Brian Perry

In addition to overseeing Pure’s investment offering and platform, Brian works closely with Pure’s financial advisors, helping provide them with the tools and resources necessary to serve their clients and continue the firm’s mission of providing the highest quality financial education and planning to as many people as possible. He has been actively involved in [...]

Will the Fed get inflation under control? Is the economy headed into a recession? Will market volatility continue? Are there financial moves to consider making now? Pure Financial Advisors’ Chief Investment Officer and Executive Vice President, Brian Perry, CFP®, CFA® addresses all of these questions, and viewer questions, in this third quarter market review and outlook for the remainder of 2022.

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Inflation and the Markets White Paper


Andi: Now please welcome him. Here is your presenter, Brian Perry, CFP®, CFA. Brian, tell us what is going on in the markets, please. That’s why we’re here today, right?

Brian: I forgot my crystal ball. I can’t tell you what’s going on. I think the key, as always, is not what’s going on, but what will go on. And there it gets a little murkier, but we’ve got a few slides to go through. A little bit of an update. It’s been an interesting environment, to say the least. Why don’t we do this? We’ll invite questions throughout. So if you have a question, throw it in, lob it in. The harder the better. But let’s dive in and take a look.

00:48 – Inflation, Recessions, and Markets

Stocks Go Up and Down: S&P Intra-Year Declines Vs. Calendar Year Returns, 1980 to Year to Date

And let’s start with a slide that I’ve used before, which is a reminder that markets go up and markets go down. And let’s look at the one before that, which looks at these bars of the S&P 500. And this is going back quite a ways to 1980. And when you look at it, the gray bar shows how the market did in a given year. And as you see, about 75% of the time, the stocks end the year higher. But what I think is instructive is the red dot, which is how far down during the course of a year the market may have fallen. And what you see is that even though the market generally ends up, there’s usually a point during the year in which the market is down. So a couple of takeaways here. One, stocks go up more than they go down over the course of a year. Two, stocks tend to be volatile within the year. And three, just because the market fell at some point during the year doesn’t mean that stocks ended the year down. So a little bit of hope there in what’s been a pretty gloomy year, at least through July.

The other thing we want to look at, if we flip forward to the next slide is looking at the long run of the stock market going back to the 1920s, but then all the conflicts there have been. And you might remember that coming into the year, we had a little bit of volatility, but it really ramped up with Russia invading Ukraine. And unfortunately, when you look at the slide, you can see why there’s a famous quote that says that “only the dead have seen the end of war”. We’ve had a non stop litany of conflicts going back throughout the 20th century and prior. But what you see here is that in general, and we said this back when Russia invaded Ukraine, and I think it still holds true, conflicts, wars, whatever, are usually just a blip. Not dismissing the human element or the geopolitical implications, but from a financial market perspective, sadly, wars begin to recede from the front of the headlines and from a market perspective, not really moving markets for the most part at this point. Two caveats, and I’ve said this before, one is if Russia were to use weapons of mass destruction, particularly nuclear weapons, that would obviously be a game changer. And two is if NATO or the United States was drawn into a broader conflict, that would be a game changer. Absent that, certainly a terrible toll from a human perspective and geopolitical implications still to be played out, but from a financial market perspective, I think the story has moved beyond Russia, Ukraine, and really moved to what’s going on with inflation.

Consumer Prices Soar: Consumer Price Index since 1997 – data as of July 7, 2022

And some of you may have noticed that things have gotten more expensive lately. You go to the gas station, you go to the food store, you go to the restaurant, you do just about anything, and stuff has gotten more expensive. CPI, Consumer Price Index is at the highest levels going back to the early 1980s, running north of 9% now. And it doesn’t really matter how you measure inflation. The Federal Reserve likes to use something known as the PCE deflator, that is at 40 year highs. You can look at the Producer Price Index at 40 year highs. So very high inflation right now. The Fed is way behind the curve. And last year inflation was ramping up and the Federal Reserve was saying, hey, it’s transitory. It’s only temporary. They were drastically wrong on that count. I’ve generally given the Federal Reserve a lot of credit over the course of my career. I started in this business in the mid 90’s. I think they’ve generally done a pretty good job at a very difficult task. I think this time they were drastically behind the curve as far as saying inflation is transitory, and they were still stimulating the economy at a time when inflation was ramping up. And we’re kind of sowing the seeds of that. Although, obviously here in the last several months, they’ve gotten more aggressive about tightening monetary policy, trying to rein in that inflation that we’re all experiencing.

When the Federal Reserve tries to tighten monetary policy, what happens is that they are slamming on the brakes of the economy. The question becomes, can they do that and just sort of manage the economy, slow it down a little, rein in inflation? Or will they push us into a recession?

Length of US Expansions and Recessions, 1921 – 2009

This chart is just a little bit of historical context on recessions. The gray bars are economic expansions, the blues are recessions. What you can see here is that in general, expansions last a lot longer than recessions. Again, it also shows that recessions are part of the economic cycle. At some point, we will have a recession. I don’t know if that’s next year. I don’t know if that’s 5 years from now. I don’t know if that’s the second half of this year. I don’t know if we’re in a recession right now. Recessions, the common rule of thumb is two consecutive quarters of decline in Gross Domestic Product (GDP). That’s actually technically not correct. Recessions are named and dated by something known as the National Bureau of Economic Research, the NBER. They come out, they look at all the economic data in aggregate, including GDP, and say, hey, a recession started on X date, and it ended on Y date. And a lot of times you don’t even know you’re in a recession until after you’re in it.

