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Are stock market declines keeping you up at night? Are you scared to turn on CNBC? How can your retirement fund endure another crash? In a tribute to David Bowie, Reese and Ryan discuss how to react when the market is Under Pressure and how to deal with all the Ch-ch-ch-changes.
Reese Harper: Welcome to the Dentist Money show where we help dentists make smart financial decisions. I’m your host, Reese Harper; I’m joined by my co-host, Sir Ryan Isaac.
Ryan Isaac: Hello, Reese. Today we are going to start off the show with a little tribute to a late-great one, Sir David Bowie.
Reese Harper: He gave Madonna her start.
Ryan Isaac: Really? Is that true?
Reese Harper: A lot of it. There’s a lot of truth to that.
Ryan Isaac: I feel like we’re going to cover a lot of trivia here that might or might not be true.
Reese Harper: It’s what my wife tells me. She’s more into that genre than I am, but I respect both legends.
Ryan Isaac: He passed away this week at the age of sixty-nine, and so did another famous actor today at the age of sixty-nine by cancer.
Reese Harper: Who is that?
Ryan Isaac: Don’t ask me questions like that. He’s in Harry Potter. I’ll get back to this later.
Reese Harper: Let’s stick with Bowie.
Ryan Isaac: We’ll stick with Bowie. Rest in peace; we want to pay our respects.
Reese Harper: I can’t play his music on our show today. We might be able to get away with it, but we don’t want to take the risk.
Ryan Isaac: That’s fine. But you’re a musician, so you can sing for us.
Reese Harper: Musicians don’t sing. Not all musicians have to be singers. I’m not a singer.
Ryan Isaac: You can sing.
Reese Harper: What do you want some “Space Oddity?” Maybe some “Ground Control to Major Tom.”
Ryan Isaac: “Under Pressure.” That’s my favorite.
Reese Harper: That’s the one he did with Queen. But you shouldn’t bring up Queen on a David Bowie tribute episode. The best one to do on today’s topic is probably “Changes.”
Ryan Isaac: Well there’s actually a line in changes that says, “don’t want to be a richer man.” And when the market is down, as it is right now, “Changes” would be very appropriate.
Reese Harper: Okay, we’re going a capella on this. I’m just telling you; everyone prepare.
Ryan Isaac: You’re going to actually do this?
Reese Harper: Just give me a note, like a pitch to start with.
“Ch-ch-ch-ch-changes. Turn and face the strain ch-ch-changes. Time may change me, but I can’t trace time.”
Ryan Isaac: This is groundbreaking; we haven’t done this before. We talk about your musical ability.
Reese Harper: That’s probably enough. We can probably stop there.
Ryan Isaac: I’m just saying—we talk about your musical ability, and this is how you choose to debut it: a capella David Bowie.
Reese Harper: We set the bar low.
Ryan Isaac: Next time it will be a lot more impressive. Just kidding, I liked it.
Reese Harper: So, let’s talk about why we just sang “Changes” though.
Ryan Isaac: Well your phone has probably been ringing a lot.
Reese Harper: Tons. The call volume is heavy; the text volume is even heavier. I think people feel scared to call because they know that it’s the same old answer. So I’m actually getting more texts than calls.
Ryan Isaac: Then they can hear it quick.
Reese Harper: I did get a text the other day that said, “Speak words of comfort to me my financial Yoda.” I didn’t know how to take that.
Ryan Isaac: And your response? I know you have a Yoda; I’ve heard it.
Reese Harper: I do have a Yoda impression, but I don’t know that this guy knew I did.
Ryan Isaac: And you said in your Yoda voice back to him?
Reese Harper: I said, “Mm, recover the stock market will.” I mean that’s kind of what I said back to him. It wasn’t exactly that.
Ryan Isaac: I wonder how that came across in a text.
Reese Harper: But I just feel like everyone’s texts have been similar.
