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March 12, 2022 9:00 am
Volatile markets, spiking oil prices and prices at the pump, Russia-Ukraine conflict escalations...All this can weigh on the minds of investors watching their life savings fluctuate in the markets. Peter Richon helps to provide perspective for long-term strategy success.
Reach out if you have questions: (919) 300-5886
Plan planning matters when you welcome once again the planning matters Radeon Scott Wallace and we're here to shed some light on the financial issues of the day with me is are starting a Ramsey trusted smart investor probably is an author. Understanding your investment options and he's a fiduciary, financial, investment, retirement planner, serving his clients throughout the great state of North Carolina, Peter Sean. Welcome to the program. Hey Scott, always a leisure and plenty of information to talk about today as 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 and 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 an 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 Sean to contact him about your personal financial situation you can call 919-300-5886 or go to his website www.rochonplanning.com that's www.richenplanning.com and you can speak to the man himself, Peter market downturns that happen are always good happen at some point their inevitable.
What is the overall kind of reaction we should have when we either see them happen or were either going to happen. Phyllis in a 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 will 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 a 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 for progress but there are absolutely times where the market is going to be down. 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 is a possibility but is 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 in just three really quickly to begin the program investing into the market during downturns is the opportunity to buy at a lower cost. If you're 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 in 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 401(k) 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 build up a large tax-deferred balance such as a 401(k) 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 taxes. 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 land there is 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 and that is not helped by the daily news cycle in the red that we see when we turn into CNBC or or look at the stock ticker's but if you have a long-term plan for continued financial progress and success that include 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. When we see it most easily likable makers is as many returns as we can. But in the in a tough market. Perhaps that means losing less than you might have. Normally, if you hadn't planned properly, regular short and ends that is really what we try to capture in our motto and tagline identifying opportunities and protecting what's important right there's a balance there was Sean planning strives to identify opportunities where they are present where they are available and protect what's important on a ongoing basis to 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 phone no fear of missing out. As the market is going up. They are buying in close to the top.
This is a rocking party and everybody wants to get into it and they buy-in when things are very high when the receiving a lot of the headlines in the buzz and inevitably that's not the right time to get in. That's that's when the parties about the end the hotter 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 they sell out. Usually that's toward the bottom and dowel bar is a financial institution that has done studies on investor related Havey or 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 1, 2000 till December 31, 2021 21 investment years there.
The market has averaged just over 5 1/2% so a lot of people have these expectations that the 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 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 1/2% 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 the counts on December 31, 1999 write those dollars experienced at 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 much higher rate of return but unfortunately investor behavior. Our our mental, emotional and psychological feelings about our 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 dowel bar has found is they do a study of of this every year and every year, investors underperform the markets because we's we buy-in at the wrong time and we sell out at the wrong time. We think were somehow smarter or we let our emotions drive our decisions and 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 were taking risk with. Here's the money that were 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 some really smart and measure advice coming from Peter Sean if you want to talk to him about your personal natural situation you can call me and talk to the man directly himself. 919-300-5886. Maybe take a spin through that optimize retirement plan.
That, of course, it's optimized for for each individual person is not just a it's not just one thing and that's really the magic of that plan so you can call 919-300-5886. Talk about good markets bad markets, all 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 and times like the NASDAQ, which is a pretty tech heavy index its collection of more heavy tech tech base 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 of 1/5 of your money if it was invested in the market or in one of these indexes. 1/5 of your money disappearing. It has happened 16 times over the last hundred years, 16 times so so about every 6 1/2 years or so, on average, and those downturns I think we have recency bias because we remember the most recent thing that happened and and sort of feel like that's what's going to happen every time will the most recent downturn.
The most recent bear market technically was the covert downturn, we lost 33% in market value it in about 15 days and we snapped back within about a month and 1/2.