Let’s go to the next slide. I think it’s important to keep recessions in mind. As you see here, this looks at the different recessions and then the drawdown in gross domestic product. And there’s a couple of outliers. The Great Depression back in the 1930s. The economy is very different today, a lot more social safety nets, a lot more government support. So I don’t think that’s necessarily instructive. You see the demobilization after World War II, that was an environment in which the entire country had been geared towards war or was at war production. As the country shifted to a peacetime economy, you saw a pretty big drawdown. And then COVID. During COVID, we were literally told you can’t go out of your house anymore, you can’t go to the store, you can’t do this and that. The economy fell about 10%. Despite all that, if you look at the average recession, the economy falls about 2%. And why I think that’s instructive is that if the economy-and again, this isn’t a forecast, but it’s in the news, that’s why I’m talking about it with you all-if we go into a recession, the news is doom and gloom. We’re in a recession. That means everybody has lost their job, the economy has gone to zero, and every business in America is closed. If you look at the headlines, you might think that, but it’s just not true. The reality is that recessions impact different people disproportionately. In the 2008-2009 recession, some public workers, teachers and the like, and public workers, some of them were furloughed. If you looked at housing and construction, that really slammed on the brakes. A lot of those folks lost their jobs. If you look at 2020 and COVID, if you worked at a restaurant, you were told you can’t go to work anymore. The restaurant was closed. So a lot of those jobs were lost. But for the average person, if you average it out across America, a recession means that if, let’s say they stay in hotels 15 nights a year over the course of a year, a couple of vacations and a couple of long weekends, maybe they stay 14 nights. If they go out to eat twice a week or DoorDash twice a week, maybe they cut back one day every 6 months. So it’s a very incremental impact on most people, which I think is important. But what happens is that recessions feed on themselves. People hear that we’re in a recession, they sense that the news is bad, they cut down their spending, that slows the economy, that leads to job losses, which then leads more people to cut their spending and it becomes a self fulfilling prophecy. So again, recessions, if and when they occur, have a very disproportionate impact on different people. And for most people it’s much more nuanced than what the doom and gloom of the media would lead you to believe.

US Bull and Bear Markets, 1926 -2020

I want to talk a little about the historical context of bull and bear markets too, because we’ve had a pretty rough stock market so far this year. When you look at the bull markets in the left hand side of the chart and the bear markets in the right hand side of the chart, you see that on average, a bull market sees stocks go up about 160% and last for a little more than 4 years.
A bear market lasts for about a year and a half and sees stocks go down about 40%. Bear markets don’t need to be long, though. You can see that since 1987, you had a 3 month bear market, a 1 month bear market, a 6 month bear market. So bear markets vary in length. I don’t know that we’re at the bottom right now, but this is normal. Stocks go up, stocks go down, just like economies expand and decline. It’s part of investing. It’s why the fundamental key to your financial goals is coming up with a financial plan that maps out where you’re trying to go, and then building a portfolio to meet those goals with a mix of different assets that allows you to withstand markets like what we’re in right now.

Also keep in mind that if we go into a recession and again, it’s not a forecast, but it’s a possibility. If we go into a recession, it doesn’t mean stocks need to collapse. First of all, this chart looks at recessions and bear markets. And what you can see is about two thirds of the time a bear market is accompanied by a recession, but about one third of the time you have a bear market, but not a recession. So just because we have a bear market, just because stocks fall, doesn’t mean you have to have a recession. That’s one. The second key point is that stocks are a leading indicator. What I mean by that is that stocks precede a lot of the rest of the economy slowing down because market participants are looking out, they’re reading the tea leaves, they’re saying business is slowing down, companies are warning about profits. People sell stocks, the market falls, and then eventually those companies lay off workers, you get in a recession, et cetera. So a lot of times what might happen is that the economy may go into a recession, stocks may have sold off preceding that, it may have even bottomed and could be increasing even as we’re in a recession. So if you at some point hear, hey, we’re in a recession, it doesn’t mean it’s all doom and gloom for stocks. It could, but stocks may have already had their fall. Stocks could be in the process of bottoming or even beginning to go back up again at that point.

Consumer Confidence and the Stock Market: Consumer Sentiment Index and Subsequent 12 Month S&P 500 Returns, 1971 – 2022

The other thing I want to point out is the importance of doom and gloom. So this chart looks at different stock market returns and peaks in consumer confidence. Going back to 1970. Anytime consumers were very confident, anytime they were very gloomy. And then it says, if you pick a high or a low in consumer confidence, what was the 12 month forward stock market return? And what you see is that when people were really optimistic, stocks didn’t do that well. You see that in August 1972, people were in a really good mood, and stocks the next year were down 6%. In May of 1977, people were optimistic and stocks were down 1.2% the next year. January of 2000, people were in a good mood and stocks were down 2% the next year. You average out all the 8 times that people were the most optimistic, the next year, stocks averaged 4% returns.
But when people were gloomy, stocks then returned 22%, 20%, 29%. Average of 8 troughs in sentiment, 8 sentiment lows when people were the gloomiest, the next year, stocks averaged 25%. The reality is that usually stocks do the worst when people are the most optimistic, and they do the best when people are the most pessimistic. Again, that’s why it’s so important that you stay the course with your stockholdings, and that you have a portfolio that’s built in such a way and finances that are built in such a way that allows you to stay the course. Because usually it’s when the news is the worst that stocks are about to do the best.

Now, I don’t have a crystal ball, I freely admit it, Andi wishes I did. But the reality is that when stocks bottom is when people are most pessimistic. I don’t know if we’re at an absolute bottom in stocks yet, even though we have fallen. And the reason being is I haven’t seen a lot of signs of depression, capitulation, people throwing in the towel. People aren’t happy, obviously, but for the most part there’s a resignation of OK, you know what, stocks are down, it’s awful, this is part of the deal. It’s usually when the news gets really bad and people start to throw up their hands and say, “I can’t take anymore”. That’s when stocks are close to bottoming. I don’t know if we’re quite there yet.

Andi: We do have a question from Donna. She says, “What determines when the bear market is “over”?”

