This show is full of financial fireworks!* Steve and Dave start off with a discussion of how the markets did for the first half of 2023, then pivot into a back and forth about Artificial Intelligence. They finish with some sophisticated ideas to make your extra cash really work for you. Plus, a rare (and only ever) cameo mention of former Surgeon General C. Everett Koop! It’s all on episode 103 of Plan For Life Now
*Not really, but had to write something for 4th of July
Steve:
Welcome two. Plan for Life. Now, episode 1 0 3, we’re sitting here almost at the end of the second quarter. Dave, how are you doing?
Dave:
Uh, I’m, I’m doing great. <laugh>, I have no, has nothing to do with the second quarter, uh, or how, although I am happy about the second quarter As of today’s recording, it’s gonna be a good quarter. We’re gonna assume that tomorrow will be okay.
Steve:
As long as tomorrow’s not a total wipe out. It’ll be a a pretty good start to the year. And that really is the, the first thing that I wanted to talk about is, you know, what the market’s done so far this year and the numbers I had jotted down a couple days ago as we were up on the s and p 500, about 14% on the year. So don’t hold me to it cuz it changes day to day, minute to minute, um, s and p 500 up, you know, around 14%. The Nasdaq up over 30%. Wow. And the Dow only up, I think it was about four and a half percent year to date. So I wanna get into this a little bit and kind of dissect some of this, um, but also kind of set the stage for what were all of the experts thinking coming into this year. Now this is always a fun exercise, <laugh>,
Dave:
This is good. We’re checking up on the experts. Yeah. Now the experts usually just make their things, they say their stuff and then it goes into the ether. But I guess we’re gonna, we’re just gonna look back a little bit to what the experts were saying.
Steve:
Let’s go back and check it out. Now, I will say we’re only halfway through the year. So these expert predictions are for a full year. So, uh, you know, they could come back and they could really throw it in our face six months from now if their predictions turn out to be true. Um, no, I kind of doubt that Morgan Stanley, ubs, Citigroup Bank of America will come back and say, Hey, plant for Life now <laugh>, you guys were so wrong. One
Dave:
Of our main competitors, <laugh>, we’re gonna put it in their face.
Steve:
Um, but okay, here, just, just interesting. Uh, this guy on, on Twitter, Sam Rowe, he always puts together this great list of Big Wall Street firms. 16 biggest Wall Street firms. Now, to give you some context, the s and p 500 ended the year at 38 40, right? 3,840. And as we sit here today, what are we hovering Right around four, 400 or so. Um, you can check me on that,
Dave:
Dave. You know what’s weird? And we didn’t coordinate, we did our usual, uh, 30 seconds of talking about the show before we just started. Right? I thought about this today. I didn’t know you were gonna bring this up. And I did a calculation to figure out how much the s and p has been up this half year. I’m just interested thinking about it. Earlier this morning I came up with something like about 13% for the year. Am I close on that? Cause I think I did the map.
Steve:
No, I mean, I, I had some numbers here. Like I said, I’d written down a couple days ago that were right at 14. But as we all know, I can change day to day. It can also be a little different depending if you’re looking at price return or total return includes dividends or not, blah, blah, blah.
Dave:
It’s been a good, it’s been a, a darn good first half of the year.
Steve:
Yeah. Oh, believe me, we, we would all as investors take that every day. Oh,
Dave:
You know what, I’m gonna interrupt you again.
Steve:
Yeah.
Dave:
Because we’ve been starting talking to our clients a lot, about 2022, where really bonds took a major hit and stocks took a major hit. Yeah. Feels like the first half of this year is the opposite on both ends.
Steve:
Oh, absolutely. So I, I wasn’t even prepared to talk about the bond market, but let’s, let’s hit it real quick. The bond market’s up 1.73% year to date. Um, this was as of as of last week. But like I said, probably in that range. So, you know, the bond market, as most of our clients know at the worst year in history last year. So the stock market gets all the headlines. That’s the, the thing that runs on the crawl at the bottom of the screen. That’s the thing. If you listen to W T O P, they, you know, <laugh> blare that, do people still listen to W T O P? They do.