It was so quick that most investors honestly they didn't even notice. They were so wrapped up in a quarantines and masks and and personal health and safety, rightfully so, we were we were all concerned with that of the beginning of coven that allow them didn't even have time to open a at a investment account statement and notice that the money was down and and if they did. By the time they opened it. It almost was back up out of the Esquivel sac.
Is it perhaps the reason why it snapped back so quickly is because people didn't react and sell it happened. It came in and in and left before we even knew it.
So there was no chance to react and sell in panic and things like that. That is certainly one reason other couple other factors that go into that one being that that was more of a healthcare related event rather than an economic event right we have regular economic business cycles, booms and busts in the economy, expansion and retraction of the markets and the end of the economy.
We have been in a fantastic expansive phase for a good long time is as new technologies and and technological revolutions have 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 healthcare related event and the shutdown of the economy while simultaneously, the government said let's start handing out money and 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 St., American went out and had a pile of extra money during what was a very scary economic time because of the healthcare event and so Americans were saving at a higher rate than ever before because they were worried and on one hand, and then couldn't spend money on the other hand, they didn't have anything to do so. Where try to buy a dishwasher and there were none to buy yeah or or you try to go out to dinner. You can't write couldn't. During that time so American savings rates were at the highest record levels ever set that the percentage of our income that we were actually saving and putting away went up substantially during that first period of coronavirus, where does that money go right. It goes back into investments in in in many ways. So not only did people not sell, but there was actually way more money available for investments in Econ 101. Supply and demand. When more people are trying to buy something. Prices go up right so that was so quickly here's the thing that's not typical it maybe recency bias where we believe that that's the case and 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 that that $3000 check started showing up in our mailboxes and it was unlike almost anything in Washington had bipartisan support. So great is that now the the playbook. The fallback to address these downturns in the future. Possibly so, do we see snapped backs out of these in the future, maybe, but long term it's creating debt and and more financial instability because if you build a financial foundation on on holes in tunnels and and a foundation that is not founded on solid ground.
Eventually things are shaky so I don't know if it helps or hurts. In the long run, but certainly during covert it snapped us back out very quickly and the decade that included that covert 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 that 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 trough the 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 owner we lost another 5% owner. We lost another 2% owner.
We lost another 4% and before it's all over a year and 1/2 is gone by and we've lost 30, 40, 50%'s in it and in the market. The average losses during those 16 different bear markets that have happened over the last hundred years has been almost a 40% loss like 39 1/2% loss on average over those 16 different downturns and on average it took about a year and 1/2 to get from the top to the bottom and then another five years to get back to where we were previously at the tops of recovery.
So 6 1/2 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 eventually crept back up over the time span of about 5 to 6, 6 1/2 years and a lot of people don't have that kind of time to not make anything with their money. Not to mention lose 1/23, a 40% 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 919-300-5886 is the number to talk to Peter Sean directly we hear about the end of the aphorism. Past performance is not an indication of future results is past performance even an indication of past results. Great great point here. I want to hit on.
This is, is that when we see an advertised past rate of return this this fund this. This stock has produced an average 10% rate of return over the past three years, and average 11% 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 in math can be complicated especially over the radio. I'm gonna try to make this as simple an example as possible. But if we have 1/3 a a 10% average rate of return over a three-year period.
So the first year were up 60% the second year were down 50% the third year were up 20%. So 60-50 is 10+20 is 30 divided by the three years that's an average 10% rate of return, the past performance that is advertised would be a 10% average rate of return over that for you. Here's what actually would have happened with your money the first year hundred dollars becomes $160. That's a 60% rate of return, the second year we lost 50%.
That's hundred and 60 becomes 80 and the third year we get a 20% rate of return that 80 becomes 96. So in that.
That generated a past performance of a documented 10% average rate of return are hundred dollars went to $96 and it's because losses actually count more than gains. I can give you and an even simpler example, here's an average zero rate of return. We have $100 in the first year we lose 50% so that hundred goes down to 50 the next year, we gain 50%. We are gaining that 50% off of a smaller number so when you gain 50% that $50 only goes up to $75.
