Paul Winkler: Welcome to “The Investor Coaching Show.” I am Paul Winkler, talking about money and investing and answering questions that you might have.
A lot of times people email us questions. Going to paulwinkler.com/question is another way of doing that. Paulwinkler.com/question.
Sometimes people ask us questions based on some of the workshops that we do from time to time. If you want to check out some of the workshops and the material on the website, there’s a ton of it out there, paulwinkler.com. We have video and webinars on social security, on Medicare, on investing, on just all kinds of different things. And we’re going to be even doing more of that in the future. So check that out.
Cognitive Biases
One question that somebody just asked was on why sitting on cash is hurting many investors. That was the topic.
We were talking a little bit about cash in a portfolio. You have different asset categories. You have stocks of different types, large companies, small companies, and you’ve got value companies and growth companies and US companies and international and emerging markets, and then you have different types of bonds in a portfolio.
I’ve talked a little bit about that over time, but somebody was asking a question, and making a statement actually, just disagreeing with me. And that’s fine. I’m good. I’m a big boy, disagree with me.
But the reality is that I’m going to use research and data and I am going to walk through the thought processes. Because here’s what it gets down to: When we look at investing and we look at the returns that investors have gotten historically, we talked about the DALBAR research, and there’s Morningstar’s research on investor returns.
There’s a lot of research out there. There are behavioral scientists who actually look at investor returns and talk about it. Terrance Odean from Berkeley is one of the big ones.
A lot of these people that are doing this work in this particular area of behavioral research are looking at it going, “How can we get investors to be more successful? We’ve got to help them deal with their cognitive biases. If we can help them deal with their cognitive biases, then maybe we’ve got a fighting chance to make them better investors.”
But cognitive biases, they’re hard, because every ounce of our being wants to protect ourselves from risk.
We want to protect ourselves from things that we see as scary, from the Boogeyman.
A lot of times what happens is it’s like a kid in a ghost costume, and he’s got this sheet over his head, and he comes popping out and he goes, “Boo!” And we go, “Ah!” And then when we finally investigate it and look into it a little bit, we find, “Oh, it’s a little kid in the sheet. It’s not that big of a deal.”
But a lot of times what happens with investing is we can look at the sheet and we go, “Oh, that thing is scary.” And what we do is we jump, but we don’t know how to take the sheet off to see what’s really going on. That’s why information is so important. That’s why it is so important to understand and be educated about investing, because it is really easy to be pulled off track and thrown into a tizzy and make a big mistake with our investment portfolios.
Sitting on Cash
This person was disagreeing with something that I said about why cash is hurting many investors, and doesn’t agree with my idea of sitting on cash. He was talking about his wife’s 401(k) having a return of only 2% over the past year.
Now, if that was the return over eight years, which is what he said here, that’s a pretty bad return. Now, if you look at a few year period, especially with 2022 being such a tough year in the stock market, yeah, you could probably find shorter periods of time where the return was maybe 2% or even lower, depending on the period of time you’re looking at. So no question about it.
But if you look at the past eight years, if you had just a well diversified stock portfolio, I would just look at my own stuff, and what the returns were in stocks over that period of time.
Well, you had a rate of return of a growth rate of about 100% (or 99 point something percent is what I was looking at for the US section of a portfolio). There was well over a 50% return in international. International didn’t do as well. But if you look at the proceeding period in time, international did way better than US, and that’s why we own them both, US and international.
Now, is that lower than historic norms? Yeah, if you annualize that, you’re looking at about a 9% return in a US section of a portfolio.
Now, some areas were higher than that in US, like the S & P 500 had a higher return. Some areas were lower, like the smaller companies, but historically, smaller companies do better. But there are times when large does do better than small. And that’s why we own them both.
That’s why we diversify. You just can’t predict it.
You don’t know what’s going to happen next. But you look at that return and go, “Wow, that wasn’t 2%, for eight years.”
I don’t know what the time period is. I don’t know what the situation is for this particular person, but I want to just concentrate on the concept here.
He’s saying, “I’m seriously thinking about taking my portfolio out and putting it in CDs since I’m 75 years old.” Okay, so number one, we look at this eight year period, which is what I just did, and I ran some statistics and I used different asset categories. I used large value companies. I used small and growth, and I was just breaking up over that period of time, but I just want to focus on treasury bills because that would be a close proxy to CDs — or something fixed or something that’s guaranteed, something that I know will not drop down in value from a nominal standpoint.
