From the rise and fall of the individual stocks to get-rich-quick tales of crypto currencies – many people are looking for a short-term solution to a long-term planning problem… and playing the retirement lotto. Financial professionals Joe Anderson and Alan Clopine discuss ways to avoid the retirement lottery and they guide you through strategies for investing in volatile markets.
Avoid Retirement Lotto:
- Investing vs. Speculating
- Market Timing
- Volatile Market Don’ts
- Volatile Market Do’s
(0:00) – Intro
(1:19) – Financial Focus
(2:56) – Avoid Retirement Lotto
(3:43) – Investing vs. Speculating
(6:34) – Cryptocurrency
(9:00) – Gains and Losses
(10:04) – Volatile Market Don’ts
(12:24) – Panic Sale
(14:20) – Emotional Investing
(15:17) – Stop SIP
(17:36) – Volatile Market Do’s
(19:44) – Buy & Hold
(21:24) – Diversify Portfolio
(22:57) – Ask the experts
(24:15) – Pure Takeaway
Joe: Do you know what the best investment you can possibly own is? Stick around because I am going to give you the secret sauce today. Welcome to the show. The show is called Your Money, Your Wealth®.” Joe Anderson here, president of pure financial advisors. And of course, I’m with the big man, Big Al Clopine. Hello, Big Al.
Al: How you doing, Joe?
Joe: Very, very good.
Joe: The best investment you can possibly own, folks. Here it is. One individual stock. Put all of your retirement, every last dime, in one individual stock, one company. That’s the best investment that will give you the best return. Unfortunately, the absolute worst investment you can possibly make is one individual stock, putting your money on one individual stock and one company. The problem is, we don’t know what stock to pick. And when you do pick that stock, right, the return has already made its course, right? You’re making a short-term– a long-term problem into a short-term solution. You just can’t do that. You know what you’re doing? You’re playing Russian roulette or retirement lottery. Stop doing that. That’s today’s financial focus. [slot machine chimes] all right, here’s the problem. I understand. Because look at the markets over the last 8 to 9 months. Extreme volatility. The market goes up, the market goes down. And so we get nervous, we get fearful, we don’t really know what to do. And it’s like, “man, I keep on losing my money. I’m chasing good money after bad here. I don’t want to do this.” but if we look at the long term, right, it’s like from 1985 to now, the market trends up through all sorts of crises. And then we get overconfident, all right. And then this is the issue. It’s like, you know what, I get that the markets go up, so I’m going to buy that one individual stock. I’m going to hit the lotto. So look at amazon. If you put a thousand dollars in amazon in 1997, today it’d be worth 2.4 million. 2.4. It’s like I won the lottery. Stop doing this, because this only happens to a very small fraction of the universe. It’s not going to happen to you. Get out of the drugstore, stop buying lottery tickets with your overall retirement. And to help us get you out of there, let’s bring in the big man.
Al: Wow, Joe, you’re pretty amped up today. So let’s continue that. Let’s talk about investing. So we’ll focus on a few things. Let’s talk about investing vs. Speculating. Speculating can be fun when you hit the lottery. But in many cases, probably in most cases, it doesn’t work out so well. We’ll also talk about market timing. Should you market time? Should you not market time? We’ll talk about when markets are volatile, things that you should not do, and things that you should do. So there’s a lot packed into the show. And, Joe, I think it’s very timely, because the market has been volatile, as you just said, recently. We’ve been–had like a decade with not that much volatility except maybe coronavirus where it dipped a month or two, but now it seems to be back.
Joe: It’s been pretty calm. Right?
Joe: And then all volatility comes back in, and then all of a sudden, people think that they’re geniuses or they get fearful. And so they really don’t know what to do. So let’s kind of break things down into investing versus speculating. When I’m looking at an investment, ok, this is time horizon–long term, speculation. You’re in, you’re out. You’re getting in, you’re getting out. You hear the stories, al. How many multi-millionaires that bought crypto, right? It’s like, get in and then now I’m going to get out, or I’m going to buy this stock, I’m going to get out. So time horizon. So if you’re an investor, your time horizon is a lot longer. If you’re speculating, you’re quick, getting in and out.
