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. A lot of investors are wondering whether the market is getting ahead of itself, especially in AI and tech.
Hi, I'm Rob West. But what if the better question isn't whether we're in a bubble, but how should we respond if we are? Mark Biller joins us today to talk about what investors should do when markets look overheated and why trying to predict the exact peak usually backfires. And then it's on to your calls at 800-525-7000. This is Faith in Finance, biblical wisdom for your financial decisions.
Well, it's always great to have Mark Biller with us. Mark is executive editor and senior portfolio manager at Sound Mind Investing, a faithful underwriter of Faith and Finance. For decades, Sound Mind Investing has helped believers make wise, biblically informed investing decisions with clarity and confidence. Mark, great to have you back. Thanks, Rob.
Always good to be back with you. Mark, you have a timely article in the latest issue of your newsletter on how investors should handle a potential bubble. And it comes at a good moment because there is plenty of chatter right now about whether AI and tech stocks are getting overheated.
So why don't we start there? What's fueling those concerns? Yeah, well, the AI story has been increasingly driving markets for really about three years now. We can see that real clearly in the performance of the tech-oriented NASDAQ index, which is up about 160% since the end of the 2022 bear market. That's about a third better than the broader SP 500 index, which is up closer to 120% over the last three and a half years.
But then, more recently, Rob, we just finished an earnings season where many companies showed really rapid profit acceleration that they were attributing to AI. And that was a bit of a wake-up call on a couple different levels. One, it showed that this AI story is real, that many companies across many industries are starting to show tangible benefits to their bottom line from AI. And then, by extension, companies were clearly communicating that they're going to. To demand a lot more AI computing power than we currently have.
And that's the part that sent everything related to AI just soaring.
So semiconductor stocks are at the center of all of this, and they've gone parabolic over the last couple months. Whenever investors see a sector start going really almost straight up, they naturally get nervous because it brings to mind past blow-off tops that ended with sharp declines. Yeah, so are those concerns warranted? Are we really looking at a bubble or is something different going on beneath the surface?
Well, first of all, it's really hard to call a bubble in real time, or at least to call it in a timely way that's helpful to anyone. And the go-to story for me on this, Rob, is that a lot of people suspected internet stocks were a bubble back in the late 90s. Federal Reserve Chairman Alan Greenspan famously said the market was irrationally exuberant at the time. He got it right. He did call it correctly.
But that comment came three and a half years before the bubble ended.
So anybody who sold stocks based on that idea left a ton of money on the table and had to wait a really long time for that bubble to pop.
Now, regarding this potential bubble, we've got to keep in mind that the stock market is forward-looking. And what that means is investors care a lot more about what companies are likely to earn in the future than what they're earning today.
So when future expectations improve dramatically, like they just did during this recent earnings season, it's really pretty natural for stock prices to adjust in kind.
So all of that to say, Rob, it is entirely possible that we could be seeing a bubble forming in, say, semiconductor stocks specifically, while the rest of the market doesn't really look particularly bubbly. But again, even if that is the case, there's still the question of what do we do with that information? Hmm. Wow. Yeah.
There's also the shoeshine boy. I guess that's the anecdote from 1929, right? Where he was giving stock tips. I think it was JFK's dad that said, wait a minute, I got to get out of this market. We got a problem here.
But regardless of what your sign is, how do you handle it? When we come back from this break, we'll continue to unpack this with Mark Biller today because it becomes challenging. You know, emotionally, we want to avoid these downturns without missing the upside.
So, how does all of this relate to your portfolio and where is AI and tech headed in the future? We're talking with executive editor and senior portfolio manager at Soundmind Investing, Mark Biller, today. Check out this article, How to Handle a Bubble at soundmindinvesting.org. Back with more after this. Stick around.
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For more than 30 years, they've offered financial wisdom for living well. SMI provides step-by-step guidance for do-it-yourself investors, from those just getting started to those getting ready for retirement. More information, including a short video webinar on profit and peace of mind no matter what's happening in the market, is available at soundmindinvesting.org. We're talking about how to handle a market bubble today with our friend Mark Biller. Mark is executive editor and senior portfolio manager at Sound Mind Investing, a faithful underwriter of this program.
