We want you to plan for success. Welcome to Planning Matters Radio. Welcome to Planning Matters Radio. We're here today with Peter Rishon from Rishon Planning. That's richonplanning.com. Visit him on his website there.
Give him a call at 919-300-5886. We're here today to talk about some fact versus fiction as it relates to the market. Of course, there's a lot going on in the market today, particularly with geopolitical conflicts, inflation worries, all of the normal things that go into market fluctuations. But with that comes some fact and fiction and it's easy to get confused with all of the information that we're overloaded with on a daily basis. So today we're going to be talking with Peter Rishon and he's going to shed some light from his years of expertise on this subject. So let's get right on into it. Welcome, Peter. Thank you for joining us today.
Hey, thank you, Daniel. Pleasure to be here and glad to put a little perspective on this because I think any time there is volatility, people tend to get a little nervous. They may make some emotional decisions with their money. And if we can shed some light on this, put some perspective on it, maybe it will give people a little bit of reassurance to make the sound fundamental financial moves rather than the ones that feel feel right emotionally in the moment. Talked about geopolitical events. We're seeing that right now with the Russia Ukraine conflict, it seems to be dominating a lot of the news headline and there's a lot of discussion that it's also dictating the direction of the market. Put it in perspective, geopolitical events are not a new phenomenon and they have had impact on the market, but generally that impact is short lived. I've got a list of about 20 different geopolitical events from the past, all the way from the London subway bombing to the Boston Marathon bombing to Iraq's invasion of Kuwait to 9-11, the U.S. terrorist attacks. The downturns happen.
They are real. The market does react to those kind of things anywhere from 4 to 10 to 15 percent or more now. It reacts. But the time spent until the markets rebound on average is like 40 days or so. And so while we're seeing the market shake, I don't think that all of it inherently is the geopolitical conflicts. I think that that has some attributing factors, but I think that we were overdue for a year where we're seeing more typical volatility rather than the past decade plus or so where they there has been a typical stability in the market. So basically you're saying it was time for a shake up regardless of whether Russia did its thing in Ukraine or not. This was to some degree it was bound to happen.
Yeah. And I actually sent out one of my market synopsis that I send out to my clients every month at the beginning of the year. And this was before Russia and Ukraine was even on a lot of our radars. And I said, this is going to be a year that you should expect to see a little bit more volatility. We have just come so far for so long without a real market correction and we're facing headwinds. The supply chain issues, inflation, the Fed has indicated that they are raising interest rates not once but multiple times throughout the year. They said more aggressively was their language in the last Fed meeting with that combination of factors by itself before Russia, Ukraine, we were going to see a little bit of a different environment for the market than we have seen the past 10, really 14 years since the bottom of the Great Recession in 2009. The market has been atypically stable and unvolatile, really moving in a kind of a straight upward direction.
There were a couple instances there. COVID obviously was a big one, but that bounced back so quickly. Most people hadn't even opened their statements to notice that their accounts were down and they were already back up. 2018 was the last time that the Fed did raise interest rates.
There was a reaction there. And I think this year as the Fed raises interest rates, there will be a reaction there again. But 2015 had a little bit of a shakeup, 2018 and then COVID 2020. And over the past 14 years, those have really been the only instances where we have seen more of a typical type of market with volatility included throughout the year, both down and up.
Other than that, it's sort of been a straight line up and there are reasons for that as well. Well, a lot of good information, a lot to unpack just in that small intro there. So with that, then let's look at some of these fact versus fiction kind of situations that we often find ourselves talking about when we're talking about fluctuations and stability versus instability in the market. So, of course, we've already mentioned that we've seen some recent instability and for a lot of people, it can invoke some sort of emotion, really. When you're talking about having a lot of money invested in the market, you can elicit a lot of emotion.
Whereas other people, they've just kind of shrugged all of this instability off and just kind of ignored it altogether to some degree. But just because we see market volatility or believe it's coming doesn't necessarily mean that we should stop our financial progress, doesn't mean that we should put off our goals, our financial goals out of fear. Fear is not a stop sign, I think is how I would probably put that. Fear is not a stop sign. Of course, caution. Caution is always prudent, but fear should never be driving the car of our investments or our willingness to invest. If your plan is long term and only has money exposed to the market that you're comfortable taking some risks with and seeing it fluctuate, then, of course, these instabilities that we've been talking about, this is just a natural occurrence. It's just a part of the living, breathing system that is the financial market.
