Wiser Financial Advisor –Strategies for Turbulent Markets
Hi, Everyone. Welcome to the Wiser Financial Advisor with Josh Nelson, where we get real, we get honest, and we get clear about the financial world and your money.
This is Josh Nelson, Certified Financial Planner and founder and CEO of Keystone Financial Services. We love feedback and we’d love it if you would pass it on to me directly: firstname.lastname@example.org . Also please stay plugged in with us, get updates on episodes and help us promote the podcast. You can subscribe to us at Apple Podcasts, Spotify or your favorite podcast service.
It’s funny, everybody I seem to talk to right now says, “How are you guys doing? Are you OK?” Because they know what business we’re in. They know we’re in the wealth management and comprehensive financial planning business, and so of course we get involved in things like investments and markets and so forth. And recently, if you’re not paying attention, then you’ve been blissfully ignorant—and I say congratulations to you, because oftentimes getting all anxious about crazy markets doesn’t really help anything.
I think most people have noticed that the markets have been relatively volatile recently. In fact, depending on which markets you’re looking at, some are actually in a bear market right now. I say markets because sometimes people just think of the stock market, but there are also lots of different stock markets and the cryptocurrency market, the real estate market and the bond market. There are all these different asset classes out there, and they’re all trading in different ways at different times. And of course, they’re all going to experience downturns from time to time.
I’ve been in this business for 23 years now, so I’ve been through plenty of really nasty bear markets and plenty of great bull markets. These are just terms that get thrown around, right? But here’s some definition: A bear market is a 20% or more drop in that particular asset class. I say asset class because it might not just be stocks; it could be cryptocurrency or something else that you’re following, but whatever it is, a bear market is a 20% or more drop.
A correction is a 10% or more drop. The good news is that corrections happen all the time. Corrections happen about once a year historically, and 80% of the time corrections don’t turn into bear markets but 20% of the time they do. I think this market that we’re in right now may turn into a bear market for the stock market, at least before things turn around. The good news is that bear markets don’t last forever. The bad news is bull markets don’t last forever either.
We go through cycles. It should be comforting to know that bear markets don’t last forever. There’s never been a bear market in the history of the stock market that hasn’t been followed by a bull market. Recessions happen all the time. Recession means that the economy is going backwards and right now you might feel like we’re going backwards even if we’re not, because inflation has been so darn high.
The Federal Reserve is the entity that largely controls the money supply and oftentimes does cause us to go into different cycles, either down cycles or up cycles. The economy goes through cycles. The world goes through cycles. That’s just part of life. Some of those are good and some are bad, but ultimately those who take advantage and are really adaptable can even take advantage during down cycles. That’s what we’re going to talk about today.
Now I’m an authority on this because I’ve been through some really nasty markets and I’m a student of markets starting even before I was a financial advisor. I started out in 1999 and you might remember if you were around back then or if you’ve studied economic history, that 1999 was the culmination of the tech boom. Everybody was getting ready for Y2K, the end of the millennium and the beginning of the 2000’s.
Those of you who are younger probably don’t even know what I’m talking about, but in the late 90s there was this big tech build-up to make sure that all the technology was up to date. That was because supposedly when the year 2000 rolled around, if the computers weren’t up to date it could cause everything to go haywire and companies to go broke and all the nuclear bombs to go off. I mean, that’s what was being talked about at the time—that the world could really go haywire. Of course, nothing really happened but all these individuals had bought new computers to prepare for Y2K. Businesses had upgraded all their networks and computers and everything, so there was a lot of technology spending that peaked.
Then we had the dotcom crash, the tech crash in 2000. Sometimes we call that the tech wreck. We saw that sector pull way back because of all that pent up spending and the fact that people didn’t need to spend so much in technology for a while afterward.
