This Faith in Finance podcast is underwritten in part by Sound Mind Investing. For more than 30 years, do-it-yourself investors have relied on SMI for proven strategies and trustworthy guidance. SMI helps people build wealth so they can provide for their families, prepare for the future, and give generously. Learn more at soundmindinvesting.org. Markets rise and fall, but not all cycles tell the same story.
So, what do those ups and downs really mean for your investments? Hi, I'm Rob West. We often hear about bull and bear markets, but those trends actually come in two forms: cyclical and secular. Understanding the difference can help you make wiser long-term decisions with your portfolio. Mark Biller joins us today to unpack these market cycles and why they matter.
Then it's on to your calls at 800-525-7000. This is Faith in Finance: biblical wisdom for your financial decisions.
Well, if anyone can help us unpack the difference between cyclical and secular trends, it's Mark Biller. He's executive editor at Sound Mind Investing and a valued underwriter of this program. Mark, great to have you back with us.
Well, thanks for inviting me back, Rob. Mark, I want to dig into a great piece you wrote for the Soundmind Investing newsletter titled Bulls and Bears, Cyclical and Secular. Let's start with the basics. People often hear about bull and bear markets, but what do those terms really mean? Yeah, Rob.
Well, cycles, of course, are part of the fabric of creation. You know, Solomon wrote in Ecclesiastes 3: to everything there's a season and a time to every purpose under heaven. We see cycles all around us in the natural world: the sun, the moon, the tides, the seasons, and so on. And financial markets go through cycles too. They're obviously less predictable than the natural world cycles.
But the most familiar of those investing cycles are bull markets when prices and market indexes are rising and bear markets when they're falling. That's helpful. Your article also explores the difference between cyclical and secular bull and bear markets. These may be new terms for our listeners. Unpack those for us.
Yeah, absolutely. Those are really just fancy words for a very simple idea, Rob, and that's that markets experience both short-term and longer-term cycles.
So we call the shorter term cycles cyclical, as in the cycles of the economy, the short-term stuff. And then the longer-term cycles we call secular.
Now, where this can get a little confusing for people is that you can have a longer-term secular cycle that might last from 10 to 40 years, but within that longer-term period, there can be a lot of shorter-term cyclical turns back and forth. That's not confusing at all. Right? Give us an example of how these shorter cyclical trends fit within the broader secular trends. Yeah, a couple examples will definitely help.
So from 1968 to 1982, The SP 500 index was flat. It didn't go anywhere for 15 years. In reality, the situation was actually a little worse than that because high inflation meant that stock market investors were actually losing about 60% of their purchasing power over that time. But that's the idea of a secular bear market. It lasted 15 years without any sustained progress.
But within that 15-year period, there were several shorter-term bull and bear markets where the market was going up and down. A more recent example of that same thing was from 2000 to 2009. Again, the US stock market was flat for a decade. That was another secular bear market. But within that decade, we had two distinct cyclical or shorter-term bear markets with a five-year bull market in between those.
And fortunately, that's pretty typical on the stock market side of things, where the bull markets tend to last a lot longer than the bear markets, and the gains from the bull markets are much bigger than the losses from the bear markets. Yeah. And so, why does it matter for everyday investors to know whether we're in a cyclical or secular trend? Yeah, great question. You know, it's actually probably more helpful in terms of bonds than stocks, to be honest, for two reasons.
The first is that the bond market secular cycles have been much longer and more pronounced.
So most investors know the U.S. bond market had an incredible 40-year bull market from 1982 to 2021. What they may not realize is that those types of long cycles are actually pretty typical for bonds, which may be a little scary given that it seems like we may have flipped into a new bond bear market since COVID. Interesting.
Well, we'll continue to unpack this. And also, how does this affect how you build your portfolio? And if we're facing some of these challenges, especially with bonds, what do we do about it? Mark Biller here today. He's executive editor at Soundmind Investing and a regular contributor on this program.