Now, that word “nominal” means, let’s forget about inflation and act like there’s no such thing as inflation. From a nominal standpoint, we don’t have a negative rate of return going back through history, but what was the rate of return over eight years for that? The answer is that the rate of return was about 1.2% from September of 2015, where we have data in the software that I use, through the end of July of 2023. So it’s 1.2%.
So I’m going to move everything over to something that over the last eight years had that rate of return — when as I said, if you were well diversified in US, it was a 100% return approximately, so that doesn’t make any sense. But remember, investing and humans don’t use sense. We make decisions.
Dealing With Anxiety
I was listening to a podcast this week about that, and this guy was talking about dealing with anxiety in general. He had a great thing on anxiety. Matter of fact, I probably need to talk about it a little bit in just a bit, but he was just talking about how we try to deal with anxiety using the cognitive part of our brain.
We try to outthink it. And he says, period, end of sentence:
You will not outthink anxiety.
You won’t think your way out of it, he said, because it comes at you at an emotional and visceral level, and your emotions and your instincts were designed to keep you alive. They were not designed to think.
So what happens? We react to things. We’re reacting at that particular level, and thinking has nothing to do with it.
And he’s absolutely right. The parts of our brain that deal with emotions, the medial part of our brain that deals with emotions, it has a connection to the front part of our brain, but it’s tenuous many times, especially when you’re younger. This is an older person, but when you’re younger, it’s really tenuous.
Matter of fact, guys don’t have fully developed brains until they’re 27, and girls until they’re 25. And it’s a challenge. Any of you that have had kids, you know that that’s a challenging age because they’re not thinking.
“What are you thinking?” “I wasn’t thinking,” is their answer.
Inflation Is the Reason
So if you look at this and you say, “Wow, okay, so I’m going to move things from this one asset category to this cash because now that CD is paying a higher interest rate.” You’ve got to ask yourself this question: Why is the CD paying a higher interest rate now than what it did over the past eight years?
And the answer is inflation. There is a very, very high correlation between interest rates and inflation.
Incidentally, what is the reason we invest in the stock market? Why do we invest in the stock market? I hope you are screaming at your radio, “Paul, it’s inflation.”
Because if we look at fixed-income investments throughout history, we see no return after inflation.
Matter of fact, I was talking to somebody about gold this weekend, and I made that comment. I said, “What’s the rate of return? Well, you could buy a good men’s suit for an ounce of gold 100 years ago. What can you buy today? A good men’s suit for an ounce of gold. What’s the rate of return then, after inflation? Nothing.”
Okay, but the standard deviation and the amount of volatility is huge in gold. So just perish that if you’re even thinking that that’s your solution for inflation protection. No, it’s not.
But stocks have always been that solution because inflation is, of course, prices going up, and we own the companies that are raising prices and that gives us protection because their land values, their property, their assets, and their inventories go up in value.
If I have inventories for a company and that’s part of the valuation of my company, whatever it is I sell, I have some of that ready to be sold, my inventor. And all of a sudden you have inflation, which means I’m going to raise the price for that thing if somebody wants to buy it from me.
Hence, what happens, by definition, if that’s part of the value of my company and the price is going to go up on it, what’s it do to the value of the company? Eventually it ends up in higher valuations.
So, hence, we look back at history at the highest returning periods. When we look at stocks, it’s always been through inflationary periods. Now, you can have a dip down just before an inflationary period.
Could be what happened in 2022. If you think about it, why’d the market go down in 2022? And not just large stocks, but small, and different areas went down in differing amounts, but they went down. Why? Maybe in anticipation of that, and because inflation could be a negative in the short run because nobody wants to raise their prices first. Hence, the reason they don’t want to is because they could lose market share.
That Money Isn’t for You
If we look at this and we say, “Well, but I’m 75 …” Let’s bring us back to that. Now, I did a whole workshop on this, and the whole workshop was on the idea that “I’m Too Old for This.” That was the title of it, because this is commonly what people do. As they get older, they go, “I don’t want to lose this.”
And you go, “Well, what’s your fear?”