Ryan Isaac: It’s fair. As we are recording this right now, there is a lot of stuff going on. People are scared about China; the commodity prices are kind of all over the place; there’s interest rate worries; there’s always some country ready to bomb another country or in the process of doing so. It’s rational, people are nervous about their investments. So the goal of today’s show is we want to provide some words of comfort—maybe in song. This advice, whenever you’re listening to this, will be applicable whenever you choose to listen to this—in a year from now or even ten years from now. I’m sure it will be the same stuff.
Reese Harper: Regardless of the ups and downs of the market, a good investment strategy doesn’t really change.
Ryan Isaac: Okay, so we are going to talk today about crash-proofing your retirement fund and also addressing the question, “What should I do with my money the next time the stock market goes down?”
Reese Harper: The good news about market crashes is that if you’ve been investing the right way they really aren’t a risk to your overall retirement portfolio.
Ryan Isaac: Yeah, and nobody has a crystal ball, although I really think if you turned on the TV right now there’s an expert every five minute segment or so that seems to have a crystal ball.
Reese Harper: There’s a guy with really long hair that actually has a crystal ball on the show; he’s touching it right now and pointing to a trade. “How to trade the China crash, using my crystal ball.”
Ryan Isaac: History has shown what though? Over a long period of time, markets recover.
Reese Harper: I think what’s important to talk about today is why do markets recover? Hopefully you knew that’s what we were going to say—that markets do recover. But why do they recover?
Ryan Isaac: Oh this isn’t the end-of-the-world podcast? We’re going to save that one and release it later?
Reese Harper: I’m not saying there’s never going to be one, but I won’t be singing David Bowie when that goes down.
A stock market—what is a market? A market is the value of all the companies that are in a region, country, sector, or across the whole world. You can invest in these companies individually or in small groups of them, or you can buy all of them. You could buy every company in the US, or you could buy Apple only; or you can buy Apple and Google. But when we say “a market,” we’re not talking about one company or a small group. We’re talking about an entire market—all of the companies. That is how we would define a market in this conversation. And so it’s interesting to think about why those recover. People really are incentivized to make money; unlike you, you’re altruistic.
Ryan Isaac: Yeah, I give everything I make away to my wife and kids.
Reese Harper: Think about a dentist—they will wake up every day and go to see patients because patients pay him or her and the dentist wants the money that the patients are willing to pay them. At a minimum, he needs to eat and pay for his shelter. He’s probably got a one-bedroom condo. But for most people there’s an element of greed in it; they don’t just want to eat and have the one bedroom. He wants a nicer house, better cars, early retirement, more vacations and more money to feed all the hobbies. People just like you— the dentists, are all over the world running these companies, and they own all these companies. They will do everything they possible can to make money over time and increase the value of the businesses they own just like you would do anything to increase the value of your practice. If somebody designed a robot that did dentistry and eliminated all of your supposed skill, I guarantee that you would find a way to still make money. Do you want the bedside manner of Siri?
Ryan Isaac: We can’t discuss Siri in this podcast because I fight with her in my car on a daily basis.
Reese Harper: Yeah, if somebody invents something that makes you not make money, you’re going to find a way to make money.
Ryan Isaac: The history of the world has proven that.
Reese Harper: And that’s why markets recover because people do everything they can, and all of these things result in a really powerful force that’s arguably the highest returning investment in history. It’s just people’s ability to innovate and make money, and I think that’s really important to remember. When you’re investing correctly, that is the fundamental concept that’s driving the recovery of your portfolio, and that’s why you can’t expect to see it recover in a week, month, or a year. If there’s significant structural problems, for example China is devaluing their currency and that affects a ton of public companies in the United States and in Europe because they’re selling stuff to Chinese citizens who can’t afford to buy things anymore, that’s going to be a problem. It’s going to take a while to recover from that; we’re not going to see Apple stock rebound tomorrow until they have figured out how to replace their sales that they were doing to China. You just have to be aware of those dynamics. That’s my academic rant. Understanding what a market is is really important.
