Paul Winkler: Welcome. This is “The Investor Coaching Show.” I am here with Mr. Jonathan Walker. Well, the thing about you Jonathan is that you worked with me literally one-on-one for like seven years.
Then I said, “Okay, you get out of here and do your own thing. So he has been doing his own thing up in the Gallatin office. One of the things I love is that you always have stories, so I am going to pick your brain for stories.
Struggling with Investing
You love talking about the whole idea of investing and especially the reasons that so many people struggle with it.
They struggle so often because of stinking thinking. Recently, it was said what investors hate the most is a common investment strategy.
Meaning, people hate diversification because it puts you in the bottom quartile of investment markets. Because when you own lots of different things, you have all these different things. And when you’re owning something that is diversified, it’s going to be in the middle of all of them.
If you have one asset category that’s just rocked and done really, really well, and you have something else that hasn’t done as well, you’re going to be really frustrated that you owned that thing that didn’t do as well.
Then something in your portfolio will do really, really well. If you’re diversified, there’s going to be something that did well, because that’s why you diversify, and then you’re going to feel that you missed out on something.
Investors want to chase whatever just did well because it feels good.
Jonathan Walker: Yeah. I think that’s the biggest thing. I mean, we have some natural God-given survival instincts that really benefit us in a lot of areas of our lives, but they’re actually kind of counterproductive when it comes to investing.
Overwhelmed with Information
The biggest thing I think for me, and right now, I’ve got clients that we’re all inundated with information. We have information coming at us at a clip that we’ve never seen before.
The process of trying to work through that to take it in, to figure out what’s right, what’s wrong is difficult. We live in an age where information is just coming at us so fast.
If you go back to the sixties or seventies and you get a report on either your portfolio, or even a stock report, the information was already outdated. It didn’t matter. There wasn’t anything to react to. It was just, “Okay, I’m just going to read this and see what happened a week ago.
JW: And now, it’s really impossible to differentiate what’s a real world and what’s a fake world, and that’s happening in investing.
PW: Well, and the important thing about this conversation is to remember that when people get scared it can cause market drops, but that is only a problem if you’re a market timer.
It’s difficult to differentiate what’s real and what’s fake, even in investing.
JW: Right. If you’re sticking to a solid financial plan, that’s not even going to seep into your area.
PW: Yeah. It’s going to go down and it comes back up, and you didn’t even know it happened. It wouldn’t have hadn’t mattered to you. But if you were an investor that was trying to time markets and move things around based on what you thought was going to happen next, it’s a problem.
JW: I can’t even imagine trying to be somebody that doesn’t believe in market efficiency in today’s time and place.
PW: Now, what are some of the things that people have called up and asked about?
Seeking Investing Security
JW: Right now, the biggest thing that I hear about is FDIC insurance.
PW: Okay, let’s talk about that. So often, what people do is they say, “I want safety in my life, and what can I do that is safe right now?”
When they’re scared of what’s going on in the banking industry, what do they do? They say, “Hey, let’s go put a bunch of money in banks because that’s safe.” And my thinking is, is that really safe?
When you’re dealing with a situation where we don’t know whether the banks will be covered, because I’m the guy that lived through the late 1980s. Some people’s money was locked up for long periods of time.
JW: Yeah, it’s a little bit of a different situation, obviously there. But when you look at it from a standpoint of safety, to your point, to the safety aspect, let’s have some reassurance that the money I’m putting in, this institution, this banking institution, is going to be safe and secure.
The thing that has people rattled right now is recognizing the names of things that are failing.
That is going to jar anybody. I’m not saying that that shouldn’t make you a little nervous, but I’m also saying, you take that information in and go, “Okay, hold on just a second.” Am I trying to fit these three banks that have failed in the last six months across the entire board, or do I just need to look at them as three banks that have failed?
If you’re looking at regional banks, most of these banks are very solid and secure. Now, FDIC actually has a watch list that they look at, but they don’t make that public. Because if they did, that would create a run on the bank.
PW: That would create some real scare.
Bank Failures
JW: But we’ve kind of been, I guess, spoiled, I don’t know if you want to call it that. We haven’t had any recent bank failures. If you look at the FDIC website, I’ll pull that up right now, the last bank failures that we had previous to these, we didn’t have any.
JW: We had 4 in 2020.
PW: Wow.
