Paul Winkler: Welcome. This is “The Investor Coaching Show.” I’m Paul Winkler talking about money investing along with Evan Barnard and Ira Work.
60/40 Blends
Wells Fargo came out with a statement that said: 60/40 blends may rebound this year.
Now historically, when we talk about stocks versus bonds, usually stocks come first. When you say the numbers that’s usually what comes out first is the stock part of the mix, which is 60% stocks, 40% fixed income with a 60/40 mix.
A 60/40 mix is traditionally used in pension plans quite often because you have a lot of money in fixed income. Now, should stocks go through a downturn, as they will, it’s distributed.
Three out of four years is an upturn historically. One out of every four years it goes down. When you have fixed income, 40% of the portfolio, you’re looking at a 4% distribution. As we talk about often with inflation, you have 10 years worth of distribution sitting in fixed income.
If you look at it, what’s the worst market downturn we’ve ever had, which was four years? The depression, which was just unbelievably bad. With most downturns, if you average the amount of time it takes from the market to completely recover, it’s 111 days.
The average downturn lasts no longer than roughly 110 days.
That means that some of them are longer, some of them are shorter. You might have a one-year period. You might have a two-year, it might be 10 days and then it comes back. So it’s the average. When you hear me say average, think some of them are longer, some are shorter.
So anyway, the 60/40 blend may rebound this year. And you go, “Well, why are they getting so excited about this?” Because it’s already rebounding. “Hey, now it’s time to get in. Look, it’s up!” You go, “What? You mean it’s already up?”
Evan Barnard: That’s even after a trying week last week.
Throwing Money Away
PW: Yeah. Well, see, it was trying for the S&P 500. I’m glad you brought that up because what we’ve been hearing is, “The market’s down. It’s been bad.”
And I’ve been going, “Oh, actually, I’ve been looking at it all week long. The international stuff has been doing great.” It hasn’t been that. But what we do is all we hear about is the Dow, the S&P and the Nasdaq.
When they report on it, that’s pretty much all you hear about are those areas of the market. And in reality, there’s a lot more to life than just those little areas of the market.
EB: There is. So this is probably a great time. It is a good time to sneak this in here. A friend sent me something after the Jags game. When you were talking about Wells Fargo saying that the 60/40 is doing well, that it’s time to get back into the 60/40.
The article he sent me was about the gambler that at halftime in the Jags game bet 1.4 million that the other team that was ahead, 28 to zero or whatever the score was, was going to win. He placed the bet when he thought it was a sure thing, even if he wasn’t going to win very much.
Ira Work: Recency bias.
EB: Then the other team came back to win, and he lost 1.4 million.
PW: Oh, no.
EB: I mean, he’s now one of the most famous football gamblers because it was such a terrible call. That’s exactly what Wells Fargo was doing, but it sounds like smart people are telling me it’s safe to get back in.
The problem is we don’t view this maneuver as somebody throwing away money.
PW: No, it is the same thing though. It’s interesting to look at what’s happened so far year-to-date, up through three weeks into the new year. And this is something we haven’t heard in quite a while. International large companies, I mean, when’s the last time you heard that EAFE is up at the top of the return pack? Been a while, hasn’t it? Europe, Australia, Far East, right?
A Reason for Bad Results
Yeah, it’s there. It’s the number two asset category. Number three is emerging markets. Next one down is international small companies. Next one after that, international small value companies. These are the asset categories that we would hold in a portfolio. Have you heard me say anything U.S. yet so far?
EB: No.
PW: In all of those top asset categories, but yet what are American investors primarily invested in? So if you go, “Hey, now I think I’m going to go to that.” Well, you missed out on a big bunch of returns if you weren’t already there.
I think it’s just a lesson. I’m not saying here’s what I think is going to happen in the future. Don’t misconstrue what I’m saying. It is “horse out of the barn” investing. The horse is out of the barn and now we’re going to shut the gate, and that’s basically what these guys do over and over again. And you wonder why investors get bad results? It’s because of that.
