This Time It’s Different

FAMILY UPDATE

My wife had her birthday this week and with each passing year, I appreciate her more and more.
In a family of six, with four kids going to school, germs invariably make it home. And once an illness takes hold, it sweeps through the house (sometimes more than once). When it's Mommy’s turn to get sick, the wheels really fall off.
We suddenly must subsist on Pizza, grilled cheese, and scrambled eggs. Bathing becomes optional and the kids’ bedtime schedule is altered, resulting in crabby kids, an exasperated Dad, and Mommy needing to come to the rescue while sick. My wife is truly my angel. I literally don’t know what I would do without her. For even a couple days.

Some of you may be understandably concerned with the markets right now. I can't emphasize enough how important it is to look at long-term returns. If you didn't turn on the TV for two years and then looked at the past, all of this would look like a temporary blip. Focusing on the daily ups and downs is bad for your health. I have zero concerns. But I still understand how hard it is to ignore...

To quote Sir John Templeton, "The four most dangerous words in investing are: This time it’s different."

I'll show you what I mean through a few colorful anecdotes.

Robert Pinochle

The year was 1930. Robert Pincohle had $10,000 invested in the stock market. (A lot of money in 1930.) Robert thought to himself, "We are in the middle of the worst economic downturn this country has ever seen." He was right about that, but what he did next was a mistake. He thought, "This time is different. The markets are dangerous." Robert took all of his money in cash and buried it in his backyard. Ten years later, in 1940, his $10,000, had he had kept it in the stock market, would have been worth $11,925.

John Canterbury

The year was 1940. John Canterbury had $10,000 invested in the stock market. He thought to himself, "We are in the middle of another World War. Countries are collapsing! The economic predictions are dire. This time is different!" John took the money in cash and stored it under the bed in his wife's best Tupperware. Ten years later in 1950, his $10,000, had he kept it in the stock market, would have been worth $35,035. And his wife wouldn't have had to re-buy all those containers!

Earl Pickett

The year was 1950. Earl Pickett had $10,000 invested in the stock market. He thought to himself, "The Communists have infiltrated our government. I’m pretty sure my neighbor Bob is a Commie. A Communist takeover spells disaster for our country, and the market. This time is different. " Earl took the money in cash and hid it in his collection of Elvis Presley nesting dolls. Ten years later in 1960, his $10,000, if he had kept it in the stock market, was worth $44,694.

Paul Kowalski

The year was 1960. Paul Kowalski had $10,000 invested in the stock market. He thought to himself, "The stock market has been going up for nearly 20 years. We are due for a crash. This time is different." Paul took the money in cash and hid it in the stuffing of his Day-Glo orange beanbag chair. Guess what? Ten years later in 1970, his $10,000, had he kept it in the stock market, would have been worth $21,959.

David Malkin

The year was 1970. David Malkin had $10,000 invested in the stock market. He thought to himself, "This country is falling apart. Vietnam. Oil embargoes. Hippies. This time is different." David took the money in cash and buried it in his backyard, putting his Pet Rock on top to guard it. Ten years later in 1980, his $10,000 would have been worth $22,555 ... if he'd kept it in the stock market. Bummer, man.

Tom Chadwick

The year was 1980. Tom Chadwick had $10,000 invested in the stock market. He thought to himself, "The Cold War menace is looming. Nuclear tensions are at an all-time high. Russian paratroopers could descend from the skies at any time. This time is different. " Tom took the money in cash and buried it in his backyard. Ten years later in 1990, his $10,000, had he kept it in the stock market, was worth $36,813.

Wolfgang Applebottom

The year was 1990. Wolfgang Applebottom had $10,000 invested in the stock market. He thought to himself, "Saddam Hussein has us on the brink of war. Stocks are overvalued. We haven’t had a significant recession since the early 70s. This time is different. The markets are dangerous." Wolfgang took the money in cash and stuffed it into his wife's collection of Beanie Babies. Ten years later in 2000, his $10,000, had he kept it in the stock market, was worth $49,907. Worse, his wife's McDonald's International Beanie Bear would have been worth $10,000, except Wofgang tore all the stuffing out to hide his cash.