Brian: It’s a great point. It’s something that you don’t necessarily know until afterwards when you look back and you say, when did stocks resume their upward movement? So, let’s say the market was at 35,000 and it fell to 29,000, and then you would be able to look back at a chart and say, okay, the 29,000 was the bottom. It started going up on June 30, and it went up from there. So it’s something that you don’t know until retrospect. The problem is that a lot of people are really experts at timing the market in retrospect. Well, obviously that was the time to buy, and obviously that was the time to sell. But rarely were they saying it ahead of time. And even if they were, when do you get back in? So even if you sold, when do you get back in? Even if you bought, when do you sell? That’s the tough part.

Andi: Shweta says, “Is Pure Financial considering placing clients in fixed income investments like annuities to cover basic living expenses, given the possibility of low real returns over the next 10 to 20 years for stocks and bonds?”

Brian: Yeah, there’s a lot in that question. So the reference to real returns, that means returns in excess of inflation. So it’s one thing to get 5% from an investment, but if inflation was 4%, your standard of living only increased by 1%. And fixed investments like annuities and stuff, in order to guarantee some income… Yes and no. We certainly consider it and we look at it and if the situation calls for it and obviously every person is different, then it’s something that we’ll consider. But the reality is that we think that there are other ways to protect against potential low real returns as well. One of them is that when we do financial planning for people and when all of you do your financial planning, whether it’s at home or with somebody else or with us, you should do it based on some sort of realistic forecast for both inflation and returns. And we only run our financial plans for the most part at 2% or 3% real returns and we’ve been doing that for years. So for years we were running to be conservative with inflation at a little bit higher than what it was. Now it’s a little bit lower than what it is today, but we think it’s a pretty good long run average. So we’re being relatively conservative on the real returns that we’re assuming and then backing in diversified portfolios we think can get a couple percent above that rate of inflation. That’s our preferred way of doing it. But certainly if somebody needs fixed income or needs that money to sleep at night, considering an annuity might make sense. You could also hold more cash, you could also have CDs and the like. So there are a variety of different possibilities. But do keep in mind that depending on which annuity you buy, A) you want to be really careful about fees, lockups, commissions, embedded costs and stuff like that. And then, B) if you’re worried about inflation, some annuities, if they don’t have an inflation rider, may not be a good vehicle if we’re in an inflationary environment for the long term.

15:33 – What Looks Good Now?

Housing: Why This Might Not Be 2008, Isn’t 2008: Mortgage rates, home prices, housing inventories, and mortgage orientations by credit score

Let’s dive back in with what looks good now and let’s start with looking a little bit at housing. Many of you might remember 2008/2009 and some of the pain that we felt in the housing market with the collapse there. And when you look at the bottom left hand column here, this is the change in home prices and you can see the really sharp increase over the last couple of years in house prices. And that’s troubling. Anytime you see something go up that much it’s like hey, is it going to collapse? Is it going to go back down? My personal opinion is that we are not going to see a housing collapse like what we saw in 2008/2009. I think you could see some moderation in prices but I don’t think you’re going to see a collapse. And there’s a few reasons why. If you look at the top left hand, people are worried about affordability. There’s an article out today that mortgage applications hit the lowest level since 2000 and it’s for a few reasons. One of them is that mortgage rates have skyrocketed. We’re in the mid 5% versus we’re at 3% a year or two ago. But the reality is that compared to the long run average, mortgages are still reasonably affordable. So I don’t think that housing is nearly as affordable as it was when mortgages were at 3%, 3.5%, but we’re not at the 8%, 9%, 10% that a lot of people became accustomed to in the 90’s and 80’s and the like. That’s one.

The second is that housing is very supply and demand driven. And when you look at the top right hand column, you see that housing inventories are down quite a bit, so supply isn’t as constrained as it was a few months ago. There’s a lot more inventory now available, but not nearly as much as there has been at historical times in the past. That’s another supportive factor. And then the third is, if you look at the bottom right, who’s taking out mortgages? If you look at the gray or people with low FICO scores, the blue is kind of middling, and then the green is high. You look at the percentage of people today that are taking out mortgages, most of them have very high FICO scores, and almost none of them have sub 660. Versus in the mid 2000’s, you see there are a lot more people with below 660 and very few people with higher FICO scores. So you’ve got an environment where, although home prices are up and mortgage rates are up, mortgages are still reasonable from a rate perspective. Housing inventory, although increasing, is relatively low. And the mortgages that are being taken out are by people with reasonably high FICO scores. I think that’s all supportive of housing, where I think we’d be more inclined to see a softening of prices or a slowdown in the rate of increase that we’ve seen, as opposed to a collapse in houses like we saw 15 years ago.

S&P 500 Returns and Valuations: S&P 500 Price Index, 1996 – 2022

When we shift back to the stock market, valuations are definitely more attractive than they had been. We were quite expensive coming into the year where price earnings, which is a ratio of how much you are paying for every year of earnings, were up at 21, 22 at the start of the year, and we’re down to about 16. So certainly stocks are more attractive than they were. They’re still not cheap. They’re back into a kind of fair value. They’re not cheap. And that’s another reason that perhaps there’s more room for stocks to fall, is that sentiment, while not great, isn’t in the gutter, and prices, although more moderate than they were, are not screamingly cheap yet.

But it depends a lot on what kind of stocks you buy. And so the biggest stocks are the most expensive. And when you look at this, if you look at the S&P 500 and you break it down into the 10 biggest stocks, your Apple, your Amazon, your Google, your Tesla, your Nvidia and then you look at the other 490 stocks, what you see is that the price earnings ratio of the ten biggest is about 23.5. The price earnings of the other 490 stocks in the S&P 500 is 14. So the biggest stocks are very expensive. The rest of stocks are more fairly valued. And that’s why I think it’s important right now to diversify, look under the hood. We’re not seeing as many people come to us and say, “hey, why don’t I just buy the FAANG stocks?”, the Facebook and Apples and Amazons of the world, today as we did 18 months ago. Just because that was at the end of a period where those stocks had done the best, so everybody wanted to buy them, where they’ve kind of done the worst lately. But they’re still not screamingly cheap. The broader market is a little bit closer to fair value.