Al: Right. And as you said, speculating or buying one stock, or let’s just say buying crypto, this can work. This is what we call concentrating, concentrating on one thing, and it can work, there’s no question. But the variability of returns is much greater. You can make a lot and you can lose a lot. Long-term investors, it’s kind of a slower– it’s almost like the tortoise and the hare. The tortoise tends to win over the long term. It’s slow and steady wins the race when it comes to investing.
Joe: Looking at level of risk investor. You know, you could have very conservative to high level of risk and still be an investor, all right, if I have an investment. But in most cases, it’s fairly moderate, right? You want to have a balanced portfolio. If I’m speculating, I’m trying to hit the lotto. Also looking at my attitude. I could be a little bit more cautious and conservative as an investor. I just want to be a little bit more thoughtful. Speculation, its aggressive. I got to hit this. I got to hit it now. Decision criteria. Well, it’s based on fundamentals. Do you have a financial plan? What target rate of return do you need to generate? What does that portfolio look like? And what is your time arising– time horizon? All of this is an investment. Speculation is like you hear something. The uber driver’s talking about a hot stock. So what do you do? You go buy it. So it could hit or it could explode on you. So speculation can work. We’re not saying it can’t. But it’s not the right strategy for a long-term financial plan.
Al: Yeah. And, Joe, something that happens is when you get a stock tip, typically what’s happened in that stock, or the stock price, is already reflecting what people know, because stock prices are based upon the expectation for the future. So when you get a stock tip, generally other people know about the things that made that company good, and so the price has already gone up. So just be aware of that. I mean, you might know one industry is more favorable than another industry, so you should invest in the favorable industry. Not necessarily, because that stock price is already reflected in those industries.
Joe: You know, you look at risk and come risk, there’s reward. And if I’m looking at standard deviation–and standard deviation is just a level or measure of risk in any given type of security here. So we have a bunch of different cryptocurrencies and the Dow jones, right? The Dow is–people freak out about the Dow. It’s 30 stocks. It’s very risky. The stock market is really risky. But if I look at the Dow compared to crypto, right, you’re looking at significantly more risk. So you can have an exponential return or you could lose 100%.
Al: Well, and there’s stories of people that have made money in crypto or other investments. It’s great when it hits. Just realize you’re taking a lot of risk. I’m not against investing in those types of things, but maybe do that with a small part of your portfolio, so the higher percentage of your portfolio is in something that’s more sensible long term.
Joe: You know, a lot of us are a little bit behind the eight ball in regards to retirement, and so we hear stories, you go to the cocktail party of someone, you know, bought amazon and is now a millionaire or bought crypto and is now a millionaire and everything else, and it’s like, “oh, that’s easy. Let’s play that lottery and hopefully we can fast-track our overall retirement.” it can work for probably one out of a million. So, what we want to do today is kind of break things down and help you have a sensible overall financial plan. And to help you with that as well, go to our website, yourmoneyyourwealth.com, click on our special offer. This week it’s our retirement readiness guide. Are you ready for retirement? What are the steps that you got to take to make sure that you’re doing things right. We got to take a break. The show is called Your Money, Your Wealth®.”
Joe: Hey, welcome back to the show. The show is called Your Money, Your Wealth®.” Joe Anderson, Big Al. We’re trying to keep you out of the retirement lottery line. A lot of people kind of just put all of their chips on red and hopefully it hits. Let’s not do that. Go to yourmoneyyourwealth.com, click on our retirement readiness guide to help you get ready for retirement the proper way. Hey, let’s see how you did on the true-false question.
Al: “Percentage gains and percentage losses are equivalent.” in other words, if a stock goes down 20% and then goes up 20%, are you in the same spot? And the answer to that is false. Joe, why don’t you explain?
Joe: You know, the math on this confuses everyone. Is that all right, I bought a mutual fund or an investment and you’re down 20%, right, then the market the next year is up 20%. Well, I’m down 20%, up 20%, I should be whole. But unfortunately, that is not the case. Let’s do the math here. You got a hundred dollar investment. You’re down 20, 80 bucks, but then you get 20%, you should be back to a hundred, right? But 20% on 80 is not 20, right? It’s 16. So you’re at $96. So you have to get an even higher rate of return just to break even. This is where it gets fairly complex for those of you that are in retirement or approaching retirement. As you’re taking dollars out of the overall portfolio and the market goes down 20% and you’re pulling your 3 or 4% out to live off of, right. Well, you need a lot higher rate of return just to get your nut back. Right? This is the math that kind of blows people up.
