But you can see that just getting through the 2008 crisis, even if you start counting back at the beginning of oh seven, you’re still able to fully fully rebound out of it in a couple of years. That’s without rebalancing that’s without diversification, etc. Like, these markets can be scary. I highly recommend to anybody who wants to take a look at it as the book simple wealth, inevitable wealth by Nick Murray, sold pricey online, but it’s well worth it. We’ve never had a client read it that didn’t totally change the way they look at long term investing.
This is our global pandemic, the one that we talked about earlier that like most everybody got through because it was too. I mean, this all happen from the end of February, like in less than a month, the market dropped that much. This looks so much scarier than 2000 789. Well, at least that graph. No, you’re right. Because that started in September, the real dip started September of oh eight and didn’t finish till March of oh nine, this was all done in a month. Yeah.
And so those while it is scary, that we have all that recession, that it is scary that the markets gone down. And I’m just going to show dimensional funds disclosures to respect our relationship with them.
That those things are scary in the moment. But what’s more scary than any downturn, the scariest thing about any of these potential downturns is the risk that our clients that any of our listeners would lose money, because what you did was pulled away from the strategy that was working. Like when you have an academically allocated globally diversified portfolio, and that portfolio is down.
People relate to it like that’s not working, that is actually working.
It’s supposed to go down.
And then it rebalances or we add money if we can, and then it goes back up. And that all works to our favor if we’re using the strategy.
But if what we try to do is layer on top of that strategy, whatever people are saying out in the marketplace, whatever people are saying on CNBC or Fox News, and you try to layer that in, you will only confuse the strategy. So that’s why we want to do episodes like this one. It’s why we want to pour into the sound financial family, any of this academic research, we can get a hold of at least presented in an entertaining way so that you don’t fall victim to what can be hundreds of 1000s if not millions of dollars of lost wealth over a family’s lifetime, simply because they suck came to the pressure that the overall market was putting on them.
Yeah, Cardno aims to come soon. Oh, thank you, you’re working on my grammar, not disagree with their concept.
So that’s why, you know, the folks who only listen, don’t get to see the amazing narrative that goes on in my face as we
encourage you to check out a video there’s there’s like three conversations going on at the same time. Well, and by the way, I am going to do my best in one of our future episodes to capture the some image of the sparrow that lives in my beard. He is super comfortable now and he’s very cute. So I’ll see if I can get him on the show.
With that sound financial family we’re so glad you guys could be here. We hope that this was useful to you. And as always, we hope that this has been a contribution to you being able to design and build a good life.
This Material is Intended for General Public Use. By providing this material, we are not undertaking to provide investment advice for any specific individual or situation, or to otherwise act in a fiduciary capacity. Please contact one of our financial professionals for guidance and information specific to your individual situation.
Sound Financial Inc. dba Sound Financial Group is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance. Insurance products and services are offered and sold through Sound Financial Inc. dba Sound Financial Group and individually licensed and appointed agents in all appropriate jurisdictions.
This podcast is meant for general informational purposes and is not to be construed as tax, legal, or investment advice. You should consult a financial professional regarding your individual situation. Guest speakers are not affiliated with Sound Financial Inc. dba Sound Financial Group unless otherwise stated, and their opinions are their own. Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions and are subject to change without notice. Past performance is not a guarantee of future results.
Each week, the Your Business Your Wealth podcast helps you Design and Build a Good Life™. No one has a Good Life by default, only by design. Visit us here for more details:
© 2020 Sound Financial Inc. yourbusinessyourwealth.com
Podcast production and show notes by Greater North Productions LLC