Do You Still Believe in America?

Apr 21, 2020 David Kennon

With all the craziness in the world, both socially and economically- we need to get some perspective on the long term viability of our economy and the stock market as a whole.

There are two very different ways to view our economic future.

1. For those of you who invest in stocks, you’re basically saying, “I believe the American and world economy will continue to grow and develop as the years go by.”
2. By not investing in stocks you are basically saying, “I believe the economy is going to be decline indefinitely.”

Let’s take these two thoughts to their logical conclusions.

For those of you who believe that we are going to continue to advance as a culture, there are some valid reasons.

Innovators

Visionaries

Brilliant scientists

Philanthropists

Technological advancements

Determination

The Human Spirit

I think we can agree that these reasons make sense.  You believe that the economy will continue to grow, and naturally, your standard of living will improve.  Remember, we have 200 years of history that prove this exact point. The Dow Jones was 68 in 1900 and it is now 23,000.

By investing in stocks, you are getting on board with the most brilliant and driven human beings on the planet.

The Other Way

For those of you who say, “I believe the economy is going to decline for many years.”

Your rationale may be:

Unstable geopolitical situations

War

The Great Depression Part 2

Selfishness

Greed

Corruption

Innovation has reached its peak

We are just waiting for the world to collapse

If you fall into the second category, let’s take it to its logical end.

If ten years from now the economy has not advanced in any way- with no innovation or societal improvement, it would be the first time in 200 years of American economic history.

But let’s say all your fears come true.  Wars rage, markets collapse, and we start to decline back into a time that looks akin to the Great Depression: mass unemployment, food lines, homelessness.

Now, at this point, the banks are in trouble too.  Remember, if nobody is able to pay back their debts, banks start failing.  If banks start failing, people start to lose their savings. There would be a run on the banks.  There would be rioting in the streets as citizens attempt to pull their savings. ATM machines would not work.  Banks would lock their doors. Martial law would be declared.

FDIC insurance? It doesn’t mean a thing in this scenario.  There is no way the government can fulfill its promises.

Would the stock market dive in this scenario?   Of course. During the Great Depression, the markets went down 80%.  The only way the markets could go to zero is if every publicly traded company went bankrupt.  If that were to happen our world would truly devolve into anarchy.

What about if you put your money in “guaranteed” products like life insurance or annuities?  Same problem. Those promises are only as good as the companies who make them. You would lose everything.

So, in a way, in this doom and gloom scenario, those of you with money in safe investments could lose everything.  But those with their money in the stock market might actually walk away with something.  It happened during the Great Depression.

So, ironically, those who had their money in “risky” investments, may end up with more than those who had their money tucked away safely in banks.

The next logical step would be that society is wiped out.  We return to tribes and gangs fighting for territory. Food, water, shelter, fuel, and weapons would be the most prized possessions.  Gold would be worthless. Paper money used as toilet paper (Due to Covid-19, I guess some of us are almost to that point now).

At that point, does it matter where you had your money?

All of this to make this point:  You are investing in the stock market whether you are or not.  What do I mean? If the stock market dives for ten years or more, we are in economic chaos with banks failing and hyperinflation. Either way, you lose money.

If the stock market and economy improves you will get far greater returns than money in the bank.

We are at a point in history, where everything is based on the stock market.  Either go for the ride and reap the benefits, or only utilize “safe” instruments that become worthless if the markets completely collapse anyway.

So what do you believe?  Will America continue to change the world for the better or falter permanently?  Own stocks or stay “safe.” You need to decide.

Myself.  I believe in America.  I believe in the power of capitalism and democracy.  I believe we will keep growing, keep innovating, and continue to make life better.  I believe the stock market will continue to grow as it has for hundreds of years.

I refuse to bet on economic Armageddon. Anyone betting on that has been every time.  I’m going to live my life with a sense of opportunity. Not a sense of fear.