Al: Well, it does, and it’s just simply because that 20% is on a different number, right? So when you’re down 20%, you know, you probably need more like 25% or so it to get back to where you started from. So, Joe, let’s talk about volatile market don’ts, things not to do in a volatile market. And I think maybe the first one right off the bat would be market timing. The tendency in a volatile market is for us to get fearful. The market declines, and then we want to sell because we think it’s going to decline further. That generally doesn’t work out that well.
Joe: Well, I mean, it’s understandable, because it’s like panic selling or emotional investing. All of this is interrelated. When the market goes down, it’s like, “oh, my gosh. How much further is this going to go down?” and you’re looking at the balance of your account, right? You had a $100,000, and now it’s 90,000. Now, it’s 80,000. You’re like, “I can’t do this anymore. I got to get the heck out.” so you get out of the overall market. But then what happens the very next day? The market goes back up, and you’re like, “now, what do I do?” right? “do I go in now? Do I wait? Do I sit on the sidelines.” It can drive you bananas. All right? So having a market timing strategy could work if you time it exact. But how many people do that?
Al: It’s very difficult. And then the other thing people do is they stop investing in their 401(k) or systematic investment plans because they think the market doesn’t work anymore. That’s actually the best time to be investing in a systematic investment plan because shares are lower cost, which means then you have greater chance for recovery and greater return. You definitely want to keep that going when markets are down or when markets are volatile.
Joe: Right, because when the markets are down, that’s just when you want to buy, right? So you’re systematically going into your 401(k) plan, the market’s down 20%, guess what, you get a 20% discount. And then here’s probably the worst is leveraging your bets. I mean, I think some of us have maybe sat down at a table, you know, playing blackjack and then you lose two hands and you’re like, “oh, I got to get my money back,” right? So what do you do? Then you double your bet and then boom, you lose it again. So, be really careful with leverage because leverage could be your friend, but in most cases, it could be your enemy.
Al: It really can. Of course, we see that big time in real estate because you leverage to buy properties. In other words, you get a loan, you can make a lot more than your investment, you can actually lose it all and then some. So just be aware of that. Joe, I think when it–when it comes to, you know, investing in the stock market, it’s interesting. We do have this tendency to want to get out of the market when things are bad, but that’s not necessarily the best idea.
Joe: Right. If you look from 2001 to 2020, is that the S&P 500 had about a 7.5% total return. If you just missed the 10 best days, right–we’ve seen some really high days where the market’s up 700 points, 1,000 points, and things like that. If you missed the 10 best days out of those 20 years, your return goes to 7.5 to 3.3%. You don’t know when those 10 days are going to happen. If you missed the best 20 days, you’re almost flat. If you missed the best 40 days, you’re down almost 3.5%. But the market did 7.5. If you would have just stayed put, you got 7.5%. But if you’re getting in and out of the overall markets and trying to time, things are good, things are bad, let’s get out, let’s get in, this is what happens to most investors.
Al: Yeah, and those best days, Joe, typically happen after the market declines.
Joe: So, if I’m looking here, the great depression, 1932, really bad time in the overall market. Subsequent years, market’s up 367%. All right, if I look at 1982, there was a big recession. The market recovered 267– you know, the list goes on and on and on. Things are doom and gloom. We don’t know really what’s going to happen, right? But we we’re fearful that it’s going to continue to be doom and gloom, so we get out, and this is what returns we miss.
Al: Yeah, and I think that’s a great slide because really, it’s showing that it’s really better to stay in than to market time. And when you look at our emotions, right, market’s going up, we start to be optimistic, and then it goes up a lot, and now we’re elated. What do we do? We buy a lot more stock. And then things turn, right. It goes down. We start to get nervous. We get fearful. We tend to sell. And then it repeats and we buy high and sell low. It’s not a good recipe for success.
Joe: Right. But I mean, this is most of us.