It's actually a fantastic opportunity. That's the thing is that money is math and investing in the market. There's math that goes into that as well. But money is not only math. It's not exclusively mathematic. There's a lot of mental, emotional and psychological aspects with our money as well. And so what I find is that it's behavioral. For the person that has that long term outlook and that has the confidence in their paycheck, hopefully they understand that these downturns in the market actually represent an opportunity for investment.
They are not uncharacteristic. And if you are investing, your behavior with your money is that you can control your expenses, you've got a little leftover after each paycheck and that you can put it to work for you and that you are, in fact, investing that money on a regular basis over time, oftentimes the behavior is what is in fact the correct behavior, which is continue with your investing approach and progress regardless of the conditions of the market up, down, sideways. Just continue to invest every paycheck, every month, every year while you've got the security of the paycheck and are not intending to use that money in the near term. That is ultimately going to be your gasoline in your engine and the long term ingredients for financial success is your continued investment. And these downturns represent an opportunity to buy more of the market for the same dollar investment.
You're buying those shares while they're on sale. Here's the thing, for those folks who don't invest regularly, don't have that as a routine part of their financial behavior, maybe they save up a chunk of money and then say, hey, should I invest this money? Times like this scare them because they don't want to put that big chunk of money in at the wrong time and lose that money. So it's a behavioral characteristic with our money that actually dictates our emotional response and oftentimes if we're not investing as part of the routine, we sort of have the wrong approach to it that volatility is a bad thing, volatility is the time that I shouldn't invest. And then if we're getting a little closer to retirement, that changes because we don't have the security of the paycheck.
We don't have the excess income above and beyond paying our expenses. And so we do get a little bit more conservative there by nature, which is appropriate. But if again, we're not investing on a regular routine basis as a result of the excess income derived and generated from the paycheck, then there can be a little bit more nervousness and apprehension about downturns in the market. However, if we've got a long term plan that only has an appropriate portion of our total assets exposed to the market, then we should continue to treat that capital as investment capital and understand that downturns in the market are going to happen.
They are predictable, not in their timing or their magnitude, but predictable in the fact that they are going to happen. We don't know when, we don't know how much, we just know that as part of the investment experience, we are going to see good times, yes. But there are also going to be periods where we experience headwinds and challenges and down markets. And it's the right approach to have a long term outlook beforehand so that you can stick with it throughout those good times and bad times and just make slight adjustments such as rebalancing to make sure that we are capturing gains when they're available and only maintaining the level of risk that we are comfortable with, good times or bad times. So basically all of this circles back around to making sure that we have the right information, that we make well informed choices, making well informed decisions that are informed not only by our own financial situation, but also having an understanding that the market is going to fluctuate. It's not a matter of if, but a matter of when. And like you said, we don't always know exactly when or to what degree, but we do know that it's going to happen. And if we can anticipate that or at least expect that, then that will help to mitigate some of our emotional response when our money is involved.
Absolutely correct, Daniel. And so the question isn't, will the market go up or down into the future or where will the market go from here? The question really should be, what will my reaction be with my money if it goes up or down? And we've got to be introspective there.
We've really got to ask ourselves and sometimes it is beneficial. In fact, often it is beneficial to have a sounding board, have somebody to bounce that question off of and really to be a little bit more reflective on what our behavior is, what our emotional response is in order to really arrive at a conclusion of how much risk is appropriate. Should we have this much money invested in the market? Because the reality is we will see market downturns and downturns are painful.
They are hard to go through. And for many, we don't want to lose the kind of years that we have put into building our life savings that a regular routine market downturn can represent. I mean, there have been 16 bear markets in the last 100 years. A bear market is defined as a 20% loss in the market value.
So one fifth of your life savings disappearing on average about every six and a half to seven years. That is the reality of the market. We hear that the market always goes up or has always gone up or has gone up over time. Yes, that is true, but it's not a straight up journey.
