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March 24, 2022 5:00 pm
We have seen some recent instability in the markets. It has invoked a lot of emotion from some investors. Just because we see market volatility or believe it may be coming does not mean we should stop our financial progress or put off goals out of fear. Fear is not a stop sign. Caution is always prudent, but fear should never determine the steps in your financial progress. Listen this week as Peter Richon and Daniel Diggs talk about the facts and the fiction of the market.
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We want you to plan for success planning matters radio welcome to planning matters radio were here today with Sean from Rochon planning that's rich on planning.com visit them on his website there.
Give them a call at 919005886 here today to talk about some back versus fiction as it relates to the market. There's a lot going on in the market today, particularly with geopolitical conflicts, inflation worries all 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 the information that were overloaded with on a daily basis. Today were to be talking with Peter Schott if you can shed some light from his years of expertise on the subject while let's get right on into it. First off, while computer. 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. Talk about geopolitical events were 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 an impact on the market, but generally that impact is short-lived.
I 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 US terrorist attacks, the downturns happen. They are real. The market does react to those kind of things anywhere from 4 to 10 to 15% or more. Now it reacts but the time spent until the markets rebound on average is like 40 days or so and so wow were seeing the market shake. I don't think that all of it inherently is the geopolitical conflicts. I think that has some attribute in factors but I think that we were overdue for a year where we were seeing more typical volatility rather than the past decade plus or so, where they had there has been a typical stability in the market. So basically you're saying it was time for a shakeup, regardless of whether Russia I did stay in Ukraine or not this was to some degree it was bound to happen yeah and and I actually sent out one of my market synopsis that I sent 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.
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 were 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 un-volatile really moving in a kind of a straight upward direction. There were a couple instances they are coated 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 backup 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 cove in 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 in a straight line up in their reasons for that as well.
A lot of good information. A lot of impact Justin Justin that small intro there. So with that, then let's let's look at some of these fact versus fiction kind of situations that we often find yourself talking about when were talking about a fluctuations instability versus instability in the market. So of course we've Artie mentioned that we've seen some recent instability and you know for a lot of people it can invoke some sort of emotion really a lot of people can bit when you talk about having a lot of money invested in the market you can you can elicit a lot of emotion. Whereas other people you know they just can't shrug all of this instability often and just kind of ignored altogether. To some degree skews me 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 are financial goals of fear. Fear is not a stop sign.
I think is how I would probably put that fear is not a stop sign and 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 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 is just a part of the living breathing system that is of the financial market. It's actually fantastic opportunity that's 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 is not exclusively mathematic. There's a lot of mental, emotional and psychological aspects with our money as well.
And so what I find is 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 they are not uncharacteristic and if you are investing your behavior with your money, is that you can control your expenses. You got a little left over 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. Often times, 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 in 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 a 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 and lose that money. So it's a behavioral characteristic with our money that actually dictates our emotional response and often times, if were 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 were 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. They are by nature which is appropriate. But if again were 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 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 they are predictable, not in their timing or their magnitude, but addictive on 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. Where we experience headwinds and challenges and down markets and its 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 the circles back around to making sure that we have the right information that we make well informed choices make making well-informed decisions that are informed not by not only by our own financial situation but also having a an understanding that the market is going to fluctuate.
It's not a matter of if but a matter of when. 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 when our money is involved, absolutely correct, Daniel and 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 right and and and we 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 AAA sounding board have somebody to bounce that question question off of and and really to be a little bit more reflective on what our behavior is what our emotional responses in order to really arrive at a conclusion of 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 in downturns are painful, they are hard to go through an end 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 that 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 1/5 of your life savings disappearing, on average, about every 6 1/2 to 7 years. That is the reality of the market and 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 6 1/2 to 7 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 of 2/5 of your life savings.
That is, if it's invested in the market.
Subject to disappearing without you having anything to show for now.
Here, you know, 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 than 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, 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 10 years ago as a percentage of their life savings so you mentioned that sometimes those those bear markets can actually take losses you're close to 40% and that's you talking a lot of money especially like you. So we talk about some of his retirement our life savings. Things like that that can that can be a lot of money. It can add up really quick and it can that 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 were well on our way to doing that over here are joined with Peter Sean from Rochon planning that's rich on planning.com. I have a visit to his website or give them a call at 919-300-5886 today will discuss some of the concerns we have with our money and examine why we have them, and if were taking a practical and productive approach to addressing those concerns. Peter will ask you a few things I want to tell me if it's fact or fiction or kind somewhere in between. I will get your expert opinion on this in 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 asked that question. Often times to investors. I say what you believe to be a realistic or a fair rate of return and I get that answer not, 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 with ask what type of investor are you are you willing to take on the full risk of the stock market losses will they know 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 it should be eight 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. Complete 15 year period from 1996 to present. So 96 through 2010 97 through 2011 98 through 2012 there are 11 complete 15 year periods ranging from 1996 to 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%. That's far lower than that expected eight or 10 or 12% rate of return in 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 dowel bar Institute. They study investor behavior.
We started the program talk about how people sometimes make emotional reactions and decisions with their money.
Dowel bar Institute does an annual study of what are the index returns verse. 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 eight or 10%. The average rate of return of the investor is more like three or four but again, the market has not average that eight or 10 or 12% rate of return from 2020 until 2021 January 1, 2020 through December 31, 2021 a.