Returns and Valuations by Style: Small, Mid and Large Cap, Value, Blend, and Growth

When you look under the hood at different kinds of stocks, there’s a million numbers on this chart, but the numbers to focus on are the bottom left hand column, which is since the market peak. If you look at the middle bottom, which is since the market low, so since March of 2020, across the top of that column you see large companies and at the bottom, small. And then the left hand column is value and the right hand column is growth. And you see that value stocks have done better than growth stocks and small companies have done, in some cases, better than large companies. And particularly this year a lot of the value companies in particular have much outperformed, by about 15%, growth companies. And so it’s like, hey, have they gotten overly expensive? If we look at the next chart, what you can see is that anytime you’re above the green line it means that value stocks are expensive and growth stocks are cheap. And if you’re below the green line it means that growth stocks are expensive and value stocks are cheap. And even though values outperformed by about 15% just this year alone, you can see that from a historical perspective, it’s still cheap. Again, that doesn’t guarantee the future. But it does say that in the long run value stocks have produced higher returns. Recently they’ve produced higher returns and they’re historically cheap. It probably makes sense to make sure you’ve got an allocation to value as well as growth.

Bonds Having a Rough Year: Bloomberg US Aggregate Intra-Year Declines Vs. Calendar Year Returns, 1976 – 2022

Let’s shift gears a little bit and talk about bonds. So stocks, we’ve used this chart many times, we’ve never used it before for bonds because we’ve never had to. Same as with stocks, the gray bar is the annual performance of the bond market. The red dot is the worst performance trough of the year. And what you see in this case is the bond market, almost every year is up and when it’s down, it’s down 1% or 2%. But there’s a big glaring omission there and that’s this year where as of this printing, the bond market was down about 10%. It’s recovered a little bit since then, to where it’s down 6% or 7%. And at one point it was down 13%. So a really rough year for the bond market, where in the past, almost always up, and even if it fell during the year, it fell 2%, 3%, 4%. Now all of a sudden you’re in a year where you’re down close to double digits and at one point you’re down 13%. And that’s due to the increase in interest rates where you go from 1.5%, 2% up to 3.5% at the high, and about 3% now on the 10 year treasury. That’s the bad news. The safe portion of your portfolio, you’re still down. The good news is two things. One is that it’s still done a little bit better than stocks. The other is that bonds are becoming relatively more attractive. And if we look at the next slide, what you can see is these gray bars show over the last decade the range of yields for different types of bonds. And then the blue diamond is where we are right now. What you see is that in almost every type of bond, we’re closer to the top than not of the historical range over the last decade. What that means is that when you look at bonds, starting yield is a really good indicator of future returns. It’s been a painful year for bonds, but we’re way more attractive on bonds than we were a year ago or 18 months ago or at the beginning of this year. So not fun, not a great ride. But bonds are becoming more attractive than they had been, certainly even just six months ago.

The Dollar Might Not Be Going Away: The US Dollar Index, 1997 – 2022

Let’s talk about the dollar because I get a lot of questions about is the dollar going away? Is it going to be replaced by the Chinese yuan or the euro or whatever? A lot of times this is driven by somebody’s view of which direction the country is going in. The reality is that the dollar is at a 20 year high. The dollar just hit parity with the euro for the first time in decades. So the dollar, even though people worry about it disappearing or going away, is actually doing really well. Why? Well, the reality is that every currency is relative. The dollar doesn’t trade in a vacuum. It’s compared to something.

Why Should You Invest in Global Stocks? MSCI EAFE and MSCI USA Relative Performance, 1971-2022

And if you look around the world, yes, the US Has plenty of issues, but what country doesn’t? Look at Europe. Well, Europe has COVID. Europe has economic issues and inflation. Europe is also a heck of a lot closer to Ukraine and Russia than America is. What about China? Well, the Chinese government last year decided to destroy some of their best companies for political reasons. China has been on full lockdown repeatedly for COVID. You look around the world, every country has issues. And so while the US isn’t perfect, the dollar is doing well just because the US, in some ways, is the cleanest shirt in dirty laundry. And then when you look at what impact this has on investments, a rising dollar, a strong dollar is a negative for US buyers of foreign stocks. And so if we look at international stocks, they haven’t done that well.

We’re proponents, as many of you know, of global diversification. And here on this slide, you can see in purple, times when for a cycle foreign stocks did better and in gray when US stocks did better. You see this long, long outperformance of US stocks. And there’s really two main factors. One of them is that for a long period of that time, the big tech companies were dominating markets and most of them are headquartered in the US. But the other factor is the strong dollar and the fact that the dollar has performed very well. Despite this, we still think it makes sense to own foreign stocks. And there’s a couple of reasons for that. One is if you look at the next slide, even foreign companies are still selling a lot of their goods outside their home country. So companies in Europe are selling more than half of their goods and services in other countries. Companies in Japan, half their goods. Companies in emerging markets, a third of their stuff. So you’re not just relying on how that economy or how that market is doing. But remember, when you buy, you look at markets, it’s a stock market, but it’s also a market of stocks. So you’re looking at underlying companies and there are great companies around the world and we think that if you just focus on the US, you’re missing a Nestle or a Toyota or Unilever or BHP Billiton or whatever. So you’re missing really good companies by just focusing on the US. We also think that just from a diversification standpoint, particularly if you’re thinking about distributing income back to yourself, the number one rule in finance is to buy low and sell high. If you have different asset classes, again at different times, they’re going to be doing better or worse. You can be selective in what you sell to sell high to put money in your pocket. And then also of course, from a tax perspective, you want to choose what’s the most tax-efficient way to put money in your pocket.