Bobby Bickleberry

The year was 2000. Bobby Bickleberry had $10,000 invested in the stock market. He thought to himself, "The tech bubble is bursting. I’m hearing rumors of a long-term recession. This time is different. The markets are dangerous." Bobby took the money in cash and stored it in a safety deposit box at the bank. Ten years later in 2010, his $10,000, had he had kept it in the stock market, would have been worth $11,500 (after two of the worst bear markets in U.S. economic history).

Derek Johansen

The year was 2010. Derek Johansen had $10,000 invested in the stock market. He thought to himself, "We just experienced a decade with two historically awful recessions. I am spooked. No more investing for me!" Derek took the money in cash and locked it in a fire-proof safe, which he kept in his closet. Ten years later in 2020, his $10,000, had he had kept it in the stock market, would have been worth $32,016.

Jerry Claxton

The year was 2020. Jerry Claxton had invested $10,000 into the stock market. He thought to himself, "We are in the middle of a global pandemic. Racial and social tensions are as high as I can remember. There is no way the economy can survive this. You would be crazy to invest in the stock market." Jerry took the money in cash and buried it in his backyard. Had he kept in the stock market, two years later on August 31st, 2022 his account would have been worth $12,735.

Maybe this time isn’t different. Maybe it’s time to embrace a financial vehicle that has had an almost uninterrupted string of success for decades.

Be Blessed,

Dave

 

6% Mortgage Rates

FAMILY UPDATE

Now that my daughter got her driver's license we never see her. She leaves at 6:30 AM for school and comes back around 9:00 at night. She is busy with sports and friends and all those fun things you do at sixteen.

It’s amazing how dogs can pick up on emotions. I was having a tough day this week and Desmond followed me around wherever I went. Whenever I sat down, he lay on my feet. It's like he can sense distress. Have any of you had this experience?

The Federal Reserve has been increasing interest rates in order to cool off the economy. What does that mean exactly, and how does is affect you?

The Fed determines what kind of interest banks charge for loans. It also determines what interest you receive from your savings account. Increasing rates is terrible for people who want to buy something on credit. For savers, it can be a good thing, as interest rates on savings accounts will increase.

Mortgage rates have doubled in the past couple of months. What does this mean in real money?

As recently as two months ago you could get a mortgage at around 3%. This means that if you purchased a $500,000 home your mortgage payment would have been around $2100. Now that rates are closer to 6%, a $500,000 mortgage would increase (incredibly) to $2900. As you can see this is basically screeching home sales to a halt. This is what the Fed is trying to accomplish. They want to slow down spending.

The same goes for cars. If you buy a new car and want to finance the purchase, you will be paying 6-7% interest. It would increase your payment by over $100. The days of 0% financing are long gone.

Along those lines, since everyone’s house in our area has basically doubled in value over the past few years I've been seeing some advertisements about refinancing your home so that you can get the equity into your hands.

"You can renovate your house, pay off high-interest debt, or just use the money on a dream vacation!" they say.

Don’t listen to them. While it may be tempting to get a bunch of equity from your house, the new mortgage will be based on current interest rates. I can’t believe that some people even consider this, but getting a big cash payment sometimes is too hard to resist.

The housing situation in this area is a very serious problem. There is no affordable housing for those people working in the service industry. I’m not sure if anyone has any answers.

Anyway, the Federal Reserve says it is going to continue to raise rates. As you can see, they wield a ton of power. Their policies are working to slow larger purchases, but it is harder to reign in the prices of consumer goods or anything that you don’t need to buy on credit.

In other news, this week, Bob Baloney sat down with me and had some questions:

"Dave, things seem so crazy right now. We are experiencing things the world has never seen before," Bob said.

"I understand," I replied. "We are experiencing some historically rare variables in the investing world right now. It can be very disconcerting."

"I still have that 401k at work that I’ve been contributing to. I’m thinking about stopping. As soon as I put the money in my account goes down and the money disappears," Bob said.