JW: There were 4 in 2019, 0 in 2018, and 8 in 2017. Now, here’s the thing, the issue is most people don’t realize this.
PW: No, I didn’t.
JW: But if you look at 2013 and 2012, there were 75 bank failings.
PW: I had no clue. That is fascinating. And folks, you can look at this yourself on the FDIC website.
JW: Yeah, this is on the FDIC website, FDIC.gov.
PW: That is eye-opening to me.
Take the context of what’s happening currently and put it in perspective.
JW: We’ve had three bank fails. Now, I’m not going to argue that these aren’t three large bank failures. Ask yourself: How do I take what’s happening in California and some of these other areas, and look at it where I am?
The companies that I used to work for, the banks I used to work for, I’m not concerned. The first quarter in bank revenues were some of the largest they’ve seen in years.
PW: Yeah. Banks have struggled for a long, long time, and the reason being that the interest rates were nothing.
JW:They were anemic.
PW: And they couldn’t charge anything. So you had this spread on what you had to pay to borrow money versus what you could lend it back out at. And there was nothing going on right there.
JW: Well, and that’s the issue too that we’re running into right now. You’ve got banks offering decent rates on CDs right now, and it’s really easy for somebody that is looking for safety and security to say, okay, I’ll take somewhat of my free cash or whatever, and I’ll go and put it into a CD, viewing that as safety and ease of access if they need to get to it.
PW: Well, Jonathan, I was thinking about that this morning too.
Perceived Safety
JW: Well, the other thing too was pre-2008, you could go into a bank and you could get a decent rate of return on a CD, and you might even be able to negotiate what we would call a CD bump, which is where your banker or whatever would give you maybe a little bit of an increase because you were a loyal client.
After 2008, my experience has been that it doesn’t exist anymore. The rates obviously went down to anemic levels after that.
A lot of people that were in fixed income assets, such as CDs and those kinds of things that were utilizing that as a common part of their income, vanished. And they were forced back into the market at a time when quite frankly, they wanted to be nowhere near the market.
And here we are literally 15 years later and we’re just now seeing those increases in fixed income investments. And then you’re paying tax on that as well.
So I’m not saying that you shouldn’t have a cash position. You’ve got to look at your own individual financial plan.
However, there’s the safety and security, what I tell clients all the time is that’s perceived. It’s not guaranteed. It’s the perception that you have that, okay, this bank is solid, stable, whatever. And as I’ve been telling clients recently, it’s like everything’s fine until it’s not.
PW: Oh, that is such a good point.
Everything is fine until it’s not.
JW: And you can’t get in front of that. There’s no way to get in front of that. I’ve got a good friend who was talking about his particular company and that they lost a very large contract.
He works there and had no idea it was coming, and the stock lost 40% in one day.
PW: Well, that also brings up real estate and some of the things that I’ve seen recently. You don’t when something is going to happen. When it happens, there’s nothing you can do.
JW: Well, and not only that, I think if you talk to anybody in real estate, they would’ve probably told you, at this point, if they were to predict what had happened years ago, they would’ve never seen it growing to this point.
Bank Structure
PW: Right. Right, right, right. And especially with interest rates going up, they’re just like, okay, so why and how long? So you don’t know how regulation is going to change things too. You come in and all of a sudden government regulations change on a dime, and all bets are off.
JW: Take it on a more simplistic level. Take estate planning for example. We’re about to see quite a few laws that are going to sunset in a couple of years. And so we’re going to be looking at legal documents for clients and talking about, okay, if you pass away today, this is what’s going to happen.
If you haven’t knocked the dust off of your financial plan, your estate planning plan, or any of those things, it is time to do it.
Hey, going back to the bank, most banks are structured in a way that they have a three pillar system, and it’s mortgage, it’s depository, and it’s investments.
At any time, generally one, if not two of the three are going to be positive based on what the economic environment is happening. So if one’s not doing well, the other two kind of pick up the slack. Or if two’s not doing well, the third one will pick up the slack.
That’s generally how they’re structured. That way they don’t have a situation where they’re all three not doing well.
PW: You have a few different pillars holding up the roof, right?
JW: Yeah. So that is the structure of most banks. And it can get more complicated than that, obviously.
So right now, the banks are taking on deposits because they’re offering these higher interest rates, and people are more than happy to give over their dollar that’s either been sitting in cash.