26:24 – Investor Behavior and the Road Ahead

Time Moderates Returns – And Volatility: Range of Stock, Bond, and Blended Total Returns, 1950 – 2021

Let’s talk about investor behavior on the road ahead. And these are some bigger picture items. One of them is a chart looking at the range of outcomes. And so what you see in green is stocks, blue is bonds, and then the gray is a 50/50 portfolio. And if you go back over the last 70 years, in any given year stocks have been up as much as almost 50% and down as much as almost 40%. A 50/50 mix of stocks and bonds has been up as much as 33%, down as much as 15%. But then as you look at 5 year, 10 year and 20 year rolling periods, what you notice is two things. One is that the range of outcomes starts to compress. And two is that negative outcomes start to go away.

So when you look at 5 year rolling averages, the best year for stocks now is only 28%, but the worst 5 year rolling period is down 3%. When you look at a diversified portfolio, the best year is 21%, but the worst year is still a positive 1%. And so the idea here is that if you’ve got a long term time horizon, the power of markets really starts to work for you. The certainty or the projection of your outcome starts to compress to where there’s less variability and the likelihood of positive outcomes starts to increase. Again this gets back to why you want to figure out what your goals are, what your required rate of return is, then build that portfolio and stick with it. Because if you can act across market cycles, kind of stay with it, your range of outcomes is more likely to be what you’re looking for and what you need to meet your goals.

Don’t Be Your Own Worst Enemy: 20-Year Annualized Returns by Asset Class, 2002-2021

The reality though is that most investors are their own worst enemies. And here you can see the different asset classes and different investment mixes for the last 20 years. What I want to highlight is that all the way towards the right hand side is the average investor. So for all the time we can spend talking about: do you want to buy emerging market stocks or US stocks or European stocks? Should you be 60/40 or 40/60? The reality is almost anything is better than the average person does. And this is because what happens? Well, remember I talked about all the questions we were getting about “should I just buy the big tech stocks” a couple of years ago? Why? Because they had done the best. And just when everybody wanted to buy them or was saying “hey, yes, I own them. Why should I sell any of them? Why should I trim back?” Now they’ve done the worst. And that happens again and again where people pile into recency bias or whatever has done the best. They don’t harvest any gains on the way up, they don’t rebalance their portfolio. And then when markets are down, they either sell and panic or they don’t buy more. They don’t rebalance what’s fallen. And so the average investor, sadly enough, is their own worst enemy.

And one of the things that we do is we offer a free financial assessment. Usually we charge several hundred dollars an hour to meet with people. But if you’ve attended this webinar and you want to do a free financial assessment, Andi will put an offer up later. But basically we can go through your portfolio to see if there are rebalancing opportunities. How much risk are you taking? Have you wound up taking on more risk? Or honestly, as markets have fallen, are you now taking on not enough risk? Do you need to rebalance your portfolio in order to get closer to the returns you need? And then also from a tax perspective, there are a lot of tax things that might make sense to be doing right now in this environment. Whether that’s tax loss harvesting, whether that’s Roth conversions. If you can do a Roth conversion and convert more shares while they’re on sale, maybe that makes sense. Should you put cash to work? Should you be rebalancing your portfolio? Do you have an appropriate level of risk? Are there tax strategies in place? We can look at all those things. Again, usually we charge a couple a couple hundred dollars an hour. If you want to do a free financial assessment, it’s something we offer for people that come in. There’s no cost, no obligations. We’ll meet with you. We’ll spend an hour or two with you kind of going through your finances, giving you some thoughts on the things you should do to improve your situation. You can meet with one of our CERTIFIED FINANCIAL PLANNERS™. If that’s something you’re interested in, there’ll be a link up there.

Ignore the Hype: Don’t Listen to the Financial Media

But let’s go back to the slides here for a moment. This is my favorite cartoon, and I always think it’s fun to put a cartoon in there. And I titled this Ignore the Hype, which as Andi mentioned is the title of my most recent book. The pilot has indicated we are going to experience a little turbulence. Please fasten your seatbelt. And then somebody screams, “we’re going to die!” And then the wife turns to husband and says, “hey, he’s a financial reporter”. And I think this sums it up. The book is called Ignore the Hype. But my original title was Ignore CNBC, and then Wiley, my publisher, thought that might get a suit, so we switched to Ignore the Hype. But the reality is, the media exists to attract eyeballs and to generate emotions, because emotions make people stay tuned in. Whether it’s around politics, whether it’s around markets – if they’re tugging on your heartstrings, making you nervous, making you excited, making you angry, you’re more likely to stay tuned in, they’re more likely to sell advertising dollars. It’s really easy to have your investment portfolio swayed by what you’re watching on TV, but you need to either A) turn it off, that’s going to be the best approach. But if you can’t turn it off, at least don’t move based on the latest flashing news headline, because chances are it’s going to have zero impact on your long term finances.

Andi: We do have a few questions before we get back to the slides. Leslie says, “what about tiered CDs?”

Brian: Yeah, so tiered CDs, the phrase I might use would be a ladder. That’s a term that we use a fair amount. And basically what that refers to is buying CDs, Certificates of Deposit, and maybe you buy a 3 month one, a 6 month, 9 months, a year, and you go out as long as you want. CDs are government guaranteed FDIC insurance up to $250,000. Yeah, we think that could be a viable option. Now, it depends on what you’re trying to accomplish. Is it the right tool for the right job? For some people, yes. If you have surplus cash or let’s say you had a liquidity event and you don’t want to put all the money to work at once, putting it in laddered CDs might make a ton of sense. It’s better than sitting in a bank account earning zero. You could probably get 2.5% on a 18 month or two year CD ladder right now, which is not going to keep pace with inflation, but it’s not nothing. I wouldn’t want my whole portfolio in there. Because again, it depends on your situation, but I think for a lot of people, you’re going to need more gains, more returns that are going to come from stocks or maybe different types of bonds over time to meet your goals. But for a portion of a portfolio or as a cash alternative, I think laddered CDs can definitely make sense for some people.

