Transcript
Paul Winkler: And welcome. This is The Investor Coaching Show, Paul Winkler talking about the world of money and investing. Here with me today is Arlene Brown. I’m getting kind of different types of nervousness from investors lately.
Nervous Investors Tend to Make Hasty Decisions
And it’s really interesting how opposed they actually are and what they’re nervous about. You know, some people are nervous about the markets for one reason. Other people are nervous for other reasons. Some people are nervous because they’re afraid one party is going to get in, while the other people are afraid that the opposing party is going to get in. And I thought we’d talk about that some start off, you know, so one of the things that I think is that I like to, you know, just talk about, you know, when, when I talk about investing and what we do, we’re hardcore, we tend to be pretty hardcore.
And what I mean by that is I am really big on not allowing investors to self destruct, because that is what the rest of the industry does. Just, you know, “Hey, what do you want to do?” I was reading a lot of different investment proposals that different firms have and what they do. I was reading one this week, and they were talking about investing, ESG investing was one of the things that they had talked about.
And I think we’ll probably cover that a little bit. I may hit it. I don’t know, but ESG, environmental, socially responsible governance type of investing, it’s really popular right now. And it’s interesting that if you look at the (DOL) proposal department of labor proposal regarding this stuff, there was an article actually talking about how asset managers are ignoring this deal: A proposal to limit ESG investments and retirement plans. Now, the reason they’re limiting these things is because they’re gimmicky.
They’re not really great for investors and they can be really hazardous to your wealth. And yet what’s happening is the investment world is ignoring it. Why? Because it sells, you know, so that is typically how the investment world works is what will people buy? Oh, guess what? We’ll give you that. So, you know, for me, that’s never been how I like to operate.
So, you know, my big goal is to make sure that I don’t allow investors to self-destruct. And, and you know, if let’s say that somebody comes to me and says, “Hey, I want to pull all my money out of the market.” I would tell them you’ve got to fire me because I’m not going to allow you to self-destruct in that way. And that’s how strongly I believe. And I’ve had to, I had to use that once. I remember somebody had come in and they said, you know, “I want to pull everything out of the market because I’m really, really scared.” And, and I said, “you’re going to have to fire me.” And you know, he was like, “are you kidding me? No, I don’t want to, I want to keep you as my advisor. I just want to go to cash.”
And I said, “no.” I said, “I’m not going to allow you to do that. Well now, you know, I can’t stop you from doing it, but I don’t, I’m not gonna allow you to do it and keep me as the advisor. Let me, let me rephrase that.” And what happened is because you really believe this stuff, don’t you? And I said, yeah, I really believe this stuff. And you know, what ended up happening is that, you know, he ended up staying on a and, and there, there was, you know, of course, 2003, we had something like a 50% to 60% run-up in an aggressive portfolio. And so it was one of those things where wow, glad I stayed disciplined.
Arlene Brown: I had a case last March when this fiasco happened, when the market really dropped 40%, one of my clients said, “I need, you need to get me out of this.” I said, “no, I can’t.”
Paul Winkler: Okay. Yeah, I can. But I won’t. Yeah.
Arlene: You have to fire me. And he stayed on and then we had a conversation just two weeks ago and he said, “wow, my goodness, if I did that, I would have lost a lot.”
Well, and you have to consider too, the fact that we take that position, right? We sometimes do lose clients and we lose money. The easiest thing in the world is to say to a client, sure. What do you want to do? We’ll do it, right? Because they’re probably going to be making a commission. They’re going to be keeping the money and we’re telling people, we are willing to lose your business, because it’s that important.
And I actually had a conversation with a client at the outset of the relationship. I said, no, this is one of those things that, because he is a business owner, he said, I know you, you want control. Okay. But this is one of those moments that you have to tell yourself, let it go, let it go. Because no, if you are left to your own devices, you are gonna go in and make changes and just do it. And you’ll up all your money in cash.
Don’t Make Decisions Based on Possible Election Outcomes
Paul Winkler: Yeah. So, you know, and, and what happens, people are concerned about the election and worried about where it’s going to go. But what they don’t realize is let’s say we look at different, different candidates. Now, it’s so stinking complicated because you not only have to get the candidate in, we would have to say that let’s just, you know, choose a side for a second. And let’s say that I’m worried that Bidenis is going to get in. Other people that are worried that Trump is going to get, but I’m going to use that one.