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I'm so glad you're with us today on Faith and Finance. You know, we often hear about bull and bear markets, but those trends actually come in two forms: terms that Mark Biller introduced to us before the break: cyclical and secular. Mark is, of course, executive editor at Soundmind Investing. He joins us regularly on this program, Soundmind Investing, a longtime valued underwriter of this program. Mark, before we dive back in, just again define those terms: secular and cyclical.
Yeah, so cyclical is short term.
So those are the trends that change relatively quickly. You're probably talking about, you know, a year or less, maybe a year to three years, that sort of thing. Secular trends are longer term trends, usually measuring those in decades, 10 to 20 to 30 years at a time. Yes, that's helpful. And you made a statement just before the break that we may have actually flipped into a new bond bear market since COVID.
Talk about that just for a moment and give us a sense of kind of how it's performed. Sure.
So the the main idea there, Rob, is that In the early 1980s, interest rates had reached such highs, we had 10-year treasury rates of like 15%. And persistently over the next 40 years, those rates became lower and lower and lower and lower until during the COVID year of twenty twenty, the ten year Treasure yield actually hit zero point five percent.
So, over the course of that 40-year secular bull market for bonds, interest rates went from 15% to one-half of 1%.
Well, there's really only one direction you can go once you basically hit zero, and that's back up. And that's exactly what we've seen in the five years since.
Now, most people pay a lot more attention to their stock portfolio than their bond portfolio. But it may be surprising for listeners to hear that the main U.S. bond market index is actually negative overall for the last five years.
Someone in bonds in that index has actually lost a little bit of money over a five-year period. I think that kind of catches people by surprise if they aren't watching that closely. And that's why we think that we may have had a turn in interest rates and thus a change from that secular bull market in bonds to a secular bear market. As rates now are starting to climb in this higher inflation environment. Yeah, interesting.
So, how should these ideas, Mark, that you've been sharing, shape how long-term investors, and that's what we should be, build their portfolios? Yeah, well, first I want to say real clearly, Rob, we're not trying to dramatically change anybody's mind about how to build a comprehensive personalized investing plan here. All we're doing is suggesting that the assumptions about how large a percentage of your portfolio you want to permanently allocate to bonds is at least a question worth thinking about. You know, for the last 45 years or so, investors could put a lot of their money in bonds and never really think about it because they were getting the capital gains along with the income that those bonds were generating. But that hasn't been the case for the last five years.
So if it really is a new secular bear market for bonds, it may be worth thinking about how we can diversify beyond just the simple stock bond portfolio that we're so used to. You know, the last secular bear market in bonds lasted 35 years. From the end of World War II until the early 1980s.
So it's probably worth our time to at least entertain the possibility that bonds aren't going to be quite as helpful in the decade ahead as they have been for the last four decades. Yeah. Well, you've talked about how SMI is responding to these market shifts. What specific adjustments are you making, Mark, then, in light of this environment? Yeah, well, we've been wary about the risk of a secular bear market in bonds.
And the first thing, Rob, is we just allocate less to bonds than many investors do because of that. The article explains in some detail how we get to a bond allocation that's closer to 30% in total than the 40% that most typical 60-40 type investors would use for bonds.
So we're about 10% less in terms of bonds. We certainly haven't abandoned them. We've just diversified further beyond bonds. About a dozen years ago, we created a strategy called dynamic asset allocation, which offers a variety of investment options for the part of a portfolio that isn't invested in stocks. And about 20 months ago, that strategy steered us into gold, which we've talked about a few times recently.
And that's been a significant allocation for us ever since, taking up some of the space that bonds would normally occupy in a portfolio. Earlier this year, we wrote about a different approach that diversifies across 20 different asset types in a moving tactical way that changes as markets change. And I'll link to that report that explains that strategy on the soundmindinvesting.org website if there are any listeners who want to learn about that approach. And thankfully, there's an ETF that takes care of the hard work of following a 20-asset class strategy. But that's another way, Rob, that we've kind of diversified beyond just a simple stock bond portfolio.