“The market will come down and never come back.”
And the way I answered that, of course, is, “So if the market goes down and never comes back, that means earnings went away and they never came back. Which means if earnings have gone away, then that means taxes have gone away. If taxes have gone away, that means the government has gone away and your FDIC insurance isn’t worth anything. So let’s just put that one to bed.”
But the other thing is this, “I’m worried about it going down. Well, if I’m 70, I’m worried about it going down. I’m worried about running out of money.”
Well, if it goes down, we look back through market downturns, and how long do they last? You look at 111 days as the average downturn before it comes back, but maybe a little bit longer than that, maybe a year, maybe two years.
But if it takes longer than that, or if it takes that amount of time — let’s say, one to two years or something like that — and you don’t have that much time, then let’s face it, the money isn’t for you anyway. It’s for the next generation.
And is a portfolio of a bunch of CDs an appropriate asset mix for maybe, let’s say, 40- and 50-year-old people who inherited the money from you? Does it make sense for them to have a CD portfolio? No.
So, if we look at that, we say, “Well, if you don’t have that long of a period of time that you’re going to be on the planet, then the money isn’t for you.”
Irrational Fears
The reality of it is, I don’t know what the asset mix is for this particular person, but it’s probably a significant amount of bonds in fixed-income investments. We already have a significant exposure to fixed income, most likely, at that particular age. Therefore, that money is just fine taking care of you forever, however long you have, if it’s not that long.
But if it is a longer period of time, then you’ve got a problem on your hands, because if you don’t have any stocks or any equities in your portfolio, you’re really putting yourself at huge risk for inflation.
And then you might ask a person such as this, “Well, what’s your biggest concern? What are you really, really worried about?”
And quite often they’ll go, “Look at the administration. Look at the government. Look at what’s going on in Washington, DC.” And they’ll go on. Let them rip. Let them go on. I like to. I like to hear what they’re worried about. “What is just your biggest, hairiest fear?” And it’s normally that, right?
I say, “Oh, so you’re really concerned about the government and now you want to put all your money in an investment that is backed by — and the investments, which are dollars, are printed by — the government. So aren’t you going and concentrating all your assets with an entity that you basically just told me you don’t trust?”
So remember, none of this is ever rational.
It’s never rational, these fears that people have.
If we’re dealing with our rational mind, we wouldn’t be having these types of conversations, because we know intuitively that diversification is about the best thing that we got getting us to safety that there is. There is no such thing as safety in the world.
The Legacy of Our Choices
Also, the other thing that we want to recognize is that maybe you’ve been an investor who has spent your entire life, in your investing experience, engaging and trying to pick which stocks are going to do better than others, which areas of the market you ought to be in, and which areas of the market you ought to stay away from.
Maybe you’re an investor who has tried to move out when you thought things were a bit scary. Move out of stocks, move back into them when you thought things were going to be really good. In other words, market timing.
Or maybe you’ve been engaging in tactical asset allocation, moving between small companies and large companies and value companies and growth companies and US and international, versus what you thought was going to happen or what somebody else thought was going to happen. Maybe that’s the legacy that you’ve had thus far.
What we know is that our kids pick up on what we do and they tend to repeat what we do. We know now because of the scientific research that we have mirror neurons and we tend to mimic what we’ve seen before.
The example I’ve given on here before is the kid who plays baseball, and his younger brother just watches him for several years because he’s too young to play. And then when he gets a chance to play, he’s a better baseball player than his older brother was. Why? Because he vicariously played baseball, just watching. What ends up happening is that we do that with our parents.
We say, “Well, how do you deal with this situation, Mom or Dad?” You don’t even have to ask them. You saw them deal with it when you were growing up. You watched your parents do the things that they did with each other, how they resolved conflict with each other, how they handled money, how they handled work stress, how they handled mealtime, how they handled raising you as a kid, let’s say.
Well, don’t you think that our kids watch us no matter what age we are? I think about what my dad did when he was at this stage in his career. What was he doing? That’s a question I ask myself all the time. What was he doing? I was talking to somebody about my uncle a little bit earlier, what he did, how he handled his business, how he worked in it, what he did, and the decisions that he made. There’s always somebody watching us.
