Transcription: Segment 3
Paul Winkler: You are listening to the Investor Coaching Show, following Evan Barnard and Arlene Brown. Okay, so let’s talk a little bit of shop here for those people that think that they’re getting some safety out of their investments by sticking their money off cash investments. The idea being that we can protect ourselves from market downturns.
Can we protect ourselves from market downturns?
It’s actually a pretty good article talking about how old investors are. Now we often think older investors are seen as patient in market downturns, but they are anything but. Now this is going to be a two parter. I’m going to actually mix two different things that were in one, one was in MarketWatch, which is the Wall Street Journal publication. And then one was in the Wall Street Journal. But talk a little bit about what’s going on with older investors. And a lot of times people have, and I have, I’m guilty of actually thinking that older investors are often quite disciplined because they’ve been there done that.
I think back to remember when we talk about the 1970s, it was the older investors. Remember 1979, the elderly, the death who are sticking with equity. Exactly. Evan, that was, that was an article that he is quoting for is from the death of equities that was in business week. And younger investors had been bailing out of the stock market, going with alternative investments, going with options and real estate and gold and diamonds and you know, all kinds of stamps even, right?
Yeah, exactly. So they were investing in all kinds of things and it was only the elderly who have not understood the changes in the nation’s financial markets or who are unable to adjust to them are sticking with equities. You can tell we’ve taught that workshop a couple of times, but it was the older investor that was just staying put at that point in time while apparently, they’re not necessarily all that patient anymore. They’ve lost some of their patience and I’m going to, I’m going to give a reason that I think that they may be losing their patients.
Older investors have been burnt
Cause I have, I have a theory and I have lots of fear and I may have a competing theory or we may agree that we may disagree. It’d be interesting. You first? Nope. No. Okay. I’m going first. Okay. So my theory is this: in the 1973, 1974 downturn, it was a pretty nasty downturn, about a 40% decline in the stock market business. We came out with this article in 1979 and they said that younger investors are going off the beaten path, older investors are staying put, but older investors were doing okay, and they’re sticking to their guns and sticking with stocks. This time I have, my theory is this. You have a group of people, older investors that have seen a lot of garbage more than in 1973, 1974 was bad. Sure. But here they go through 2000, 2001, 2002, then they go through another slam late 2007, 2008.
Right? Then they go through another slam with COVID and all of the things that happen, you know, so far the first part of this year. And you know, you get hit with three things in a fairly short period of time in the dominant asset category that most investors invest in, which is large US stocks, because you can remember during that 2000 to 2010 period of time, large US stocks were hammered. You had a dead decade, no return negative return for more than 10 years, right? Yet other areas of the market actually did quite well.
There were some areas that did quite well, but the problem is American investors don’t invest in those areas of the market. They weren’t diversified into small internationals. They weren’t diversified into some of these value asset categories or small cap categories that did quite well. So the reason that I believe is that, that these older investors are losing their discipline is because of the fact that good grief they’ve been burnt, burnt, burnt, and now they’ve lost discipline.
Desperation
Evan Barnard: The other is that, how about your competing one? So yeah, my sense is it’s out of desperation because like when that article came out that’s of equities and so forth, even then you were looking at, say an 8% or 9% rate on a 5-year CD, 10-year CD. And you could afford to stay disciplined at least on the cash side of the equation. Okay.
Yeah. But we’re talking about equity side of the equation here though. Yeah. But I think that because rates are so low now there’s nowhere to go though. Yeah. So going over to cash now, it doesn’t seem like that makes any sense to me because I look at it and go, you know, back then. But you know, I didn’t even think of that Evan, though, but that’s a good point to bring up in this whole equation. They should been less disciplined back in 1979 because interest rates are what they could go to.
Paul: They have to stay disciplined, now is maybe a better way to say it. They can’t afford to get out. Yeah. Yeah. I agree. They really should stay more disciplined now. And they’re not, which is interesting. But I think the reason, I just think it’s just been, you mess up, mess me over once. Shame on you messed me over twice. Shame on me type of a thing. Yeah. And where markets have burnt them. So many times that they’re, they’re just gun shy anymore. Well, you know, I’m thinking a little bit about your quote on the webinar you did earlier this week talking about the election.
Evan: You made the statement, “Presidents don’t make markets, markets make presidents.” Yeah. Yeah. And so I’ll tell a family story here. I’m picturing, you know, growing up. So I was born in ’63, you know, the UN had kind of recently been formed, formed this and that. I grew up hearing about the biller birder society. I grew up hearing about the trilateral commission. I grew up hearing about the Marxists taking over the education system, various things like that.
Well, now my dad’s 85 and they’ve seen what has happened in this last 40 or 50. Well, it’d be 60 or 50 years now. Anyway. Yeah. And I think there is this sense of, “Hey, I’ve been saying this for 50 years or something like that.” And you know, it’s kind of like, you know, there’s always the, in times, as soon as that was written in scripture, everyone thinks during the entire generation right now. Yeah. But I do believe that there is this sense of, you know, something is coming in.
I just think it’s a reaction to it because it’s been part of their existence for so long. Yeah. That’s an interesting idea.
