2022 EP0312 PLANNING MATTERS - CURRENT STOCK MARKET CONDITIONS

We want you to plan for success. Welcome to Planning Matters Radio.

Welcome once again to Planning Matters Radio. I'm Scott Wallace and we're here to shed some light on the financial issues of the day. With me is our star, a Ramsey trusted SmartVestor Pro. He's an author, understanding your investment options, and he's a fiduciary financial investment and retirement planner.

Serving his clients throughout the great state of North Carolina. Peter Ashawn, welcome to the program. Hey Scott, always a pleasure and plenty of information to talk about today, as with the case usually on a regular ongoing basis, but maybe a little bit more to pack in here with everything that's gone on this year and in recent news with people's concerns and questions about their money, their investments, their outlook for their financial future. We try to address concerns and help people get a plan that they feel confident in. That's what we call the optimized retirement plan. And the reason it's optimized is because this helps people make that financial progress regardless of the day to day conditions, because it is a plan with a long term outlook that helps address many facets and aspects of the financial world.

And more importantly, your specific personal financial situation. So Scott, as always, a pleasure. Thank you for being here as part of the program.

Look forward to another great show. If you want to talk directly to Peter Ashawn and contact him about your personal financial situation, you can call him 919-300-5886 or go to his website, www.rishawnplanning.com. That's www.richawnplanning.com.

And you can speak to the man himself. Peter, market downturns. They happen. They're always going to happen at some point. They're inevitable.

What is the overall kind of reaction we should have when we either see them happen or are worried they're going to happen? Fill us in on market downturns. Well, you know, as I mentioned, that optimized retirement plan helps individuals, couples, savers and investors make the financial progress regardless of the conditions of the market.

And on the surface level, a lot of people listening may say, hey, Peter, how can you even claim that? How can you say I'm going to make progress if there is a market downturn? Well, to simplify it, we look at your situation, we look at where your assets are allocated and located, and we try to help you address the balance of assets, only taking risk where it is appropriate. And we don't have to have all of our assets in the market all the time. Certainly over time, it is beneficial to have a portion of assets that is exposed to the market because over time the market has been the best vehicle to gain substantial growth over and above the historic rate of inflation and to give us that forward progress. But there are absolutely times where the market is going to be down. And I think that's where we need to concentrate is that market downturns are not something new. Market downturns are not something that is rare. They happen, they happen frequently, and we need to have a plan that includes that not only as a possibility but as a likelihood and a consideration that that could happen at any time, but we still want the plan to help us make forward financial progress. So, as the phrase was once coined, there is opportunity in crisis, and where a lot of people panic when the market goes down, there are opportunities to continue to help us to make forward financial progress. And just three really quickly to begin the program, investing into the market during downturns is the opportunity to buy at a lower cost. If your bills and standard of living are taken care of by your paycheck, then you absolutely should continue the investment progress through uptimes and especially through downtimes in the market. Don't stop, don't panic, don't sell out as long as your standard of living and your ability to pay your bills is not being taken care of or generated from the market. And instead, you are taking the excess income from earnings after paying your bills and investing that through like a 401k or an ongoing investment program.

Don't stop that progress, that's number one. Number two, down markets make a great opportunity for tax management. If we have built up a large tax deferred balance, such as a 401k or an IRA, downturns in the market actually make for a great opportunity for managing that future tax liability.

Sure, I'd rather have $100,000, but I'd rather pay tax on $75,000 or $70,000 and then move the shares over to an account where the recovery happens tax free and I get the benefit of not paying tax as the market helps bring the account balance not only back to where it was, but eventually well over and above where that starting point was. And then third, regular rebalancing will help you along the way to maintain your risk tolerance level within your investment accounts to make sure that your investments continue on an ongoing basis to reflect the level of risk that you're comfortable with and that is appropriate. Regular routine rebalancing is important to do that, but it also helps you to capture gains when they're available and then to buy in when there's a downturn and when equities are on sale. So again, there's always going to be a motion tied in with the market. We've seen more volatility and instability in the market. It's invoked a lot of emotional response from investors and that is not helped by the daily news cycle and the red that we see when we turn into CNBC or look at the stock tickers. But if you have a long term plan for continued financial progress and success that includes some of these fundamentals, you can continue to make forward financial progress regardless of day to day, month to month, year to year market conditions. It's interesting, making progress, I mean we see it most easily, like we'll make as many returns as we can, but in a tough market perhaps that means losing less than you might have normally if you hadn't planned properly, right Peter? Sure, and that is really what we tried to capture in our motto and tagline, identifying opportunities and protecting what's important, right? There's a balance there.