Dave:
They do. Assuming they drive in their car occasionally,
Steve:
Right? Uh, if you’re still in the DC area, you do. So, um, you know, yeah, bonds have had a good year. Stocks have had a great year so far. Um, but let’s take a look at these predictions here from the 16 biggest Wall Street firms. So you’ve got, I won’t list them all, but the big ones, you know, Barclays, Morgan Stanley, ubs Citigroup, Goldman Sachs, bank of America, credit Sus, JP Morgan, Wells Fargo, Deutsche Bank, all of the big ones. And it ranges anywhere from 36 75, right? So remember last year ended 38 40, so that’d be a little bit of a decline. A bunch of them are all right around 38, 3900. And then all the way to the most aggressive, or the most bullish was Deutsche Bank up at 4,500. So we’re right around 4,400 right now. So it, it looks like 15 outta 16 of these would’ve been, you know, low or, you know, underestimating.
And I’m not saying that to pick on these people, but I’m saying it to prove that nobody really knows, you know, you can’t sit there and say, oh, well JP Morgan, there’s a lot of smart men and women there. They know what they’re doing. You know, they’re c e o Jamie Diamond. He’s all over the news all the time. And I mean, if you’ve listened to him talk, I’m always impressed by hearing him talk. And, and you could walk away from that saying, well, I don’t know. But those guys, I’m sure they do Well, they don’t <laugh> despite how great they sound. They don’t really know where it’s going. So that was my first takeaway from, from the returns so far this year. The second thing I wanted to touch on is, is something I’ve seen a lot of headlines about. Um, I don’t know Dave, if you’ve seen some of these, which is the fact that the returns in the market are almost entirely, if not entirely coming from seven stocks.
So the, the numbers that I had here, and this was about a month old, but you know, I think the numbers probably are, are pretty close now. Um, this was as of towards the end of May, the seven mega cap tech stocks. So you could probably rattle ’em off Amazon, I’m still gonna call ’em Facebook, even though they call themselves beta. I’m still gonna call ’em Google, even though they’re Alphabet. Um, Amazon, Facebook, Microsoft, apple, Invidia, Tesla, um, Google, those seven stocks had accounted for all of the gains of the s and p 500 year
Dave:
Indeed Nvidia, Nvidia. Is that AI related? Don’t they do a lot of AI stuff? Cause they haven’t been mentioned in our show yet,
Steve:
Nvidia, right. That’s a, that’s a not a newcomer. I mean it’s, you know, been a pretty big stock before, but man, it’s, it’s really been a big stock. I think it’s up over a hundred percent year to date. Um, and Nvidia, they, they do, uh, microprocessors chips and, you know, they, they had done chips primarily for gaming and things like that, but with the boost of ai, man, NVIDIA’s just gone through the roof. And I, I don’t have numbers, but you know, I’ve heard these, these things talked about for, um, you know, to run some of these AI programs that they’ve gotta have 250 of these chips from Nvidia that cost $15,000 each. And you know, the numbers obviously get pretty big. So you know what the, what we were looking at here is sure, the s and p five hundred’s up 14%, but what about the s and p 4 93? Right? So the s and p 4 93 is take out those seven big stocks. Yeah. And the s and p 4 93 is basically flat or maybe has actually lost a little bit of money.
Dave:
Wow. Interesting. I didn’t know that.
Steve:
Now, the, the, you know, I say this, this is not entirely out of the ordinary. I mean, any market cap weighted index is going to be dominated by those biggest stocks. I mean, that’s the nature of the way a market cap weighted index works. Um, but the extent to which this year’s market is dominated by those seven stocks is actually extreme. You know, it, it it’s more concentrated about twice as concentrated as the average, as far as returns there. You know, what does that mean for investors going forward? You know, depending on who you listen to and, and expectations is that you’re probably going to see a broader kind of a broadening of returns going forward that it would tend to be less concentrated in seven stocks. And that might mean outperformance for, um, more equal weighted or small cap weighted, um, type of funds. But, you know, that’s getting into the, the nitty gritty there.
Dave:
You know what I feel like part of the story is in fact ai, I don’t, not saying AI taking over the world. I’m saying AI and its psychological effect. Like to me these days, if Silicon Valley’s doing well, the stock market, the s and p five hundreds doing well
Steve:
Yeah.
Dave:
For the reasons you just said. And Silicon Valley was dead for all of about four minutes <laugh>. And then the AI thing started up all these little villages of young people and the San Francisco Harriet came together and starting to get some office space and this and that. And you know, and to me it was like this, the quickest death ever of anything was the Silicon Valley is dead. Uh, what I’m meant to say is it’s becoming alive now again. Yeah. And part of this whole thing is hope. Part of it is, you know, venture capital money and businesses starting and something that we see growing in the future. And the whole AI thing, I feel on a whole bunch of levels in the long run, the long run being the next five years is going be good for the, for the s and p 500 slash Nasdaq business.