Andi: And another question, Chuck says, “given you are typically not fans of annuities, how do you recommend getting the firm income that you need in retirement? Municipal bonds, short term, i.e, a withdrawal strategy to not have to sell your stocks in a down year, even though you need income for your basic expenses or just a cash position for a few years?”

Brian: Yeah, great question. First of all, you need to know what your cash flow needs are likely to be. And it’s always going to vary. This isn’t an exact science, but if you know you need $50,000 or $100,000 or whatever the number is, for starters, you want to have 6 months, a year, maybe even 2 years in cash. And maybe it’s a savings account. Maybe it’s those laddered CDs we just talked about. So if you had, let’s say, 18 months of your spending needs in laddered CDs, well, now you don’t need to care about the portfolio because you’re going to live off of those laddered CDs. And then from there, maybe your next bucket is some sort of relatively short term bonds that don’t have a ton of exposure to interest rates. So although maybe they’re down a couple of percent, hey, first of all, in the next year or 18 months they are likely to rebound. They don’t have that much volatility. And even if not, you sell, you lose 1% or 2%, it’s not a ton of money. You live off that. And so now you’re 3, 4, 5 years out and you’re hitting up your longer term bonds and you’re 5, 7, 10 years, a decade from now before you’re even thinking about drawing down the money with your stocks. And so the idea is that you want enough safe assets in your portfolio in order to withstand a market decline in recovery before you need to hit up the stock. It’s really by thinking about it mentally as perhaps a bucketing approach and having different tranches of safety that you can pull from while markets are down to give them time to recover. Another word for that is total return as opposed to just clipping coupons. It allows you to control, to keep your income stable even as markets fluctuate or interest rates fluctuate. That’s the approach we prefer.

Andi: Another question from Ales, “what do you think about the future of oil and how it relates to renewables?”

Brian: Yeah, I don’t think oil is going anywhere anytime soon. You can talk all you want about electric cars and we’re in San Diego recording this and there’s a Tesla on every driveway. But I live in Denver and there are not nearly as many Teslas. People still have SUVs and regular cars and stuff. And then when you look around the world, there’s plenty of cars. When you look at factories, many of them run on fossil fuels. And I haven’t heard anybody even mention the idea of a solar plane or anything like that. Planes still fly on oil. So I think we’re decades away from shifting to renewables. I think it will continue to be a larger portion of probably our overall energy mix. But I don’t think energy and natural gas are going anywhere anytime soon. As far as the price of it, I don’t know. It tends to be a little bit A) self correcting and B) really sensitive to geopolitical events. So Russia invades Ukraine, prices spike. But at the same time, projects that don’t make sense, if you think of the oil sands and fracking and stuff like that in North America, doesn’t make any sense at $40 a barrel, but at $100 a barrel, it makes a lot of sense. So I think that there’s probably a range that, absent periodic geopolitical shocks, you probably have a floor of $40 or something like that and a ceiling of $140 or give or take. And within there, you might be able to deviate above or below that for short periods of time. But then supply and demand bring it back into that range, at least for the foreseeable future.

Andi: Dan says, “what are your thoughts regarding I bonds and utilizing monthly contributions versus paying $10,000 in one shot?”

Brian: Yeah, so I bonds are inflation adjusted government guaranteed bonds that you buy direct from the US Treasury. Right now, the rates are really attractive. They’re like north of 9%. I think they probably make sense if you got some cash and you’re looking for a home for it and you can get 9% guaranteed by the government. Yeah. By all means, go do it. A couple of caveats. One is that you are limited to buying $10,000. If you use your tax refund, you can buy another $5,000. But the bottom line is you’re pretty limited in the amount of cash you can put to work. But if you have a few bucks and you want to throw it that way, just know that the actual coupon on the bonds is 0 and then there’s an inflation adjusted component, which is why the return is high right now. So that return isn’t guaranteed forever. A couple of years ago, the return was 0. So you’re getting an attractive return now. It’s not guaranteed indefinitely. But yeah, throw a few bucks that way. I don’t know. I probably wouldn’t overthink it because, again, you’re putting $10,000 to work. I’d probably do it all at once if it was me, just honestly, for convenience sake. But if you want to dollar cost average every month, you could do that. But if you think of the last couple of decades, I think inflation is going to run hotter for longer than what we grew accustomed to with 1.5% or 2% inflation. But I don’t think we’re going to be staying at double digits either. So if you’re trying to time it out where you’re going to get more from your I bonds in six months than you do today, I don’t know if that’s necessarily the case. I think we’re probably closer to the top readings we’re going to get on inflation than to the bottom.

Andi: Dan had another question, “what do you think about shifting to oil stocks for long term investment options?”

Brian: We own, in our portfolio, a percentage of natural resources producers, including energy companies. I think owning some makes sense. It’s diversification. It’s a little bit of an inflation hedge. And again, it’s an interesting sector of the market. I don’t know if I’d be piling in with both feet now. Those stocks have come off their highs for sure, but they’re probably the best performing sector or one of the best performing sectors this year. So I think the time to be kind of doubling down on them was a year or two ago when they were lagging everything else as opposed to now. So tactically, I want to be jumping in but as part of a strategic allocation, I’d either continue to hold them or if you don’t have them as part of your mix, I’d consider adding them.

Andi: Mark says, “what about a reverse mortgage?”

Brian: That’s completely situation specific, so reverse mortgages can make sense. It used to be a little bit of the Wild West where it was kind of buyer beware, and the government a handful of years ago cleaned it up a little bit. So it’s still an area where you definitely want to do your research, you want to ask around, you want to make sure you’re with a reputable company. But depending on what your legacy goals are, what your overall financial situation is, what your home is, a reverse mortgage could be part of your cash flow plan. Again, it’s really case specific, but it’s not something I would dismiss out of hand. And if you think it’s something you’re interested in, I would definitely consider it along with your other income sources that might keep you from drawing down your portfolio while markets are down or frankly, just help you make it through retirement.

