Transcript
Paul Winkler: Hey there. Welcome to The Investor Coaching Show. Paul Winkler talking about the world of money and investing and starting 2021 off with a bang. Arlene and Anne, you know, I was going to talk about, well, Arlene, you brought up lessons learned. So what’d you learn this year? Oh, how about investing? Panic is an enemy. We didn’t learn that. You knew that. Yeah. Yeah, we did.
Lessons Learned
Well, the reason I that’s that I w that I say this is because I hear that. I see like financial writers all the time, what we learned from blah, blah, blah, blah. And I’m going, don’t learn on my dime. You know, if I go to somebody for advice on fixing something or building a house. Wait a minute. What’d you mean you learned something from building my house. You were supposed to be an experienced builder. You know, how much money did I pay you? How many hours, how many hours did I pay you? I, you see that though. Oh, you see that, like, for example, attorneys, and you probably see this where some attorney takes on a case and they have no clue about what they’re doing in that area.
Oh, I’ll take your case. Oh, do you have, well, they should have a clue. I don’t think so. Yeah, they should. Yeah.
I’ve had people take estate planning cases and they’ve never done any work with estate planning really. And they’re just basically doing boiler plate wills. Oh, you know, I’ll take this, I’ll hire my attorney to go work with this, you know, and, and set up a will for me the last time I’m being funny.
Anne Sawasky: Well, I tell you as an attorney, I am a former attorney. I tell people all the time you get an attorney who’s experienced in that area. Your brother-in-law, the real estate attorney shouldn’t be doing your estate plan. Yeah.
Paul Winkler: Well, well, but I get this all the time. What did you learn? Well, I learned this year and you’ve had a lot of financial people that have never been through a major correction or a downturn in the stock market. You have a lot of people out there. They never lived through or were in the business. And you know, we’ve been through, you know, you go back to the 1980s, you go back to 1990, go back to 2000, 2002. You go into 2008 and we went through a lot of fire. And, you know, the reality of it is if you’re just learning right now on the market, it’s kind of a bad place to be learning on somebody else’s dime is the way I look at it.
But you know, this year it was just one of those crazy, crazy years. And we were looking back at predictions. So I was looking for articles from the year before last, the end of the year before last. And what I found was, well, one article I found was, I love this one. If a recession hits next year, it would probably be mild. But the recovery, the recovery would also be tame. And I saw that article in USA today, and I cracked up, I said, what a funny prediction.
Anne Sawasky: Well, and it also says the odds of a slipping into recession, we’re getting less and less as of this point.
Don’t Trust Predictions
Paul Winkler: Which is hilarious because if a recession hits next year, this is 2020, they’re predicting what was going to happen in 2020. It would probably be mild. Yeah. I think it was more than mild. Yeah. Hey, we shut down just about every business in America. Number, number one, but a recovery would also be tame. I think it was anything but tame the recovery. It was V-shaped. So you just laugh at these predictions about the future. And another one article that I found was an Epic stock market crash looming analysts warn. And you know, if you look at that article, you’ll say, well, what was going to cause the epic market crash?
It wasn’t a virus. Let me just give you a hint. It had nothing to do with any of that. So another bad prediction. So here it is, you’re going to see all kinds of predictions. What’s going to happen this year. Just stick your fingers in your ears and go la la la. They don’t have a clue. And you know, you probably saw a lot of things, right, right here.
Anne Sawasky: I mean, here’s one too: prospects for global upturn look really good as numerous headwinds fade and tailwinds pickup.
Yeah. I mean, then you had, you know, minus 14% in European markets. And so, you know, so they’re very often wrong basically. And you know what? I don’t, I didn’t find any articles at all.
Paul Winkler: I’m saying that a virus is going to make the stock market go down and go back up right now. Okay. That’s what I was thinking. I didn’t think you found anything.
Anne Sawasky: No. And I didn’t find any that told you to get an NIO, which went up 1112%. Nobody told you to get that. Nobody, nobody did.
Paul Winkler: Oh, that’s just wrong. So I’ll like this article, supposedly risk-free assets are looking awfully risky was what this article said. I thought that was good. It said that no one knows what will trigger the next recession, but we know which assets are going to go down and which are going to go up. No, that’s not what the article says. Often a downturn starts with the financial sector. Then when the value of the asset class suddenly falls. Wise people agree after the fact the price has got too high and rot financial instability, blah, blah, blah, blah, blah, blah, blah. But here’s what I like about that headline. Supposedly risk-free assets are looking awfully risky.
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Bonds and Risk-Free Assets
Now, why would they say that risk-free assets are looking risky? And the reason is this, it has to do with what’s called interest rate risk. So let’s say that you have an investment and that investment is a bond and you pay a thousand dollars to buy that bond. And that bond will mature as some year in the future, 10 years, 20 years, even up to 30 years into the future, that bond will mature. And let’s say that the interest rate on that bond is like 1%, 2%, something like that, you know, two and a half percent, maybe for 30-year bonds.