Steve:
Oh, absolutely. And, and I mean, we could probably do whole show all about AI or you know, we’d have to do a lot of research and do it.
Dave:
I no idea about ai
Steve:
No, I, what I’d
Dave:
Read, but yeah, as far as, just as far as the money in real and psychologically good feelings about your stocks and equities and all that, I think AI’s a good thing.
Steve:
Yeah. And I mean, it, it brings to mind, I hope I’m not misquoting this, I, I think it was Bill Gates who said it, and I, I don’t know if I’ve used this quote on the show before that, you know, when it comes to, to looking at the impact of new technologies, we drastically overestimate the impact in the short run and we drastically underestimate the impact in the long run. And I, I think that’s going to be one of those things with, with AI that, you know, oh, everybody’s getting all hyped up about it. And there’s some statistic how in earnings calls for companies that, you know, something like 35% of companies are mentioning AI in their earnings calls when, you know, if you went back last year it was probably 5% or something. Um, so in the short run, you know, you think, oh my God, it’s really gonna change things. Well it is, but it, it might take a little bit of time there.
Dave:
How many have you been asked? I’ve been asked by friends, what do you think about this company? And I’m like, I’ve never heard of it, but I’ll bet you they have something to do with AI and you’re asking me about their stock, is what I say. And then I always go back to, I swear every time I get that, like, cause I’m getting that question, those kinds of things now, a lot the gold rushy kind of questions. Yeah. I go right back to the tech bubble era and I, for some reason you’ll remember, cuz I forgot Sea Everett Coop had something going on. He was the surgeon general and maybe it was, he had some sort of website, it must have been health related obviously, right. But it was gonna be the big thing and it maybe had gone up to like 180 or something price. And then I, the next day it went down to like seven, whatever it was, <laugh>, whatever it was, this whole thing, the AI thing, just like you said, short, short term, it, I I get the tech bubbly kind of feel. Yeah. Uh, when you’re betting on companies that you have no idea how they’re gonna be there in the long run or not. And, and long term it does, it, it certainly feels good.
Steve:
Yeah. Um, you know, but as I, as I looked at this market concentration, um, I was reminded of this, this other chart that I’ve seen from, I think this is from Dimensional funds. I can find it here somewhere. Oh yeah, here it is. Um, and this is, this is an interesting one because especially because this is not at all how the market has played out in the last decade or so. Um, but it, it looks at the returns of the 10 largest stocks before they become part of the top 10, right? So, you know, think about Apple back when, you know, apple wasn’t part of the top 10 stocks. Um, you know, think about all these different companies and then it looks at their returns after they become part of the top 10. And you know, as you would expect before they become part of the top 10, the prior three years, the returns are averaged 26% per year.
You know, just phenomenal returns there after stocks become part of the top 10. And this is long term, going back to 1927 averages the three years after the average return 0.7%, the five years after 0.6% loss, and the 10 years after a one and a half percent loss. So, you know, what it tells me is, you know, these companies that, that are in the top, they’re not gonna be the top forever. And I’m not sitting here predicting the downfall of Apple or anything like that. Um, but you’ve gotta expect that, you know, it’s, it gets pretty hard at some point for a company like Apple or you know, pick your big company to grow at 30 or 40% each year. It just, at some point the numbers just, it becomes too big there. Um, and that’s, you know, of course this is why we favor these broadly diversified portfolios. You know, we don’t go in there saying, oh yeah, we can pick individual stocks and we can pick the best ones. And there’s just way too much data showing that you can’t do that reliably.
Alright, let’s shift gears, Dave. Um, so obviously the market’s doing really well this year. Um, if you pay attention to, not to what the analysts said in December, but to what they’re saying now, um, you’ve kind of have a mixed bag going forward. You know, some people are cautiously optimistic going forward, and some of them are a little bit more bearish, you know, and it’s easy to make the bearish case to say, Hey, you know, we, we haven’t totally licked inflation yet. It’s gonna be persistent, it’ll stick around longer. Um, these rate hike increases really haven’t fully been felt in the economy yet. So once they are felt, the economy’s really gonna slow down. So you can certainly make that case in there. Um, but the question that we get from a lot of people in all of our review meetings is, Hey, what should I do with this cash that I’m sitting on?