Next we had the year 2001. It was going into a recession anyway, but then we had 9/11, which was tragic on a national and personal level and also resulted in a bad recession. Then in the year 2002 when things were already bad, we had accounting scandals from accounting firms that had been helping cook the books with some big companies like Enron and Worldcom. Many very large companies were either being questioned as to whether they were cooking the books or not, or they outright were and went completely bankrupt. These were some of the biggest companies in the world at the time. Of course, the stock market really did not like that because there was some fear that all the Fortune 500 companies could be maybe cooking their books. If that were the case, maybe the stock market is all this big sham using fake numbers. It turned out it wasn’t as widespread as feared, and so eventually things burned themselves out and the market ended up coming back.
It was an up cycle in the late 90s and the Federal Reserve (the Fed) started raising interest rates to tighten things down. It’s the Fed’s job to keep inflation in check and also to keep the economy going and make sure we have as full employment as possible. So they’re looking at all of those numbers. Naturally, they can’t control all those things but they are able to manipulate the money supply and interest rates, and so they are able to give some stimulus.
They’ve been giving stimulus bigtime over the last couple of years, printing trillions of dollars that have been injected into the economy. And now there’s too much money in the economy and it’s causing a big inflation problem. You might remember there was a theory called Modern Monetary Theory being thrown around about this time last year, which said that basically the Federal Reserve can print as much money as they want to and that we as a nation can use as much money as we want to because we’re the global reserve currency and blah blah blah. There was this whole theory that there would be no consequences to just spending unlimited money.
Now, of course we find that yes, there are consequences to that. I don’t think any of us really believed to begin with that there wouldn’t be, right? And now we’re seeing the consequences. We’re looking at very high inflation. The Federal Reserve now has no choice but to raise interest rates and tighten up the money supply. That’s going to cause us to go into a down cycle because of what they’re doing. The stock market is screaming and reacting to that, and the cryptocurrency markets and real estate markets are all reacting to that. Interest rates have gone up bigtime. Not that long ago, you used to be able to get a mortgage rate down in the twos. Now you’re looking at the fives and maybe beyond by the time this is over.
The point of going over this is that we go through these different markets and the Federal Reserve has a big role in that, but these things don’t last forever. Expansions don’t last forever. Neither do recessions. Bulls and bears don’t last forever. And there are things you can do in these different markets that will help you out or could hurt you if you do the opposite.
I’m going to throw out a few different strategies because I’ve been having these conversations with clients this spring. And maybe it’s just that we have clients that are pretty resilient and they’ve been through enough bad markets to know that these things just happen, but our phone is not ringing a whole lot right now other than a lot of calls from people who aren’t working with us yet.
Often, these sorts of times are our biggest as far as bringing new clients on board because there’s a lot of uncertainty and so people are questioning what they’re doing. Whether they were trying to do it themselves or maybe working with an advisor, they’re questioning what their strategy is and what their value propositions are through the downturn. Therefore, we do end up bringing on a lot of clients during those times. Mostly our phone is ringing with people contacting us and saying, “Hey, can we meet because we really think we want to make a change and take a look at working with you guys.”
Anyway, there are a few different strategies I want to put out there because they are really helpful, not only because I say so, but also because we’ve used them. We have experience going through all kinds of different markets, not that we can guarantee anything. Nobody can guarantee anything in this world, nor can we as financial planners guarantee returns or guarantee anything that will happen or not happen with the stock market or the economy. But experience does tell us quite a bit, and we can tell you what has worked for other people most of the time.
One of those things: If you haven’t done so already, now is definitely the time to go back and find your risk number, how much risk are you comfortable with. Every single one of our clients has a risk number chosen by them. That’s what we’re targeting as far as the level of risk that we can take for that particular client in their portfolio. A lot goes into that as far as figuring out what investments and funds and so forth would result at that number. It’s important to understand what you are going to be comfortable with and what you are not going to be comfortable with.
We have a free risk assessment on our website. Don’t worry, we’re not going to spam you and send you a bunch of stuff. You can find out your risk number right now by going to www.keystonefinancial.com and scroll 2/3 down the page where it says Find Out Your Number. In just a few minutes you can answer some questions to help pinpoint what your risk number is. Then you can compare that against your current portfolio and we can help you with that. You can take a look and ask, “Where am I right now and how much risk am I actually taking?”
