2022 has started off with something we haven’t seen in a while: Volatility. Listen to the latest podcast to hear Dave and Steve discuss why the stock market is off to a terrible start. What does this mean for the rest of the year? How can we use history as a guide to what might happen going forward? Should we pay attention to the financial pundits when they make predictions? Tune in to gain some perspective on the market decline and to determine whether you should make any changes to your portfolio!
https://soundcloud.com/user-992484600/episode-88-an-ugly-start-to-2022
Steve:
Welcome to Plan For Life Now, episode 88. Dave, we are doing this off schedule. Not that we have any hard past schedule.
Dave:
I’ve always said that we should try to do more podcasts. So when we don’t do only one a month, it’s off schedule. But you’re right. This is not an emergency podcast, but it is a-
Steve:
No.
Dave:
Off schedule would be a good way of putting it.
Steve:
It’d be there’s something worth talking about so let’s go ahead and do one sooner than we normally would. And you’re right, normally we just do it once a month, but gosh, we’ve gotten off to a pretty rough start in the stock market. And we were just talking before we started recording, who knows what the market will be doing by the time you listen to this, because as most of our listeners know we record this, we’ve got to submit it to our compliance people, they listen to it, then we post it, sometimes it’d be three or four days before you’re hearing this.
Steve:
So we are recording this here on Tuesday, January the 25th. And yesterday… Wow, that was an interesting day for the stock market. At one point, the Dow Jones was down 1000 points, and by the end of the day, that was percentage wise. What was that? Something like 4% or so down?
Dave:
Mm-hmm (affirmative).
Steve:
And by the end of the day, it was up a 100 points or I don’t know exactly what it was. It was all over the place. So it was positive at the end of the day.
Dave:
Or as I read this morning and I would love to take credit for this line, but I’d stealing it from Axios. The market made a Patrick Mahomes-like comeback.
Steve:
Man. I don’t think I talked to you, I know I didn’t talk to you about that Chiefs Bills game on Sunday. That was… Or was that Saturday? All blurs together.
Dave:
That was Sunday. That was Sunday.
Steve:
Sunday? Man. That was wild. I feel bad for those Bills fans.
Dave:
I feel horrible for those Bills fans and especially… They just are jinx fan base.
Steve:
Yeah. `But that was great. My son said, he texted me, “Is this the greatest game? Was that the greatest of all time?” I’m like, “I think so.” That might have been the greatest game of all… That’s subjective, but boy, that was an amazing game and the stock market was reacting the next day as if it were that game.
Dave:
Yeah. I wanted to try to pull off. Have 13 seconds left and get into field goal range for a 48 yard field goal and come out positive. So putting this in some perspective here, I’m always wary about statistics because you can massage data and statistics to show anything. But this one, it is true, through the first… Now this was of the day yesterday, so this is certainly a moving target here. But at that point, when Bloomberg produced this report, the S&P 500 had an 11% drop and that was the first 16 days of the market year. That was the worst return in the first 16 days of the market ever in a year. Now, to me, that has a little bit of a feel like one of those super bowl, prop bet type of things. They say, “Okay, well that was the longest punt in the second quarter by the AFC team that didn’t win 11 games or more in the regular season.”
Dave:
Okay. I guess. That’s right. Or the Chiefs are 73 and two when they’re up by eight points going into the fourth quarter.
Steve:
Right. I look at that one. I actually do look at that particular one as somehow we’re trying to get people to read this versus something that really matters. The one you just said about the beginning of the year.
Dave:
That one about the Chiefs should be a “No, duh,” but it did make me think real quickly, I had this memory and, gosh, all these years of market returns sort of blur together. But it did sort of remind me and I went back and looked, it was 2016 when we had the worst January returns, the worst January that you’d ever had. And I remember doing meetings with people and say, “Listen, January, that was the worst January of any stock market returns.” And what happened in 2016, S&P 500 was up 12% on the year. So, that worst January didn’t wind up meaning anything. And I always think that it’s useful when we go into maybe this is by the time you’re listening to it, we’re officially in a correction territory. Remember, corrections are officially at 10% off of the high. A bear market is going to be 20% or more off of the market high.