Rashan planning strives to identify opportunities where they are present, where they are available, and protect what's important on an ongoing basis. To make sure that we are not making emotional decisions based on the news of the day that can actually derail our financial progress. And studies have shown time after time that that is what happens. Is that people have a greed factor in that FOMO, fear of missing out. As the market is going up, they are buying in close to the top. It's a rocking party and everybody wants to get into it. And they buy in when things are very high, when they are receiving a lot of the headlines and the buzz, and inevitably that's not the right time to get in, that's when the party is about to end a lot of times. And so it comes down and as it's coming down people panic, people worry, people have fear, and eventually they reach a threshold where they just can't take it anymore and they sell out.

Usually that's toward the bottom. And Dalbar is a financial institution that has done studies on investor related behavior, and specifically the returns that investors get compared to the market based on the behavioral decisions that they make. And over the last 21 years, since January 1st, 2000, till December 31st, 2021, 21 investment years there, the market has averaged just over 5.5%. So a lot of people have these expectations that they'll make 10, 12, 15% rates of return.

Over the last two decades plus, that simply has not been the case. And the reason why is because we've experienced some downturns during that period of time. But here's the thing, those that have kept up with a formulated plan of continuing to invest over those years, actually ended up with a much, much better rate of return than that 5.5%, 5.63%. Because they were continuing to invest during those downturns, down toward the bottom, and the return on those dollars as the market recovered was much more substantial than the dollars that were already sitting in accounts on December 31st, 1999. Those dollars experienced that 5.63% rate of return before any fees or expenses. But the new dollars that we were putting in over those years, those dollars experienced a much more advantageous and a much higher rate of return. But unfortunately, investor behavior, our mental, emotional, and psychological feelings about our money, and then the decisions that we make based on those feelings often leads to doing the wrong thing at the wrong time.

And what Daubar has found is they do a study of this every year. And every year, investors underperform the markets because we buy in at the wrong time and we sell out at the wrong time. We think we're somehow smarter or we let our emotions drive our decisions. And while I think caution is always prudent, fear should never be driving the car. Fear is not a stop sign that we should stop making any financial decisions and stop our forward financial progress.

And fear is not a helpful factor in making rational decisions. So we want to have a plan that is laid out so that here's the money over here that we're taking risk with. Here's the money that we're not comfortable taking risk with. And the money that we are taking risk with, we expect to see some good times and that those good times over time outweigh the bad times. But that we can continue the fundamental approach even during the bad times and not impact and affect our standard of living.

I hope you folks are listening closely. That's some really smart and measured advice coming from Peter Rishon. If you want to talk to him about your personal financial situation, you can call him. You can talk to the man directly himself, 919-300-5886. Maybe take a spin through that optimized retirement plan that, of course, it's optimized for each individual person. It's not just a one thing. And that's really the magic of that plan.

So you can call him 919-300-5886. We talk about good markets, bad markets, bull markets, bear markets. How frequently have we experienced a bear market over the recent past?

More often than most people think. A bear market, technical definition, is a 20% drawdown in value of a particular index. So at times like the NASDAQ, which is a pretty tech heavy index, it's a collection of more heavy tech based stocks, could enter into a correction or a bear market. And then the S&P and the Dow do not. But there are times where all indexes across the board enter into these bear markets. A bear market, again, is quantified and defined as a 20% loss.

So one fifth of your money, if it was invested in the market or in one of these indexes, one fifth of your money disappearing. It has happened 16 times over the last 100 years. 16 times. So about every six and a half years or so on average. And those downturns, I think we have recency biased because we remember the most recent thing that happened and sort of feel like that's what's going to happen every time. Well, the most recent downturn, the most recent bear market technically, was the COVID downturn. We lost 33% in market value in about 15 days and we snapped back within about a month and a half. It was so quick that most investors, honestly, they didn't even notice.