I think that was what it was. Something like that at the beginning of the year is that as I recall, I mean, that was like an incredibly low interest rate for the government to be borrowing your money for 30 years. It’s insane. They can borrow your money, use your money and pay you two and a half percent per year for 30 years. Or you’re just like, okay, what is the likelihood that interest rates, you know, I mean, when have you seen interest rates that low in your lifetime? Okay. So here’s what an interest rate risk is. If I lend money to the government for 30 years or 20 years, are you in 10 years at an incredibly low interest rate and all of a sudden interest rates go up, then that bond will crash in value.
Why? Because I’ve locked in a 2% interest rate for a really long period of time. And nobody wants to buy that bond off of me because they’re not going to get their thousand dollars back for another nine years or even 29 years. So they’re sitting there going, Oh, put up with 2% for the next 29 years when there are new bonds out there paying 3% or 4%. No, I don’t think I want that. Well, investors are rational. So what the article is saying is in essence that these risk-free assets look risky because there’s not much lower than interest rates that can go then 2% for 30 years.
I mean, what’s the likelihood of that, but they did, but they did. So you had intermediate bonds during the market downturn. And these are like, five-year bonds. I won’t go much past five years in an investment portfolio. You know? So in our bond mix in our, in our portfolios, we don’t go out 10 or 20 or 30 years. Cause that interest rate risk is real, but here’s the thing. The bonds that would have been most risky from that standpoint, from this article standpoint were the five-year bonds in a portfolio. And what did they do? They shot up 10%.
So when the stock market took its a little nice little dive in February and March of 2020, those bonds shot up 10%, which allows us to do what, sell some of them and buy the stocks low. So from an investing standpoint, they were dead wrong. And doing what they told you to do in this article basically stole from you a huge opportunity from a rebalancing standpoint. Yeah. So, you know, to me that that’s a, that’s a big deal.
So if we look at that and we say, well, okay, so these predictions, why do they do it because you’ll read it, you’ll read stuff like that because it’s like, Oh that’s intriguing. I want to hear what they have to say, marketing. Yeah. And you know, the reality of it is there, the people out there, investment managers they’ll throw their stuff out there. Those are what these investment managers got. The last prediction, right. You know, they got the last three predictions, right. That they’ve done or whatever. Well then what are the odds? There’s going to be somebody out there that gets maybe three, even four predictions when you’ve got thousands of thousands of people. It’s the law of large numbers. If you have a thousand people flipping coins, they’re going to be some weirdo that flips five heads in a row.
I mean, what are the odds of it? I mean, you know, so the odds are basically 50/50 on the first flip, 12 and a half percent for the next flip. It’s like 1.4% that you’ll flip three, three times in a row, it’s getting shaky guys. I’m doing the math in my head. The reality of it is the odds of you getting something are so low. But the reality of it is you have so many people trying the odds of not having somebody that does get it. That does predict right. Three or four, even five times in a row when they’re predicting the market’s going to be up, it’s going to be down the odds of somebody not getting it right are pretty slim. There’s going to be somebody we just don’t know ahead of time who that person is going to be. And if you have the Fed chairman, you know, some of the best, some of the brightest, most educated people in the world in financial markets, can’t figure it out. What’s the likelihood, your little investment person at what XYZ investment firm is going to get it. Right. Or your fund manager. What are the odds pretty low. So Arlene, what do you think? What do you think you’re like reading an article about predictions?
Arlene Brown: Well, I, I just want to point out that if you had, because we were talking about the, the right type of bonds that we have in our portfolio, but if you had the wrong type of bonds in, during the crash in the, well, the March 26, okay. If you had the wrong type of bond and you had the 50/50 portfolio, you’re 50%. And most of that, most of the portfolio is the S&P 500, the 50% that’s negative 18. And then you have the high yield bonds. Negative 19. There’s no place to hide.
Paul Winkler: Oh yeah. It was, it was amazing. They moved right together. That’s a really good point, Arlene. Yeah. They moved right together and even municipal bonds moved down and alternatives and alternatives.
Arlene Brown: It’s important to get the right kind of bonds.
Paul Winkler: Yeah. Alternative investments. Yeah. That’s exciting stuff. It’s a nice name. Well, yeah. Yeah. Commodities alternative. Yeah. I want an alternative to the stock market. Well, you know, the reality of it is that you think, well, there’s gotta be all kinds of alternatives out there. There really aren’t other types. You own businesses, you own bonds, but alternative investments would be things that like commodities that have no expected return after inflation. And they sound really, really good. And you know, they sound really exciting and all of that stuff, but you know, not, not so much.
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