And frankly, I’ve been shocked <laugh> by the amount of cash that some people have. Um, you know, it is a lot of clients, you know, we, we’ve got a general sense for, you know, yeah, you guys manage my investments, but I like to keep 50,000, a hundred thousand. You know, some clients keep 200,000 and even though they know maybe could do a little better, they just, they feel comfortable with that. Um, but I’ve been really surprised with the amount of cash that people have sitting on the sidelines. So we’ve been going through this discussion in all of our meetings, but I felt like, hey, it makes sense. Let’s talk about it on the air here. Uh, so here’s how we kinda walk through things with people. You know, of course I can always make a case. And if you’ve looked at long-term stock market numbers, I can always make a case that if you’re gonna invest this money and you’re gonna leave it in there for the long-term, you will do fine investing in stocks.
You know, I don’t know what’s gonna happen in six months or a year or two year, but I think that if you’ve got 5, 6, 7 plus years, you’ll do fine in stocks. So let’s not talk about that, but let’s kind of go up the risk ladder here of go from cash to where else can we go. So the first thing I tell people is, hey, if you’re in cash and you still want to stay real secure, take a look at some CDs for money that that might be you might need in the next two years or so, because a lot of people are shocked by the rates that you can get. You know, I, I look at these things pretty much every day and I, I mean, I’ve seen as high as 5.4% for a, you know, one year or 18 months cd. Um, so, you know, these things are all F D I C insured.
You’re not, you know, you’re not risking this in that sense. Um, but I, I think that’s a, a really good place to say, I wanna stay safe, but I actually wanna earn some, some interest on this, right? So that’s first step up, the next step up where people say, okay, I wanna stay really safe with this money, but you know, I want to invest it for longer term and I, I don’t want to just keep it in there for a year or two. This is money that I really don’t need for 3, 5, 7, 10 years, but I want to stay pretty safe. You know, I, I’ve got enough money in the stock market. If the stock market does well, I’m gonna do fine. I just want to feel a little more secure. And this is really where we’ve been talking with a lot of people about fixed multi-year, guaranteed fixed annuities.
So what does a multi-year guaranteed fixed annuity look like? Well, it’s from an insurance company, it has a set interest rate for a set number of years. And to give you an example, a five-year contract, you can get 5.2% per year guaranteed upfront, right? So you put your money in, you get 5.2% per year. At the end of five years, you’ve got a decision. You know, do I wanna leave the money in there? Do I wanna roll it over to a three year contract, another five year, a longer term? So, you know, the risk there, of course, is what if interest rates go up quite a bit. You know, what if interest rates two years from now are, you know, at seven or 8%,
Dave:
Right? Then you lost a little.
Steve:
Yeah. I mean, then you’re, you’re locked into that 5.2%. So that’s not good. Uh, on the other hand, what if interest rates go down? Well, you’re locked in at that 5.2. You don’t have to worry about that. So this is one of those things where, where some people see that number and they say, Hey, that solves all my problems, right? I mean, that’s in a lot of the retirement projections we do 5.2% is the goal. I mean, that’s what we’re trying to achieve to get these long-term, uh, you know, successful plans. So, but the reason why we don’t put everything in there is it, it just doesn’t give you a whole lot of flexibility. You know, you’re, you’re kind of locked in there. You don’t have a chance to pivot or change if interest rates go higher or your situation changes or anything. So I love it as a piece of the plan.
It is not the entirety of a plan right there. All right? So we’re kind of climbing up the, the risk ladder a little bit here. And now we get into a category, um, that I’m gonna just very generally called buffered products. And these things come in a, a wide variety of different formats. So they can come in an E T F format, that’s an exchange traded fund. They can come in what are called structured notes, that’s more of a bond. They can also come in an annuity format, right? So these are different formats. Not gonna get into the technicalities of it, but here’s the broad picture of how one of these things might work. It says that you are buffered or protected against the first, let’s say 10% of losses. So I’m investing this money, it’s tied to the s and p 500. If the s and p 500 goes down by 10% or less, I, I’m gonna have just a zero return for the year, right?
So I put my money in s and b 500 is down 7% over the next year. My return is zero. The s and b 500 is down, let’s say 20%. My return is gonna be negative 10 because they absorb those first 10% in losses. On the flip side though, of course we know we’re not getting something like that for free. So on the flip side, they’re gonna cap out your gains and that the cap might be anywhere from 15 to 20%. I’ve seen ’em as high as 23, 20 4%. But the idea is that you’re giving up some of the upside to have some of that downside protection there. And I, I think this is a good, I don’t wanna call people who are investing money chicken, but I do think it’s good kind of, Hey, I wanna invest and I think stocks will go up, but I’m kind of scared. That’s fair. Um, I, I think this is a good way to sort of dip your toe in there, get some of that upside, but not have all the risk and, and downside in there.