Check out the article that Mark recently wrote for the SMI newsletter. It's called How to Handle a Bubble. You'll find it at soundmindinvesting.org. That's soundmindinvesting.org.
So, Mark, from your perspective, this isn't necessarily just market hype, what's going on with AI and tech. There may be legitimate innovation and growth beneath the excitement. Yeah, that's right. You know, a lot of the enthusiasm is tied to genuine earnings growth. Companies are finding ways to get more output from the same number of employees through AI tools, and that significantly boosts profits.
And by extension, then, investors are also realizing this isn't just smoke and mirrors. Corporate America is spending heavily on AI infrastructure because these tools are already improving efficiency and profitability. Very interesting. But even if there are legitimate forces behind the rally, that doesn't mean investors can ignore the risk, right? How should they think about that tension?
Yeah, absolutely. That's really what this article is about. It's not really so much trying to prove whether we are or aren't in a bubble yet. We think the better question is: what should wise investors do if markets have become overheated? One of the biggest lessons from history is that trying to predict exactly when a bubble or even just a long-running bull market is going to end usually doesn't work very well.
Yeah, that's where it gets difficult because emotionally we want to avoid the downturn without missing the upside, right? Exactly. That's every investor's goal. But in practice, that type of market timing is extremely difficult. You know, investors often wind up either selling too early and missing out on major gains or selling too late after stocks have plunged and fear has already taken over.
That's why SMI emphasizes staying invested while still managing risk in a thoughtful way. And part of that, Rob, is because historically it's really clear that a lot of the market's biggest gains come late in bull markets right before things eventually cool off. Yeah. So if someone's listening today, Mark, and they're feeling uneasy about the market, what are some wise practical steps they can take without reacting out of fear? I'd say the first one is that diversification really matters.
A well-balanced portfolio helps reduce the danger of becoming overly exposed to any one hot area. And right now, it's pretty easy to tell if you're truly diversified. If everything you own is going up, or if nothing you own is going up, then you're probably not diversified. On the other hand, if some of your holdings are racing higher and others are kind of just sitting there playing dead, well, that probably is a good sign you have a diversified portfolio. And second, Rob, simple rebalancing can be a really powerful tool in market environments like this.
The reason for that is that if you've got one part of your portfolio that's grown dramatically, when you rebalance, that naturally shifts some profits out of those fast-rising assets and into the areas that haven't run up as much. And that's one really disciplined way to manage risk without feeling like you have to predict the future. Yeah, and there's an emotional benefit to that too. A clear process helps you respond with discipline rather than reacting impulsively. Absolutely.
I mean, emotional decision-making is where many investors often get into trouble. A disciplined approach removes some of that pressure.
So instead of asking, should I sell everything right now? You're just following through on your plan and making measured adjustments along the way over time. Yeah. Another point you make in the article, Mark, is the need for what you call reasonable expectations. Why is that so important, especially in a market like this?
Yeah, it's really important that investors recognize that markets don't move up in straight lines like this forever. If you stay invested in the strong performing sectors, it's pretty likely you're going to give back some of your gains eventually when either the market leadership changes or when a bear market finally arrives. You know, that's really just part of the deal with investing. The goal shouldn't be to avoid every decline. The goal really is to participate in the market's long-term growth while you manage risk thoughtfully along the way.
Yeah. But even so-called defensive investing mark comes with trade-offs though, doesn't it? Oh, absolutely. You know, if you play defense too aggressively, or in this case, maybe too early, it produces a lot of false alarms that can cost you a lot of potential returns over time. On the other hand, if you stay invested longer, then you've got to accept that you're probably going to experience some discomfort and give back some of those profits when markets eventually pull back.
There's no perfect way to sell for that. You're kind of leaning to one of those two options. A disciplined long-term strategy is going to work better than constantly trying to anticipate every market correction. And the way we approach it at SMI is we use trend-following strategies that keep us invested. But again, we know we're likely to give back a little bit of profit at the end of this type of a move.