Andi: As a reminder, if you do have questions, type them into the Q and A, and Brian will be able to get those answered. We do have a couple more, but they’re fairly situational specific. So do you want to go back to the slides for a little bit and just wrap up?

Don’t Vote With Your Wallet: Percent of Republicans and Democrats Who Rate National Economic Conditions as Excellent or Good, 2000-2022

Brian: Yeah, I just kind of have one last slide that I really want to show, or maybe two is we’re coming up on the silly season again with the election, and I talked a little bit about ignoring the hype around the economy, but same thing. This is going to make me sound like an old fogey, but 50 years ago, people tuned into the news and there’s always a slant, but you kind of got something that was reasonably the news, or balanced. And now if you lean right, you watch Fox News all day. And if you lean left, you watch MSNBC all day. And there’s a lot of confirmation bias in there. And the result is that when you look at a chart like this, it shows that if you’re a Republican and your party loses, you think the world is coming to an end and you go from really feeling great about the economy to really bad. And if you’re a Democrat, it’s the exact opposite. And vice versa. And the reality is that the truth is always somewhere in the middle. When you look at some of the proposals the Biden administration had when they were running and when they were elected, and then even just around taxes or this or that, how many of them have actually come to fruition? I would say relatively few of them have passed, at least the major ones. And that’s with the Democrats in control of both the White House as well as both houses of Congress. The reality is our government is set up and designed to be pretty slow moving and to prevent most large proposals from passing as proposed. And so just keep that in mind. It’s our duty and our privilege to vote and to have an opinion on politics but make sure that when you’re kind of applying what’s going on with politics to your portfolio, you’re doing it more from a lens of what is actually likely to happen and what the actual impact is likely to be as opposed to the way you feel the country is going. Because a lot of times you might feel really strongly about something but the actual likelihood of it passing or the actual impact on the economy and your portfolio over any kind of reasonable time horizon is pretty limited.

Stocks and the Mid-Term Election: Hypothetical Growth of $1 Invested in the S&P 500 Index and Party Control of Congress, January 1926 – December 2019

One other slide. Again, silly season is coming up. We’re going to have a congressional election. This just looks at the S&P and then Democratic regimes, Republican regimes and then when we had a mix. The bottom line here, the takeaway is it hasn’t really seemed to matter. Markets go up most of the time, they fluctuate regularly, but neither the Democrats or the Republicans have spelled disaster for financial markets. Keep that in mind as we come up. The one good news about having a really interesting year with inflation, COVID, Russia, Ukraine, et cetera, is that we haven’t heard that much about politics and about the election. But I suspect that will ramp up here towards the end of summer and especially after Labor Day.

Andi: Another question. Tina says, “if you have some lump sum cash, should you keep it, put it into an IRA to fully fund for the year, or pay down more on a home loan that is at 2.75%?”

Brian: Yes. I think it depends on how close you live to Vegas. You might just go there and have some fun. No, I think it depends. Again, that’s a hard question to answer just because it depends on your personality. Paying down a mortgage, there’s a certainty there, a comfort. But if you’re still going to have a mortgage outstanding, it’s not going to change your bills. My personal preference and what I generally tell people is I would rather have the flexibility of having liquid funds and knowing I could pay down the mortgage than paying down the mortgage. And now that money is kind of locked up, and you can get it out, but who knows at what rate and what structure and stuff like that. But it depends on your personality. Depending on your investment experience, your risk tolerance, how you feel about markets right now and how big the lump sum of cash is relative to your portfolio. The math would say invest at all on day one because more times than not that’s going to be the best investment outcome. The reality is, if you’ve got a $400,000 portfolio and you got a $500,000 lump sum from an inheritance and you put in all the work on day one and the market falls, you’re probably not going to feel great. Maybe you won’t stick it out or something. So dollar cost averaging, the math would say don’t do it, but the psychology would say it might be a reasonable approach.

Andi: Tina says she’s conservative and has 15 years left.

Brian: Okay, here’s the important part with dollar cost averaging. If you do it, you need to stick to it. So if you say, hey, I’m going to put $100,000 to work every month for the next 6 months, you can’t get spooked by the environment and stop doing it or it doesn’t work, you need to actually follow through on the plan.

Andi: Another question comes from Lisa, and like I said, this one’s a little bit more situation specific. “What are your thoughts on taking a monthly distribution from your pension for a lifetime versus taking your entire pension at one time?”

Brian: So the lump sum? I think these are really good questions. And this isn’t a plug, but if you want to do one of those assessments, we can look at the actual numbers that you have and give you a little bit more thought and guidance, because it depends on a couple of things. One is you need to run the numbers to see what kind of rate of return is built into the monthly distribution. So sometimes, just mathematically, one is clearly better than the other. A lot of times that’s not the case, and they’re pretty balanced. And then it comes down to what other fixed income sources do you have and then what other liquid investments do you have and what does it mean for your taxes? Because sometimes you have a little more flexibility around forward tax planning by taking the lump sum and then investing it, and then you could always convert it to a Roth or something like that. So it just depends. But again, you either want to run those numbers on your own or contact us. We’re happy to kind of meet with you and we can walk you through some of those numbers to guide you a little more.

Andi: And that phone number and email address, as well as the link to schedule that appointment are all in the chat so that you can do any of those that you prefer. I’ve got another question. This one’s from Theo. This is also situation specific. He says, “I’m withdrawing from my investments as I’m in retirement and would like it to last for over 40 years as I’m in my 40s. Currently in 75% equities 25% bonds. I have three years in cash. My equities are 45% large cap growth and tech, and 30% on VTI total stock market. Should I rebalance currently as I’m over 20% down, or should I hold off?”