I replied, "This isn’t exactly what happened. You are buying low. You are buying shares. The share price may be temporarily down, but you are buying more shares at a lower price. If anything you should increase your 401k contributions."

"You say that we can safely spend 5% of our portfolio each year. How does that work exactly? How can you take money from an account that is going down?" Bob asked.

"Remember over the past three years when stock portfolios were returned an average of 15% or more? I know it is easy to forget. Did you get extra money because the portfolio was performing so well? No. We are sending you an average. Short-term volatility like this has no bearing on your long-term plans," I replied.

"My friend read that the stock market could go down as much as 80%. I would have to go back to work. I don’t know what I would do," Bob said.

"I’m not sure where he is getting that information. The market didn’t go down that much during the Great Depression. If the market goes down that much, banks are going to fail, and it won’t matter where you had your money. Do you really think that Apple, Facebook, Microsoft, Visa, Walmart, and Proctor and Gamble are all going out of business? We need to think logically. Markets temporarily go down and permanently go up," I replied.

I interjected, "Bob, I do have a good piece of news about inflation. Social Security has a cost-of-living-adjustment. Since inflation is raging your Social Security benefit is going to increase by around 9% next year. That increase happens whether you are taking your benefits or not."

"High inflation," I continued, "does not equal losses in the stock market. The news keeps talking about how we haven’t had this kind of inflation in forty years and they are right. Let’s look at what happened."

"1979, 1980, and 1981 is when inflation peaked. That data is what everyone is referencing. What did the stock market do? +18.5%, +35% and -4.7%. You have to remember that the stock market is not logical." High inflation does not guarantee the markets are going to crash.

"Wow! That’s great news," Bob exclaimed.

Bob asked, "Since everything is on ‘sale’ now. Would this actually be a good time to invest some of my extra cash?"

I replied, "It totally depends on your situation and risk tolerance. Personally, I am investing my own money into the stock market. The Dow Jones is hovering around 31,000. At its peak, it was at 38,000. I figure that any money I invest could always go down more, but the markets are certainly not at their all-time high."

"Thanks for the help, Dave," Bob Baloney said. "I’m going to go grab a baloney sandwich and walk on the beach."

Be Blessed,

Dave

 

Worst-Case Scenario

FAMILY UPDATE

We had a great labor day with the family. We went fishing with the family and the fish were really biting. At one point, four of them caught a fish at the exact same time. We also witnessed a stunning sunset.

As hard as I try, I just cannot get interested in fishing. From my perspective, you have to take a shrimp and impale it with a hook, which is gross. Then you stand there forever waiting for a fish to bite. And if you do catch one, you have to find a way to get the flopping fish off of your line. And if it is a "keeper" you have to scale and debone it.

I will just buy my fish at the store.

For about 50% of retiring Boomers, as soon as you retire you need to start spending a reasonable amount of savings each year. My rule of thumb is to “spend the money the money is making.” If your CD is paying 2%, spend the 2%. If your stock and bond portfolio is returning an average of 5%, spend the 5%.
“But Dave,” I keep hearing, “nobody can guarantee the future. While what you say is logical and sensible, you never know what might happen.”

Ok. If that’s the way we want to think, let’s go down that road.

Story #1

Joan Smith retires and starts spending her money in a responsible and reasonable manner, making sure never to spend the principal, but enjoying the interest and dividends her investments paid out.

She uses the money on things she enjoys- things that are important to her. She spends more time with the kids and grandkids. She spoils herself at the spa from time to time. She goes out to dinner with friends. She confidently lives her retired years, knowing that she has a plan in place.

In fact, as she reached her late 70’s she really started to spend some money (“You can’t take it with you”, she always said.). She bought a small condo for her sister who was recently widowed. She organized and financed a large cruise/family reunion with her extended family. Sure she was spending the principal, but she figured, “I’m not going to live forever.”

Then it happens. Early in her 90’s the money starts running out. “I never thought I would live this long,” she quipped. She was reduced to living on her Social Security, small pension, and the small amount of money left over.

