The last month has been interesting to say the least. This is a wonderful time to ask yourself
Are you an Investor or a Trader?
The mindsets are completely different, leading to different behaviors, and different outcomes.
I ask this question in my video this month, talk about the differences, and let you decide by the end which of the two you are.
So, what do you think? Are you an Investor or a Trader?
Click on the video
Transcript:
Hi there. Mike Brady with Generosity Wealth Management, a comprehensive, full service financial firm here in Boulder, Colorado. Today I’m going to ask the question and by the end of the video hopefully you’ll answer it for yourself. Do you have the mindset of an investor or as a trader? Because they are two different mindsets. An investor is long term, a trader is short term.
Let me talk about a few things in order to help you answer that question. When I talk with people – when the market goes down and I talk with people and perhaps I hear some trepidation, some concern, some worry, I think unconsciously they’re worried about losing everything. Their hard earned savings all gone. They go from having money to nothing. Unconsciously even if they don’t even know it themselves that’s what’s going through their heads.
Let’s talk about some situations on TV or in the newspaper that you’ve heard about where that has happened because that does happen periodically. First off it’s usually a sweet lady or a sweet couple, okay. And they’ve invested everything into maybe a single stock. They’re completely undiversified. And many times that might be something that is exotic. They invested everything in some gold that maybe their brother-in-law or their son-in-law convinced them to buy. Or maybe it went all into one sector like technology or Internet. Or maybe they bought something like coins and then they lost it all and they found out that it was a scam. Many times included in this story is non-liquid. Maybe they bought into a shopping mall and that shopping mall, you know, come to find out is filled with asbestos or something bad and they lost everything. Or it was some kind of a private investment that went belly up. And so I think that these are some of the most common themes when you see people lose it all on TV or when you hear about that.
So therefore let’s talk about that. What are the lessons from it? One, hey if you’re a sweet lady and couple you can stay that. That’s cool okay. But all the others we can avoid, okay. Let’s not go into individual stocks. I am a firm believer in diversification and while we’re in a general decline market diversification does not guarantee against losses, okay. That’s one of the disclaimers we have and it’s true. I’m going to talk about why diversification does make sense.
You shouldn’t go into things that are exotic, okay, in my opinion. Gold and tech and coins and things of that nature. Instead invest in those things that are the market. I talk about the general stock market and the general bond market whatever that mix might be for you specifically in your situation. And I believe that liquidity is very important. And understanding that when you are illiquid if it turns against you you can’t get out of it. And so knowing what your liquidity is and how quickly you can convert to cash if you feel that you’ve erred in our choice of those things.
So one of the other things that I think people do is they feel that the market is linear, okay. And when I mean linear that’s, of course, means a straight line. And it just doesn’t work that way. When a market has gone down five percent it does not mean it’s going to continue to go down another five percent. You can’t annualize. You can’t take a short time and make it a big time. And, of course, the reverse is the same thing. You can’t take well the market went up five percent so therefore it’s going to end in a year at 10 percent of 15. You just can’t do that. Just because it went up doesn’t mean it will continue. Just because it went down doesn’t mean it will continue. As a matter of fact, the market has a tendency and I’m going to show a graph later on to go up and go down. And so therefore if you believe that Point A is here and Point B is here, okay, further out then it’s going to be wavy along the way. And so the higher it goes the sooner it is to a downturn. And the sooner it is when it’s going down the sooner it is to an upswing. So that mentality I think is very, very important.
But let’s pretend like what we’re seeing right now is 2008 again. Let’s pretend like that’s the situation, okay. I’m going to put up on the screen there a graph and I’m going to try to highlight it, make it really big. But if you had invested in the S&P the highest point. You had three different portfolios there, a 60 percent stock and bond or a 40 percent bond and stock or a 100 percent stock market index the S&P 500. You invested spectacularly in October of 2007 at the worst time. And you went through the decline of 2008 which was the worst decline in the S&P 500 going back except for the early 1930s, okay. So it was the absolute worst and definitely in our lifetime, for most of our lifetimes.