The key to doing that, if you're going to try that approach, though, is you've got to have a rock-solid selling dispute. Discipline to eventually get you out when the trend changes. And we've developed those over many years, and that's worked pretty well for us over SMI's 36 years and the several bear markets we've endured during that time. Yeah, no doubt. It sounds like, Mark, that much of this comes down to understanding your own temperament as an investor.
Is that right? Yeah, very much so. You know, a huge part of successful investing is about behavior, probably even more than investing knowledge, and definitely more than your predictive abilities. You know, the investors who tend to do the best are usually the ones who can stay patient, diversified, disciplined, and emotionally steady through both the good markets and especially during the difficult ones. Mark, bring this home for us.
When bubble talks start showing up everywhere, what should investors keep in mind at the end of the day? Yeah, you just can't let fear or excitement drive your investing decisions. You know, markets can stay hot like this a lot longer than people expect. And trying to guess the exact turning points usually creates more problems than it solves.
So, again, the main pillars we've touched on: stay diversified, rebalance periodically, keep reasonable expectations, and focus on a long-term strategy that you can stick with through all different types of market environments. That is so good. Folks, as Mark said, wise investors don't have to ignore market risks or be ruled by them. A disciplined, diversified long-term plan helps us respond with wisdom rather than reacting out of fear. And, Mark, as always, great to have you on the program.
Oh, it's always my pleasure, Rob. Thank you. Folks, if you want one of those time-tested, disciplined approaches to investing, that's where the SMI newsletter comes in. You can learn more at soundmindinvesting.org. You can also delegate and take advantage of the SMI private client group.
It's all there at soundmindinvesting.org. While you're there, check out the article we've been talking about today, How to Handle a Bubble. All right, we're gonna take a break. When we come back, we're gonna dive into your questions today. Whatever is on your mind, we wanna help you live as a faithful steward.
The number 800-525-7000. I'm Rob West, and we'll be right back. Stick around. What we do is very special and it's very unique. This is Bethany.
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15% of everything in God's word connects back to money and possessions, and it's not because I'm convinced God wants something from us. No, it all belongs to Him anyway. It's because God wants something for us, and money is a competitor to our hearts. If we're going to have something get in the way to complete devotion to God, in my view, especially here in the most prosperous nation in the history of the world, it's most often going to be money and the empty promises money will tell us that it will provide security and significance and ultimately peace of mind, that our self-worth is found in our net worth, and that we have to keep up with those around us that are living a lifestyle, perhaps projecting a lifestyle they can't even afford, the best version of their life. And we're chasing that.
No, we instead want you to see money as a tool to have a healthy relationship with money, living within your means, avoiding debt, giving generously to your church, helping the people on your path. And having money be a tool. To promote human flourishing, to advance the common good, to enjoy. And to provide. That's our goal here on this program each day.
Hey, what are your questions today? Call right now. We'd love to tackle those at 800-525-7000. Let's go to Tennessee. Mary, how can I help you?
Yes, I was calling to see what I could do to navigate getting out of debt. As far as things that may have fallen off my credit report. and also how to navigate doing things ethically and with integrity as far as getting out of debt. 'Cause I heard, for example, that you can like um work with the creditors to maybe reduce the amounts. But I think with me I would probably want to p pay in full what was owed.
Yeah, yeah, great questions.
So let's start with that first part. When you talk about things that have fallen off your credit, are you saying you had balances that were never paid, but because of the age of the account they've fallen off, but you still want to pay them, or something else? That is correct.
So trying to figure out how to navigate that, because I'm trying to clear up a. you know, thirty years of wreckage, as it were, when I didn't know how to manage things of that sort and didn't even know what such thing existed.
Okay, got it. Yeah. It's not going to be easy because they probably charged them off. And so, if you want to repay old debts out of personal conviction, and I love that, even after they've fallen off, it's really an issue that you're going to have to work and put some effort into. The first step is to verify the debt carefully.