Be Blessed,

Dave

Ten Things You’re Getting Wrong

Apr 13, 2020 David Kennon

Quick Note:  As of this writing (4-8-2020), the stock market has been showing strong gains.  After all this awfulness, the market is only down 16% for the year.  This is absolutely incredible to me.  The one year return (from last April to this April) is only -6%. Ten Biggest Retirement Planning Misconceptions After 19 years of “in-the-trenches” planning experience, I can tell you that I consistently see the same misconceptions come up time and time again among the Baby Boomer generation.  Do not trivialize these misconceptions.   It only takes one or two to really mess up your retired years. For example, a very nice woman, who was about to retire, once told me that she didn’t plan on ever spending any or her savings or investments.  When I inquired as to why, she said, “You never know, I worry about medical costs.  There is a history of cancer in my family.” I replied, “If you are enrolled in Medicare and if you have a Medicare supplement, the most you can be ‘out-of-pocket’ is less than $10,000 each year.  If you get cancer and have a $400,000 medical bill, you are only responsible for less than $10,000 of it.” Without that tiny tidbit of information, this woman would have made every financial decision for the rest of her life based on a faulty understanding of the facts.  She would have lived small, worried about money, and feared the future- for no reason. So let’s make sure you live the life you deserve. Misconception #1 “I need to have $1,000,000 to retire.”  There is no standard amount of money that you need to possess in order to retire.  It all depends on your monthly budget and your expectations.  Someone with $200,000 in savings and a budget of $3000/mo is probably going to be just fine.  Someone with $2,000,000 in savings and a budget need of $20,000/mo is probably in trouble. Misconception #2 “The stock market is unpredictable and dangerous.”  If you still believe this fallacy, please go to www.DavidKennon.com and read dozens of my commentaries.  The stock market has a remarkably consistent (and successful) track record. Misconception #3 “Once I retire, I am too old to invest.”   The life expectancy of a healthy 65 year-old is around 90 years old.  Without utilizing growth investments, such as stocks, you are missing out on a powerful tool.   I’m not promoting that you put all of your money in the stock market, but a diversified portfolio of stocks and bonds is usually appropriate throughout your entire lifetime. Misconception #4 “Super Smart People are able to make more money investing than Normal People.”   There is zero academic evidence that anyone can outperform the markets.  In other words, no one has a magical secret that will make your money grow faster than everyone else. Misconception #5 “If the stock market crashes it could take me 10 or 20 years to recover.”  Not true.  It took less than four years for you to recover your losses from the 2008 crash.  2001 crash- four year recovery.  1987- one year.  1973/74-  four years.  1939/40-  three years.  The Great Depression was only 4 ½ years. These are the worst examples in 100 years of economic history. Just get that belief out of your mind.  Markets recover faster than you realize. Misconception #6 “Social Security is going to go bankrupt.”  I stay very close to developments within the Social Security Administration.   I can find no evidence that your benefits are going to get cut.  Luckily for you it is easier for politicians to kick that can down the road.  My kids need to worry.  You do not. Misconception #7 “I need to have my house paid off before I retire.”   While it might feel nice to be debt-free, it is not a prerequisite for retiring.  As long as your retirement budget can handle the payment, many people retire with a mortgage. Misconception #8 “I need to stay on top of my portfolio.  I need to continually adjust my investments, watch financial news shows, and check my phone ten times a day to see what the Dow Jones is doing.” No you don’t.  Believe or not, people back in the 70’s and 80’s only got market news once a week (gasp).  Checking your portfolio daily makes you a worse investor.  You are much more prone to making emotional decisions. Misconception #9 “I shouldn’t spend any of my retirement savings until I absolutely have to.”  If you still believe this widely-held misconception please read my past commentaries (or listen to my radio show).  It is absolutely responsible and prudent to withdrawal a reasonable amount of money from your retirement accounts each month once retired. Misconception #10 “Some people who invest in the stock market lose all their money.”  While this may be possible if you put all of your money into a single stock or a single bond; a diversified portfolio of stocks and bonds has never gone to zero.  In fact, in the past fifty years, the WORST year for an investor with a 50/50 stock1/bond2 portfolio was 1974.  You would have lost about 12% overall for the year.  By the way, the same portfolio would have been up 20% the following year. Be Blessed! Dave 1- as measured by the S & P 500 2- as measured by the Barclay’s Aggregate Bond Index

How Will This Change You?