And so two year breakeven on a 40-60 split. You know you had absolutely horrible timing or you invested and then you gave some of that up, some of those gains. Two years later you broke even, okay. Okay. I mean if your time horizon is two years you shouldn’t have any investments in my opinion except for cash or extremely short term instruments of some type – CDs, whatever it might be. But even if you’re retiring today or you just retired hopefully your time horizon is many decades. I’m hoping you’re not dying in two years or three years or four years. None of us know of course the future but hopefully we are going to have many many years, okay. And so that is very important.
If you had a 60 percent S&P 500 and a 40 percent bond index your breakeven was three years. I mean that’s on the worst in our time, okay. I’m going to put up on a chart there the time, diversification and volatility of returns. You’ve seen this before if you’ve paid attention to my videos which I certainly hope you have. And so at the first band of bars is one year, second is five years, third is 10 years and then 20, okay. And so the first bar is 100 percent stock market index. The second one is 100 percent bond index and that kind of ugly brown is a split of 50-50 stock and bonds.
So what you’re going to see is going back to 1950 – 1950, okay. That’s 50, 60, 64 years, 65 years, okay. We just finished a year. Sixty-five years of returns a diversified portfolio of stocks and bonds squished together like that. The worst that you’ve done – the worst – not the best, the worst is one percent on average per year. And you can see from that previous chart that sometimes there are years where you’re negative, okay. I mean you are not entitled to positive returns every year when you are invested hoping to get good positive returns over a long time horizon. That is part of the deal. If your time horizon is very short well that might be different. You’ve got to consider why the heck am I in some stocks and bonds if I need this money in a very short amount of time.
As you go out 10 years and 20 years the same, you know, has it normalizing. It continues to go – the absolute worst is making a couple percent a year on average, okay. That’s the worst. And the best is of course much better. This includes that 2008 timeframe. This includes the tech bubble. This includes 1987. This includes the 1970s which were pretty horrible. I was alive in the 70s but I was a young kid. I’m 47 so – almost 47, okay. This week. Send me a birthday card.
So I want to show a graph right there. You see it up on your screen. This is going back to 1926 and this includes the Great Depression. This includes the great recession, okay, of 2008. And what you’re going to see is 73 percent of the time we had positive years. Three out of four, okay. And then when we add in that one bar there of zero to 10 percent this is how the year ended by the way. Almost nine out of ten years are positive. Not 100 percent. You can see on the left hand side one and two years, you know, out of 89 years were the really bad ones that we really, really hate – negative 30 and 40 and 50 and 60. Oh, those are horrible. We hate those. But they’re very infrequent. That’s the point, okay. And even when they do happen, even when they did happen if you had a diversified portfolio then the recovery period was very short. And so these are one of the things that we as investors have to understand.
Going forward it could absolutely be different. Anyone who tells you that they know the future is lying to you and trying to sell you I don’t know – a sack of potatoes or something. And I’m not trying to do that to you. I’m trying to be as realistic as I can understanding that we live in uncharted territory. And by definition the future is uncharted territory. Which is one of the things that I want to talk about. I mean every once in a while someone will say to me yeah, but it’s different. I mean you can’t really say that the 1950s and 60s are the same thing as 2015 or 2016. Yeah, absolutely. I totally get it. And 2008 is not the same as here, okay. Every year is different and every year there is always something whether it’s the downgrade of the government by the S&P, you know. The trip way down. Whether or not it’s a war. Whether nor not it’s the concerns about a war. Whether or not it’s quantitative easing or it’s not or it’s tightening. Every year I could sit here and point out a year and I’ve been doing this for 25 years.
I like to think of it like the presidential election. You know how every four years you hear well this is the most important election of our lifetime. I don’t know. After a while it starts to lose its impact on me because if every four years is the most important of my life, darn, you know, they’re all important. I get it, okay. To say that they’re all the most important and it’s the same thing with an investment, right. You looking at it from a long term point of view and do you believe that Point B, that future, is better than it is today. If the answer is no then that’s your own choice to do then why do you have any investments whatsoever? I mean really why do you have any?
So I believe that every year is different, okay. However, history does have a tendency to repeat itself and that’s what we are working on. And I believe that I’m still very bullish on the markets and I do believe in diversification. Gold, silver, commodities. I don’t like them, never have. Essentially they are very, you know, let me just tell you a little insight. They have a tendency to go up with inflation except when they go opposite, okay. And they really go up when the stock market goes down except when they go down with the stock market too. I mean I hate the correlation. They have a tendency to have a mind of their own and I’m just not – and I don’t think that true investors are going into something that you have no control over like a commodity of gold and silver and things of that nature.