They were so wrapped up in quarantines and masks and personal health and safety, rightfully so. We were all concerned with that at the beginning of COVID that a lot of them didn't even have time to open an investment account statement and notice that the money was down. And if they did, by the time they opened it, it almost was back up. It happened so fast. Is it perhaps the reason why it snapped back so quickly is because people didn't react and sell.

It came in and left before we even knew it. So there was no chance to react and sell and panic and things like that. That is certainly one reason.

There are a couple other factors that go into that. One being that that was more of a health care related event rather than an economic event. We have regular economic business cycles, booms and busts in the economy, expansion and retraction of the markets and of the economy.

We have been in a fantastic, expansive phase for a good long time as new technologies and technological revolutions have come about. There's a new way that money is made and that's always a good thing for an economy. Plus interest rates have been fantastically low if you're a borrower and a lot of businesses have borrowed money at very low interest rates to buy back their own stocks, which drives prices up.

So it was not that that had flaws fundamentally and that caused the downturn. It was a health care related event and then the shutdown of the economy. Well, simultaneously the government said, let's start handing out money and solve this problem as quickly as possible. They started sending checks to every American household. A lot of businesses got billions of dollars in stimulus and they put that back into their companies to pad the bottom line as the American, you know, Main Street American went out and had a pile of extra money during what was a very scary economic time because of the health care event. And so Americans were saving at a higher rate than ever before because they were worried on one hand and then couldn't spend money on the other hand. They didn't have anything to do. I tried to buy a dishwasher and there were none to buy.

Yeah, or you try to go out to dinner. You can't. You couldn't during that time. So American savings rates were at the highest record levels ever set. The percentage of our income that we were actually saving and putting away went up substantially during that first period of coronavirus. Well, where does that money go? Right. It goes back into investments in many ways.

So not only did people not sell, but there was actually way more money available for investments and Econ 101 supply and demand when more people are trying to buy something, prices go up. Right. So that was so quick. But here's the thing. That's not typical. It may be recency biased where we believe that that's the case and into the future. That may be the approach that the government takes to the next round of downturns.

I personally don't love it, but the American public, it was very popular. That $3,000 check started showing up in our mailboxes. And unlike almost anything in Washington, it had bipartisan support. So is that now the playbook, the fallback to address these downturns in the future? Possibly. So do we see snapbacks out of these into the future?

Maybe. But long term, it's creating debt and more financial instability. Because if you build a financial foundation on holes and tunnels and a foundation that is not firm and on solid ground, eventually things are shaky. So I don't know if it helps or hurts in the long run, but certainly during COVID, it snapped us back out very quickly. And the decade that included that COVID downturn from 2010 to 2020, it really didn't see much instability at all.

There were very few instances where the markets were unstable. That is not the case on a regular basis, though. We are well overdue for a true correction. And so people need to be aware that that's a possibility and can happen. And when those corrections have happened in the past, it's not overnight that we go from the peak to the trough to from the top of the market to the to the bottom of where that correction is. It generally is a slow bleed kind of situation where, oh, no, we lost another 5 percent. Oh, no, we lost another 2 percent. Oh, no, we lost another 4 percent. And before it's all over, a year and a half has gone by and we've lost 30, 40, 50 percent in the market. The average losses during those 16 different bear markets that have happened over the last 100 years has been almost a 40 percent loss, like thirty nine and a half percent loss on average over those 16 different downturns. And on average, it took about a year and a half to get from the top to the bottom and then another five years to get back to where we were previously at the top.

So recovery. So six and a half years where if money was sitting there and we were not buying in and investing in dollar cost averaging during that whole process, if we did not continue the act of putting money into the market, then we we essentially broke even and did not make any progress, but took that big roller coaster ride way, way down and and then eventually crept back up over the time span of about five to six, six and a half years. And a lot of people don't have that kind of time to not make anything with their money, not to mention lose a 20, 30, 40 percent chunk of their money. And even if they in theory do have the time, you have to have the patience to stick with it and the fortitude to to be able to do that. Very good stuff, Peter.