I try to stay apolitical as much as I possibly can. And you’ll see why, but, you know, let’s say that I’m concerned that Biden is going to get in. And what happens is he does get in, well, let’s say that you have a divided Congress. You know, let’s say that you have, and all of a sudden, now you can’t get your proposals through. Or even if you don’t have a divided Congress and you have people that are even on your side that are going, Oh, I don’t think doubling the capital gains taxes is a really good idea. I don’t think increasing, you know, the estate taxes, you know, and decreasing the exemption amount.
Hence increasing estate tax is a really good idea. People in my state don’t want that. And I’m going to get fired if you do that. And I’m up for election in two years, you know? So you can have a situation where there are people that don’t even go on board on your own side. Number one, number two, another thing we see quite often and you know, Trump, wasn’t a Trump basically said, “Hey, I’m going to do this. And here’s what I’m going to do. And he did it in a lot of areas, but the reality of it is that’s not normal.”
Normally what you see is people saying, I’m going to do this. I’m going to do this. I’m going to do this. And here’s how I’m going to give all the money to, and then when they get elected, they don’t do that. Right. They don’t do anything that they said they were going to do. So that’s another thing you got to think about now that the Wall Street Journal was saying this week, they were talking about the runup in the market this week. And the reason that they gave for it was fascinating. You know, what the reason was: that there was a lead widening. Okay. And because the lead was widening, they were less worried about an election that was going to be up in the air.
Well, what happens when you have less, when, when you have less uncertainty, is that stock prices go up because of that less uncertainty. Now of course, if that’s the case, let’s say that. And they, you know, there are people that a lot of people in the Wall Street Journal actually had some articles and other people on both sides. So I hesitate to say this, but there are a lot of people that say that there’ll be a big market runup if Biden won and you go, well, wait a minute. That’s not what I think. Well, you know, the reality of it is there are a lot of things that we don’t necessarily see.
Number one, if you think about large US stocks, one of the things that we notice about large US stocks has been the sole area that’s really done well under Trump. And it’s mostly tech stocks. Yeah. Very much, very much technology COVID has been its friend. And in reality, one of the things the Democrats are talking about doing is antitrust legislation. And if that happens, then you break up some of these bigger companies, which makes way for some of the smaller companies, number two, the other thing that you make way for are some of these international firms that right now, you know, they’re dealing with a new trade deals that they’re trying to navigate.
Now, if Trump gets back in, they’ve had time to navigate some of this stuff and they’ll probably do okay there too. So I don’t want to say that if Trump gets in, it’s going to be bad. If I can get in, it’s going to be great, you know, I’m not saying that, but what I am saying is that you could have a situation where Biden gets in and some of the trade deals start to get a little bit looser. And therefore what happens is, you know, you can have runs up and not only US markets, but in our international markets, especially in that particular case, because it increases demand for their products, but it could also have an effect on us markets too, because let’s say that the cost of the goods that you put in your products goes down because you’re outsourcing it more and people said, well, you could lose jobs and you could, yeah, that’s a possibility, but that doesn’t mean that stock markets won’t go up.
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Cash Isn’t Necessarily the Safe Route
So that’s one of the things that you got to think about right there. Other things, you know, that you have to think about is let’s see. I was, I was trying to think I was making a couple of notes to myself. Oh, you know? Yeah. There was another thing I was going to make a point about. And that was one of my clients is a teacher at a college that teaches financial planning too. And they have lots of, you know, the degree programs that are taught for financial planners, a certified financial planner, professional designations, and charter financial consultant, designations, and wealth management, certified professional.
And he’s a client of mine. And we got into talking and his worry was about what happens if the debt gets out of control and, you know, think about it when I’m going to cash. If I’m worried and I’m going to go to cash, what am I doing? I’m putting money in something that’s backed by good faith and you know, the credit of the United States government treasury. And I’m putting all my money in US dollar bills. Well, who’s to say that we’re not going to have, or couldn’t have a devaluation in our currency. Now we could have our devaluation in our currency versus other currencies.
Anne Sawasky: Well, and we’ve actually had some countries in the world where the currency went away. I have currency from when I lived in Europe, that the country is gone.
Paul Winkler: Yes, they do. Yeah, they definitely do. So, you know, we could have a situation where the devaluation of the currency versus other currencies, but we also have the devaluation of the currency in general, that happens. And over the past 20 years, and it’s funny, I’ve said this to a few people this week and they were surprised, which was, do you know that the CPI, the consumer price index, that the cost of living is up 50% over just 20 years. And this is a low inflationary period. And they’re like, are you kidding me? They were shocked.
