Paul Winkler: And welcome to “The Investor Coaching Show.” I am Paul Winkler, talking about the world of money and investing.
It has been quite an interesting week, has it not been, in the world of investing and retirement planning?
I was saying something to somebody this week, and he said, “Yeah, that’s all they’re talking about is Russia, Russia, Russia.” It’s like going back to “The Brady Bunch” and hearing “Marcia, Marcia, Marcia.”
No, it’s “Russia, Russia.” That’s all they’re talking about this week, and that’s what’s on everybody’s mind.
So, of course, better talk a little bit about that, what’s happening.
Got a couple things that are fairly interesting off the beaten path on that particular topic. So I will get into that to some extent.
Of course, how is this going to affect markets? How is this going to affect inflation?
You’ve got oil prices, and how is that—and it’s a lot of conjecture, just a tremendous amount of it.
Paying Attention During Stock Market Turbulence
And if there were ever a time to be diversified and to follow academic principles of investing—well, it’s always the right time to do that as far as I’m concerned. But particularly now, there’s so much going on that I think that it’s a really good time to pay attention to this stuff.
Especially seeing as some of the things that people have been doing over the past few years just haven’t worked terribly well.
I mean, can we just say that a lot of the stuff that I’ve been talking about for a while and going, at some point, this gravy train starts to slow down a little bit and things start to change.
And that’s what we’ve been seeing. We’ve been seeing exactly that.
Matter of fact, there was an article. My wife sent this off to me.
Had a few people sending me some stuff. J.R. sent me one thing, and he’s usually sending me something that he’s been looking at.
My wife sent me this, this morning. So I figure I better cover it.
No, I’m kidding. I would cover it anyway because it’s good.
It’s good in a bad way.
Media Advice on What to Do During Downturns
It was from The Tennessean. It was “Inaction Is Not the Only Alternative Amid Stock Market’s Turbulence,” was the headline on the article.
“Stock market investors [this] month endured their first sizable decline since the early days of the pandemic, and most heard a familiar refrain from advisors, investment firms, financial media, and others. Hang tight. Don’t overreact.”
And it’s “generally good advice,” they say.
And the reality of it is a lot of times you hear that type of guidance from the investment industry; they’re the last ones following it. They’re not doing it.
If you really look inside of investment portfolios, I think you’d be shocked at the amount of buying and selling, turnover, trading, tactical asset allocation. Style drift is sometimes what it’s called.
In my book, I actually have a statistic on style drift. I don’t remember exactly.
It’s been a while since I looked this up, but I want to say it was, like, 75% of mutual funds had drifted in style.
And that’s when you go from maybe mid-cap blend to mid-cap value, or you slide from large-value stocks to large-blend stocks or mid-caps, or you move from one investment style to another.
And it was just an incredibly high percentage of funds that had actually engaged in that.
And what do we know about market timing? It doesn’t work.
And it’s a form of market timing: tactic asset allocation.
Because basically what you’re doing is you’re assuming that whatever you’re moving from is overvalued and “out of style,” let’s say. You’ll hear those types of terms.
And you’re moving to something that is undervalued and that you can increase returns. Well, no surprise here.
They said that generally it’s good advice:
“As it can keep investors from making drastic shifts that they might regret later. Timing the market isn’t easy.”
Now, timing the market doesn’t work. Why don’t you just put it that way?
That’s what they said in the article: “It’s not easy.” We see that people don’t have that ability.
Matter of fact, there was a study of 91 pension plans. These people are pretty bright.
They’re pretty well educated. They sort of have some information about investing.
They, maybe, are hooked up with people that they pay hundreds of thousands of dollars a year to guide them on their investment choices. And yet 100% of them—not one of them increased returns as a result of their market timing or stock picking that they engaged in.
And they all engaged in it. That was the crazy thing about the study.
So it’s just not really a good idea, but still: “It’s not easy.”
What Strategies Make Sense?
“But some actions might be warranted during times of investment turbulence.”
What would be maybe the worst time to try to time the market? When markets are really turbulent?
Because if you have lots of turbulence, you have more to lose by screwing up because that means that there is more movement going on. That doesn’t even make sense.
“Here are some of them. Buy and hold strategy is a historically wise strategy, but it rests on the assumption that you can stomach and wait out the downdrafts.”
Now, this is a whole thing about being able to have risk tolerance, being tolerant of risk. And this is something—I had a conversation with one of the professors at one of the universities that teaches on investing years ago on the radio show.
And I had him on here, and we got to talking about this. And he said, “Recent research [is] showing it doesn’t work.”