Nine one nine three zero zero five eight eight six is the number to talk to Peter Rochon directly. We hear about the kind of the aphorism past performance is not an indication of future results. Is past performance even an indication of past results?

Yeah, great, great point here. I want to hit on this is that when we see an advertised past rate of return, this this fund, this this stock has produced an average 10 percent rate of return over the past three years, an average 11 percent rate of return over the past three years. That is not an indication of what has really happened with your money. And I know numbers and math can be complicated, especially over the radio.

I'm going to try to make this as simple an example as possible. But if we have a 10 percent average rate of return over a three year period. So the first year we're up 60 percent, the second year we're down 50 percent, the third year we're up 20 percent. So 60 minus 50 is 10 plus 20 is 30 divided by the three years. That's an average 10 percent rate of return. The past performance that is advertised would be a 10 percent average rate of return over that three year period.

Here's what actually would have happened with your money. The first year, one hundred dollars becomes one hundred and sixty dollars. That's a 60 percent rate of return.

The second year we lost 50 percent. That's 160 becomes 80. And the third year we get a 20 percent rate of return.

That 80 becomes 96. So in that period that generated a past performance of a documented 10 percent average rate of return, our hundred dollars went to 96 dollars. And it's because losses actually count more than gains.

I can give you an even simpler example. Here's an average zero rate of return. We have one hundred dollars and the first year we lose 50 percent. So that hundred goes down to 50. The next year we gain 50 percent. We are gaining that 50 percent off of a smaller number. So when you gain 50 percent, that 50 dollars only goes up to 75 dollars.

So we have a zero percent rate of return over two years, but we have lost a quarter of our money. I don't know if you remember in school, Scott. I remember this very well. I had classes where we had regular quizzes and I generally did pretty well in school. I had, you know, 10 quizzes and had a 95 average across those 10 quizzes. And then I got a C as a grade in the class. And I'm like, what's going on here? And I talked to the teacher.

She says, well, you missed this quiz. You got a zero on this quiz and you didn't make it up. Right. That one zero brought my average way, way down. And when we're talking about market losses, it's not just a zero. It's a negative number. Right. So you work a negative number into an average and it really has a big impact.

Luckily, you know, many of my teachers let me make things up if I if I did miss them. So that usually didn't happen. But in the market, we don't get to make up for years where we have lost significant value. And when we grow back, we grow back from a smaller number. So if we're in retirement or nearing retirement or in the transition period and we have identified what money we don't want to lose. And then what money we're comfortable taking risk with. That's the fundamentals for a well-balanced plan. And then with the money that we are taking risk with, how much are we willing to lose?

We really need to find that threshold. And I I really don't like seeing any money that we're going to to be relying on in the next five to 10 years. Have the possibility for more than about a 10 percent drawdown, a 10 percent loss. I think that's the kind of cap that we need to put on things. And there are mechanisms that can limit losses, even in investments in the market. There's there's downside caps. You can do several things with options.

You can do structured notes. You can put things in place so that you limit losses on the downside. Stop losses, they're called.

Now, they're not perfect. There are limitations to their ability. There's pros and cons with with every financial vehicle and option. But stop losses can stop the loss, as the name indicates. And then there are other vehicles that don't carry the risk of the market or there are certain investments in the market that behave in an inverse way. So there are ways that we can limit those losses. But if you start to risk losing 20 percent and then you have to make back 25 percent just to get back to break even, that becomes exceedingly difficult within a small period of time. If you lose 20 or 30, 40, 50 percent, which happens much more regularly than people would like to think in the market, then making the returns necessary just to get back to break even become exceedingly more difficult. Now, the idea of that 10 percent average return.

Now, that's true. And from a mathematical standpoint, they're giving an accurate average return, but it's deceiving in terms of what the effect of that return is. Is that being done on purpose to deceive? Is it just a matter of if they're reducing the information to simply get it out in a commercial and we lose the forest for the trees?

What's happening there? Well, a couple of things. Yeah, it's true and it's approximate, right? In any given year, that's going to change a little bit.