Yeah, that's helpful. By the way, again, that website is soundmindinvesting.org. All right, Mark.
Well, if a lot in our listening audience are in that retirement season, they have that classic 60-40 bond. Stock portfolio and bonds are likely to face challenges given what you've said. What other asset classes can they look to for diversification right now? Yeah, well, the last few years, our SMI portfolios have included gold, which we've talked about, commodities, sometimes real estate. You and I have discussed the pros and cons of adding a small Bitcoin allocation.
And then there are several other asset types, such as energy stocks, things like that, within that ETF that I mentioned that adds additional diversification as well. You know, in September, Morgan Stanley's chief investment officer created a real stir by proposing that the traditional 60/40 stock bond portfolio should be adjusted to 60% stocks, 20% bonds, and 20% gold.
Now, like we've discussed, Rob, as much as I like gold, and I really do, even I'm a little hesitant to go that high just in gold, but it does make the point that getting to a 20% type of allocation across a blend of gold, commodities, Bitcoin, real estate, energy stocks, et cetera, that type of arrangement does sound pretty reasonable to me. Yeah. All right, we've got just about 30 seconds left, Mark. What encouragement would you leave our listeners with if they're feeling uneasy or unsure about where to go in these markets? Yeah, the main thing, Rob, is we're just trying to build portfolios that you can stick with and that will be resilient for you through both secular and cyclical bull and bear market shifts.
This bond idea is pretty new. That's where the focus of this article is.
So we're not advocating for huge changes, but hopefully this article will at least get listeners thinking about some of the right questions. Oh, I think it'll certainly do that. What a great perspective. You know, understanding both short and long-term market cycles helps us invest with patience and discipline and even faith. Trusting that God is sovereign over every season.
Mark, thanks for breaking it down for us. Always a pleasure, Rob. That's Mark Biller. Head to soundmindinvesting.org and look for bulls and bears, cyclical and secular. We'll be right back.
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Let's go to Florida. Hi, John. Go ahead. Thanks for taking my call. I'm calling because I'm getting close to retirement age, and I just wanted to know your thoughts on annuities.
Because I have no debt. I have some investments, savings But I don't have a pension. I don't have a retirement plan, anything like that.
So I was just wondering what your thoughts were for annuities for a steady guaranteed monthly income. Yeah. What do you have in liquid assets, if you don't mind me asking? In liquid assets, probably about Yeah.
Okay. And that would include your emergency fund, or is that separate from your emergency reserves? No, that would include my emergency, yes.
Okay. So if you were to take six months' worth of expenses and set that aside, what would that be? Um it would probably be about Hmm, I'd say. Probably about Leave me about 160.
Okay. And are you married? No, single.
Okay, and so if that left you 160 and what is your age currently? Yeah. Okay. Yeah. And so right now, what are you living on?
Uh I still work. I still work. And now when you asked me liquid assets, was that As far as what I have in investments or just Emergency fund that I don't have invested. The 200 I mentioned before, I have it in. interest saving money market accounts But then I have my stock portfolio that's different, that's separate.
Okay. And what's the total of that? The stock portfolio, probably about 700.
Okay. And would you be looking for an annuity as a to complement the seven hundred where you'd keep that invested? Or are you considering replacing the current investments with just kind of one annuity for the whole thing?
Well, that's just it. I was wondering if I should take maybe part of those investments and make it an annuity to at least have a guaranteed monthly income besides whatever Social Security might be. Yeah, no, that makes sense. And I think that could, you know, alleviate some of the risk. I mean, these typically aren't my first choice, but when you're describing your situation, I mean, that's what it can be used for is a guaranteed monthly income, especially when it's alongside other investments.
If you were not working any longer. What would you need per month beyond Social Security to just make sure that your monthly expenses were covered? What amount per month? If I wasn't working, probably about I'd say probably about four thousand.
Okay, great. Is that based on you anticipating taking Social Security, John, at full retirement age, or did you take it early? No, I have not taken it yet, but I do plan to take it earlier, yes.
