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Paul Winkler: And welcome. This is The Investor Coaching Show. Paul Winkler. What an interesting week it has been, has it not?
Trump Tweet and Market Drop
And I think that’s one thing that we have to keep in mind is people promise all kinds of things. They say they’re going to do all kinds of things. And then, you know, getting it done, doing it, carrying it out is so often a whole different story because after the election occurs, now you have a new dynamic, as in you know, who other people are in Congress, in the Senate and the House. And you’ll have some people even on your own side that are like, eh, I don’t know if I want to pass that because I want to get reelection next time and my district isn’t really for that.
So, you know, to really go and say, Oh, this is definitely what’s going to happen because this person said it during the election. I go, Hmm. And then the other thing is, how are people going to react to it? You know, one of the common topics of conversation is if they go and increase estate taxes, now what’s going to happen there? How are people going to respond? How are wealthy people going to respond? Are they going to find ways to avoid those estate taxes?
Are they going to, you know, find ways to hide assets as they have in past generations? How about income taxes now? What if they go and do something? And you could have people that are running companies say, Hey, you know what, we’re going to change this. And they’re going to start loaning companies back and forth money, company A loans company B money. And that’s how they avoid the taxes for repatriating cash back to the States.
But you know, one of the things that I was asked this week was, “Well, Paul, what did you think when the market went down so much?” I think it was on a Tuesday. Yeah. I think it was Tuesday. You know, what, what did you think about that? And I said, “well, you know, Trump came out and basically said, “I’m done negotiating. I’m not going to, you know, go for a stimulus package anymore.” And then of course, when he came back and said, you know, we’ll come back and we’ll talk and then the market goes back up. But it was interesting because he basically said, and you know, when it first happened, I thought, well, you know, here’s his saying, I’m not going to negotiate anymore until after I win.
And then we’ll have a big stimulus package for everybody, you know, we’ll take care of everybody. And you know, you have to look at it and go, well, Democrats would do the same thing. They would come back and give something. So it really doesn’t have anything but a short-term impact. Because when you look at the market drop, he said, well, “the market dropped, it crashed, it plummeted.” And then I look at it and go, eh, you know, 1% to 2% is not plummeting in my book. You know, plummeting is when the market drops 20% or something like that. And is it that maybe that people looked at it and said, Hey, you know what, both sides are going to do something.
We just have to wait a little bit longer. And therefore there’s a time value of money. And therefore markets go down a little bit because we might have to delay. Or there may be some companies that do struggle for a little bit longer or people that do struggle and not to discount the struggling that’s going on. I mean, it’s, you know, I look at it and go, gosh, it’s, it’s horrible what people are going through. And it’s, it’s like, they’re pawns in this game and they don’t want to be pawns in the game, but they have no choice because you know, they’ve been hurt through no fault of their own, you know, through things that the government has been doing.
You know, as far as shutting things down, not making, you know, it’s like that lady up in Michigan that basically said, Hey, we’re going to shut down. You can’t buy lawn supplies and you can’t buy paint and paint and products and home improvement supplies, but you can buy lottery tickets. And how does that fit?
So what was happening there, I thought was kind of interesting, was transfer. “I’ll give you what you want as far as some stimulus.” And you look at it, whether he would have done it, if basically people didn’t believe him, probably the market would have gone down by more. But he’s been a guy that for the most part has come through with a lot of his things that he’s promised in the election; it’s very, very unusual. So I think we forget that most of the time and Democrat, Republican going back through history, I try to stay out of politics as much as I can, but most people don’t come through with what their promises are because they can’t, because they’re dependent upon what other people do.
And that’s, I think that’s the interesting part. Now, when it came, he came back and said, we’re going to go back to the negotiating table. And markets went straight back up again. And even when we had this negative unemployment number or, you know, things weren’t so great there, and it was cast as, Oh, this is terrible. These are awful numbers. You know, markets kind of shrugged it off and that’s because it was expected and that’s how markets work. You know? So what I think is going to be interesting here and somebody said, “well, what do you think the biggest surprise will be?”
And I say, you don’t, you don’t know. The biggest surprise could be that there is no contention in the election and the election results come back. And there’s an orderly change of power or no change of power. And nothing happens. That would be probably a surprise because a lot of people are thinking maybe this could drag on for a couple of months. And what effect that has is with uncertainty markets will stay lower than they normally would be because of that. Uncertainty, nobody likes uncertainty.