But nice round numbers. Let's just call it 10 percent over the history of the market. Here's the thing. I don't know anyone who has left their money invested over the entire history of the market.

Right. We've got a finite time that we are investors and then we make the transition to retirement during a period in that window. We just want to preserve what we have. And then we we are D investors. We are actually creating income. We are drawing down or drawing from our investments. So if we're pulling money out during a period of decline, we're not going to see those same kind of rates of return. In fact, we're locking in losses.

We're liquidating a larger percentage of our portfolio. And once we remove those dollars, they are not there any longer to even participate in the ensuing recovery when things come back. And so it is significantly detrimental to our financial projections when we remove dollars.

And sometimes it's not an option. Sometimes we have to write to to pay our bills, to pay our taxes, to buy stuff, to spend, to live life. Sometimes when we're retired and don't have a paycheck, we have to move money from our savings and investments. And so a downturn, especially early on in retirement, can be very detrimental. There's one financial principle called dollar cost averaging, and it is it is a fundamental for long term financial success. And it basically says, regardless of where the market is over time, just continue to invest on a regular basis. And over that period of time, you will buy in at the average price. So if equity fluctuates and you're buying during those down times, you've brought your average price down. So hopefully in the future you will make an even more substantial profit when the direction of money reverses. Reverse dollar cost averaging has the same negative consequences as dollar cost averaging had positive consequences. Or it's also known as sequence of returns risk. The way that the returns are ordered when we are making withdrawals matters.

And so we really need to examine that on an ongoing basis. And that's part of the order of operations of mapping out your account balances, contributions, and then eventually distributions, the income. What order should we be taking income from? What order should we be tapping into these various sources of income?

Social security, pensions, if you have them, and then different accounts, investment accounts, tax deferred savings accounts, retirement accounts, Roth's tax free accounts. What order should we tap into those in order to create an optimal outcome? It may not be the best every time, but it's going to be the most consistent optimal answer in sitting down and mapping out how to tackle that question and create a solution. And that's really one of the cores of the optimized retirement plan. I mean, we also look at risk. We also look at taxes. We also look at health care and legacy and make sure that those things are addressed. And there's several subtopics under each one of those. But today we're talking a lot about the market.

That's part of it. And one of the benefits of the optimized retirement plan is that you can hopefully maintain your sanity through the process and not get too worried about either FOMO or anxiety or things like that. Peter, I can't thank you enough for this great information. If you want to talk to him directly, talk to the man himself about your own optimized retirement plan, you can call him 919-300-500-5886. And the thing about this is you get to talk directly to Peter Rishon himself. It's not just me that gets to talk to him every week. You can talk to him too.

Or you can go to his website, www.richonplanning.com. Peter, any final words for us today? Well, we specifically overlooked talking about any of these current events that have people so, so worried. You know, I'm aware of them. I'm cognizant of what's going on in the world internationally. Here I'm actually more focused on what we're going to be doing with interest rates domestically, but obviously international situations have some impact.

Price of oil, supply chain issues, just getting back involved with issues that are beyond our borders. They are reasonable to be concerned about. However, these fundamentals that we've talked about today, and if you've got a plan that includes these, they should not be impacting your financial decisions to cause you panic.

They should actually, in many cases, be working to your advantage because we have forecasted that things can and will likely happen that we are positioned to take advantage when they do. And if you are concerned about these events, call your financial planner. And if you don't have one, you can't do much better than Peter Richon.

919-300-5886 is the number. Peter, thank you so much and thanks for listening. And join us for another episode of Planning Matters Radio.

This has been Planning Matters Radio. The content of this radio show is provided for informational purposes only and is not a solicitation or recommendation of any investment strategy. You are encouraged to seek investment, tax or legal advice from an independent professional advisor. Any investments and or investment strategies mentioned involve risk, including the possible loss principle. Advisory services offered through Brookstone Capital Management, a registered investment advisor. Fiduciary duty extends solely to investment advisory advice and does not extend to other activities such as insurance or broker dealer services. Advisory clients are charged a quarterly fee for assets under management while insurance products pay a commission which may result in a conflict of interest regarding compensation.