Is she thinking to herself, “What a horrible mistake! I had such a great retirement. I enjoyed my kids and grandkids. I deepened relationships with people I love most. I helped people in need. But now here I am, living on a small fixed income.”?

Do you really think she would have looked upon her retirement spending as a mistake? Do you really think she will look back on her life with regret? Of course not! She’s 92 years old. Her bucket list has been achieved. She might not live high on the hog anymore. But she’s 92 years old.

Story #2

Jane Smith has found herself in financial trouble. After making a few poor decisions (including investing in a new apartment project in Puerto Rico), she found herself with very limited savings in her late 60’s. Her daughter offered to let her Mom move into their home.

“This is my worst nightmare,” Jane thought to herself. “I am a burden to my children. I can’t believe this is actually happening to me.”

But, as Jane settled into her new life living with her daughter, son-in-law, and three grandkids, she discovered something extraordinary.

Living with her daughter was a joy. Her grandkids desperately needed more attention from their busy parents, and Jane was able to help out.

Her daughter felt blessed for helping out her Mom. Jane’s grandkids will be forever changed by her presence in their life. “Life is funny,” Jane chuckled to herself. “My worst fear ended up being one of the best things that ever happened to me.”

Story #3

John Smith always worried that the economy was going to collapse. Once he retired, his worries got even more intense. “I’m not going to spend a nickel unless I have to. I am going to grow and defer this money as long as possible. Because you just never know….”

Well, in this example, John’s fears came true. The economy faltered. In fact, the country started to experience such economic devastation that the landscape of the U.S. started to look more like the Great Depression than the 21st century.
Banks began to fail. People, desperate for their money, begin rioting and looting. The stock market drops 80%. A majority of Americans begin to default on their mortgages. 30% of the population is homeless. Marauding bandits fill the streets, making a simple trip to the store an exercise in hand-to-hand combat.

John saw his investments and cash evaporate. The nightmare he had always imagined had arrived.

So my question is: Did it matter that John deferred and grew his savings? No. No, it did not.

If this scenario were to happen, we would be in the same boat.

In fact, if anything, John missed out on the only chance he had to enjoy the money. By the time economic Armageddon arrived, he lost everything anyway.

Story #4

Janice Smith always worried about needing nursing home care. She never spent a penny of her savings. 20 years into her retirement, Janice developed dementia and ended up in a 24/7 nursing care facility.

The nursing home used up all of her money over the next couple of years. Janice, with the disease progressing, was unaware that her life savings were being drained. Looking back, maybe Janice should have used some of the money on things that were important to her.

Story #5

Bob Billings feared distributing 5% of his portfolio each year for him to use. He understood that since the Great Depression, this strategy would have worked 100% of the time. Looking at every permutation, Bob learned that 100% of the time, he would have ended any twenty-year period with more than what he started with. This is simply because the market returns equaled or exceeded his withdrawals.

Then over the next twenty years, due to several historically rare situations, his portfolio only averaged 4%. That's just great, Bob though, I just happen to live in a time of lower returns.

Bob had invested $500,000 in retirement and took out $500,000 during those twenty years. Even in this unprecedented economic environment, Bob, at the end of the twenty years was left with $410,000.

What is my point? Maybe the “worst-case scenarios” you are imagining would play out differently if they actually happened.

Live an empowered retirement, now. Have FUN. You’ve earned it. You deserve it. Don’t live scared. Don’t die rich. You are probably better prepared for retirement than you realize.

Be Blessed,

Dave

 

The Tragic Cost of Fake Recessions

FAMILY UPDATE

Since my wife is home during the day, the pets have grown very close to her.

I get mad because the cats completely ignore me, but when she walks around she has a parade of animals. They follow her everywhere, including the bathroom and shower. Every time she is about to get into bed, she has to move a bunch of furry creatures.

My orchid garden is in full bloom. It looks like Selby gardens. To see a video tour, click here.

You cannot listen to any news source lately without hearing warnings of a pending stock market correction. I’ve had several people in my office in recent days scared to death.

There have always been talks of recessions, but what makes this worse is how financial news has blended with political news. The stock market’s performance has become a political talking point.