Brian: Yeah, that’s obviously a pretty specific question. First of all, congratulations. If you’re in your 40’s and retired, good on you there. It depends. If you’re looking at rebalancing to get more conservative… Again, I don’t think we’re at the bottom for stocks. That’s pure speculation. But that being said, I don’t know if the time to get more conservative in your portfolio is when we’re already down 20%. If you feel like, hey, maybe you took too much risk, I would lean towards assuming you have enough safe assets and enough cash to fund you for another couple of years. I would lean towards holding off on rebalancing to a more conservative portfolio, but I’d be looking for opportunities to do it. So maybe set parameters where, hey, if you get a 10% rally in stocks, you sell 5% of your stocks and move it to bonds or something like that. So I’d figure out where you should be longer term and then come up with a game plan to get there based on some sort of market rules or something like that.

Andi: We are winding down here. If you do have any more questions, this is pretty much your last chance to get them in. Type those into the Q and A so that Brian can get to them. And again, as Brian just mentioned, that is the perfect time. The question that we just had would have been a perfect opportunity to schedule that free financial assessment. Have your entire financial picture looked at, see what your best claiming strategy is for Social Security, what investments make the most sense for your needs and goals in retirement, and how much risk you can tolerate. All of those things play into it, and they will all be able to be determined in a free financial assessment. Last question is, “I’m 65 and was planning to retire at the end of this year. With everything down, should I wait to retire until the market recovers?”

Brian: Again, these are really good. So congratulations, because you’re asking the right questions. They’re just not questions that have a blanket answer. You know what I mean? The reality is that there are principles and concepts of planning and investing, but then a lot of it has to do with your particulars. That’s why you, again, either need to do your own plan, do a plan with somebody else, talk to us, we’ll do a free assessment for you, but you need to kind of answer these questions based on your particulars. I don’t know how much you want to spend, because there’s a lot of options there. You could keep working, you could quit if you don’t like your job, but then go back to work and find something part-time you enjoy more, you could spend a little bit less the first few years of retirement. You could turn on Social Security earlier than expected in order to slow the burn rate on your portfolio. So there’s a lot of different directions you could go. It really just depends. The real goal with a lot of this planning is you want to have levers to pull and options to pull. And the more choices you have, the more that you can then come up with. It’s like having a bunch of ingredients. You can make a much wider variety of recipes if you have more ingredients. But the reality is you’re all asking the right questions, but just the answers depend on your particulars. And you want to crunch the numbers, look at what choices you have, and then you’re looking at irrevocable life decisions. Do I retire? Do I need to change my portfolio to make my retirement last 40 years? Should I take a reverse mortgage? Get good information, don’t make those decisions. Those are all really good questions to ask and really good decision points. But a lot of them, once you make them, you can’t undo them. So get the best information you can, whether it’s with us or with somebody else, before you make these decisions because you want to make them well informed. You don’t want to come back and regret that, oh, you screwed up because you weren’t looking at all the pieces or something.

Andi: And once again, that link to schedule, that free financial assessment is in the chat. While you’re answering that one, two more questions came in. “How many more rate hikes do you think we will see from the Fed?”

Brian: Yeah, I don’t know the number of rate hikes, but I think we’ll see a minimum of another 1.5%. I think we’ll probably see 75 basis points at the next meeting, and then 50 or 75 at the one after that, and then at least another 25. I think historically, monetary policy has a 6 month lag, so if you raise interest rates, you don’t see the effect on the economy for 6 months. So if you do another couple meetings where you raise interest rates, at that point, you’re probably just seeing the impact of those initial rate hikes flowing into the economy. So I think we’ll see at least another 1.5%, and then you might either see a slowing or a moderation because I think inflation is clearly raging and it needs to be reined in. But you’re also starting to see, depending on who you talk to, a few concerns or a few stress signs around the economy slowing down. And I don’t know what the odds of them actually slowing the economy without putting it into recession are, but they’re going to try, and so they’re certainly going to be really careful about overdoing it. So anyway, that’s my guess at this point.

Andi: One more question. “Better to do a lump sum amount into your IRA each January or do it in monthly allotments?”

Brian: The math would say lump sum. It would be lump sum and invested, especially if it sounds like you’re still contributing, you’re still working, you have a long time horizon. Stocks go up over time again, like that one slide, 75% of the time they’re up on the year. So the math will say that if you’re consistently contributing and if you’re still working, put it in at the beginning of the year, invest it. Some years it’s going to be down like this year. But more often than not, having the money in there sooner is going to lead to more growth and the numbers would say you’ll be better off doing it lump sum.

Andi: And Theo has one more question. “Do you think, just your opinion, that the market will rebound back at the end of this year or sometime next year?” Get out that crystal ball, Brian.

Brian: If you could tell me what’s going to happen with inflation, I think the market will rebound when inflation feels like it’s peaked and is moderating. I think the market will bottom at the end of or towards the end of this year, if I had to guess. And it’ll be basically a 9 to 12 month sort of bear market. I don’t know if it’ll be a really rapid recovery, because I think when inflation starts to moderate, there’ll be fears about whether the economy tips in a recession. So I think you could see a market bottom and then kind of dragging along the bottom with some volatility before you increase. But if you put a gun to my head, I’ll say the end of the year.

Andi: And that is all the questions that we have. Thank you all so much for joining us. Brian, thank you for taking the time to work this all out for us and explain how all this stuff is working out.

Brian: Yes, my pleasure. And best of luck to you all. Again, some pretty specific questions there. Do your homework, whether with us or with somebody else, but make sure you dive into it. Figure out all the moving pieces before you make these decisions. But best of luck to you all. It’s a little bit of a crazy environment, but this is nothing we haven’t seen before and nothing we won’t see again. And it’s why you really want to plan on a road map in order to make sure that you don’t do anything rash when things are a little bit volatile.

Andi: All right. And once again, that link to schedule your free financial assessment is in the chat. If you didn’t get your questions answered during this webinar, that’s a perfect opportunity to schedule a meeting. All right, thanks everybody so much. We will see you again soon.

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