Steve:
Yeah.
Dave:
Who knows by the time you’re listening to it, we could be in a bear market, I don’t know. But I think it’s always helpful to go back and look at how common are these types of corrections? Correction being 10% or more and it’s roughly once a year. Once every 13 months or so, we experience a correction. And last year, 2021, we didn’t experience any sort of correction. We had I think the worst decline was about five and a half percent, so you can certainly say, “Well, we’re overdue for it.” Not that that means anything, but we’re sort of overdue for a correction.
Dave:
And then in terms of bear market, on average, that happens about once every three and a half years. Now, clearly we all remember the last bear market, which is right when COVID hit just about two years ago now. So, it’d be a little bit more frequent to have one happen now, but that’s of course, just an average. I always point this out to people when we talk about averages, that means half the time people are doing better than the average and half the time you’re doing worse than the average.
Steve:
Right. So fair market. I think this correction is, I don’t know about overdue, but let’s just look at the reaction of our clients or reactions whatsoever. So far, [crosstalk 00:07:53] which I wouldn’t expect.
Dave:
I said yes.
Steve:
So far-
Dave:
I believe is what I said, no reaction.
Steve:
We had a meeting yesterday. It didn’t really come up. We brought it up joking about yesterday with the client, but it didn’t even come up really. It wasn’t… It’s just not-
Dave:
I don’t think. I mean, I know the clients who do watch the markets every day like we do, but I don’t think the vast majority of people do. You’re doing your jobs and living your life and you’re not sitting there watching these 1000 point swings like we might be. And I think that would be the case for people yesterday.
Steve:
That’s true. But even if you’re looking at… So this things that come to my mind during this as personal disclosure, I feel like I’m a lot like our clients in the way I do my own personal investing and stuff like that. I’m basically a 60, 40 guy. And anytime this stuff happens, I feel good about a couple things. I always feel good about my 40 part that’s not stock.
Dave:
That’s not pure in the market, that just makes me feel better as a 60, 40 guy. And on the growth side, because you know what, this might just be a correction that bounces back by the time you listen to this, or like you said, this be a bear market or more serious things. And we can even discuss some of the things we’ve heard about more serious just… But the bottom line is what… I always come back to any moment when things are down and it comes to discussions with other advisors more than anything else because you and I know there are basically two groups of advisors.
Dave:
There’s the group like us, which I guess they would call passive. But mostly we want to be super well diversified in a bunch of ETFs and funds. And that way, statistically, we know where we’re going with our clients long haul. And the other group is really, they’re sort of, they pick several companies or a bunch of companies. But nothing compared to the amount of companies our clients have and they go with those and they get rid of some, they keep others, whatever they do, it’s sort of a very high, intense, several company management of a portfolio.
Dave:
And what this reminds me of is that I don’t have the stomach. I don’t have the stomach for saying, “You know what? A year ago, a big part of my retirement plan, 50% will be Netflix is doing great, Pelotons doing great, and why not some crypto?”
Dave:
That to me is where I… These time, some point, I think I could speak for many of our clients, you get it, what’s going on? You understand that a correction or even a bear market might be healthy in the grand scheme of things.
Dave:
Versus I always look at that and I’m not even saying what I just said. Well, could work out just fine in the long run, a bunch of individual… To me do you have the stomach for the type of this drop you can get when your entire portfolio is maybe 30 to 50 companies.
Steve:
Yeah, no. That’s a fundamental difference in philosophy there, but I did want to hit on Dave, because we haven’t really talked about why is the market going into a correction or a bear market or whatever it might be going into. Let’s just hit on some of the reasons. And I was going down that rabbit hole of going on Twitter yesterday. And I say, “rabbit hole,” because you can just dive into these terrible discussions and you guys know how it is. But I was going down this rabbit hole of looking at some of the reasons for the decline and some of the people on there, some of the pundits were just making fun of some of the euphemisms and just word salad things that people throw out there where they say, “Well, there’s some profit taking going on here in the market and some of the fundamentals they’re just not supporting the current price levels.”