Apr 8, 2020 David Kennon

This is an incredible time in history.  I can’t wait until it is over. Did you, ever, in a million years, think that you’d be quarantined in your own house for weeks? Let’s review some investing concepts.  I’m still getting calls from people who want to “wait this out until things settle down.”  It is impossible to time this. And when it comes back, the beginning phases of the recovery often happen quickly. Check out this quote: “Investors who flee to cash during bear markets should keep in mind the potential cost of missing the early stages of a market recovery, which historically have provided the largest percentage of returns per time invested.” (The Balance.com) Also, remember than your dividends will continue to pay uninterrupted.  The portfolio is still producing the same amount of cash. I have spoken at length about this in a past article. “Recessions and bear markets are an unavoidable part of long-term investing. But it’s important for investors to realize that while stock prices can be extremely volatile during such periods, dividends tend to be far less so.” (Intelligent Income) And let’s take a look at what Warren Buffett has to say about the virus’s effect on the economy. “You don’t buy or sell your business based on today’s headlines,” legendary investor Warren Buffett said recently in an interview with CNBC. The coronavirus “is scary stuff,” he said, but added, “I don’t think it should affect what you do with stocks.”  (Grow.Acorns.Com) Good News About the Coronavirus When this is all over, some good will actually come out of it. We will all appreciate stuff that we took for granted in the past.  Dinner with friends, family get-togethers, sports, going to church… The madness of the world has slowed down.  I am finding myself experiencing life in a whole different way.  Maybe we will move on from this pandemic different people. Working from home is going to become more prevalent.  I imagine a lot of companies and employees are saying, “Wait a minute, we still get everything done, and we don’t have to pay for office space, and people can spend more time with their families.  This is great!” It has made the world come together against a single foe.  Never before has the entire world needed to work hand in hand like this. Our response to future pandemics should improve. The COVID-19 pandemic has exposed shortcomings in healthcare systems throughout the world.  We won’t let this happen again. A Couple of Exciting Corona Virus Updates Coronavirus might hate heat and humidity.  Scientists have found that the virus is extremely heat sensitive.  Now that the state is getting warmer, the transmission of the virus might go down.  This is why hot, tropical countries have not had nearly the problems so far. In addition- The FDA has allowed an emergency authorization to allow the use of an anti-malarial drug to fight Covid-19.  The drug might dramatically shorten the duration of the sickness and lower mortality rates significantly. Over 37 million doses have been distributed to doctors and hospitals across the country.  The results seem promising. This won’t go on forever.  We will get past this as a stronger and closer community and country. Be Blessed, Dave P.S.- Does a friend need an encouraging word?  Please share.

Your Recession Primer

Mar 26, 2020 David Kennon

These are scary and unknown times.  But it won’t last forever.

-I don’t know why the media isn’t reporting this, but Israel says they are weeks away from a vaccine.

-There is incredibly positive data coming from the drug hydroxychloroquine.

–Remdesivir, in very small sample sizes, showed very quick improvement in sick patients.

-Due to high levels of self-quarantine, Codogno, one of the two coronavirus clusters in Italy, has reported significantly fewer infections per day

-China has also closed its last coronavirus hospital (there are not enough new cases to support them).

-Test results for the virus are now coming back in hours, not days.

-All of this is making us appreciate things we totally took for granted in the past.

As far as the stock market goes:

-The markets HATE uncertainty.  This is part of the reason for so much volatility.

-The stock market projects what they think may happen to the economy.  It does not reflect the economy itself but what the traders fear could happen.  These fears are usually exaggerated which is why often times the markets will rebound as situations become more clear.  Markets usually overreact both negatively and positively.

-The Aggregate Bond Index is positive for the year.  This represents thousands of bonds throughout the country.  This is common in a stock market downturn as people move money to very low interest bonds.  Most people older than 60, have bonds in their portfolio to balance out returns.

-Gold is down for the year, which is interesting, as many Americans believe it is a “safe” instrument in times like these.  I’ve discussed in the past why gold is generally a poor investment.

-”Staying the course” can be so difficult.  But selling low and buying high is the number one mistake investors make.