Let’s not forget that the pundits that you see on TV, that you see on any of the cable news or at the end of the day, their job is to get you excited. They’re sort of like when they cover – like a politician. A politician who’s trying to win election is there for hey look at me – bright, shiny light right on me. Their job is to be entertaining and to tell you maybe what you want to hear. Maybe get into your fears and also feed your hopes, okay.
I’m like a policy wonk, okay. I’m sometimes boring. You’re like gosh Mike, you know, why do you have to say that when it’s exciting to get maybe ignore and then overreact. And that’s just not me. I’m here to try to be as upfront and try to be as non-emotional as I can. Still being passionate – hopefully you get that as you listen to me. I have passion for what I do but I want to be non-emotional. And so getting back to my original question an investor is someone who looks at things from a long term point of view, understands that the decisions that you make, your behavior, is probably going to – your behavior and how you react to it or not emotional as you look towards to the long term. You know what? Ups and downs are a part of it. A trader on the other hand is always looking for well what about this and what about that. Always looking for maybe a short cut, maybe a get rich quick scheme. And also worried about these fluctuations that are going to happen. They will always happen and they always have, okay.
And so I want you hopefully to be an investor versus a trader. But if you want to talk about it some more you give me a call. (303) 747-6455. Generositywealth.com. Great to talk with you today. One month, one six months, one year. You know what? When your time horizon is multiple years and hopefully multiple decades it really doesn’t matter. In the whole scheme of things it doesn’t matter. Find something that allows you to stay with your plan. That’s what’s important I think. Anyway, have a great day. We’ll talk to you later. Bye bye.
With an unmanaged stock market index going back to 1926, 73% of the time U.S. Stocks were positive. When you add in the “slightly negative” column of declines from 0 to 10%, that adds up to about 87% positive or slightly negative.
The future could absolutely be different, and you have to ensure it fits with your individual goals.
“Every journey in life has a destination.” — Ken Poirot
In today’s video, I share a conversation I had with a friend of mine, who is a surgeon. How does he handle things when the surgery outcome is unknown, and in the middle of the operation if things go awry? How do you stay calm?
What he deals with on a daily basis is the same as investments and your financial plan. How do we keep our eyes on the big picture? What is normal, and how do we stay calm?
One of the benefits I bring to my relationship with clients are the 24 years of experience, and in that time I’ve seen just about everything. The behavior and attitude we bring as investors is probably the most important variable in reaching our financial goals. At least, that’s been my experience.
It is normal for there to be corrections with a generally bullish market, which we’ve been in for 6 years now and I believe will continue.
The chart above does NOT mean our RED line will continue, as it could be the end of the bullish trend. I don’t think so, but it’s possible. I’ve made the argument many many times why I’ve come to my conclusion (see previous newsletters and videos going back 2 to 3 years).
We have 4 months left in the year, but more importantly, if you’re invested in the stock market in any way, you should have years in your time horizon
“I never said it’d be easy-I only said it’d be worth it”–Mae West.
That’s what I think about when I think about investments.
Yes, the unmanaged stock market indexes are making the news, but the whole reason we have a plan, discuss the time horizon, and determine our conviction is because these events happen. Always have, and always will.
History has shown us that those who ignore and then over-react are the ones most hurt. I don’t do that, and I wouldn’t want any of my readers to do that either.
For my full thoughts, click below for the video.
Hi there. Mike Brady with Generosity Well Management, a comprehensive full service financial firm headquartered right here in Boulder Colorado. And I am recording this on Sunday after a pretty interesting week in the unmanaged stock market index; it’s like the Dow Jones and the S&P 500. Perhaps you read something about it or saw it on the news. And so the question is should we freak out or how freaked out should we be? And I’m here to tell you step away from the ledge and why I say that. I was recently at a conference. This was a big conference in Washington DC, I just got back last night with probably 1500/1700 people there, big key note speakers, the whole deal. And I know that not everything went according to plan. I noticed that there were a couple problems with the speakers and some other logistical things that happened. And I know the organizer and she was cool as a cucumber. And so I went up and I talked with her. I’m like, “Wow how can you stay so calm when a couple of things really didn’t go the way it was supposed to?” And she said to me I thought very wisely she’s like, “Mike, that’s why I do all the planning in advance. I’m here to execute the plan. That’s why it’s called a plan. Conference organizers who are running around like a chicken with their head cut off are those that haven’t done planning in advance because when a problem happens it’s too late. You already have to have a plan that you can stick to and you just work through it. You just know that nothing is going to go perfectly; there’s going to be some speed bumps and it’s just part of the deal.”