Should you buy now or wait until after the election?
So if I’m buying a stock right now, I would pay a lower price for that stock. Then if I knew exactly what was gonna happen, I knew what tax policy was going to be. You have the debate where they were talking about, Oh, you know what anybody making over, I think it was $400,000, $400,000 are getting a tax increase. And then, you know, then Pence basically says, now, wait a minute, no, you said you were going to get rid of the Trump tax decrease.
And therefore people under $400,000 are going to be paying more taxes. Well, reality is they could go and change that they could say that nobody under $400,000 and you just don’t know what they’re actually going to do until they do it. And that is so frustrating. That’s why it’s so hard to predict markets now.
If somebody asks me this way, “Hey, Paul, do you think I ought to go and stick money in my IRA before the end of the year? Or should I put in an after the end of the year?”
And I said, well, you know, you always hear me say that two out of three times the market goes up and one out of three times it goes down. Putting it in earlier is typically better. Now, if you’re talking about non-qualified accounts, you know, which has taxable accounts, you have to think about, well, you know, in taxable accounts, you’re buying stocks and those stocks, they declared those companies, declare dividends, which are taxable, and you’re paying taxes on dividends that you weren’t there to earn. You didn’t get the returns. Now this year, it’s probably a moot point because of course, most markets are still down.
I say some most markets that are always little segments of markets that are up, you know, when you look at the technology sector that has benefited from COVID and that, you know, that’s a different story, but most market segments are down. So it’s probably a moot point this year that you didn’t benefit a whole heck of a lot, but you do have dividends that get paid and they’re paid for the entire year. And you didn’t, you weren’t in there to benefit from those, those dividends, but you are paying taxes on it. So that’s one of the things you have to be careful about investing towards the end of the year and a non-qualified account is that when those dividends are declared, you end up paying taxes on those dividends.
So sometimes, you know, toward November, December, I will often tell people I want you to hang on and wait, but there’s always this part of me that goes, but you know, when you’re dealing with an event like an election, you could have exaggerated movements in the market. Now they can be exaggerated off or they can be exaggerated down. This is something I struggle with. I absolutely do, even in my own personal investing.
Now, if I’m in a market and I’m going from stocks to stocks, you know, I’m just changing the mix of the portfolio and I’m making sure that I’m more diversified. Yeah. I’ll make changes all day long toward the end of the year. I don’t mind that, but if I’m taking cash and sticking it in the stock market or in an investment portfolio, I’ll think twice when I’m putting money in toward the end of any year. And that’s just, you know, just wise, because from a tax perspective, I don’t want to pay taxes on some money that wasn’t in there to benefit from all year long.
And in other words, those returns that came in due to dividends from the company’s operations all year long, I wasn’t there. And you may have lower than well, typically you don’t have lower dividends. A lot of times companies are loath to reduce their dividend, even if they’ve had a difficult year. So it just depends how companies come out and what they decide their dividend policies are going to be this year. So it’s a complicated thing, but, you know, when it comes to non-qualified accounts, that’s where I’m thinking twice about whether I invest or do things toward the end of the year qualified accounts.
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If You See Something Wrong, Then Fix It
Whenever I see something wrong, that’s when I fix it. You know, people will say, well, there’s people looking at changing their investment based on the election. And I go, well, if it’s not incorrectly managed, if you’re not invested in properly, there’s no reason to change it. You know, if I have the right amount of large companies, the right amount of small companies, amount of large volumes, small value and international, large international, small international, large value, international, small value, emerging markets, emerging markets, large merchant markets, small value, so on and so forth and right amount of, you know, fixed income, the mix of fixed income or bonds to stocks, then there’s no reason to change it based on an election, because the reality of it is what I say all year long, still stands.
You have a two-thirds shot, three-quarters shot that the market goes up, a one-third or one-quarter shot that they go down, and you don’t know which it’s going to be, you know, you may look at it and say, well, gee, I think so. And so is going to be a negative on the stock market going forward. And you say, well, if so, and so looks like they’re going to win a month out, two months out, two weeks out, whatever, then that information that they’re going to be a negative on markets has already built in the stock prices.
Because if you’re an investor, you’re naturally going to pay less, if you think you’re going to get a company that is going to be struggling to be profitable in the future, you know, because of, so, and so being the President, you know, going forward and it’s a handicapping, so to speak, of the stock market, that makes it so challenging. You know, when I see people go, ah, you know what, I’m just going to put money off on the sideline and I’m going to, it’s going to put it off to the sideline.