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The Federal Reserve and interest rates
Paul: Yeah. But, but now we’re really thinking the wolf’s really coming because he’s crying wolf. Yeah. I don’t know. But yeah, but I think it’s interesting because that actually leads to the second point you were talking about that Evan, that they really can’t afford to do that right now. And that is made even more apparent because of this Wall Street Journal article, which says that the Fed approves a shift on the inflation goal ushering in a longer era of low rates. Now they’re saying this is as monumental as the Fed changing their target on inflation to 2% and says federal reserve approved a major shift on how it sets interest rates by dropping its longstanding practice of preemptively lifting them to head off higher inflation, a move likely to leave the US borrowing cost very low for a long period of time.
Now, why are they doing this? Well, the reason is because they’ve had this target for inflation. We like a little bit of inflation. If you never heard me explain this as to why we like it. It’s not a conspiracy. We like it because if costs go up progressively, then people will buy things now rather than wait, because it’s going to be more expensive in the future. So we like a little inflation. We’ve got deflation and Costco down. Then people say, Oh my goodness costs are going down. Right. And I got some money in the savings account. I was going to buy a car.
But next year it’s probably going to be about $2,000 cheaper. Why don’t we get another year out of this car? Can we? Yeah, we can, let’s do it because next year is probably going to be $2,000 cheaper. So that’s why they don’t like deflation. Well, what has happened in recent period of time, if what we’ve been seeing is a deflationary possibility that is causing the Fed to step back and go at hand, we haven’t hit our 2% target. Maybe we’ve only hit one and we could stand to have maybe 3% inflation to make up for the inflation that we didn’t have.
That’s where their stance is coming from right now. And as a result of that, basically what’s going on is they’re looking at keeping the interest rates low for a very, very long period of time. And it demanded the most ambitious revamp of the centrals nations, the central bank’s policy setting framework, since the Fed first approved a formal 2% inflation goal in 2012 is what they said here in the Wall Street Journal by signaling signaling Thursday, that it wanted to inflation rise modestly above the 2% target.
The Fed revealed how global central bank principle of inflation targeting widely adopted over the last quarter century might have outlived its usefulness in the world of lower interest rates. Well, why is this important? Why does this go along with what Evan said in terms of why is it that people shouldn’t be going and bailing out right now? Because inflation is, as we always say, prices going up, but in essence, inflation is the devaluation of the purchasing power of your dollar or any fixed investments that you have.
And the Fed is pretty much out and out saying right now, we’re going to keep interest rates low and we’re going to allow inflation to be higher. So what they’re doing is they’re in essence saying we are going to allow for bigger, negative, real rates of return. So basically saying that we’re going to let you have a higher guaranteed loss on your fixed income investments. And that is the problem here.
Bailing is historically bad
So if you’re going and saying I’m going to and historically it has always been a bad idea to bail out on the stock market. After market downturns it has always been a bad idea to do that. And I’m not sure I’m gonna be the one that wants to bet that this time it’s different because what we’re seeing right now is most everybody three to four months ago, talk to anybody three to four months ago, and nobody was saying that would have seen the level of recovery that we’re seeing right now.
Nobody was saying it, right. I mean, this is going to go on for years. Oh, you know, vaccine, Oh, year and a half, two years. It may be a day. I don’t know. You know, maybe people were saying it was going to be a long, long period of time. And here we are three to four months later talking about vaccines. And we’re talking about five minute tests. Yeah. That will tell us for 10 bucks. Yeah. I think it was five bucks. I think it was even less. I mean, it was like good grief. Maybe it was a 10 minute test for five bucks.
Yeah. Oh no. Yeah. Think about that. What that does is it tells us, I am just like that. Are you somebody that needs to maybe stay home today and then therefore you don’t spread it. And then the reality of it is it doesn’t spread. We don’t have a problem. We don’t worry about going out in public. So question, do you think there’s any sense that in keeping these rates low, they’re trying to incentivize the American public to keep money in equities so that they don’t experience negative real rates on the cash side?
No, no, no. Everything I’ve ever seen. Jay Powell says that he is not, that’s not his focus. Their focus is dual employment, full employment, and a stable currency, stable, you know, that’s their main focus of the federal reserve. So I don’t see that as, because I think that would be a byproduct is, if I’m getting nothing in cash, at least I’m getting, you know, not that we’re dividend investors for a whole host of reasons, right. It causes problems. But you know, at least people are getting some kind of growth on the stock side of the portfolio from a cash flow standpoint, instead of having money in cash.
Are you diversified?
But it’s interesting. There’s a ton of cash sitting on the sideline right now. Anyway, there really are older investors. This is something that maybe you made a mistake. Maybe you jumped out of the stock market and it’s slow. And you’re worried that it’s too late to get back in. The reality of it is prices. You know, if we look at how stock markets are priced, they’re price based on all knowable and predictable information at any point in time, this is a really important point. You’ve may have heard me say this, but it bears repeating at any point in time, there’s about a two-thirds shot that the markets will continue to rise on one third shot that they’ll go down and it can be up to three-quarters depending on how you’re diversified.
So two-thirds to three-quarters shot, it’s going to go up one-quarter to one-third shot that it’s going to go down. So at any point in time, people always ask if it is the right time to be in the stock market. And I always say that depending on my time horizon, if I have money that I’m not going to need in the next year or so, and then you’ll have different asset mixes for different time horizons, right? But you know, maybe one to three year period will be different mixed than a three to five year period of the six to nine year period or a 10 plus year period. But the reality of it is, is that I want to hold equities.
Why? Because it protects me from inflation, Whereas fixed income investments. That’s not something that is even designed to protect you from inflation; it’s a short term parking lot for your money. And the interest rates are nonexistent right now. And not likely to go up anytime soon from what we’re seeing here.
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