When you’re in a bull market and the economy is doing great, nobody really cares about risk. They should of course, but a lot of people don’t because everybody is just making money. It’s like throwing darts at a dartboard; you could make money on anything when things are going really well. That’s what it was like in the late 90s and last year in 2021 where just about everything was going up. It was easy to make money regardless of the level of risk you were taking. So now, it’s important to go back and know your risk number. Our risk assessment will assign you a number and tell you what it is on a speed limit sign, something from 1 to 99.
To give you an idea, if you’re a 1 that means your money is pretty much all sitting in a bank or a credit union account where it’s probably not earning any interest. It’s just sitting there where it’s “safe.” I use quotations because although it may be safer from a principle standpoint, think about it from a purchasing power standpoint. If we have inflation running at 8, 9, 10% depending on whose numbers you believe right now, that means that if you’re sitting on cash that’s earning zero, you’re going backwards 8, 9, 10%. Even though we’ve seen interest rates come up a little bit, you might have noticed that your bank probably has not increased the interest rate on your savings account.
Why is that? Because they want to make money, right? They want to leave interest rates as low as they can for as long as they can before they have to start raising interest rates for what they’re paying their depositors. Keep in mind, that cash rate may not change a whole lot.
We spend a lot of time talking with clients about the risk in their portfolio. It’s important to be willing to adapt. That’s an important part of getting through tough markets—your adaptability. You might have heard of IQ, (Intelligence Quotient), and EQ (Emotional Quotient). We like AQ, which is Adaptability Quotient. We think it is crucial not only to get through turbulent markets, but to get through turbulent life.
When you think about life, there are all kinds of curveballs. Anyone who’s lived any length of time knows there’s all kinds of great stuff that happens, but also a lot of crappy stuff that happens to people in their lives, things they didn’t want. Maybe it’s not just in your personal life, but things happening in the world or the economy or in politics, whatever it might be. It wouldn’t take very long for us to start a conversation and think of all the bad things that happen in the world. But I think the people that end up being the happiest and most successful are the ones that are most adaptable, who are willing to adapt and change. It’s often very easy to default to what you’ve been doing in the past in life and in business and in finance; it’s easy to let things go on like they’ve been going on. Sometimes that works. Sometimes it works to keep letting things continue to default, to not make a change.
But the economy around you right now and the markets, those are adapting whether you’re adapting or not. If you’re not making changes or at least assessing where you are to reaffirm that you’re in the right spot, you could be in a bad spot. You could end up in a very risky situation when you didn’t think you were.
Strategy #2 is to recognize that asset allocation and diversification are your friends. Because they’re your friends, let them help you. Back when you were college age, probably every time you moved, you got everybody together, right? All your friends would bring their pickups and you’d give them pizza and donate some beer to bribe them to show up. Bottom line is you probably got free help to move because you were poor and you didn’t have the money for a mover.
The nice thing about investing is that there are a couple of friends that will always help you if you choose to let them, and that would be asset allocation and diversification. Let’s define what those are.
Allocation is where you decide how much of which big asset classes you will put in your investment pie chart. Asset classes are stocks, bonds, real estate, alternative investments, private equity, all kinds of categories of investments. If you think of a pie chart, how much are you going to put in these different pieces of the pie in your portfolio? If you haven’t listened to it yet, you might want to go back and listen to the episode titled The Most Important Investment Decision. That is your asset allocation, choosing what your pie chart looks like.
If you had a pie chart filled with only cash earning zero interest, that means you’re back to number 1 risk. It might help you sleep at night in the short term, but your experience over the long run is going to be very different than the person who invested at a higher risk and allocated more of their money to growth assets, things that could outpace inflation. We can’t guarantee anything, but stocks, real estate, commodities, things like that can do very well in an inflationary environment given enough time.
Staying diversified is the second of these friends that can help you. Within those asset classes, you don’t want to just buy one stock or one piece of real estate, one bond, or one whatever. As far as your portfolio goes, you want to be very diversified within each of those pieces of the pie. The name of the game here is that we want to make sure we’re building up wealth over time. We want that wealth to generate income at some point for you, for your family, for whoever it is that you’re investing for. At some point, somebody is going to want income, and that probably is you at retirement. You’re going to want income from your portfolio, so the name of the game is to build up wealth and hopefully build it up abundantly so that you have lots of choices and flexibility someday when you retire.