Well, you’re what you’re doing is market timing in that case. And you’re putting your money in fixed income investments. And, you know, the fixed income investments are making just about nothing, you know, less than 1% in many cases. And then you think about the fact that, you know, when we go through history and we say, well, you know, large US stocks, historically average about a 10% return. And every 30-year period through all of history and small companies about 12%.
Let’s say, let’s say it’s 1% versus 10%. Let’s just use it as an example. I’m willing to forego that 9% just to have safety in the short run. Well, the problem is that doesn’t go with how markets actually work. You know, if you look back through history and you say, well, how many times was the return 10%? The answer is just pretty much never. So, you know, you can have, and in many areas of the market over the past five, six years have been way, way under the historic norms.
You’ll have, you know, smaller companies and, you know, their returns 3% to 4% per year, which is historically more than they’re like 12%. So how do markets get back to their historic norms? Well, typically what you’ll see is that the returns will be the way the heck higher than average, you know, in a really short spurt, you know, in like in the 1970s and, and you, you would see small companies toward the end of the 1970s shooting up 70% plus per year, more than 70% per year for even a couple of years in a row.
And you go, Whoa, and then you’ll see, you know, small value companies shooting up after that small cap shooting up 50%, 60%, 70%. And you’ll have some years where value companies shoot up 40% to 50%. And so what happens is it typically follows where you have lower than average returns for a while. You’ll see this jump up and above and in what causes the biggest jumps are the biggest changes, and presidential elections would fall into one of those things that I would consider to be big changes.
The Market Always Comes Back
And that is something you don’t want to not be there when something like that happens, something monumental like that happens and you go, well, I could miss the downer. Yeah. You could win that. You know, that’s a possibility, but here’s the thing about downturns. They’re not permanent. I don’t worry about them going on forever. They never happen permanently. Why? Because if you have a downturn it’s caused by the fact that the company’s got lower profits or lower profit expectations going forward, or something came back a little bit less than what we wanted for the company standpoint.
But the company just didn’t sit there and take it. They will adjust their operations to say, okay, well, we’ve been handed a lemon, let’s make lemonade out of it. Now, some people may be, it may go through some pain, might have some layoffs that occur. And we may see that the company doesn’t buy stuff because you know, raw materials for whatever it is that they sell. You know, they, if they’re making cars, they don’t buy as much steel because they’re not making as many cars.
If they’re making cars, they may not buy radios from the company that supplies the radio for the car or the heat and air system and the parts for that or the parts for the muffler or thethe catalytic converter, or they don’t buy the seat material or whatever. They don’t buy that stuff because they’re not selling cars. So down the line, you have the pain from that, but the company reduces their expenses by not buying those things, which helps for profitability going forward.
Or if somebody comes in and says, we’re going to nail you with taxes and it may take them a little while to go, okay, how do we avoid these taxes? But avoid them. They will, they’ll figure it out. They’ll figure out what they have to do to get around that. And it’s just a temporary issue, but they have to, you know, maybe we have to change how they do things, how they’re changing, how they’re doing accounting, where they’re located, how they’re determining taxes. And, and, you know, maybe that they’re looking for things that they can write off to the doctor or whatever, to reduce those expenses.
There are all kinds of little tools that they have in their bag to figure out how to avoid them. They will. And if they can’t, then, they do like some companies have done and pick up their toys and go to another country. You know, it’s, they’re adaptable is really what it gets down and trying to figure out, okay, you know, how exactly is this presidential election going to affect stock markets? It’s a futile exercise for that reason. And then when I stick all my money in fixed income, that goes up 0.1%.
And then markets, you know, some areas of the market jumped 30% to 40%. If I’m making a half a percent on my fixed income portfolio and it goes up 40%, you know, I just missed, you know, take 80 years at this rate of return to make up what I just missed. You see. And it’s why investors really struggle when it really gets down to it. They really struggle, you know, and if you’re getting closer to retirement, you don’t put everything in stocks. Obviously you have fixed income to help you weather the storms when markets go down.
And like I said, it’s always something, it’s temporary. And you know, I don’t worry about whether it’s going to come back. It always has. When it comes back, it comes back with a pretty good vengeance when it does come back. And the reality of it is it goes up more than it goes down. So just a little insight regarding a week in the markets and some of the things that have happened.
You’re listening to The Investor Coaching Show. I am Paul Winkler.
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