PW: Well, a lot of them are market timing is what I’m saying. Absolutely. And we know from every study ever done by mankind, that market timing doesn’t work. It actually increases risk, doesn’t decrease it.
Then when the markets jump up, people feel comfortable again, that’s when they jump back in, and then it’s too late.
Fearful Investing
JW: Well, that’s just it. And it’s easy to do one side of that equation. It’s easy to look at the market and speculate that something negative is across the horizon. We’re really good at continuing that pattern in our brain, whether it’s right or wrong.
You have a 50-50 shot on that one side of it. But then the harder part is deciding when you are going to get back in the market. What does that look like? And we never get back.
PW: I’m going to get back in when it looks okay.
JW: That’s right. We never get back.
PW: Tell a client story.
JW: So around 2008, a client got out of the market. He was a conservative investor. He came into the office wanting to sit down and talk about what they had. I thumbed through the statements looking for some mutual funds, and I can’t find anything. Turns out, he’s all in cash. He’s stayed in cash since 2008.
Here’s the kicker. I’m going to make sure I get the age correct. Because that story is becoming more common for somebody getting closer to retirement.
This gentleman is currently 43, so he had been out of the market for that period of time. So think about not only what he’s missed just currently, but what the growth on those assets would be over his lifetime. There’s no way to come back from that.
He has such a strong fear of getting back in the market and the same thing happening again. He is paralyzed by fear. So my heart goes out to him first of all, right? He is just so fearful that he’s living in a place of scarcity.
We can become so fearful that we begin living with a mindset of scarcity.
But the moral of this story is I don’t think he’s alone. I think there are other investors out there who are afraid because of, once again, all the information that we’re constantly getting inundated with.
PW: Well, and this is something that I’ve been talking about a little bit, and it’s this graph that I love. It’s just the idea of being in flow is the idea that whatever your challenges are matching up with your skills.
And we’re overloaded. We’re so overloaded with information that we’re overwhelmed. And when we get overwhelmed, we get anxious.
Overwhelming Joy
I was listening to this study talking about people with overwhelming joy. You know what the one thing is that they all had in common?
What they all had in common was a sense of gratitude. Some people say gratitude is an attitude, but according to the study it’s an action.
It said that because we are so fearful about the future, what we do is we make up stories about what’s going to happen in the future, and they’re always bad stories. It said we tend to sabotage our joy.
JW: I think that’s pretty common. It’s really weird. We’ve convinced ourselves that we don’t deserve this happiness. I think we’d be so much better if we had these conversations. So what Amy and I do with our kids, every evening at dinner, we do this, what’s your rose? What’s your thorn situation?
Well, our theory is, and we got this from someone else, is that you can’t ignore the negative things that are happening in your life or things that are frustrating.
Know how to deal with frustrations in your life.
PW: Well, it’s so good, Jonathan, because if you think about it, that’s one of the things that I always talk about. When I talked about earlier, I said something to the extent of investors failing. And why do we fail? And why do they struggle?
The reason really comes down to that when you diversify, you’re never going to have the best thing. Not everything will be the best thing.
You’ll have some in the best performing area of the market, but you’ll always be kind of mediocre, so to speak, in a way.
But the reality of it is, when you look at the long run and you look at investors that actually follow the academic rules and diversified and did all things we talked about, it’s head and tails historically. The DW bar numbers from the company out of Boston that actually looks at actual investor returns are bad.
And if you look at what would’ve happened had they just followed what I’ve been teaching here on the show since 2001, when I first started the show, no comparison when you look at the research.
But what we don’t do is we don’t get that. And the reason we don’t get that is because of our kind of way of doing things.
Thinking Rationally
And this point that I like to make, is the reason that coaching and education and our job as advisors is so important is that when people are worried about something, when there is a thorn, to use your language, they come to us with it.
And then you can unload it and you can deal with it, and you can walk through it. Because so often what happens, we have that thorn, we don’t think rationally.
When we face frustrations or misinformation, it’s important to slow down and continue to think rationally.
JW: Yeah. I’ll tell you, one of the huge and main differences of what I do now versus what I used to do at the bank is what I used to do at the bank, it was all product-centered.
Whereas here, that’s part of what we do, but it’s just part of the cog in the wheel because there’s so many other things that have to be taken into consideration.
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