And I go, “Yeah, it’s interesting to hear the research is showing that risk tolerance isn’t something that is terribly helpful.”
In other words, going in and saying, “How would you react during this? How would you react to a 10% market decline?”
“What would you do? Would you buy?”
“Would you sell? How would you react?”
And I said, “I’ve always believed that’s a flawed idea because I am completely intolerant of risk after market downturns. I am bulletproof after market upturns.”
The Pitfalls of Risk Tolerance
And the problem with risk tolerance: it’s like putting somebody in a flight simulator—is an example I like to use—and putting them through a plane crash and saying, “Hey, let’s see how this person would respond during a plane crash.”
And they put them in a flight simulator, and you crash the plane. You’re like, “Oh, I see how you’d respond.”
No, you don’t; you won’t know until you’re going through the real thing. It doesn’t even make sense.
And so what happens is people’s risk tolerance, it’s not a terribly helpful thing. What I believe in is this: I believe that to educate an investor to the point where they can take the type of risk that they ought to be taking, so to speak.
So for example, I might have somebody that walks in my office and says, “Hey, Paul, I’m getting ready to retire. I have no risk tolerance whatsoever.”
“I can’t stand to see markets decline at all. I can’t stand to see my portfolio go down in value at all at any point in time.”
I’ll go, “Okay, here’s a person that, for every million dollars they’ve got, they can maybe take about a $5,000 income. That’s about it.”
Because if you look at Treasury bills, you see that the rate of return after inflation is about 0.5%, 0.4%, 0.5%. That’s it: 0.4%, 0.5% going back through history.
So your ability to be able to weather retirement and be able to keep up with inflation is pretty much nonexistent.
We’ve seen by the most recent numbers that people are losing 6–7% based on the most recent inflation numbers.
And that’s because they’re getting paid 0.5%, and the inflation numbers were 6–7%. So basically they’re losing that much money.
And if you look at the Rule of 72, 72 divided by your interest rate tells you how many years it takes for your money to double. But it also can tell you, if you’re talking about inflation, how long it takes for your money to cut in half in purchasing power.
So if I got 72 divided by six, then I got 12, right? So it takes 12 years for my money to cut in half at that rate.
Well, most people might be in retirement for 20–30 years. So it doesn’t take a mathematician to figure out that we got a problem here.
Education Helps Investors Make Wise Decisions
Now, in essence, what I look at is, okay, here’s a person that is scared because they don’t understand the market. They don’t understand what they’re doing, why they’re doing it, how markets work, the different types of risk, and how you balance them.
And because they don’t understand that, they don’t want to take any risk. Completely understandable.
Why would you want to jump in, and you have no clue what to expect?
So how do you get them around that? You educate them.
This is how markets work. Market declines, what the range has been, here’s how long when the market goes down, how long it historically takes for it to come back, and go back all through all market history.
And then, I’m really big on this: Why? Why has it always come back?
What are the mechanisms? And you hear me talk about them on the show.
What are the mechanisms that make it come back? And why is that the case?
And once a person understands that, you can get them to take the risk that is appropriate for their particular situation. So that’s why that’s so important.
Forecasting and Rebalancing: Which Methods Work?
Now it says, “If you’re having trouble handling the stress, it might be wise to alter your investment mix.”
Okay, great. So what are they telling you to do?
Let’s market time. It works so well historically; let’s just do that.
Because that’s the definition of market timing: any attempt to alter or change a portfolio based on a prediction or forecast about the future.
Because why would I alter it if I wasn’t making a forecast that the recent downside volatility was going to continue?
Now, if I knew that it was going to go up, why would I alter it? I mean, that would be crazy to go and do that.
So that’s basically what they’re telling you to do here.
“Rebalancing is the strategy of setting [a] target”—
And now this is a decent strategy, rebalancing. But it’s often used in lieu of tactical asset allocation.
So they’re saying target rebalancing portfolio. In other words, you have 10% of your money in one asset category, and 10% in another.
In one area, the market’s gone down, so now it’s only taking up 8% of your portfolio. And the other thing’s gone up so it’s taking up 12%.
Well, sell the thing that’s at 12%, a little bit of it, and bring the other one up to 8%. So bring it down to 10%, and bring the other one that’s at 8% up to 10%.
That’s rebalancing. And you’re adjusting back to the framework when the holdings fall or rise sharply, right?
Now it says, “Your capacity to tolerate paper losses might be greater than you realize, especially if you have near-term spending needs covered, debts under control, and steady job prospects.”