It is completely out of control.

Remember that the news will report on anything that will get and hold your attention. Stock market pullback? Big news! President talking about economic struggles? Network executives are even more thrilled. It’s great for ratings, but it is terrible for you.

Why? It gives you the faulty perception that anyone, and I mean anyone, can predict a recession. A couple of years ago, I sat through a lecture by a highly respected group of economists. What was their message in 2018? High probability of a recession halfway through 2019. (nope)

In 2019 I went to a conference with hundreds of other advisors. What did the keynote speaker predict? Recession in 2020. (nope)

At the beginning of Covid basically every pundit guaranteed a recession. (nope)

Oops.

But they will decry, like all prognosticators, “It is happening more slowly than we realized. The recession is still coming but now we see it coming in 2023.” And maybe it will. But maybe it won’t. And if there is no recession you could be just as financially damaged as if there were. How? Let me explain through an illustrative anecdote.

Meet Betty Bonnett.

Betty worked hard her entire life as an office manager at a small, family-owned business. The company owners offered a 401k and a very generous match to any contributions their employees made. Like most small businesses, the owners genuinely cared about their employees and did everything possible to help.

After 35 years, Betty finally decided to retire at age 65. Up until this point, she had contributed money to her 401k and never gave it much thought. The financial guy at work had suggested some mutual funds, and Betty hadn’t changed her portfolio much through the years. She had other, more pressing issues to deal with. Keeping an eye on the stock markets was not really on her radar.

Once Betty retired, she was suddenly faced with a terrifying decision: What do I do with the money now? The gravity of her financial choices had suddenly multiplied tenfold. She realized that stocks and bonds are powerful wealth-building tools. Heck, she’d seen her 401k grow almost every year since 2008.

So Betty met with a planner and got her money working in a diversified portfolio. Everything was going great … until Betty started to see stories about an imminent economic catastrophe on the way.

On TV, the radio, the newspapers — the impending market pullback was everywhere.

Betty couldn’t escape it.

Betty grew sick with worry. She watched her portfolio every day. On one particular day, the market fell 3%. All in one day! It was the last straw for Betty. She called her advisor and demanded all the money be put into cash.

The market went up 4% in the next two weeks. “Now the economy is at an all-time high,” Betty thought to herself, “it is sure to crash now.”

It didn’t. Over the next six months the stock market grew by over 8%.

Betty had made a terrible mistake. She forgot that the way to invest successfully involved keeping her money working for a long time — not trying to time the markets. The 24/7 news establishment had completely derailed Betty’s financial well-being.

By missing the “ups” in the market, her long-term returns will be dismally low.

What goes down always comes up.

Put another way, if you never looked at your statement again, took out 5% of your account value each year, and then looked again at your account on your deathbed, guess what? In almost every case, you will have more than what you started with.

While I can’t guarantee this result, it has been the case since 1930.

The average retirement lasts around 20 years. The worst 20-year period in the stock market since the Great Depression returned an average of 5.6%. The best 20-year period returned an average of nearly 18%.

Nobody knows if and when a recession is coming. Trying to time the markets is a losing bet. Close your eyes to the day-to-day hysteria and Trust. The. Process.

And I know it's hard right now. With all the economic and social turmoil happening in this country it almost seems like a market correction is guaranteed. But you need to come to the realization that the stock market is not logical. Covid would logically have wrecked the economy. It did not. In fact, the market reached all-time highs.

You would think that rampant inflation would cause the stock market to go down. But studies show that inflation and stock market returns have no correlation. The stock market is not logical.

When you see a hysterical news reporter or read a hyperbolic editorial, you can confidently turn away. You know better. Their manic doomsday prophesying can’t affect you if you don’t let it.

You have a plan. You are harnessing the power of stocks and bonds. You are utilizing financial planning concepts that have worked for 200 years. You are not in danger. It might feel that way, but feelings are not facts.

Be encouraged! Be confident! And if you know someone who is freaking out over the “impending” recession, be generous! Share this newsletter with them.

Be Blessed,

Dave