Ryan Isaac: There’s a Tweet I want to read that I read this week. What you’re saying, is the things we invest in in these markets have an underlying actual real value. They are real things that have a real value. So this tweet I read from a guy named Morgan Housel who writes for Wall Street Journal said: “flash crash is equivalent of Zillow breaking and saying your house is worth $0.” Everyone knows the house is still there and has real value. Because if you pull up Zillow and Zillow is broken, the technology itself, and said your house was worth way less than you thought it was you are going to know that your house is still there and still worth something.
Reese Harper: To take that another step, something about real estate that I like to think about is, if my house is worth $500,000 and it declines $80,000, which would have easily happened in 2008 in almost any market you’re in. Would you feel like your house was going to go to $0? And that you should sell it so you can take what money you have invested in it and just go figure something else out? The reason people don’t sell their houses, in my opinion, or don’t feel the pressure from the house price declining, is because they don’t get a statement every month on the price of their house, and they don’t get a daily updated electronic ticker that tells them what their house is worth every second.
Ryan Isaac: Well and no one says, “Hey man, did you hear the price of your house went down?” No one really talks about that.
Reese Harper: Yeah, but a stock market prices every second. You have a second-to-second price. Houses don’t have that kind of reporting or liquidity, and consequently they don’t have as much upside either.
Ryan Isaac: And there’s no button to push to just get out of the house. I might push that button right now.
Reese Harper: You can’t just sell the house.
Ryan Isaac: Another thing that you wanted to hit, which you touched on, is this concept that it’s human nature to feel like things are always different this time. The time that the market is going down now is worse than it was before, and it’s definitely different this time. We have a small collection of Time magazine Carver articles.
Reese Harper: Yes about a hundred of them, but we will do 3-5.
Ryan Isaac: I’m going to read some of these.
Reese Harper: You read them; I’ll tell you what year I think they are.
Ryan Isaac: The first one—picture the cover; it’s really dramatic and in big letters it says: “Interest Rate Anguish,” and the cover story is about how the American people are freaking out about interest rates. And there’s just so much anxiety and uncertainty. What year did that happen? It must have been in the last 3-5 years right?
Reese Harper: I’m going to be a consumer and say 2015 or 2014.
Ryan Isaac: Early 1980’s— people were still worried about this.
Reese Harper: Yeah, that was probably a much more severe interest rate period than what we’re dealing with right now.
Ryan Isaac: Number two: “America’s Banks, a Wash in Troubles.”
Reese Harper: 2008?
Ryan Isaac: 1984.
The third one I have here is the first two words are in all caps: “THE CRASH: Panic Hits the Globe.”
Reese Harper: Wednesday of last week?
Ryan Isaac: It could have been yesterday.
Reese Harper: Based on the text I got this morning, I would have thought it was this morning. When I got all the texts at 7:30 I’m thinking, what happened? And I saw the market was up about 250 points. I wondered if they were watching this. I think one of the texts said, “Tell me if this is going to stop.”
Ryan Isaac: So that was 1987. To be fair, in 1987 we had the famous Black Monday crash. So that was kind of fair. The thing about Black Monday is it recovered half of that loss in a couple of days, and three months later, the year ended 2.5% positive, even on a Black Monday year.
Reese Harper: First, remember that the financial media is in the business to be the first to break all the financial news, and that’s how they stand out in a crowded field, which results in a lot of exaggeration or at least dramatization of every economic condition. That can lead investors to overreact, which in a lot of ways is what they want. And I don’t want to throw financial people under the bus, but if you think about the incentives that an investment house has, if they make money off of trading and activity, they are going to give you all kinds of cool screens on your trading windows to encourage the activity. Keep that in mind.
Second, it’s totally normal to feel anxiety during economic downturns, but emotional reactions to financial news is not rational. It almost always leads to bad investment decisions. We already made a plan. If you don’t have a plan, you should be worried right now. If you have a plan and you have thought through these principles, don’t change it in the middle of the crises. You paid for the risk when you signed up in the first place, so stick around and take the reward.
