Transcript
Paul Winkler: Welcome. This is The Investor Coaching Show. And Paul Winkler, along with Mr. Ira Work covering well, the financial talk of the week about what’s been going on markets. I’m sure that many of you watched the debate this week. I was on an airplane flying in and watched it.
Do elections affect markets?
And it’s just interesting because people wonder how a change in presidency, if one should happen, or retaining the current president or, you know, how presidential elections affect stock markets? And the answer is not a whole heck of a lot.
Ira Work: And not for very long.
Paul Winkler: No, no, not for very long, you know, the reality of it is that they don’t affect markets a whole heck of a lot. There was an article in the Wall Street Journal, stocks typically climb, regardless of who is in the White House investors.
Ira Work: Well, you did a whole video on this last month and yeah. Not only based on who’s in the White House, but who’s in the House of Representatives. Who’s in the Senate, which party, what happened with the different markets during each one of them. And you can get that on the website.
Paul Winkler: And that is paulwinkler.com/election. I believe that’s it. I think that’s right. I think that’s basically what we did. I thought it was interesting, the Wall Street Journal must have been listening to it because they did a whole article. No, they didn’t. They weren’t listening to me because they only use one area of the market, which is what they all do with the media. It’s all they look at; the whole market to them is the S&P 500.
The Market Is More Than the S&P 500
Ira Work: Well, that’s very easy to explain because it’s the companies in the S&P 500 that are actually advertising in their newspaper
Paul Winkler: And 20%, DOW is still 20% of the S&P 500, it’s still just those Fang stocks that make up so much of the companies. People don’t realize but when they talk about “the market,” they’re often only talking about six companies. That’s not the market. And you just wonder, it just seems like an accident waiting to happen. You know, I lived that. In the 90’s. I looked it up just a moment ago.
Ira Work: Yeah, because we were talking about, you know, investors using historical returns, and they’re only using short term. And I know this because when clients come to me, they’re looking at their portfolio and saying, you know, well, the S&P market has gone so far up, the market has gone up so, so much, you know, and, and I’ll ask, you know, the question we’re famous for asking, “well, which market?” And they’ll say the S&P 500. Right? So to talk about, you know, to mention something that we were talking about a little bit earlier, the S&P 500 from 2000 through 2019, right has only had a 5.9% rate of return.
Paul Winkler: Worst performing areas of all different markets that you would hold over that period of time. That is exactly right.
Even internationally. All the international. Yeah. Yeah. More than that. Yeah, exactly. So, and it’s interesting because the Wall Street Journal had another article and I’ll get back to the first one in a second, but it’s stocks snap a three-week winning streak. So I pulled that. I can grab that article yesterday and hold it out. And then, cause I had a sneaking suspicion. So I went and looked at just for the fun of it: emerging markets value stocks up 2.5%, small value US stocks up over 1.5%, international small value off almost 1.5%, international value stocks up one in a little bit over 1.5%.
Whereas emerging market’s up one, 1.6%. So the S&P 500 was the only area of the market down this week. It was the only one down. And I just thought it was so funny. Cause you know, you would think when you pull that article out that you think, Oh, Oh my goodness, it’s the beginning of the end. Well, maybe it is the beginning of the end for one area of the market.
The Top Regrets of Millionaire Investors
Ira Work: So what are the top regrets millionaire investors regret making. All right. Lay it on me. In the survey, wealthy investors have cited failing to adequately diversify their portfolio and not having a financial plan earlier in their life as their top regret. It says you’re more than one third.
Paul Winkler: Well, let’s hit that before you said so one third, okay. You’re going to give a stat on, on that same thing.
Ira Work: More than one-third, 38% of investors said they lean too heavily on historical returns. So, and that’s why I sent it that if I see it from our clients, they’re looking at 10 years short-term performance. Exactly not far behind was 35% who cited not having sought advice, and coming in third at 21% was lack of diversification. So when we talk about this, the problem is you don’t know what you don’t know made up the remaining 6%.
So it goes on to say somthing that is encouraging. It is encouraging that seeking advice is deemed fundamental to success by, as it shows that the do it yourself investing and not having a regularly reviewed plan is typically a path full of costly pitfalls. He, furthermore noted that lack of diversification was in some ways bound to make the top three, because it is universally regarded as an investor’s best tool to mitigate risks and capital lies on the opportunities that arise such as what you were just talking about with the emerging markets pointed out that the top three mistakes are tightly linked to investors not having sought advice, but investing your hard earned money could appear as dangerous to some.