Dave:
Yeah. I think, what do you think about, I just feel like with all these things that are out there for us and other people like us to offer, it feels like with these interest rates higher, now we have all these fair, we can really pinpoint risk tolerance. Yeah. Like how much risk are you willing to take? We can, with the tools in the toolbox, all these offerings, we can really hone in on what makes you feel comfortable to hit the right amount of risk. And if the right amount of risk is super conservative, you still get a nice return. But if you’re people who are like, they get queasy when things really go down, right? Um, they have an opportunity to get a, a real good return, um, that they never would’ve had maybe before or without the availability.
Steve:
A absolutely. And I, and I think that this shift in interest rates that we’ve seen in the last 18 months has totally changed this landscape of a balanced portfolio because I, I, you know, for the longest time with interest rates at zero or near zero, it, it basically just, it took a lot of these options off the table, right? I mean, if, if you were going to, you know, invest in something and get a 1% return, it just, it wasn’t gonna accomplish anything. So it certainly pushed a lot of people. You know, there was a saying for the last decade or so that 70 30 or 75 25 was the new 60 40. And, and the saying basically meant that someone who normally meaning over history would’ve been in a 60 40 portfolio, sort of had to stretch and push themselves into a 70 30 or 75 25. And that means taking on more risk, right? More money in stocks. And now I think the pendulum has swung back a little bit the other way where you can always make a case for owning stocks and having that in there. But there are so many more options with, with fixed income rates being this much higher, um, that I, I don’t think anyone needs to press into a 70 30 if they would’ve been 60 40.
Dave:
Yeah. It really allows us to, to help people. I mean, you know, to try to get some growth for people who have risk risk issues and they’re good risk issues. It’s like, I’m older, I don’t wanna take that kind of risk anymore, but I’d like to, you know, yeah. I’d still like to have the opportunity to get a return. These higher interest rates are just, to me, I just don’t think they’re negative. Even the normal of interest rates. Interest rates have never been so low for so long. How crazy low they were. Yeah. And there’s a lot of bad to that, you know? Oh, absolutely. Overing of the stock market. <laugh> is one of them. And, and, and just the inability of older people and people we deal with to have more options to, to make money without so much risk. So I don’t know. I’d like, I’ve been saying this has, has been my personal theme. I’m pro interest rate <laugh>, these interest rates going up.
Steve:
Oh, that’s,
Dave:
I’ve been a fan. It’s like, it’s okay.
Steve:
That’s easy for people like us to say who have mortgages locked in at super low rates. Don’t borrow money to, you know, to grow our business or don’t borrow money to, to do anything. Not in credit cards or anything. So that’s easy for us to say, but I would say I think a lot of our clients are probably in the same situation. You
Dave:
Know? You know what, I’m sorry to interrupt you. Nos. I agree. But before we end this thing with July 4th coming up, and you’ll been already passed probably by the time you’ve heard this, but I wanna just give a shout out on that note what you just said to America, you know, sometimes we take America for granted, but I was reading an article the other day, they’re in this huge, with the higher interest rates in Britain, they don’t have a 30 year fix.
Steve:
I
Dave:
Know know. And if 30 year fixes or something, we just like, oh cool, I have a 30 year fix. They don’t have ’em in other countries. So the interest rates are going up and people like on a fixed income are like, oh, I can’t afford this. And it’s like, oh, well, too bad. The interest rates are going up and now your mortgage has gone up. And we don’t have that. We have the ability to lock that in here and Yeah. In this country. And I think sometimes we take for granted things financially in this country and there’s a lot of great things about the United States as we all probably agree. But one of the really great things from a money point of view is a 30 year fix.
Steve:
Well, I well said that, that does bogle my mind when I think of those poor people who have their rates resetting after five years. You know, that’s, that’s scary cuz you don’t know what it’ll reset to. All right. On that patriotic note, let’s end things.
Dave:
We don’t do enough patriotism on this show.
Steve:
Yeah. I hope everyone, like Dave said, you’re probably listening to this after the fourth. Um, so I hope everyone had a good
Speaker 4:
Safe force.
Speaker 5:
Yes, indeed.
Speaker 6:
We will check in again very soon.