Use asset allocation and diversification because they are your friends. Let them help you and recognize that they’re free. Believe it or not, this is one of the few things you get free in life. Asset allocation and diversification cost you nothing. I’m not talking about investment expenses here. Of course, your investments are going to cost something. If you’re paying an investment advisor like Keystone Financial Services, yes, you’re paying us something. But implementing those principles of asset allocation and diversification cost you nothing. Use them. Make sure to let them help you out, because along the way, they are one of the keys to making sure that not only are you getting what you expect over time, but also that you’ve got the highest probability of being successful in your financial plan.
The third strategy today is rebalancing. This is also free. We like to have free stuff whenever we can if there’s value. UNvaluable free stuff doesn’t help you at all, but rebalancing is very helpful. Lots of studies show that once you choose your asset allocation and your diversification, it’s important to rebalance periodically.
The thing about being an investment advisor is that you’re paying us to have the discipline to do that for you. Sometimes rebalancing doesn’t feel good, by the way. Let’s use an ultra-simple example. Let’s say that somebody decided, “I want a balanced portfolio, so I’m going to put 60% of my money in stocks of various kinds and 40% of my money in bonds of various types.” That 60/40 mix gets invested and you spread it out. It’s diversified. Beautiful, right? Then time goes on and let’s say there’s a bear market and now all of a sudden your 60/40 allocation might look like 50/50. Now, half of your money’s in stocks, half in bonds. A disciplined investment advisor (or individual if you’re doing this on your own) would say, “OK, I’m going to re balance. I’m going to go back to my 60/40 mix because that was the strategy I chose based on good information about the long term.”
So then what we’re going to be doing is to sell some bonds and buy some stocks. At the time, this might not feel good because you’re probably doing it when the stock market’s way down and nobody is making any money. In fact, every day you might be seeing people lose money and your portfolio going down. That can be a hard pill to swallow. But over time, studies show that it can build not only higher returns, but it also can result in you having a little lower risk because it works on the opposite end as well. Let’s say with that portfolio you go into a bull market and you don’t rebalance. A 60/40 portfolio might look like 80/20. Now your risk is very high because 80% of your money is in stocks, 20% is in bonds. Now we need to rebalance back to that 60/40 so you don’t get your risk number up too high.
It’s also important to make sure you don’t allocate too much to one sector or even to one security. Do you have too much money in your own company stock? We see this from time to time with clients that have a lot of restricted stock options and all kinds of stuff they’re getting for their company, which is great, especially if you’re with a startup. There might be a massive meta value that you end up getting out of that company, but it’s important to rebalance and take some of that money off the table or it could be too much risk for you. So, rebalancing means having the discipline to put ourselves back into the pie chart that we chose originally and being thoughtful about that. To rebalance is just prudent investing.
Finally, I want to talk about dollar cost averaging. The question I’m getting the most right now is about timing. People are wondering, “Gosh, when’s the market going to bottom out? Is this a good time to invest? Is this a good time to take money out, because I think I’m going to need money for a car in three months.” That sort of thing.
If you’re smart and you have spent enough time at this, you know that you’re not going to be able to time the market consistently. Warren Buffett has been one of the most successful investors of all time. He’s 91 now, and he has said repeatedly over the years that hasn’t known anybody in his entire career as an investor who can consistently time the market. Nor have I, nor have you if you’re honest. We know that market timing doesn’t work. It’s very tempting to think we can outguess the system, but we just can’t. It’s one of those things that we’re not going to be able to do consistently, so don’t even try to do that. Don’t be the day trader. Don’t be the person that sticks their neck out there and tries to take a ton of risk, putting way too much money into one area trying to catch a magic price.