Now, if you’re that investor that engages in these activities of stock picking and market timing, and that’s where you’ve been forever, and you start to recognize that it’s not really a great way of managing money, maybe you can be that person who makes that change in your family and changes things forever into the future on how your kids handle money.
People watch us. It’s really important that we don’t mess this up.
And when we look at the desire to move a portfolio around based on fears, recognize that your instincts and your emotions are not your friend when it comes to investing. They never have been. They’re not well-connected to the cognitive part of our mind, the part of our mind that should be thinking and making decisions based on fact and rational processes.
Anxiety Can Affect Our Choices
How we are as humans reminds me of something I was listening to this week. Somebody sent me something on a podcast. It was on how anxiety is shortening our lives. It was something like that. I think that was the title, something to that nature. And I thought, “I don’t know if I’m going to check this out.” And I’m like, “No. Okay, okay. I’ll check it out. I’m a sucker for this kind of stuff.”
So I decided to listen to it. Really interesting, this guy was a doctor, he had two PhDs, and a couple piled higher and deeper, as we jokingly like to call that. He actually was talking about something that was investing-related at one point.
He’s married, has kids, and he was talking about — back in 2012, I think it was — how he was so busy moving one thing to another to another and to another. How we get distracted, how we numb ourselves, and how we get involved in so many different things and volunteer for so many different activities and how overwhelming it can be.
There are books out there, “The Body Keeps the Score,” which he loves that title, and I do too. It’s how our body just tells us, “Hey, there’s something wrong here.”
There’s this smoke alarm going off, and it’s not necessarily the problem, this smoke alarm going off, it’s the fire that’s the problem. Fire is kicking out smoke and the alarm picks it up, and he likened anxiety to that. There’s a problem and your body is telling you that there’s a problem through how it is handling this. There’s something going on in your life that you need to fix, and I thought it was just a good analogy.
With so many people now dealing with anxiety, it’s rampant everywhere.
He said he was going through this bout in 2012, and he said he was just overwhelmed, just so many things going on. And he just had it in his head, he just knew that the real estate market was going to crash. Now, you can take that to any market, stock market or whatever you’re thinking of, but it was just that he thought this was going to happen. He was a younger guy so he probably didn’t have a lot of his net worth in stocks or anything like that. Real estate was his thing because he had his home. And he says, “It’s just going to crash.”
So he had actually talked his wife into just selling the house. That’s what he did. And they did it. And he says, “I was the dean at the university that I was at and part of my job was the the student residence halls.” And he said, “I just figured, we’d just move into the residence hall. I’m in charge of this. Let’s do it.”
And I’m thinking, “How on earth do you talk your wife into that one?” But anyway, he does, he talks her into it, and then he’s on his way someplace and he just goes, “Oh my goodness. I didn’t tell my wife, I didn’t tell anybody, but I had to tell a friend of mine. I said, ‘I need help.’”
He recognized that he had a problem, that stress had made him just snap and do something that was probably not the most rational thing in his entire life.
The Importance of Rituals
So what happens, he gets involved in this group. He says it’s a bunch of monks on campus. So he joins this group and he says, “All these students are coming in and they’re coming from all walks of life. The students, some of them have mohawks and colored hair. Some of them are athletes.” They’re all over the place, these people who had joined this group.
All of a sudden the meeting starts and they hit the bell and everybody starts chanting.
And he goes, “Oh, my goodness. I was wondering if I was going to become the sacrifice.” He was totally panic-stricken over this. He didn’t know what to think.
And so he goes on, just stays with it. And he goes back a couple of days later and continues to go to these meetings because, “I need something different in my life, and I had to figure out what was going on.”
So he’s going back to these meetings and he befriends this one person. I may be messing up some parts of the story, but this is the gist of it.
He meets this one guy that says, “Hey, you work out, don’t you?” And he goes, “Yeah, I work out.” And he goes, “Okay, meet me at five o’clock” — he’s talking about five o’clock in the morning — “when you work out and let’s just work out together.” And he says, “All of a sudden, I’ve got this guy who’s a mentor to me and helping me out because I’m a bit lost.
“And this guy’s asking me, ‘How’s your wife? How are your kids?’ And on a weekly basis, we’re going to these workouts together, and somebody’s actually interested in what’s going on with my family.”