-I hear many of you say, “Why don’t we invest in medical stocks since they will have so much demand?”  The markets saw this coming weeks ago.  It is almost impossible to stay in front of everyone else.  By the time you realize a stock might be a good buy, that ship has sailed.

-I cannot emphasize enough the resiliency of the world economy.  While there may be a short-term downturn, this is not going to last forever.  Humans always find a way to bounce back. Every single time.

Be Blessed,

Dave

P.S.- If you want to encourage your friends, please share.

Don’t Underestimate the Human Spirit

Mar 16, 2020 David Kennon

When I originally wrote this article about a week ago, the markets had not yet hit the lows that we see today (Thursday).  I understand that there is a lot of unknowns out there.  This is scary.  I don’t want the tone of this article to sound flippant.  But the information holds true. —— I am going to try to separate irresponsible and  hyperbolic investing advice from legitimate resources which are acting as the voice of reason. I think one of the most important concepts on market capitulations in times like this is the concept of “myopic loss aversion.” The concept is very simple.  Losing money feels twice as painful as making money feels good. This is built into our DNA. Numerous studies have been conducted which reproduce this idea over and over again.  Losing $10,000 in the stock market feels far worse than making $10,000 in the market feels good. Remember when the stock market went up 32% last year?  It felt good, but it was not cause for you to dance in your living room.  Now that the stock market is going down, the feeling you have is so much stronger.  Some people lose sleep.  It hurts deep down. To quote Peter Lazaroff: “Myopic loss aversion is the idea that the more we evaluate our portfolios, the more susceptible we are to loss aversion….investors that check their portfolios less frequently are less likely to make bad decisions stemming from fear-based loss aversion.” Do not look at your portfolios.  Do not pay attention to what the stock market is doing (which is almost impossible these days- it’s on every screen in America).  The more you look at your statement the worse investor you become. Let’s look at what Vanguard has to say (probably the most highly respected name in the investing industry). “I know how difficult it is to see hard-earned savings diminish, but don’t be tempted to time the markets. It’s a losing strategy. Our studies have shown that chasing returns has historically destroyed 1.5% a year versus staying the course.” (Vanguard.com) “Even from the pre-crash peak in 2008, stocks are still up almost 90% over the past dozen years and a few months. Moreover, when you look closer, you can see a lot of spots on charts where stocks fell sharply since 2008.” (The Motley Fool)  “Resist the urge (to sell). Money is made at turning points, and the crowd is rarely right at critical moments. Why? Because 50% to 90% of daily volume is driven by the trading algorithms, not by human investors with long-term time horizons.”  (USA Today) “Looking at data going back to 1930, Bank of America found that if an investor missed the S&P 500′s 10 best days in each decade, total returns would be just 91%, significantly below the 14,962% return for investors who held steady through the downturns.”  (CNBC) “Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.” (Warren Buffett) I have to admit, that in my 18-year career this is some of the most incredible volatility I have ever seen. As more speculators enter the market, the more they try to time the market, which makes the market act more like a roller coaster. But you are not a speculator. You are an investor. You understand the power of stocks of bonds. You understand that over the next 5, 10, 20 and 30 years a diversified portfolio of stocks and bonds will make money. I write these articles because I care about my readers.  While these are uncertain times, take comfort in the fact that the human spirit wins every time. Be Blessed, Dave Please share this article so that your friends can worry less.

Should I Sell My Stocks?

Mar 9, 2020 David Kennon

Clearly, with the current world situation, I am here to be the voice of reason.  You need to stay the course.  Let’s look at why.  There are logical and historical reasons, which I will address below.

But, first, I’m getting the same questions over and over again.  Here are the answers:

Common Question #1

“Dave, I’m taking money from my portfolio each month.  Do I need to stop that disbursement since the market is down?”

No.  Remember, we are assuming an average of 5%.  Did you get more money last year when the market was skyrocketing?  No. You get what a diversified portfolio has averaged for decades.

Common Question #2

“Am I being forced to sell stocks, which are temporarily down, when I need to take money from my portfolio?”

No.  Remember, the portfolios I design are made up of two buckets.  A stock bucket and a bond bucket. When stocks go down, bonds almost always go up.  If you need money now, we are sending it to you from the bond bucket.  Properly designed portfolios weather these storms because you can tactically determine where to take money from.