A full 21 years of of investment the compound annual rate of return of the S&P was only 5.78%.
So if your plan. If your plan bases your progress in your financial future off of this assumed mythical eight or 10 or 12% rate of return, but in actuality we only get 65 and 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 that I think were in much better shape their so if you've got people investing and they are they are projecting and planning their futures and maybe their retirement. For example, they're planning for this eight or 10 or 12% return like you talk about very often they will find themselves for lack of a better phrase is sorely lacking when it comes time to to try to realize those potential earnings that they thought that they would have you and it's not the good years that put you behind it's it's the impact of the bad years have I don't know if you remember in school but I remember there were classes where I have like a weekly quiz and I thought I did very well on all of my quizzes and then the final grade comes out. It's like a C average.
And I say to the teacher.
Hey, what happened here.
I made like 90s and above 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 10 working to the average would bring the average for the other quizzes way, way down and in stock market were not talking about zeros were 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 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 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 kinda just let 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 naturally what the wrong approaches at the wrong time, but more importantly, if we've got the expectation for an eight or 10 or 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 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 your listening to planning matters radio were joint here today by Peter Rochon from Rochon planning were separating fact from fiction as it pertains to the instabilities that were seeing in the current market today, continuing our conversation. The next statement I would post your Peter is bear markets there rare or are they not yet know. So again we we we have recency bias. We have not experienced a true bear market for going on 14 years here, I mean we saw a downturn in covert 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 healthcare event, not an economic event. It was a healthcare 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 bounce right back up. Bear markets are not rare they are and are not an anomaly. Black swan events is there often kinda deemed art art that aloof and and and ends are not that rare.
In fact, they they happen they happen frequently they happen with regularity over the last hundred 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 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 mentioned that bear markets actually are not all that rare, but then you also alluded to the fact that this this last one the most recently have, even though it was coded related that we did more or less recover from it fairly quickly.
Markets recovered fairly quickly.
Which brings me actually to live 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 coded was the exception and because of recency bias. That's what people remember and it's the freshest thing in our mind 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 markets lost 2% today on the market lost another percent of the market down. Another half percent and then a year and 1/2 goes by and all of a sudden the markets down 2030 4050% and we look back and say what happened where did all my money go where did the market go II just didn't really understand how to react and I didn't expect 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 pack up and so there's an old chart. It's like down at the bottom. Fear causes people to sellout up at the top. Greed causes people to buy in and use repeat that process until broke those those snap backs don't generally happen that quickly.
It takes about a year and 1/2 on average to get from the top the peak to trough the bottom and often times it takes a good. Of time to recover as well multiple years until the market gets back up to where it was previously. I mean if if there was a decade where I told you there were two different 100% returns in the market, you probably would say I was a great time to be an investor, but that was the decade between 2000 and 2000. It's a little more than a decade, 2013 two different periods where the market return to hundred percent twice, but it also lost 50% twice and it didn't happen quickly, was 2003, about 2007, 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 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 have that long term outlook and 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 will have plenty of dollars that in a participate in that recovery and will have made profits, even if the dollars that were invested 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 the right approach with the right information and that's why were joined today by Peter Rochon from Rochon planning, you can visit his website, Rochon planning that's rich on planning.com or give them a call 919, 300-5886 or 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 in 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 in the loss were the same as a percentage, but we have less money than we started with what they happen in reverse. We have 100,000 take a 50% loss down to 50,000. Then we have a 50% gain were only up to 75,000's of the order of operations there that the order in which those returns happened didn't really matter.
They could be the positive one first deposit one last however but the loss of 50% represents a more impactful event than the gain of 15% or 50% rather and that's why these these past performance adds that they put out I think are a big fallacy as well as the want to talk about factors fiction when these mutual funds advertise their past performance. That's not what investors actually achieved I could give another example here of the 50% gain the 50% loss or hundred thousand dollars turns into $75,000 and then we have a 33% gain was at one more year on top of that so now we have gained 50% we lost 50% and we gained 33% so let's 50-50 a 0+ 3333÷3 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 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 in a let's just the fact versus fiction of that one is past performance even a great indicator of past results. No, it's not got understand that about your money you got understand that that advertisement of past performance really is not an indicator of of even what your money would have done had it been invested during that period of time.
That's really hard for people to grasp like him numbers art are difficult over the radio or rewarding podcasts even as it is, but these are things that you really need to know and that the market is a fantastic tool were going to experience and headwinds. This is not an irregularity. You gotta be prepared for that.
You got have a long-term plan for it that 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 are a Peter, thank you so much for your time today.
A lot of great information shared with us today. Great job explaining it. Keeping it simple for those of us that a particularly when you're talking about numbers in math on the radio. It can be a little fuzzy. A lot of great information listening to planning matters radio we've been joined today by Peter Rochon from Rochon planning that's rich on planning. Visit his website www.richonplanning.com or give them a call 919, 300-5886 thank you so much for joining us today for a pleasure planning matters. The content of this radio shows were fighting for informational purposes only and is not a solicitation or recommendation of any investment strategy you are encouraged to think investment tax or legal advice from an independent professional advisor.
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