Okay. At what point do you think you'll take it here, once you stop working? Yes, once I stop working.
Okay. And have what's your current read on that just based on what you know today? Probably about, I'm looking probably about a year.
Okay. Yeah, I mean, so that's going to lock in a pretty sizable permanent reduction in that Social Security.
So, I mean, one option would be: what could you do to delay that at least until full retirement age, which would get you, you know, potentially 20 to 25% more than every month for the rest of your life than if you were to take it early? I think on the annuities, I mean, you know, the upside of annuities is that you can create guaranteed income for them. From them. And so a lot of people, you know, who are interested in annuities are saying, listen, I want to transfer the risk away from myself and to an insurance company so that I don't have to think about market performance. And, you know, so when you want guaranteed income for life, you don't have a pension.
You want to be able to say that, okay, my basic expenses are covered. You want to be conservative. You want protection from the market volatility. That's where these can shine. The downside is they are typically higher on the fee side, especially with variable annuities.
There are surrender charges if you need the money early. The riders get complex, the fine print, and just the loss of liquidity because the money's tied up.
So a lot of times people will try to find a balance between, okay, what if I take a portion of my money and lock in at least some guaranteed income that when I add it to Social Security, at least covers the majority of my assets, and then I could keep the rest invested. Others might say, no. Wait a minute, you know, if we set aside your emergency fund, you know, you're at, you know, let's say 860,000, you work for another couple of years, you might be pushing a million dollars. I mean, that could easily throw off 40,000 a year with a conservative mix of investments. Yes, you have the market risk, but at least you still have full access to the roughly $1 million at any point if you need it for long-term care or whatever else comes your way.
And it's not locked up with an insurance company. And I think, you know, that's typically my preference. And you manage the risk through the investment strategy. You have an advisor that you'd work with who'd use a combination of probably treasuries and, you know, maybe a CD ladder and, you know, some high-yield dividend paying stocks, things like that, you know, to offset the risk, but it gives you still full access to the money. And so I think that's where you've kind of got to determine what's the best fit for you.
But at the end of the day, I try to work as long as you can so you can let that Social Security grow and then either say, you know what, I'm just going to manage risk through my investments and I'm going to keep full access to the money and I'm going to find a great advisor to work with, or I'm going to take a portion of that and, you know, kind of put it away for guaranteed income into an annuity product. But I'd get at least two or three different bids because they're not all created equal. Does that make sense? It makes perfect sense. And you brought up a couple of good points that I hadn't thought about.
So thank you very much. All right, John. God bless you, my friend. Thanks for being on the program. Let's go to Missouri.
Hi, Dennis. Go ahead. I'm in my seventies. I'm retired. I don't have much money saved on divorced.
And a lot of sure my income goes for alimony. But what I'm wondering about in my age is I have a good enough income, I'm wanting to try to balance things. Save money for emergencies. And then at the same time, I want to start giving more to the Lord's work because I believe that that's a better reward given to the Lord's work than. saving a bunch of money down here.
Wow. Does that make any sense? It makes a lot of sense, Dennis. And I'm delighted you got on the program today because I can't think of a better way to finish our program today than to say, you know what? We have to realize that, yes, God entrusts His good gift of wealth and resources to us for our enjoyment and for provision of our family.
But I would say, even bigger than that, is our opportunity to hold it loosely and give it generously and send it on ahead and get it into circulation into God's economy. And holding on to everything God gives us and waiting to give a death, I don't believe is the right way to go. I think we should always actively be looking for ways to get what God has entrusted to us into circulation in God's economy to bless others and to spread the gospel. And I think you're right on, my friend.
So I would say, yes, yes, and yes. You go for that. Let's see what the Lord does. Thanks for being on the program and for your kind remarks today. Lord bless you.
Well, folks, a big thanks to my team. Today. We're delighted to have you along with us today, and we'll see you next time. Thanks to Devin and Taylor and Pat. God bless you.
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