Steve:
They throw out these things that are just sort of meaningless. But in their defense, they’ve got to fill a whole lot of air time. They can’t choose when they do their podcast. They’ve got to about something every single day.
Steve:
But I think if you had to point to some of the real reasons you would say, “Okay, the market’s worried that the federal reserve is going to tighten, raise interest rates, stop those bond purchases.” They’re worried about inflation. So how high will it get? How long will it go on for? And, you could throw in there that the situation in the Ukraine, that’s certainly not helping stability just with all that uncertainty there. You combine that with the fact that the stock market is up since those pandemic lows, roughly a 100% there.
Steve:
And especially for some of those growth oriented stocks, those price to earnings ratios are very, to put it mildly, very stretched and just quick refresher on price to earnings ratio. If a company has a dollar of earnings, what do you willing to pay for the stock? Well, if it’s a lower growth company, maybe you’d pay 10 to 15 times the earnings. If it’s a higher growth company, you might be willing to pay 20 to 30 times the earnings. And in some of these companies that either don’t have any earnings yet or super high growth potential, you might be willing to pay 80 or 100 times earnings. So those PE ratios are certainly stretched. That’s that’s not anything new there. So those are all kind of the fundamental reasons. But Dave, I wanted to talk about that article that I sent you. There’s been a lot of talk about this, the Jeremy Grantham thing.
Dave:
Right. Who is Jeremy Grantham? I mean, I’ve read him, I see his name, but what is his background?
Steve:
I don’t know his background in detail. He’s an asset manager with GMO assets or a mutual fund company that’s out there. And, like I said, I don’t know a lot about his background, but just the brief, what I looked at, he’s a pretty well respected investor who’s been around for a long time. And at least in the materials produced by GMO, his company. They claim that he called the tech bubble and the financial crash before it happened. Now we’ve talked about this, about pundits going out there and calling crashes. And first of all, some people’s definition and I’m not saying this is the case with him.
Steve:
I really did not look in detail of what his call was, but some of these pundits, in 2007, if they make a comment, they say, “Well, the housing market’s getting pretty overheated, if it goes down that could really hurt the economy.” Okay, did you call the market?
Dave:
You’re right.
Steve:
I don’t know. You made a promise.
Dave:
Not quite the same.
Steve:
It turned out to be true. Then there are some of these pundits that go out there and every single day they scream that it’s raining. And then once in a while, they’re right. That’s well, I kind of messed up the analogy there. It’s supposed to be the weatherman that goes out and says, “I know what you meant.” You got it. So Jeremy Grantham came out and he had this report that he put together and he published charts showing the 1929, market crash.
Steve:
He showed the Japanese asset and stock market bubbles in 1987. And he showed the tech bubble and the financial crisis. And he really compared all of those to the current asset prices. And, on the surface, it was pretty shocking and pretty jarring to say, “Oh my gosh, we’re in this situation where, 1929, Japan, 1987 tech bubble financial crisis. That is not company you want to be in. Because if that’s true, you’re talking asset corrections of 50%. And initially, I looked at that and I was, wow, this is pretty strong. But then as I dug into a deeper, he shows all these charts and he puts the current situation, but there’s not a whole lot of detail in terms of why that’s going to happen. And really you could take any chart that shows asset prices going up, overlay that with stock prices pre 1929 and say, “Hey, look at this asset prices went up in both circumstances.” But it is not, the fundamentals just aren’t the same. You see what I’m saying? You could-
Dave:
I see what you’re saying. I think you need, I don’t know… PE ratios are not going to be enough to make that happen, but things that happen, like I’m losing faith in, in my monetary system in general, which would be 2008, right. That could make something like that happen. What we’ve had in March, 2020. This new thing, which I don’t know if life will ever be the same or if I’m even going to be able to leave the house without leaving it in a hazmat suit. That would be something like that. What’s this? The feds raising interest rates. Okay. The Ukraine thing. No. All right. And in general to me, to be more specific as to why I don’t feel that’s going to happen, we’re in an environment where, unless you have those huge events of a huge loss of confidence, you have a lot of mechanisms and these markets look at their, isn’t the same.