It's not always uphill. It comes back better than it was previously and has done that throughout history. But about every six and a half to seven years on average, we don't know exactly when, but on average we see a cyclical bear market which represents the loss of 20% or more of the market value and of your money if you are invested in the market that is subject to those fluctuations. And often times it's much more than just 20%. That's the textbook definition of when we hit a bear market. Most of these bear markets have actually been closer to a 40% loss. So two fifths of your life savings, that is if it's invested in the market, subject to disappearing without you having anything to show for it.
Now I hear if you don't sell, you don't lock in those losses, you don't realize those losses. It sure seems like there's less money on paper then and the same can be true on the other side. If that is the case, then when we were at the top, that's not our money either. It's not real unless you lock in and sell it, right? And so we need to understand that it is real money. Gains or losses in the market, it absolutely is reality. Whatever we see is that bottom line and are we comfortable with the amount of risk? And because we have seen such great markets over the last 10 to 14 years, most people have more money that is exposed to risk than they did five or ten years ago as a percentage of their life savings. So you mentioned that sometimes those bear markets can actually take losses close to 40% and you're talking a lot of money, especially like you said, when you're talking about somebody's retirement, life savings, things like that. That can be a lot of money.
It can add up really quick and it can cause panic and strike fear in the hearts and minds of a lot of investors. So one way that we can be able to make better decisions is to examine some of the things that we understand and maybe some of the things that we misunderstand about the market and be able to separate the fact from the fiction and we're well on our way to doing that. We're here joined with Peter Rishon from Rishon Planning. That's richonplanning.com.
Have a visit to his website or give him a call at 919-300-5886. Today we'll discuss some of the concerns we have with our money and examine why we have them and if we're taking a practical and productive approach to addressing those concerns. Peter, I want to ask you a few things and I want you to tell me if it's fact or fiction or kind of somewhere in between. I want to get your expert opinion on this. And the first one I've got is there's a wide expectation of earning 10% to 12% growth in the market. Is that realistic for investors? Well, first of all, I ask that question oftentimes to investors. I say, what do you believe to be a realistic or a fair rate of return?
And I get that answer. It's usually 8% to 9% to 10%, but 10% to 12%, I hear that often as well. Here's the first thing is that if those are the returns of the market, in order to achieve those returns as an investor, you've got to be willing to take on the full risk of the market. In order to get the returns of the market, have to take on the full risk of the market, and that's not within everybody's risk tolerance. Most people have asked, well, what type of investor are you? Are you willing to take on the full risk of the stock market losses? They'll say, no, you know, I'm more of a moderate investor. I'm more of a conservative investor. If that's your investment stance, then it's not realistic to expect the full rate of return of the market. And, by the way, that is an average rate of return that we have heard should be 8% or 10% or 12%.
Now, here's the reality. The market has not done that in recent history. In fact, I looked at every 15-year period, complete 15-year period from 1996 till present. So, 96 through 2010, 97 through 2011, 98 through 2012.
There are 11 complete 15-year periods ranging from 1996 till present. If you look at the cumulative rate of return of all of those 15-year periods, the average cumulative return was only 5.03%. So, that's far lower than that expected 8% or 10% or 12% rate of return. And here's the real gotcha is that's before fees, that's before internal costs and expenses, and there's an institution called the Daubar Institute. They study investor behavior.
We started the program talking about how people sometimes make emotional reactions and decisions with their money. Daubar Institute does an annual study of what are the index returns versus what are the average investor returns. And they always find a huge disparity that the average investor does not nearly get the returns of the stock market indices.
And the reason they point to time and time again is because we are emotional about our money and we make decisions based off those emotions. So, while the average rate of return of the market may be 8% or 10%, the average rate of return of the investor is more like 3% or 4%. But, again, the market has not averaged that 8% or 10% or 12% rate of return from 2020 until 2021. January 1st, 2020 through December 31st, 2021, a full 21 years of investment.
The compound annual rate of return of the S&P was only 5.78%. So, if your plan bases your progress and your financial future off of this assumed mythical 8% or 10% or 12% rate of return, but in actuality we only get six, five and a half, five, that puts you well off the projection and the expectation for where you should be. So, as I am putting plans together, I take these real world numbers, the reality of what the market has actually done, I take those into account. Let's plan based off of a much more conservative expectation.