Very, very true. I would agree with that.
Factor in Social Security and Pensions
“You might even start regarding Social Security [retirement] benefits or employer-provided pensions as part of your portfolio.”
I actually agree with that too. It is part of your fixed-income portfolio.
If you look at the academic research on drawing an income in retirement, typically you do take into account pensions and Social Security as if they were a part of your fixed-income portfolio.
So when you set up your allocation, that’s something that’s in the back of my mind.
If somebody says, “Hey, I got Social Security.” How much do you have?
How much income are you going to be taking from that? And what are your benefits?
“I get a pension.” Okay, how much is that?
Does it have a COLA? Does it have a Cost of Living Allowance?
If it doesn’t, then I may need to have a little bit more equity or stock in my portfolio to help offset the inflation risk that I’m taking in the pension, you see?
So those things are something you’ve got to think about.
Beware of Assumptions About Market Patterns
It says, “Sharp market declines often mark turning points when certain types of investments rotate out of favor and others take their place.”
There’s a problem with that. It may rotate for a week, and then all of a sudden things change.
It goes back to, you have one area of the market that does better than another that you’re holding. Let’s say large U.S. stocks are rocking and rolling, and then they have a bad week, and then maybe a bad month.
And all of a sudden, small companies do better. And you go, “You know what? Now’s ‘the time of the season,’” as the Zombies would say, “’it’s the time of the season’ for small caps.”
And then what you do is you go shift over to small-caps, and then you realize that it was short-lived. And then large whatever, whatever you had, starts going back up again.
And you’re basically making the assumption that markets move in patterns again.
You’re assuming that large had petered out, and it’s just going to continue to go down. And the small, it’s a new time, and it’s going to continue to go up.
If you actually look at market history, it’s random.
You may have something that surges for one year, and then that’s it. It doesn’t surge for another 15 years.
And you’ve gone and moved all your money to it, thinking that it’s going to be the time for the next 10 years for it.
It doesn’t work that way.
Are Value Stocks More Stable?
And it says, “Technological innovation is here to stay … too much of the recent speculative action was centered here.”
And it “might be a good opportunity to shift some of your assets to other areas. For example, value stocks could offer a more stable ride.”
Actually, if you look at the data going back a hundred years, value stocks actually have more volatility to them than growth stocks.
Now, if you look at it and go, well, there’s greater risk, greater expected return—so if you look at this, and you see from 1927 to 2021, large U.S. stocks, a dollar grew to $12,000.
So you have the growth of assets from the 1920s, and it’s about a 10% return: $12,000.
Standard deviation, which is a measure of risk, is 18. The higher that standard deviation, the more the risk, right?
Well, how about large-value? Well, it’s $46,000, which is significantly higher than $12,000, right?
But there’s a higher standard deviation: 25. So you look at it, it’s just the opposite.
Now where it would confuse somebody, and this is where it would be true—but this isn’t the way they said it.
They said shift over to value, which could be more stable, right? That’s what they said.
No, you add value to the mix. You add value.
And what we know from academic research is that when we have growth stocks and we have value stocks and we put them together in a portfolio, what happens is the portfolio volatility—because they don’t move together many times—goes down.
So it’s like they almost got it. They almost got it, but they didn’t quite get it.
Don’t Get Your Investment Advice From the Media
And that’s so often—the reason I point this out is where do you get information about investing? Increasingly people are getting information about investing from the media and from writers.
And they don’t know, because you don’t know what you don’t know, right? But as I often like to point out, you don’t know what they don’t know.
And if you think about value stocks, what are they? They’re distressed companies.
Why on earth would you ever think that distressed companies would be less risky?
And until you learn these types of concepts and start to understand a little bit about it—and to understand correlation and how they move together and they don’t move together in some points in time—it is very easy to get pulled off by maybe even well-meaning journalists that write about investing for the general public.
So in essence, there’s a lot of bad information out there, is the point I really want you to get your mind wrapped around.
This is one of the things I do. I love taking things in the media, things being written about, articles, and I like to offset them just so that you get—you get inoculated, is the way I like to put it.
You get to the point where the last place you will ever go for information about investing is turning on the TV or picking up a newspaper or reading some article out there somewhere.
Exactly what happens is the people in the media don’t think about it that way.
Hey, I got deadlines. I got to write an article. Hey, I’ve got a person at this huge mutual fund company that everybody’s heard of that wants to give me a quote. Sign me up.
And that’s exactly what they do. And what you get is a lot of really questionable information and this would be just another example of that.
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