Dave:
This is a weird analogy. But look at the game, stop stuff. That whole routine where people are just, Ooh, I’m just buying because we’re going to get momentum going. Not on that crazy level. You have a lot of people who will see a bottom and they’re going to attack. And they’re so in other words, this doom and gloom, you can’t… The human brain emotionally run into a stop point. This will never stop, like session, like to a certain extent COVID in March, 2020. So you have a bunch of people say, “Oh, this is the bottom. I’m going to start. This is an opportunity right now, yesterday was an opportunity.” The Patrick Mahomes comeback, they’re calling it that we’re stealing from Axios. That’s right there was, Ooh, this is a bottom. This is an opportunity. So, I feel there’s nothing that’s eliminating that feel of an opportunity for a lead to that type of, that’s my own feeling on that.
Steve:
Yeah. And, just reading his Grantham’s piece, it made me go back and dust off this one that I’d looked at in the past, and this is one that we’ve heard, brought up to us by clients from time to time. And these are some of these predictions from an investor called Jim Rogers. And Jim Rogers was famous. He started a hedge fund with George Soros back in the 1970s and they scored 4000% return when the market only returned 47%. So these are all of the bonafides that are listed there to say, “Wow, look what a smart guy this guy is.” So I went back and I dusted off this list of some headlines that legendary investor Jim Rogers is predicting. And of course he’s also currently predicting something.
Steve:
2011, 100% chance of crisis, worse than 2008. 2012, it’s going to get really bad after the next election. 2013 you better run for the Hills. 2014, sell everything and run for your lives. 2015 were overdue for a market crash. Around 16, 68 trillion biblical crash, dead ahead. 2017 worst crash in our lifetime. And then I just Googled it to see some current things here in August. He says, “Oh, once again, next year market will be the worst in my lifetime.” So, there’s another example of somebody who man, they made a lot of money. They did really well. So should we listen to every single thing that they say? Maybe not, maybe his crystal ball is no better than anybody else’s and we shouldn’t put a whole lot of faith in that. So what can we do? We’ve talked an awful lot about not listening to these guys and how they can’t predict the future.
Steve:
Let’s go back to some of our fundamentals, the most important thing and the thing that you can control is, what is your time horizon? When will you need this money and what are you invested in? Do you have safe assets or things that you could sell and get to that are not in the stock market, if you needed to fund your expenses for the next couple of years. So, we always want to take that exercise of let’s play out, not just a market correction, not just a bear market, a market crash. Where it could take five or six years to get back to the pre crash levels. Do we have enough money in pensions and annuities and bonds in cash and things like that to help us ride it out. And I mean, our clients hopefully know that they should have those and they do have those right.
Dave:
Well, that’s why we build all our plans starting that’s the foundation of our plans, because that’s not only is that hand the right way to go. It’s also emotionally the right way to go.
Steve:
Right. The next thing I wrote down here was the reason for the decline, I don’t want to say it doesn’t matter, but I’ve said this many times before, those may most dangerous words in investing at this time is different. And I’ve often said that, I wish I kept all of these emails and reasons from people going back over the last 20 years where they’ve said, “Steve, I understand what you’re saying about long term markets, but listen, we’ve never been in situation like this. This time is different.” And the market eventually recovers and it’s different, but it’s similar.
Dave:
We heard this time is different recently. I forgot when, maybe it was a couple weeks ago and you can’t help but think it is different than the great procession. And it is different than the COVID just starting. It’s different in that. It’s not nearly as bad as that. [crosstalk 00:24:02].
Dave:
We have to reiterate. That is, I want to reiterate your point. That is a very dangerous way of thinking because, A, it’s always different and B, if that’s leading you to sell your stocks, when you’re low, stop thinking that way.