Do people get lucky? Yeah, absolutely, people get lucky and buy at certain prices, but they can’t do that consistently. Nobody can. The point here is using dollar cost averaging as your friend. Instead of choosing one day to take money out of your investments or one day to put money into your investments, why not do it over time? Because that will average out the pain or the victory, right? If things are going up, it averages out those prices and takes the guesswork out of you having to choose a certain day that is the right time to invest or take money out.
If you’re with an employer, you’re probably already doing this right now because they probably have some kind of a company retirement plan like a 401K. When you take money out of your paycheck each pay period to fund your 401K investments, you’re already dollar cost averaging. That money is just averaging in each paycheck, going into the market. The same thing happens when you’re investing on your own. You can set it up automatically, so if you use a custodian like Fidelity or TD Ameritrade or any financial institution that we might use, we can set that up where it just automatically goes in each month. Then you don’t have to worry about the actual timing, So, for people who are wanting to invest, I think that’s always a good thing to think about: dollar cost averaging instead of trying to outguess the market.
As far as how much you should be putting away in investments, we like 15 to 20% of your income going away for the future. Everybody’s situation is different, so we like math. We like to be very specific and work on your individual plan. For a lot of people, that money does mostly go into retirement funds, something that you’re going to be drawing income off of someday. It also could be going to college expenses or something else, but 15 to 20% of your money going away for the future means you get to enjoy the rest or give it away if you’re giving away to charity or something. Just be aware that we want to start out with that 15 to 20%. Is a good rule of thumb.
Some people say, “I can’t do that.” Especially if you’re starting out and you’re poor. As you know, most of us were poor when we were starting out. We don’t think we can afford it, but let’s say if the IRS contacted you and said that some legislation passed and we have to raise your taxes by 15 or maybe 20%, you and I would do it. We would scream and shout and lose sleep and call our senator and whatever to complain about it. But in the end we’d pay it. You’d pay it. You’d pay your taxes, because otherwise you go to jail. We wouldn’t like it but we would pay it anyway.
Treat this like your own personal tax but you get to keep the money. It goes into your own investments. That 15 to 20% needs to go away for your future if you want to have a future income that you don’t have to work for. Dollar cost averaging also works when you’re taking money out, say in retirement. If you’re taking money out each month, make sure you’re not taking out more than 4 to 5% of your investment assets. Let’s keep the math simple and say you’ve got a million bucks. Then you can take out $40,000 to $50,000 per year to live off of.
If that million goes down to $800,000 or half a million, does that mean you’d still take 4 to 5% off of a million? If I were you I would adjust. Because that way you will weather this. I’ve seen this time and time again with clients over the years. You will weather the storm much better and do far less damage if you’re adjusting your withdrawal percentage based off your investment assets even when they go down. It works on the upside too, and we’ve seen that. During the last couple of years, people have had their portfolios go up in general. In 2020-2021 we saw a lot of increases in investments and so people got to take out more because that percentage was out of a larger dollar amount. So again, be willing to adapt and have that Adaptability Quotient. Don’t get so set in your ways that you’re not willing to adapt to current conditions.
That’s the bottom line I can leave you with. Will your Adaptability Quotient serve you well? Remember to watch not only the markets, but also these investment principles, things that are time-tested. Often we get sucked into the day-to-day social media, the news and so forth, and all of that is going to be pointing to right now. It will be saying you’ve got to do something right now and pay attention. But the reality is, most of these principles are things that play out over time. And there are things that we actually have control over, as opposed to most of the stuff we see in the news and on social media. All that stuff we really don’t have much control over. By the way, lots of studies have shown that the more we pay attention to that stuff, the more anxiety we feel. And I can tell you from personal example that when I watch the news too much, when I pay attention to the markets too much, it just creates anxiety. It doesn’t add value to anybody.
I will leave you with those things to consider as the foundational principles of what we do at Keystone Financial Services and the Wiser Financial Advisor. We do want to be adaptable. We want to use principles that are time-tested and be willing to adapt as conditions change.
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I hope that’s helpful. Have a wonderful week and God bless.
This episode has been prepared for informational purposes only and is not intended to provide and should not be relied upon for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors. Investment advisory services offered through Keystone Financial Services, an SEC registered investment advisor.