So, after the kind of history you're talking about, 20 or 30 years, records may be incomplete. Debts may have been sold many times as they were bounced around through multiple credit collection agencies. The balances may be inaccurate. Companies may no longer exist that once owned these.
So, before paying anything, you're going to want to ask for validation so you can confirm who legally owns the debt. And make sure it's legitimate. And the challenge is that with the credit file, the credit report, often that's where we can, you know, try to chase down who currently owns the debt. But to your point, because of the age of some of these, they're not even being reflected there.
So I think you need to, you know, you're going to need to put some legwork in to see if you can chase down who is the actual owner of the debt. Can you get it verified in writing? And only then would I consider paying it off? And that may not be easy to do.
So I think that's the first step. The second piece was around settlements. Is that right? Yes, I was you wanted to know how to handle that with integrity as far as paying the amount that is due. Yeah.
So I think that's ultimately a conviction matter. You know, many people consider paying a negotiated settlement where the creditor is willing to take less acceptable, especially because the person is making a sincere effort to repay something. And they can't realistically pay the full amount. And so it's a mutually agreed resolution. The company's happy to take it.
They've charged probably a lot of interest and a lot of fees. And if they know somebody's in a hardship situation and they're willing to accept less than the full balance in exchange for resolving the debt, that avoids further collection costs on their part. They get payment now. Everybody's happy.
Now, in other cases, especially where somebody has the ability to pay in full, some people like yourself feel convicted to repay every dollar if they're able to. And, you know, I think that really is a personal conviction matter. And if you feel compelled that, you know, the Lord's leading me, that I need to repay what I owe and all the interest and fees added to it over time, which could be substantial, I think that's ultimately between you and the Lord and the creditor. And you may choose to settle this by not taking a reduced settlement, even if the creditor is willing. And that's ultimately your call.
Okay, thank you. All right, Mary. Lord bless you. Thanks for calling today. We appreciate you being on the program.
Let's finish up today in Minnesota. Hi, Angie. Go ahead. Hi. We have a term life insurance policy that is coming to an end, and we can cash it out or we could roll it into a whole life policy, but we have other adequate life insurance.
So we're just wondering with a child going to college in about a year and a half, if there's a way to put that money in a savings account. for that expenditure that would not be it painful for taxes. Yeah. Angie, the only question I have is: you know, with term insurance, just plain term insurance, there is no cash value. You just pay the mortality expense during the term.
And if you don't collect on it, meaning you don't pass away, you drop it. And I realize that you could say, well, then the money's gone. But it's kind of like your car insurance. You pay the premium to offset the risk, and you hope you never have to collect. And that's true of term insurance.
There may be a few exceptions. One is what's called a return of premium rider, but that's an optional add-on to a term life policy that if you outlive the term, it pays you all or some of the money you spent on the policy payments. Do you think that's perhaps what you have? Either that, or does a whole life policy do that? A whole life will have cash value.
Yeah, it's not term. That's a combination of a savings vehicle and the life insurance. It's much more expensive than term insurance, but it does build up savings. And I would say, depending upon the tax treatment on that, well, the first question is: do you need the death benefit? Are you all still working?
Yeah. Okay. And do you have any other insurance or is this your only policy? Oh no, we have several other policies. Life insurance policies?
Yes.
Okay. Yeah, well the key is just to make sure you have the proper amount of coverage.
So at a minimum, you want 10 to 12 times your income on the person's life that's generating the income.
So if you're making $60,000 a year, you know, you'd want to have somewhere between $600,000 and $720,000 on the person who's earning the $60,000. And that's going to give you enough to generate enough income to get through until you would have normally retired and started taking Social Security.
So, first thing is, I determine how much life insurance do we need at this point, and what policies do we have. To cover that. And then, if you have enough coverage, then I would drop that policy. And to your point, take that cash value and invest it or build up your emergency savings with it. Thanks for your call.
I hope that helps you.
Well, let me say a big thanks to my team today. Thankful for Lisa and Amy and Dan and Jim. Couldn't do it without them. Why don't you come back and join us tomorrow? We'll do it all over again.
Bye-bye. Faith in Finance is provided by FaithBuy and listeners like you.