Common Question #3

“Do I need to worry?”

No.

Common Question #4

“Should I get more conservative with my investments until this all blows over?”

No.

I’m going to give you cold, hard data that will debunk the concept that timing the markets in this situation might help.  I want you to know that I am not remotely worried. I’ve been through this before and it always ends the same way. Betting against innovation and progress is ALWAYS a mistake.

Here is a profoundly important chart.

What does this mean?

The chart is pointing out that, over the past 20 years, the stock market has averaged 5.6% per year.  But if you missed the 10 best days, you would have lost two-thirds of the overall profits.  Think about that!  Out of 7,300 days, missing the best ten, you decimated your long-term returns.

You cannot time the market.  “I’m going to wait until things settle down.”  When is that exactly? After the market has two amazing days, or three?  Oops, you just messed up your whole life-long investment strategy.

Be Blessed,

Dave

Balanced Portfolios Do Not Crash

Mar 2, 2020 David Kennon

Market Update:

1. This sucks.  Nobody likes seeing this kind of market volatility.
2. The markets in the past thirteen months have returned over 35%.  It is easy to forget that.  You are just losing a small portion of what you just earned.
3. Dividend and interest income do not change when the markets go down.  The “money that the money is making” does not change.  I wrote an article about this last year.  Click here. 
4. Read the rest of this article.

Let’s go back to the basics. First, let’s get some historical perspective to extinguish any lurking fears like, “The stock market is going to crash, I’m going to lose all my money, and end up living under an overpass with feral cats as my only companions.”

The chart below reports factual returns of an investor who put 50% of their money in bonds and 50% of their money in stocks over the past 30 years. (Specifically the Barclays Aggregate Bond Index, and the S&P 500). This is not my opinion.

The article continues at the bottom.

1990	1.5%
1991	24%
1992	9.8%
1993	13.2%
1994	0%
1995	28.58%
1996	13.74%
1997	22.47%
1998	18.15%
1999	10.87%
2000	.15%
2001	2%
2002	-11.8%
2003	20.9%
2004	10.3%
2005	4.88%
2006	11.33%
2007	4.3%
2008	-20.81%
2009	24.64%
2010	11.59%
2011	7.34%
2012	13%
2013	15.55%
2014	11.95%
2015	.34%
2016	11.07%
2017	15.67%
2018	-3.50%
2019	23.28%

Interesting Takeaways

1. Wow! You can make a lot of money investing in diversified portfolios.
2. The portfolio went down 3 times in 30 years.
3. The portfolio went up over 20% 5 out of 30 years.
4. The portfolio went up over 10% 19 out of 30 years.
5. Remember, when investing in retirement, you normally do not invest all of your money in the stock market. Bonds are important, too.
6. 2008 ranks as one of the worst recessions since the Great Depression. You would have lost 21% in 2008 and MADE 25% in 2009. Let me say this in italics to drive this home: During the worst recession in modern economic history, it took one year for your portfolio to recover. One. Year.
7. I could actually extend this chart back to 1935 and the results are quite similar.

Why does it work this way?

Usually when stocks go down, bonds go up. Human beings are extremely emotional. When the stock market is retreating, it is common for investors to move their money into more conservative bonds (which is a mistake).

There is a famous study by Dalbar, Inc. which shows the difference between investor returns vs. actual market returns. The result? Investors, on average, make 5% less than the stock market actually returns. (source)

How is this possible? If the stock market returns 8% over ten years, why do actual human beings average 3%? I think you know the answer.

This is why, I believe, it is so important to work with a fiduciary. Most humans need an objective, non-emotional professional helping them stay the course.

No matter if you think the stock market is going to go up down. It just simply doesn’t matter. If you keep your head in the sand and withdraw around 5% of the portfolio for the rest of your life, you will be just fine. We have 200 years of economic history to prove this point. Bad stuff happens. Weird stuff happens. Change is inevitable. Wars, diseases, political upheavals happen.

But, you, as a member of the Retirement Revolution are going to reject fear-based poor decisions, and reap the rewards you deserve. You can do this!

Be Blessed,

Dave