“So,” he says, “I missed a few days and the guy’s me calling up saying, ‘Hey, we had an agreement. You were going to meet me at five o’clock. Where are you?’ “And I said, ‘Yeah, yeah, yeah. Okay, okay, okay, I’ll do that.’”
He says one of the things he started to pick up on and what he started recognizing is that he didn’t have rituals in his life, and he had to have rituals.
My Childhood Rituals
And if you look at it, we’re in a generation right now that has lost sight of the ritual. We don’t do things together on a routine basis quite often. When I grew up, it was, “You get in the house at five o’clock, you’re sitting at the table, we’re going to have dinner, and then we’re going to do this. And on Friday nights, we’re going to go out to dinner.”
For a long time, for my mom, it was pizza. It’s what she liked to do on Friday nights. And then we had this place, “Old Homestead” was what the thing was called. That was one, and there was another one that’s called “The Charlton House.” She was like clockwork. She would go to these places. We were going to all go, and we were going to fellowship.
We were going to hang together, we were going to talk, and we were going to be a family together.
And then, on Thanksgiving, you had someplace that you would go. We’d have family members come over and certain groups of people would come over. And then, at Christmastime, we would go to my aunt’s house. Then we’d go to my other aunt’s house. And it was just very, very much a regimen that we had. And then we would go to church on Sundays. You just knew this is what you were going to do.
And it was interesting because my neighbors across the street didn’t have the same rituals we did, and they really envied us because we had these things that we did and we knew what to expect. And I just thought that was fascinating that one of the girls who grew up across from me says now, “Wow, you guys, it was amazing to watch you as a family.”
I thought, “Really? Because I thought we were messed up.”
So he was talking about having this ritual going and working out with this guy was a big deal. And he talked all about how our instincts and our emotions aren’t rational and how they can be so driven by, let’s say, lack of sleep, and he says, “That pizza that you had the night before, that is every bit as much responsible for the things you’re saying and things you’re doing as anything else.”
We Are Running
And he says, “Well, what do we put in our body? Our body is just keeping the score on all of the stuff that we’re doing and so often we don’t actually have any downtime. We’re running, we’re running, we’re running.” And then this is something that I’ve said many times before, but it is like we’re looking for information, we’re trying, we’re so nervous as a society.
What’s the market going to do next? What is this going to do next? Where are things going? What’s real estate going to do? Is it going to crash?
Oh, I saw this meme out there. I saw this email, and they said that this is what’s going to happen. We have a digitized currency that’s going to be coming, and here’s what it’s going to do to the world. And, oh, my goodness, did you hear what the President’s latest thing is? And, oh, Congress is thinking about doing this with tax laws. It never ends.
The things that we can be anxious about never end.
And this isn’t new. This isn’t something new. I’ve done workshops where I go back all the way through history and I talk about this. I talk about how scared people were that social security was going to become a thing in the 1930s. I talk about how Medicare was going to become a thing, and how it was going to destroy the healthcare system. I talk about how we were going to go through global cooling, and we were actually going to have an ice age in the 1970s.
In these workshops, I talk about all these terrible things that were going to happen in the Cuban Missile Crisis and having missiles right off Florida, just right off of mainland America, and how it was going to cause the destruction of the world. It’s not that we don’t have concern about any of these things, but so often we have these predictions about the future, and we’re just making stuff up.
We make up things about the future and we lie to ourselves because we don’t know the future. And yet we try to know it because we’re scared of the future. We have a fear of the future. And the reality of this is that nobody knows. We don’t know.
And, as an investor, it is so easy to get caught up in that because we do worry about not having enough, we do worry about running out. That is why it is so important that we put a check on the part of our brain that actually kicks out so many of these fears and irrational fears and then build the cognitive part of our minds number one, but, number two, also tune out this stuff.
You can hit delete buttons. You can hit unsubscribe. If somebody’s trying to scare you, they’re probably not doing it because they love you and want to take care of you. They’re probably doing it because there’s some kind of a profit motive involved. And that’s the bottom line.
Profits are king in America, and there’s freedom of speech. People can say whatever they want, and they don’t necessarily have to have any responsibility toward you whatsoever.
I’m Paul Winkler. You’re listening to “The Investor Coaching Show” right here on Super Talk 99.7 WTN.
Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.