So we have a 0% rate of return over two years but we have lost 1/4 of our money.
I don't know if you remember in school. Scott, Ira, I remember this very well. I had classes where we have regular quizzes and I generally did pretty well in school, had no 10 quizzes and and head at 95 average across those 10 quizzes and then I got a C is a grade in in in in the class and like what's going on here.
I talked to the teacher. She says will you missed this quiz you got a zero on this quiz and you didn't make it up right that 10 Brought My Average Way Way down and when were talking about market losses.
It's not just a zero is a negative number right so you work a negative number into an average and it really has a big impact. Luckily, no many my teachers let me make things up if I do 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, for in retirement or nearing retirement, or in in the transition. And we have identified what money we don't want to lose. And then what money are 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 II really don't like seeing any money that were going to to be relying on in the next 5 to 10 years have the possibility for more than about a 10% drawdown, a 10% loss. I think that's the kind That we need to put on things and there are mechanisms that can limit losses even in the investments and in the market there. 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 there called now they're not perfect. There are limitations to their ability. There's pros and cons with with every financial vehicle. An 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 you we can limit those losses.
But if you start to risk losing 20% and then you have to make back 25% just to get back to breakeven.
That becomes exceedingly difficult within a small period of time. If you lose 20 year 3040 50% which happens much more regularly than people would like to think in the market then making the returns necessary just to get back to breakeven become exceedingly more difficult.
Now the idea of that's 10% average return know 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 the reducing the information to simply get it out in a commercial and we lose the forest for the trees. What's happening there.
Well up a couple things yeah it's it's true and it's approximate right in any given year. That's gonna change a little bit but nice round numbers. Let's just call it 10% 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 AA.
In that window. We just want to preserve what we have and then we we are de-investors. We are actually creating income. We are drawing down or drawing from our investments.
So if were pulling money out during a period of decline were not going to see those same kind of rates return. In fact were locking in losses were 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 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 to pay our bills to pay our taxes to buy stuff to spend to live life. Sometimes when were retired and don't have a paycheck. We have to move her 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 if it equity fluctuates in and you're buying during those down times you 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 it's also known as sequence of returns risk of us that 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 and then different accounts, investment accounts, tax-deferred savings accounts, retirement accounts, Roths tax-free accounts.
What what order should we tap into those in order to create an optimal outcome. It may not be the best every time. But Mode it's going to be the most consistent right optimal answer in 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 optimize retirement planning. We also look at risk. We also look at taxes.
We also look at healthcare and legacy and make sure that those things are addressed and there's several subtopics under each one of those.
But today were talking a lot about the market that's part of it and one of the benefits of the optimize retirement plan is that you can hopefully maintain your sanity through the process and not get too worried about your fall mower anxiety or things like that Peter 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. Optimize retirement plan. You can call them 91930583005886 and the thing about this is you get to talk directly to Peter shot himself. It's not just be the get to talk to him every week. You can talk to them to go to his website www.richenplanning.com Peter any final words for select what we specifically overlooked talking about any of these current events that have people so so worried your I'm aware of them. I'm cognizant of what's going on in the in the world internationally here.
I'm, I'm actually more focused on what were 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 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 they should actually in.
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 if you don't have one can't do much better than Peter shot 919300586 is the number Peter, thank you so much and thanks for listening and join us for another episode planning matters is planning matters right. The content of this radio show is provided for informational purposes only and is not a solicitation or recommendation of any investment strategy you were encouraged to think investment tax or legal advice from an independent professional advisor. Any investment and/or investment strategies mentioned involve risk and possible loss of principal by three services offered through Brookstone capital management, a registered investment advisor. Fiduciary duty extends only to investment advisory advice but does not extend to other activities such as insurance or broker-dealer services advisory clients are charged a quarterly fever as a management belligerent product pay a commission which may result in a conflict of interest regarding compensation