And I said, yeah, No, that’s, that’s it. I actually did a workshop. And that was one of the things that I was shocked at when I looked at it. But you know, you look at the cost of living over the past 30 years and, and you’re, you know, 30, 35, 40 years, something like that. And you’re talking in some areas, it’s 10 times. So that’s huge. Yeah. So you’ve got the devaluation of the dollar, but here’s what happens. And I just want to kind of a thought experiment here and just walk you through this. Let’s say that I go to cash because of the election.
Now the market is constantly taking in information. This is a bad idea for another reason, because it’s constantly taking in information and stock prices are adjusting based on who they think is going to win, who they think is going to lose and what effect that these people will have on markets because of the policies that they propose and what the likelihood of their policies getting through and who the Senate is going to be filled with and who the house is going to. Okay. So it’s a lot of things, but here’s the thing you get to election day.
And let’s say, now it’s all over. And now markets open up next day and you’re sitting there going, Oh, okay. Now, okay. The market and you look at days. I remember when Trump got in, we were all talking and the markets were going crazy election night.
And I said, Oh yeah, I’ll not jump in with them. And I said, and I explained what was going on. And here’s what happened. The Dow futures went crazy down. Then they went crazy up. And the point that I made was that in effect, when the market looked like it was going to be good and everything looked like it was going well, the market, you didn’t wait until the next day the market went up right.
Then at like midnight on election day, the futures, and the next day the market opened up. And then a couple of days later, it opened up even further because Trump came out and made some comments, and people were worried. Is this guy going to be a, you know, a crazy man, a nutcase. And when he came out and he seemed somewhat lucid, they were like, Oh, maybe we don’t have to worry quite as much. And then the market went up even further a couple of days later. But here’s the thing.
If you wait till after that, and the market’s already gone up 10%, 15%, and then you’re sitting there going, Oh, okay. It seems to be okay to get back in. It’stoo late. It already went up 10% to 15% and then you jump in and then it goes back down. Then you’re kicking yourself. And this is why investors will look at the returns, man. The returns that investors have gotten are really And I looked at the returns of like the average investor in equity or stock mutual funds.
And the return over 30 years after inflation, it’s like 2%. It’s like 2% a and if you look at the difference in accumulation, after inflation, after inflation in stock mutual funds, according to the Dalbar research versus what the market did over that same 30-year period, it is a five-fold difference, five-fold difference. So I want you to think, you know, if you make the same mistakes that investors make, and this isn’t just, you know, just cause you stayed in cash, this is stock mutual funds.
Prudent Investing Decisions
Folks. You’re in stocks, but you just react and you respond because you’re nervous or you do something because you’re worried about what’s going to happen. You’re worried about an election. You’re worried about COVID, you’re worried about, fill in the blank, whatever it is. If you look at investor returns versus market returns, it is a one-fifth deal. Now imagine that you have just gotten a notice that your pay is going to go down to 20% of what it was last year.
How is your life different as a result of that? Because that’s how serious this is. You are literally looking at a situation where it could be, you’re doing all right or it’s beans and rice. And the reality of it is it is times like these that make or break investors. And plenty of it is diversification. Diversification is your buddy buzz.
The reality of it is as an analyst. I love Helen Keller’s little statement. She talks about how safety and security are pretty much an illusion unimpaired of phrasing. It is not something that we actually get to experience as humans. There is no greater safety in avoiding risk than there is in embracing it. And I’m paraphrasing everything. I’m totally blowing her quote, but this is really what she said. And I thought it was brilliant because she is so right.
We want safety so bad, but by trying to pursue safety, we end up as investors getting the very risk we tried to avoid. This is really important as an investor in this election, in times like these, that you don’t mess up because it’s easy to mess up.
Arlene: Yeah. So this is November, It should be a portfolio that it doesn’t matter whether it’s Trump or Biden.
Paul Winkler: Exactly. Very good. I couldn’t have said it better myself. So, you know, the reality of it is as an investor, if you’re properly diversified, don’t you just sit back and eat popcorn. You know, the reality. Now I’m not saying that, you know, it could negatively affect the economy, but get it out of your brain, that the stock market and the economy are intertwined that they are together and that they move together. You could have a bad economy and a great stock market.
Arlene: The lesson in November is to go out and vote, but avoid letting political preferences override prudent investing decisions.
Paul Winkler: Nice ending.
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