Joe: because we’re not geared to invest. I mean, right. If a train is coming our way, what do we do? We want to get the heck out of the way, right? So, when you see the stock market crash, you want to get the heck out of the way, right. But it’s very difficult to do that because it’s your money, it’s your livelihood, right? So you’re looking at it and you’re seeing it. And, Alan, you said it perfectly. It’s like right up here. We’re going to buy a lot more. Look at this. Right? Look at how great the market is. And then we keep doing this cycle until we’re broke, right? And you’re like, “I’m never going to do this again. I’m just going to sit in cash.” and then you sit in cash forever, right? And then you go to the cocktail party and you hear, you know, some person that you don’t really care for talking about their millions in crypto. Then you’re like, “you know what, I’m gonna buy crypto.” capital markets reward investors over the long term. Be diversified. Your small companies, large companies, growth companies, value companies, bonds. Just have a little bit in all over the long term, you’re going to be fine. But you got to make sure you have the right portfolio to begin with, right? What are you doing currently with your portfolio? Make sure it’s set up for your goals, your dreams, your livelihood, whatever it is. Start planning now. If you want our help, we have a free guide. It’s our retirement readiness guide. Go to yourmoneyyourwealth.com, click on the retirement readiness guide. That’s our gift to you for free. When we get back, we already talked about what not to do, let’s talk about what to do when the markets get volatile. We’ll be right back.
Joe: Hey, welcome back to the show. The show is called Your Money, Your Wealth®.” Joe Anderson and Alan Clopine. We’re trying to help you avoid the retirement lotto. [slot machine chimes] have you seen those shows with those people that win the lottery and then, like, 6 months later, they’re completely broke? It’s crazy how people can blow though some money. Anyway, I digress. Let’s go to the true-false question.
Al: “Bonds are the safest place to put your investment dollars in a volatile market.” I suppose that could be true and false. Bonds are certainly safer than stocks in a volatile market. They don’t go up and down as much. But are they the safest investment? What do you think, Joe?
Joe: Uh, the mattress.
Al: Put it in the mattress, right?
Joe: Yeah, right. Coffee can.
Al: Yeah. As long as you don’t lose it or the house doesn’t burn down.
Joe: As long as you don’t lose it, yeah. Yeah, I mean, it depends. Bonds are safer than stocks. It depends on what type of bonds that you own, right, because bonds are all not created equal. Probably cds or treasuries is going to be the safest. But if you want to get a little bit extra yield, yeah, then that’s where it gets a little bit tricky because people lose money in bonds and they’re like, “wait a minute. How do I lose money in bonds? I thought these were safe.” because they might have, you know, a longer duration bond or maybe a little bit higher yielding bond.
Al: Yeah, there is risk in bonds. So let’s talk about what you should do in a volatile market. Here’s 4 things to consider. The first one is buy and hold, which, by the way, is the opposite of market timing. Buy and hold through ups and downs. We already saw from last segment that market trends up over the long term. In fact, if you have the right investment strategy, it almost pays not to even think about it. Just let it do its thing. So you have to figure out what your goals are. Are you close to retirement? Do you have many years until retirement? These things will help you decide what sort of investment portfolio you should have, but whatever you pick, it should be stocks and bonds, domestic, international. Diversify. Make sure you’re diversified. Once you’ve got the right portfolio for you and stick with it, rebalance from time to time when things get out of whack, tax manage if you have opportunities to take losses. But that’s the best way to do it in volatile markets. Another thing, Joe, is gut check your risk tolerance, which essentially means you may know what your investment strategy should be for your goals, but can you handle it in terms of when the market declines?
Joe: Yeah, well said, because sometimes the portfolio that’s right for you, that’s going to get you to your goals, you might not be able to handle it, and you’re just going to be freaked out, you can’t sleep, you’re going to sell, and you’re just going to hurt yourself even more. So gut check your, you know–but you have to understand that if you go into a more conservative portfolio, you might not be able to accomplish a hundred percent of your goal. If you want to spend $70,000 in retirement and if you have a lower risk tolerance, maybe that nest egg is not going to grow to a certain amount to give you the income that you need, so you’ll have to make some sacrifices if that’s what you do. But in some cases, that’s probably the right answer for a lot of people, because, I mean, if I’m spending a lot more money but I’m still miserable because I’m so freaked out about what my portfolio’s doing, I mean, life is too short.
Al: Yeah, it is too short. I think another thing to consider is real estate. That can sort of help balance things out. It’s an asset class. It tends to have slightly different cycles than the stock market, although there is some correlation. But I think maybe here’s a good way to think about it as far as buying and holding. So this is, like, over the last–i think this is the last 20 years. No, this is last 5 years. No, 20 years. I’m with you now. 20 years. The S&P has earned 5.6%.