So with that as a lead in, the people who should be concerned are those with a short time horizon. If your short time horizon is six months, 12 months, maybe even 18 months to two years and you’re undiversified and you don’t have a plan and you’re going to need that amount of money, you shouldn’t be investing in the stock market in my opinion. I’ve said this time and time again in all these videos that if you have a short time horizon, and in my mind I think of that as one year, two year or even less, it’s inappropriate because the unmanaged stock market indexes go through ups and downs and sideways and that is too short of a time horizon for there to be a cycle. If you are undiversified, that’s not very smart because individual stocks can take a very long time in order to bounce back, if they bounce back at all. And you should be concerned if you don’t have a plan that includes stocks and bonds of some diversified nature, even though having a diversified portfolio does not guarantee against loss in a generally declining market, if you do not have a plan like that that’s the reason why you have it. Bonds have a tendency to pull things up when stocks go down and the other way around and you’ve got to find a plan that works for you because investor behavior is what hurts most people. That has been my experience in 24 years is that people ignore and then over react. And I certainly don’t do that and I’m here to tell you if you want to be, in my mind, the smart money, you’re not going to do that either.
People have a tendency to wait too long to get into the market. Let’s think about ’98, ’99, 2000, my gosh you were a fool if you didn’t get into the Internet stocks because everybody made money there and you can’t lose and how could you be so foolish to be diversified, you need to go all into this. Well, that of course was the wrong time to buy. The market goes down and then people say well this obviously isn’t for me right before the market rebounded back all through the 2000’s. I remember in March of 2009 you couldn’t find somebody who wanted to, it felt like, I couldn’t find somebody someone who wanted to invest in equities and in stocks, when really that was the time that made the most sense. So our emotions cause us to do the wrong thing at the wrong time.
So let’s talk for just a little bit about just 100 percent stock market index. I’m going to put up on the chart there, on the screen, something that I do on almost every single video it seems like. And what you’re going to see the bottom number are the red numbers there, it is normal for there to be declines of even double digits throughout the year. And if you go back and watch everyone of my videos for the last three years I’ve been saying that every time it happens people get all concerned, when in fact that is the norm. The thing that has been unusual is that the last two/three years it has been unusually not on the downside. So what we have seen the last week or two that been so alarming because it happened very quickly over a week or so.
In a future video I’m going to talk about some of the reasons and I’m going to dissect them, but if you’ve got a diversified portfolio, which is what you should have, I’m going to throw another chart up there on the screen. You’re going to see at the far left-hand corner one year and then the second grouping of bars is five years, ten years and 20. The big green bar there is over the last 64 years the high for 100 percent stock market index S&P and the low. And so you can see there’s huge highs and huge lows. But then when you look at the second bar in that grouping is bonds. Bonds have a tendency to not have the high highs and not have the low lows. And when you group them together it has a tendency to bring down the highs and bring up the lows.
When we look to the second grouping, which is a five year time horizon, not one year, not two year, historically a combination of 50-50 stocks and bonds has never had a losing five year time horizon going back 64 years, when in fact, of course, it could in the future. I can’t guarantee what’s going to happen in the next five years, but I do know that historically the odds are in our favor, I believe, that if we have a diversified portfolio that is the way to go.
I’m going to put up on the screen talking a little bit about investor behavior. At the top of the screen you’re going to see, starting in October of 2007 all the way through 2008 and all the way to the decline of 2009, and you’re going to see the top two lines did decline, but they very quickly came back because they were diversified. The bonds have a tendency, and the bottom one by the way was 100 percent stock market index, which you shouldn’t be in anyway for most people. I mean if you can have your investments for a long time multiple and you can handle, you just put it in a shelf and say no matter what I’m not going to lose a minute of sleep, then that might be the answer for you. I don’t know. I’m giving very general thoughts here, but that might be the answer. Most people though get concerned. So that’s why we have to know what our investor behavior is. We want to be the smart money and so therefore we usually include some bonds in there, which has a tendency to buffer some of the downs and unfortunately also buffer some of the up as well. When we look at those lines, I’m going to throw it back up on the screen there, you’re going to see that within pretty quick order, and this is even after that horrible 2008, it came back.