EB: Well, that coin has two sides. I’m thinking about the investors that abandoned a diversified portfolio last June, July, and August, because the U.S. was doing this and this.
So they maybe were diversified for two, three, five years, got out and they’ve missed that return. They held the risk for that long, but they missed the recovery or the growth because they weren’t disciplined.
Don’t miss a recovery because of lack of discipline.
PW: Yeah, and it’s a shame that it happens. We’ve been running data on taking an income from a diversified portfolio in 60% stocks, 75% stocks, and if you take 4% off of the portfolio, $40,000 grows to?
If you’re taking an income, the number would be $66,000. So it takes $66,000 today to buy what $40,000 did just 20 years ago, which is oh my goodness. Huge, huge. Right? Unless you’re buying eggs, then it’s $70,000.
EB: Well, then that’s true.
Taking an Income
PW: So if you had done that through this period of time or the past 22 years, and I was looking at actual what are called GIPS audited returns, which is Global Investment Performance Standards. The reason I use the year 2000 is that’s when I opened the company.
But I just thought, I’ve been talking about this and talking about how if you look at taking an income like that, what do you have left after doing that? If you’ve taken that much income out, you’ve taken somewhere in the neighborhood of $1.2 million of income, out of a $1 million portfolio.
Well, you think, “Did I wipe out the whole portfolio?” No. Actually, you have pretty much what you started with still there, just slightly less with a 60/40 mix, just slightly less than what you started with.
So if you’re, let’s say 70 years old, when you start to take this income, you’re 92 now and you still have what you started with, even as bad as the last 20 years have really been. If you looked at a 75% stock portfolio, you’re actually about 10%, a little bit over 10% above what you started with.
EB: So not an annuitization, but just a bond portfolio of treasury.
PW: No. And just to give you an idea, people are excited about it because they’re paying a little bit over 4%. Three-year treasuries are paying about 4%. So you look at that and go, “Wow, that’s really great.”
Well, let’s say if you had gone and done that from the year 2000 till now, and you took that same amount of income, same distribution each year, you’re pretty much running out of money this year. You are going to run out of money completely. Zero. Nothing left.
EB: Wow.
Don’t stick all your eggs in the same basket with investing.
PW: After that period of time. So hence, this is the reason when we look at investing, we don’t want to go and just stick everything in any one asset category, whether it be large companies, whether it be small companies or value companies or international or U.S. or fixed income.
Academic Research
People don’t think about it when they go and move a whole block of money to an insurance company and an annuity. They don’t think about what they’re doing by moving a portfolio over to bonds, which is making a market timing move.
I’ve been learning in one of my classes recently more about how research is done. So often what we do is we have that confirmation bias that we’ve talked about so many times. What happens with the researchers, they look around for something that will confirm what they want to prove and they look for evidence to back that up.
We see this in the financial world all the time, where people are looking for something to confirm that annuities are actually good for you as an investor.
Not all academic research is created equal.
We’ve often talked about academic research and the importance of it, but recognize this: Not all academic research is even created equal. It is often biased by whoever is funding that research and where it’s coming from.
We want to show how annuities are actually a really good thing for you in retirement. So what they’ll do is lo and behold a study will show that that’s actually good. And you go, “Oh wow, wait a minute, why’d that happen?”
IW: Well, you can cherry pick any particular time in financial history and find an area that has been low in returns and just throw an interest rate 1% or 2% above that and you look great. But they’re cherry picking.
IW: The biggest problem I saw was that not one actually compared itself to a diversified portfolio. You can pick a period of time, 2000 to 2010, where the S&P had a negative rate of return, and a 2% interest rate is going to look great.
PW: The public thinks, “Hey, the market’s down,” and there may be markets that are actually up. But people don’t recognize what’s happening.
So that’s one of the things that we are constantly trying to help people understand. The investing world is terribly undisciplined. That doesn’t mean you have to be terribly undisciplined. You don’t have to listen to their garbage and buy into it.
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