Joe: All you got to do is read the slide, Al.
Al: I know. I’m getting–it just has taken me years to figure that out, but now I got it. That’s 60/40 portfolio, pretty close, right? 5.2%. A lot less risk and still had almost the same return. Let’s flip it. 40% stocks, 60% bonds. 5%. Not bad. What did the average investor do in this last 20-year period? 1.9%. Joe, how often do we see that? People just buy and sell on a motion. They get in and out at the wrong times.
Joe: Yeah. The average retail mutual fund investor or individual stock investor, it doesn’t necessarily matter because you hear the returns, and then that’s when you get in, when the return already happened or you sell out, and then the return hits, and then you get back in and so on. We’ve already said this song and dance, so. But one of the interesting things, al, on that slide was, you know, if I’m 100% stocks, 5.6, but if I have 40% bonds, you know, I’m not giving up that much return to have a little bit of a safety net there.
Al: Well, that’s exactly right. And when you think about this, particularly let’s say if you’re in retirement and you’re pulling money out of your portfolio, you’re drawing money out of the portfolio, you want to have some safe asset classes that you can draw money out when the stock market is volatile. So, just remember that. Now, let’s talk a little bit about diversification, because some people have two different funds or 10 different funds and they think they’re diversified. Here’s an example of two different funds, but guess what, they’re invested in the same things, right? And so they have a very similar investment experience. So when you have different investments, make sure that they’re not all the same because you’re not really diversified.
Joe: Right. Good point. Because if you look here, I have, like, two different funds, 10 different funds, but there’s so much overlap in those overall funds, it’s a redundant strategy, not necessarily diversified. You know, just to kind of break this thing down, you know, rules of thumb are great to look at. So if you’re a conservative investor to a very aggressive investor, you want to create a portfolio that’s very specific to your situation. But just, you know, high level. You know, conservative could be 50%, you know, bonds, maybe some cash in there, short-term investments, maybe a little bit of foreign, and so on. If I want to go on the other side of the spectrum, maybe it’s more 60, 70, 80% stocks. So the point here is that the more conservative, your return is going to be a lot lower, but so is the risk and the volatility. The more that you go over here, you’re going to have a lot higher expected returns, right, but you’re going to see a lot more volatility. I guess the point of the story is make sure that you don’t freak out, that you have an overall strategy, that you have a plan in place, and stop playing the lottery with your retirement. Let’s switch gears. Let’s go to ask the experts.
Al: “Since I don’t have time to do the research into various mutual funds and ETFs for my retirement funds, if I’m not using a financial advisor to pick them, am I essentially gambling?” well, great question. We did talk about investing can be like gambling, particularly when you pick like one stock and maybe hold it for short term, but not necessarily, mona. I mean, in terms of investing, you probably want to have some US stocks. You probably want to have some stock funds, international stock funds, maybe some bond funds. Maybe you can do this in 3 different investments, right, low-cost index type funds. You could go to fidelity, you could go to vanguard, you can go to Schwab. There’s all kinds of places to get them. I wouldn’t say that’s gambling if you’re investing in those types of things long term. “When the markets go crazy, I’ve always been told that gold is the safest place to put your money. Is that true?” well, gold can be a good place to put your money on occasion, but what do you think, is it the way to go?
Joe: Well, there’s a lot of gold bugs, you know. When the things go bad, it’s like well, let’s rush to gold. I think, you know, precious metals should be part of your overall portfolio. But, you know, again, loading up on gold, seeing that that’s going to be your safe haven, that could be a pretty risky proposition. Let’s recap. Avoid the retirement lotto, folks. Speculation versus investing. A lot of us like to speculate. It’s more fun. But maybe we think that we’re acting, we’re doing something that’s proactive is better than doing nothing. In most cases, that’s not the case. Market timing works for some, but most of us it doesn’t because we don’t have a crystal ball. We don’t know what is going to happen next. We talked about the volatile dos and the volatile don’ts. If you need more help with this, go to yourmoneyyourwealth.com, click on our special offer. It’s the retirement readiness guide. The Retirement Readiness guide. That’s it for us today. Hopefully you enjoyed the show. For Big Al Clopine, I’m Joe Anderson. And we’ll see you next time
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