Ryan Isaac: So let’s talk about what people can actually do to crash-proof their retirement fund or portfolio and get through these times. The first piece of advice you would give anyone is to diversify your portfolio.
Reese Harper: Don’t concentrate your investments into one country. Don’t concentrate your investments into one company or one sector. You can think of some examples where that hasn’t gone well if you follow talk radio and have 80% of your money in gold right now. Don’t concentrate your portfolio. Have your portfolio reflect the breadth of investments that exist in the world; invest in all markets in a way that is representative of the size that they actually are. We can get into that in more detail in another podcast, but at the end of the day if the United States is 49% of the world’s market, don’t own 95% of the United States.
Ryan Isaac: That’s really common though actually. When we analyze portfolios from people who are coming to us for the first time and asking us to look at what they have—an overweight in home country bias, which is all of our clients who are here.
Reese Harper: Do you remember when I went to that continuing ed. thing in Santa Monica? I was with a bunch of Australian guys, and the joke they had was, “Yeah we diversify; we have a broadly-diversified portfolio of Australian equities.” Australia has a very low single digit world market capitalization, and these people had 90% of their portfolio in it.
Ryan Isaac: So home country bias is pretty common.
Reese Harper: Australia is a pretty solid place to invest if you look at it.
Ryan Isaac: Next item would be to keep a reserve of your personal spending. Some people say a year; we might say up to three years of personal spending in reserve. What say ye?
Reese Harper: I think there’s a pragmatic reason, and there’s an emotional reason. The pragmatic reason is that you can draw from those reserves so that you don’t force your portfolio to feel like it’s taking too much of a hit.
Ryan Isaac: So that would be the advice for someone already maybe in retirement or close to it living on their portfolio right now? They are drawing down, and it starts to go down.
Reese Harper: Yeah, if you’re in your accumulation phase you probably don’t need more than a year’s worth of cash, liquidity, time. The rest should be getting good market exposure and bond exposure if nothing else. Within ten years of approaching retirement, I would definitely want to shift from investing in stocks, and make sure that by the time I hit my retirement I have a nice ample reserve by the day I am about to start to retire. So if I’m going to be sixty-five, I want to make sure I have up to three years because a market cycle, like a crash in an equity market usually lasts at least a few years. If you have years worth of spending, you don’t have to be selling off your equities at a loss.
Ryan Isaac: So if you’re an investor later on in your life and you’re getting within the five-year mark, maybe take some of your monthly savings and start switching it to something that’s a little more liquid and conservative and safe that you could keep for living expenses.
Reese Harper: I think a lot of it just depends on talking to somebody about your own situation and get personal advice.
Ryan Isaac: Yeah. That wasn’t investment advice, right?
Reese Harper: Yeah, but the reality is, if you’ve got good market exposure already you have an ample-sized portfolio for sure. I think as a general rule, this is more advice for people that are still fifteen years out—you might not have the luxury of building up that much cash if you’re really close. At the end of the day, I still like the idea of having liquidity.
Ryan Isaac: Another thing we want to ask—this has to be the biggest question and someone just texted it to you this morning. What everyone wants to know when the market starts going down is, “Should we do something different?” What they mean by that is, “Should we take our money out and wait until it gets better and then put it back in?” It’s a very common reaction. Let’s talk a little bit about that and why that’s common but why that is so dangerous.
Reese Harper: Wise investors know that the best offense against a crash isn’t just yanking your money out of the market. And I would also say that you should look at crashes as opportunities to rebalance and even buy more stocks at a low price. If you aren’t in a position to buy during a crash, you could at least rebalance during a decline. If you have the right math setup on your portfolio, that’s just going to be something that’s automatically going to occur or manually occur if you don’t have an advisor. The advisor will handle that if he’s doing a good job, but the best defense really isn’t hoarding your money and putting it in cash. It’s easy to say right now that we’re in a tough market cycle; what’s really hard is to say, “When does it end? When am I going to get back in?” You will literally play that game at least 2-3 times every five years, and it’s so hard to get it right. We just feel like it’s not worth the gamble. You’re risking your entire future on guesses. You really can’t get in and out of an equity market. You can be smart about your allocation; you can become more conservative as you accumulate more money. You can be more aggressive as you’re younger. You can do a lot of things that make sense, but you can’t really decide when you should bail.