And he says yet nothing could be further from the truth. Not investing is likely to be more dangerous to your wealth over the longer term.
Paul Winkler: And the thing that you gotta be really, really careful about is where you get advice. Because a lot of times what happens is the financial advisors who are driven to try to sell something are going to use past performance. So they’re going to do and make the same exact mistake you would have made. You know? So you gotta be super, super careful about that. You know, how many times Ira, have we seen people walk in here and they have these portfolios full of five-star funds. Oh, all the time, you know, they walk in, they got it. And I know that they’ve got an advisor if they own, or they’re doing it themselves and make that same mistake that that advisor has just purchased those funds because they use past performance as a guide.
Past Performance and Five-Star Funds Aren’t Reliable
So they owned all and you think, well, it isn’t that that makes sense to own five-star funds. No, that’s because that star rating is based on recent past performance, you know, three five-year returns and it’s returns versus the benchmarks of their peers. And the reality of it is, past performance is no indication of future performance. You’re looking at a problem, but I’m gonna to go back to that one thing that you said about not starting early enough, maybe because I think that’s a really, really important thing that gets overlooked. Now, let’s say you had somebody that was sticking $10,000 away per year, and they’re just investing that and they did it and they pulled it off for like a 40-year period. They did that for 40-year period. They have almost $5 million today if they’d done that.
But if they just started 10 years later and they waited 10 years to start doing that instead of 4 million, it’s 1.8. I mean it is almost $5 million versus 1.8. Now, if they weighed, let’s say that said, Hey, you know, I got, I got this house, I got it. I got kids, I got college, I got this and that. And they started and they, instead of doing it, you know, they, they, they started just 20 years later, but he’ll think did it at age 45? Let’s say, you know, instead of that $5 million, it’s $630,000. And that’s where you run into problems is that you’ve time is your friend.
And number one, you go, I don’t know how the heck I had to be able to save that amount of money. And, you know, the reality is you don’t know what you don’t know. There may be things that you’re doing where you can free up money, you know, where you’re spending money on things. And you’re basically, I see people use rules of thumb when they buy a house and the rules of thumbs that they use for what they can afford are driven by the real estate industry or the mortgage industry. And that’s how they determine what their house payment should be is based on what somebody told them they could afford. And you may look at it as a planner and go, maybe you might not want to do that, or they, the way they buy cars or the way they handle debt or the way they handle college education expenses, or the way they handled their taxes or the way they have, you know, there’s so many things that you may be throwing money away and you don’t even realize you’re doing it because you don’t know what you don’t know.
And as time goes on, I mean, shoot, it’s, it’s easier when you’re younger, but when you really can get into some hot water is when you get older and you don’t know what you don’t know about taxation, as far as how social security is affected by income taxes, how Medicare is affected by income taxes, your premiums are affected by taxes, how, you know, taking distributions on when you’re dealing with cost basis and determining non-qualified accounts and taxation and non-qualified accounts versus regular taxable accounts and using pre-tax investments versus post-tax investments. And, you know, just a myriad of different types of things, you know, let alone investments, you know, how investments are managed, you can be wasting and throwing a ton of money out the window and not even realizing it.
So I think it’s critical not only to start early, but you know, the reality of it is, is that trainers, when it comes to losing weight, “eat less, move more” is a pretty simple rule, you know, and there are only two rules where you’ve got thousands of rules when it comes to taxes, investing returns, asset class, diversification, correlations, how to put forth those together. And now, you know, not having somebody to coach and guide you through all of that. I mean, shoot, we’re having a hard enough time with two rules. Let’s move more.
No, well, no, that’s just investing. I’m talking, I’m adding taxes in this. You know, I’m not talking about successful investing, 50% more rules on stock, diversify and rebalance. Well, I would, I would say, you know, buy low, sell high, diversify the market, and don’t stock pick, make sure that you use correlations. Why are they coming to me? I have rules.
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The Cost of Procrastination
Ira Work: Okay. So if somebody starts at 25 and they have a goal of a million dollars to age at the age of 65, and they got a 10% return, which money they got to put away, they probably had $188 a month. If they wait 10 years to have to put away $506 a month. So almost three times the amount, if they wait until 45 to have to put away almost $1,500 a month. Now the problem is if people didn’t start with that $188, you know, chances are, they might not be making the money. Don’t be putting away $1500 and they’re not going to be disciplined enough to put away that much money. Right. So, and that’s really what we call it the cost of procrastination.