Steve:
Right. And that is one of the fundamental things that times like this sort of reiterate or reteach us this lesson that you do not get gains. We’ve seen the past couple of years without experiencing losses, right? This is not how it works. You don’t get to rack up, 18% and 28% gains, boom, boom, 2020, 2021, without having losses like this. This is the price that we’re paying. Otherwise, we can sit in bonds or we can sit in cash and earn nothing or next to nothing and not experience this volatility.
Dave:
But if it always comes back to…. Yeah, it comes back to be honest with yourself, with your port, with the money that you’re not going to have in stocks. It’s not fun to have… I will certainly tell you that I’ll have times when I’ll look as the market was booming, it’s like, I’m doing great. I guess if I had more in stocks, I can be doing better, but then I’m… and things aren’t doing so well, I am very comfortable with my 40% of my portfolio personally, not in. And then, Hey, we have plenty of clients and people we know who are all in, and they’re always comfortable with it. We have a lot of people who are almost all in or mostly all in and for various reasons and a lot that makes sense, like big pension and other stuff where they don’t have to worry about the income piece as much. They’re fine. These clients are fine when the market’s going down. I’ve noticed that, I give them, they’re very in tune to their risk tolerance. So there’s nothing wrong with that, but be in tune with your own risk tolerance.
Steve:
Yep. Let me finish up here just with one thing, one thought on some action that we’ve been taking for clients, but you might want to take some of this action on your own. A technique that we’ve talked about many times in the past, but times when the market goes down, that’s really when it’s useful, something called Tax Loss Harvesting. And what Tax Loss Harvesting means is, let’s say we had a client late December, early January, they came in with some money, took some money in a taxable account. So this is not an IRA and invested that money in stocks. So, they said, “Okay, this is going to be long term money. I don’t need to touch this.
Steve:
Let me put my $100,000 in stocks right now. And of course, depending on what type of stocks they’re in, right now they might be down about $10,000, gone from $100,000 down to $90,000. Now, this person is a long term investor. They don’t want to sell and get out because they’re smart. And they know that over the long term, that’s a mistake. They can’t time the market. But what you are allowed to do is you are allowed to shift from one, for an example, for one large cap, US based mutual fund to another large cap, US based mutual fund. Not the exact same fund, but a similar one. They might hold a lot of the same stocks. Now, if we did that in this example on paper, you just lost $10,000, but you stayed invested. So, whenever the market recovers, whether that’s, later today or tomorrow, or next year or five years from now, you’ll get to participate in that recovery. Why would we do this? [crosstalk 00:28:05] Oh, go ahead, Dave.
Dave:
Oh, I’m sorry. I lost you for a second. I was going to say, this is my favorite thing. And this is for the new audience, because I’ve said this before. Look at all the Tax Loss Harvesting. First of all, it sounds great. This is the thing you talk to your friends about for so many reasons. A, if we have a down market, this is going to be the highlight for you. This is the glass half full. A, it sounds great. Hey, are you doing… Hey, Fred, what are you doing? I’ve been doing some Tax Loss Harvesting. Fred’s like, what? What’s that? So it sounds great. Tax Loss Harvesting. I love it. Whoever thought of that name. B, it’s a win-win. Getting a similar investment down. And for the tax reason, Steve just stated, and now I’m in a similar thing as it goes up. [crosstalk 00:28:56] I savings and I haven’t given it, go ahead and I’ll finish my point.
Steve:
Was going to say, let me explain why it’s a win-win because now come tax time next year, when hopefully at that point market’s positive and you’ve kind of forgotten you go, oh geez, remember the beginning of January 2022, we had some losses there. I totally forgot about that. You get your 1099, it shows that $10,000 in losses. What can you do with that? You can use that to offset other gains, right? So if you’ve got other gains in your portfolio, you can offset those. Don’t have to pay taxes on those gains now. If you don’t have other gains to offset, you can use $3,000 against ordinary income. Hey, that’s great. That’s less taxes you’re paying. And if you still have losses left over, you can carry them forward into the future. So, now you’re carrying forward these losses into the future and if you’ve got gains next year, you can use it. Or if you’ve got income next year, you can use it. It really is, that silver lining when the market goes down.