There’s a quote you were telling me about the other day that I really liked. You should share that.
Ryan Isaac: A guy named Josh Brown who writes on a blog called “The Reformed Broker.” He’s a veteran Wall Street guy. He’s talking about this concept of, you either take the risk (volatility of your portfolio going up and down) or you take the risk of trying to time going in and out and the risk of possibly doing it wrong and then ending up with not enough money in the future. He says, “you have a choice: you can decide when to take the risk—today or in the future. Rational investors would prefer to take investment risks today, accumulating assets while coping with drawdowns and fluctuations of value. Only an insane person would choose to take the risk at the back end of their life being short of money at an old age when it’s nearly impossible to earn more money.” So that sums it up.
Reese Harper: I think there’s a few closing thoughts that I feel like are good to leave with people.
Ryan Isaac: Yeah, so one of them would be the precise timing of these cycles cannot be predicted with any consistency or accuracy, and for most investors any attempt to time the market is highly unlikely to lead to better results and returns over a long period of time.
Reese Harper: Yeah, I’m convinced of that because I’ve really tried to be open minded about this. It affects my future; it affects our business; it affects clients. I don’t see statistical evidence to support that that was possible or enough research, analysis, and diagnosis. But when people time the market right, it doesn’t necessarily mean that they are not smart. Sometimes there are smart people that time the market once or twice. But it’s 90% luck and 10% analysis. To completely get in and out of a market at a peak in a trough is really hard. And it costs you a lot to get in and out through taxes, time, and fees. You lose opportunity cost of not collecting dividends. You don’t have your portfolio exposed. It is just not solid.
Ryan Isaac: Another one to remember is that the longer you have your money in the market, the higher the likelihood that your returns are going to be good in the future.
Reese Harper: I was just having a conversation with a client this morning. They missed out from the 2009-2013 rally, and they started investing their first time in their career in equities in 2013 at the end of the year. So we have a little bit of movement in 2014 that felt good, and we are flat and down now. They have had a two-year investing cycle at the end of a great bull market, which maybe it’s the end, maybe it’s not. But it just feels kind of depressing if you’re looking at a two-year time horizon. And that’s what we mean by timing—you don’t know if you’re at the front end or the back end of a cycle. You don’t know when you started in that cycle, but you know that if you stick around for 10-13 years that a company will give you a high return over that period. I think the length is super important.
Ryan Isaac: Last thing, Reese. You had a quote that you wanted to read real fast from a book is it?
Reese Harper: It was an article in 2008 by Joni Clark titled “It’s Not Different This Time.” The advice is still applicable today. It says, “Remain invested. There are no guarantees. But throughout our history investors have been rewarded for long-term investing in stocks. For staying the course through the short-term noise and for being prudently diversified. Looking back at all that’s happened over the last thirty-five years, we have some ground breaking news for you: it’s not different this time.”
Ryan Isaac: That’s good advice.
Reese Harper: I really enjoyed it. Great show today.
Ryan Isaac: Back to the David Bowie. It’s time to start a cover band now. We’ll go upstairs and practice a few tunes.
Reese Harper: “Ch-ch-ch-ch-changes.”
Ryan Isaac: While you sing I will say thanks for listening. We really appreciate it. We have a lot of fun doing this, and we hope that it’s helpful. If you can, leave us a review on this podcast; it’s easy to do right from the app. If you like to learn more, go to our website dentistadvisors.com. You can sign up for our free newsletter, and we have a phone number on the website. We love to get phone calls. Call us, let’s chat, or you can click on the link at the top and get on our calendar.COVID-19, Investing, Cash Management