And if we do better than that, fantastic, but if the plan works with more real life realistic numbers, then I think we're in much better shape there. So, if you've got people investing and they are projecting and planning their futures and maybe their retirement, for example, they're planning for this 8% or 10% or 12% return like you talked about, very often they will find themselves, for lack of a better phrase, sorely lacking when it comes time to try to realize those potential earnings that they thought that they would have. Yeah, and it's not the good years that put you behind, it's the impact that the bad years have. I don't know if you remember in school, but I remember there were classes where I'd have like a weekly quiz. And I thought that I did very well on all of my quizzes and then the final grade comes out and it's like a C average.
And I say to the teacher, hey, what happened here? I made like 90s and above on all my quizzes and they were like, yes, but you missed that one. And you didn't make it up, so that's a zero. And one zero worked into the average would bring the average for the other quizzes way, way down. And in the stock market, we're not talking about zeros, we're talking about negative numbers. So, it has an even greater impact there.
And the teacher would let me make up that one quiz maybe and I'd bring my average back up to where it should be even if they only gave me half credit. But a negative number worked into a positive kind of average is going to have a big impact. And people don't make the same kind of emotional decisions during the good years.
Everybody's enjoying the good years and kind of just letting it ride. But as soon as we hit a little rocky road, it's like the ship is sinking, let's bail out as quick as possible. And that's really what the wrong approach is at the wrong time. But more importantly, if we've got the expectation for an 8 or a 10 or a 12% rate of return and we start to see that the portfolio is declining, the markets are going down, that's what leads people to reacting and not achieving the goals that they thought they were in line to achieve based on the assumptions. And that's the important thing is that we've got to carefully examine the assumptions that your financial future is based off of. You're listening to Planning Matters Radio.
We're joined here today by Peter Rishon from Rishon Planning. We're separating fact from fiction as it pertains to the instabilities that we're seeing in the current market today. Continuing our conversation, the next statement I would pose to you, Peter, is bear markets.
They're rare or are they not? Yeah, no. So again, we have recency biased. We have not experienced a true bear market for going on 14 years here. I mean, we saw a downturn in COVID that would technically qualify as a bear market, but it was so short lived that we did not really have time to react. Plus, that was a health care event, not an economic event. It was a health care related event that spilled over into economic repercussions. But the government stepped in and infused trillions of dollars to help remedy that problem very, very quickly.
And so most people's accounts bounced right back up. Bear markets are not rare. They are not an anomaly.
Black Swan events, as they're often kind of deemed, aren't that aloof and are not that rare, in fact. They happen. They happen frequently. They happen with regularity. Over the last 100 years, we have seen 16 different bear markets, losses of 20% or more.
So you've got to be prepared. If you're taking an investment approach, if you've got dollars invested in the market, you have to have some expectation that you will see good times, yes, but you will probably also experience a few downturns along the way and stick with that plan if that is, in fact, the original plan of action that you had. So you mentioned that bear markets actually are not all that rare. But then you also alluded to the fact that this last one, the most recent one you had, even though it was COVID related, that we did more or less recover from it fairly quickly. The markets recovered fairly quickly.
Which brings me actually to my next fact or fiction. Bad markets happen quickly and snap back quickly. Is that always true? In fact, it is more of the exception than the rule. Most bear markets feel like a slow bleed rather than a quick event.
COVID was the exception, and because of recency bias, that's what people remember, and it's the freshest thing in our minds, so we tend to believe that that's how it always seems to happen, but it's not. A lot of times it is, well, the market's lost 2% today. Oh, the market lost another percent. Oh, the market's down another half percent. And then a year and a half goes by, and all of a sudden the market's down 20%, 30%, 40%, 50%.
And we look back and say, what happened? Where did all my money go? Where did the market go?
I just didn't really understand how to react, and I didn't expect it to get this bad. And a lot of people reach some pain threshold where they say, I can't take it anymore, and they jump out, and inevitably that's the day that the market turns around and starts to go back up. And so there's an old chart, it's like down at the bottom, fear causes people to sell out, up at the top, greed causes people to buy in, and you just repeat that process until broke. Those snapbacks don't generally happen that quickly.