Dave:
Yeah. So you’re talking to Fred, you just explained these things. You’ve talked about tax off harvesting and Fred is like, doesn’t feel good. So you’re basically you’re wanted knowledge, which is always fun. A little bit. You’ve taken advantage of this, which is great. Your friend isn’t feeling, you don’t want your friend to feel bad, but let’s face it. You just, you just put yourself in the cocktail party in there.
Steve:
You still there, Dave?
Dave:
Yeah. Did you lose me?
Steve:
I did for half a second there. You were flaunting knowledge at the cocktail party to your friend, Fred.
Dave:
Yes. It’s just a win-win in so many ways. So, and there’s only so many times you can take advantage of it. Things have to be down and we haven’t had a lot of Tax Loss Harvesting opportunity. Let’s face it.
Steve:
Yeah. If everything goes up, there’s no chance to do it. So if you are an existing client, don’t worry. We did it. Yesterday we ran spreadsheets that basically showed anybody who had any losses really at all, and went through, made a bunch of trades. So if see some of those transactions and you’re thinking, gosh, I thought we were buying hold investors. Why are we doing this? We’re not getting out. We’re simply harvesting those losses. And I should say, “If things keep going down, not that I’m rooting for it, but if things keep going down, we might do it again.” So you might see more transactions fair. But once again, we’re staying invested. We are not bailing out there.
Dave:
I want to throw… I’ll have you explain it, but I want to throw one other thing out. This is a bonus episode. Whoever’s still listening is really still involved with stuff, but you do this for our clients rebalancing. It sounds like the thing that they throw in. I just took my car, my Honda for a checkup with my friends at Joe’s Automotive in Rockville. So basically, because I know that they tell the truth and they, rebalance the tires as part of the deal. I don’t know how much that costs $25. That’s what you do. Rebalancing sounds like something that is so nothing, but what talk about rebalancing and what’s been going on.
Steve:
Yeah. And I mean, rebalancing is that basic process that any portfolio manager or even individual investors should be doing. So the basic idea is, let’s say you’re 60, 40, investor. And you went through 2021, stocks are up quite a bit, depending on what type of stocks you’re in. Let’s say stocks are up 20% and bonds are essentially flat throughout the year. Well, if you did nothing, all of a sudden your 60, 40 portfolio is going to be out of whack. Your 60% in stocks is going to probably be more like 65, 66% in stocks, and you’re not going to have good balance there. That’s something that we do periodically, but we did towards the beginning of this year, early in January to say, “Okay, stocks are way up, lets rebalance and bring ourselves back into target there.
Steve:
And it’s times like these, where we say, “That’s precisely why we do it.” And I will say that if the market were to go on correcting and say, even go into a bear market or crash scenario, then we’d be rebalancing in the other direction where we’d be saying, “Gosh, stocks are down 30%.” Well, we’re going to take some of those bonds and buy stocks now. And that’s like I said, something any investors should be doing and you’re right. It does sound. Yeah, sure, rotate my tires, rebalance the portfolio. But it’s a really important thing to make sure your portfolio stays in line with your risk tolerance.
Dave:
Yeah. But even in this one little podcast, we’ve touched on a whole bunch of things that investors should be doing, well let’s face it. A lot of investors don’t know about this. They’re not thinking about it, but it is something good advisor should be doing. It’s interesting that how good in my opinion, how good advisors earn their fee is when times aren’t good. Not just when sometimes are good.
Steve:
All right. Let’s end it there. Thanks for listening all the way to the end. We will hopefully just be back on a regular schedule. Hopefully we won’t have to do, I don’t want to say emergency, but
Dave:
If we have to do another one before our regular schedule, that one will be deemed an emergency plan, which we’re hoping we don’t need to do.
Steve:
All right. Take care. Be safe.