So one thing we have to ask ourselves is what is our conviction? If you don’t believe that two, five, ten, 20 years from now the United States, and that’s where the majority of most investor’s money is, if you don’t believe that the United States is the bet that you want to make, why do you have any money in it? But if on the other hand your time horizon is five years, ten years, 20, and if you say wow I believe that in comparison to the rest of the world we’ve got the best ingredients, we’ve got the best workforce, we’ve got the best in comparison to others or the theory of relativity, I’m throwing in some Einstein for you, then this is part of the deal. We’ve got to stay invested and we stay calm and this is a buying – the world can be really scary if you let it be scary or it can be a world of opportunity if you let it be a world of opportunity. Warren Buffett, and I’ve said this many times, Warren Buffett has said that be greedy when others are fearful, fearful when others are greedy. And people are fearful right now. This is a wonderful opportunity if you believe five and ten years down the road and you’ve got a time horizon that is long. And most people have a long time horizon. If you’re within two or three years of retirement, I have to tell you unless you plan on dying the day after you retire, you got another 20/30 years probably to live even after retirement. If you’re in retirement, you know, you’re in your 70’s your probability of you and your spouse one of the two of you is going to live into your 90’s. That’s just the actuarial reality of it. And so what works for us is our time horizon. We have a plan of stocks and bonds, we have a positive conviction, which I personally do, and we don’t ignore and then overreact. Because frankly your unsophisticated investor has a tendency to wait too long to get in and then get out right at the wrong time and that’s why we have a plan. We think about it in advance so that frankly we’re cool as cucumbers when this happens, we’re not scared by Cramer on CNBC and all of the TV. The best thing for this are the news channels and all the newspapers because people, if you want to see negative you’re going to see negative. If you want to see positive you can see positive. Frankly I try to take both of them. I try to be agnostic, although I have to say my conviction is that I see the positive in there and there’s a buying opportunity from my point of view. I have no idea if one or six months from now the market is going to be higher or lower than it is right now. I believe that it’s going to be equal or greater. I’m not going to lie to you. Not one month perhaps but six months from now, but I could be wrong. I could absolutely be wrong. I could be wrong a year from now.
But you know what, if your time horizon is a year you shouldn’t be in it anyway. So it’s an academic discussion that we’re having right now. That’s why you have stocks and bonds meshed together in a diversified portfolio with a time horizon and with a plan that works for you. There is – I said something about a scary place, just in the last couple of years, I just want to throw out some topics here, remember how scary the Flash Crash, this is just what we saw in the last couple of years, the debt ceiling, the S&P downgrade of the U.S. government, Europe almost collapsed, Greece almost collapsed just last month. The emerging markets is not going to take down the world. That’s my opening. That’s my stake in the sand and I’m going to throw out there. But emerging markets should be a minority of your portfolio anyway. Is it going to affect the U.S. portion of your portfolio? Yeah it could. But even Greece, Greece is incredibly small compared to – I mean they’re a $185 billion GDP, we’re 14, 15 trillion. They’re one percent, less than one percent of us. So there’s always things out there that are scary. That’s why we have the plan in advance.
I’m going to continue with videos throughout, you know, assuming that some headlines happen. I’m going to try to explain; I’m not going to do them super long. This one now as I look at my clock looks like a really long one. I’m going to try to keep them shorter so that they are piffy but that you know that I’m on the job over here watching things on your behalf. (303) 747-6455. Mike Brady Generosity Well Management, give me a call if there’s anything I could do for you. Talk to you later. Bye bye.
Emerging Markets cratered 40%. Commodities fell over 25%. The dollar rallied over 20%. Asia looked like it was falling apart. The US Stock Market fell 18%.
I’m not taking about now, I’m talking about 1998. Right before the US had the best GDP growth rate of the recovery.