It takes about a year and a half on average to get from the top, the peak to the trough, the bottom. And oftentimes it takes a good period of time to recover as well, multiple years until the market gets back up to where it was previously. I mean, if there was a decade where I told you there were two different 100% returns in the market, you probably would say, hey, that was a great time to be an investor. That was a decade between 2000 and 2013, two different periods where the market returned 100% twice, but it also lost 50% twice.
And it didn't happen quickly. It was 2000 through about 2007 that the market took a long downturn, multiple years, and took a long time to climb back up. And then the Great Recession hit, about two years where it went back down and then took another five years or so to come back up.
That is more typical, that is more par for the course that bear markets don't happen overnight, nor do they rebound quickly. You've got to have that long-term outlook and be willing to go along for the ride. And again, circling back to the beginning of the program, if we have the right approach to where we are investing on a regular, ongoing basis, we can actually even take advantage of those downturns.
And we'll have plenty of dollars that participated in that recovery and we'll have made profits, even if the dollars that were invested at the beginning of that period of time have not. Investing with the right approach is the key to today's topic, and you can only invest with the right approach with the right information. And that's why we're joined today by Peter Rishon from Rishon Planning. You can visit his website, Rishon Planning, that's richonplanning.com, or give him a call, 919-300-5886.
You're listening to Planning Matters Radio. We've been talking about these downturns, these bear markets, and so with that inevitably comes the question, how much does the market need to recover in order for me to recover what I lost? And so very often, mathematically, we think simply that the market only needs to recover to where it was in order for me to recover what I lost. Fact or fiction?
That is also fiction. Losses count more than gains. So let's say, and we can do this either way, by the way.
This is interesting. Let's say we had a 50% gain and a 50% loss. We started with $100,000. We had a 50% gain.
That gives us $150,000. A 50% loss is $75,000. So the gain and the loss were the same as a percentage, but we have less money than we started with.
What if they happen in reverse? We have the $100,000. We take a 50% loss, we're down to $50,000. Then we have a 50% gain.
We're only up to $75,000. So the order of operations there, the order in which those returns happened, didn't really matter. They could be the positive one first, the positive one last, however, but the loss of 50% represents a more impactful event than the gain of 50%. And that's why these past performance ads that they put out, I think, are a big fallacy as well. We want to talk about fact versus fiction. When these mutual funds advertise their past performance, that's not what investors actually achieved.
I could give another example here. The 50% gain, the 50% loss, our $100,000 turns into $75,000, and then we have a 33% gain. Let's add one more year on top of that. So now we have gained 50%, we've lost 50%, and we gained 33%. So plus 50, minus 50 is zero, plus 33 is 33, divided by three, that's an average rate of return over a three-year period of 11%. And yet our money is back to where we started. We have not gained anything. The mutual fund can advertise an average past performance over the last three years of 11%, but if our money had been invested, we would not have made anything.
And that's before fees or costs or expenses. And so we always hear the terminology, past performance is no indicator or guarantee of future results. But I would say, let's test the fact versus fiction of that one. Is past performance even a great indicator of past results? No, it's not. You've got to understand that about your money. You've got to understand that that advertisement of past performance really is not an indicator of even what your money would have done had it been invested during that period of time. And that's really hard for people to grasp. Numbers are difficult over the radio or in podcasts, even as it is. But these are things that you really need to know. And the market is a fantastic tool, but we're going to experience some headwinds.
This is not an irregularity. You've got to be prepared for that. You've got to have a long-term plan for it that will help you make forward progress regardless of market conditions. That's what the optimized plan is really all about.
That's what we're here to help our clients do is decide what is an appropriate approach, not only to the market, but to achieving your financial goals. All right, Peter, thank you so much for your time today. A lot of great information shared with us today. A great job explaining it, keeping it simple.
For those of us that, particularly when you're talking about numbers and math on the radio, it can be a little fuzzy. A lot of great information. You're listening to Planning Matters Radio. We've been joined today by Peter Rishon from Rishon Planning. That's Rich on Planning.
Visit his website, www.richonplanning.com, or give him a call, 919-300-5886. Thank you so much for joining us today, Peter. It was a pleasure. Always enjoy it.
Looking forward to hearing from you soon, folks. 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 Brooks' Own 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.
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