Paul Winkler: Yeah. Well I, and, and I look at, you know, what can we put away? And the reality of it is, is that, you know, if you get up to that 10% to 15% of income putting that away, you’re probably going to be just fine. You know, it’s the reality of now, if you wait, it’s going to have to be 20%, 25%, 30%, 40% of your living. And that’s the point that at that point in time in your life, when you think about, well, you know, I’ll have, I’ll have more income later. I can put more away later on in life as time goes on. There’s this really interesting thing that happens with people that they start to realize that they don’t have forever on the planet.
And you know, just when you are having to save a bigger proportion of your income to catch up and make up for lost time now, because you think about it, how much money did I put away? If I put away $10,000 a year for 40 years, how much should I put away? $400,000? What? I ended up with 5 million, how much did I put away? 300,000? What? I ended up with $1.8, Whoa, that’s a big difference. Wasn’t a whole lot less than I put away because there’s a whole lot less than I ended up with. So, time is what gives you so much of the return is something to really, really lock in your brain. Time is your buddy when it comes down to it. But here’s the other thing to think about if you’re having to do what I was saying, which is you’re having to put up way more money out of your paycheck, just to get to that million dollar goal that you had in his example.
Now I can use 10% rate of return. I don’t know what to return to you. Okay. So if you’re doing that, you’re getting that point in your life when you’re in your forties and your fifties, and you’re going, you know, the clock’s running, I’m not going to be here forever. I may not want to be, I mean, you know, this money that I’m having to save for retirement, it becomes even more of a dilemma that you’re thinking about hunting. Wouldn’t it be great if we just maybe took a few more trips right now in our forties and our fifties, the kids are finally out of the house. Oh no, wait, we’ve got to save for retirement. Cause we didn’t do that early on. That to me is the heartbreaking scenario that we find ourselves with when we don’t start early.
Ira Work: Early. Well, and the thing is that, you know, especially for the younger people that might be out there listening today, you know, if you can start with the 10%, which is basically the financial planning rule, you know, the guidance rule, 10% of what you earn. Start with 5% and then each year increase it by 1%
Paul Winkler: You get to 10%. And that’s a great, that’s a great tool right now.
Ira Work: Part of the problem is now we’re, you know, we’re 25 years old. And I remember thinking, Oh, you know, when I was starting this business at 23 and you know, thinking I’ll retire at 65 and like, Oh my God, dad is like so far away. I mean, I got plenty of time to just have a good time and then I can start saving in 5 years or 10 years, whatever it is. And that’s a lot of thinking that I see from a lot of young people, they think they got all this time. And the reality is, as people make more money, they tend to develop a lifestyle. Sure. So like, Oh, you know what, I’m going to buy a new car. Yeah. And now they have a car payment and then three years, four years later, they want another new car.
Yeah. You know, so they trade it in or they want to get a bigger house or maybe they want a 4runner or whatever it might be. So the more money they make, the more toys they buy. And that becomes another big part of the problem. So if you start out of high school and you’re getting a job to stop putting away 5%, you know, or sit down with a planner who can help you look at what your 401(k) is and figure out how much you need to put away to get all of the money they’re going to match. It might be 6% and then increase each year.
Learn from the Mistakes of Others
Paul Winkler: And it is critical to make sure, you know, we’re, we’re, we’re throwing numbers around right here. And let’s say that, you know, I look at this and I say, okay, let’s say it’s a 30-year period. You know, just let me use that, go back to that number again. And let’s say that I don’t get the return that I was talking about. I said, you know, 10% return, $10,000 a year grows to about $1.8 million. If that’s my rate of return, but let’s say that I mess up and I just make a few minor mistakes, not even as bad as what the data that we see that investor returns have actually been. But now I get an 8% return. Well, that’s not going to make much of a difference. Is it? It’s actually 50% less money. Fifty percent less money when the return is just 2% lower per year, over that same amount of deposit, same everything.
So making sure that you don’t make mistakes, investing mistakes. Now that is reusing a rate of return. That’s significantly higher than what some studies have shown that investors have gotten over the past 30 years. You know, so that’s why I used the 30-year period. The studies on investor returns in. And why is it? Why? Because what’s typically what people do is that they feel a little bit more bullet for a market upturn and they put more money in after a market downturn, a little bit skittish. We saw that back in March, 30% of people over the age of 55, pulled their money completely out of the stock market for the market run for the next several months. That’s where really, really, it gets critical. So starting early and none of the mistakes as I was talking about that, you know, look at the millionaires. And these are people that are fairly intelligent people and look at their regrets and learn from them.
Good, good. A good thing to look at because you know, it’s a lot more fun to learn from other people’s mistakes.
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