“Last week I found myself wondering why I don’t buy more piñatas, because right now I’d love to beat the holy crap out of something and then sit in the grass and eat candy.”- Susan Blankston
When you listen to newscasters talk about the financial markets, volatility is often explained away in a very linear and simplistic manner. Even if their explanation contradicts itself from one day to the next, they do what they can to pinpoint one reason for the ups and downs. What’s often left out is the range of emotions that have also come into play – hopes, fears, greed, and more that also get mixed into the elements.
Over the last couple of years we have seen an off kilter supply and demand – with demand greatly outweighing supply in many areas. We’ve seen shock waves of disruption as the markets responded to Covid, the war in Ukraine, and more. As the gap narrows a bit now, let’s take a closer look at what we’re seeing and what it means for investors.
Hi there. Mike Brady with Generosity Wealth Management, a comprehensive, full-service firm here in Boulder, Colorado.
Today I wanted to talk a little bit about the volatility in the market. You might read or watch on TV that it’s up one day because of X and it’s down the next day because of Y, and the journalists seem to be very confident that the reason that they’ve given for a complex question is absolutely right despite the fact that the day before might have been contradictory. They’re optimistic on day one and pessimistic on day two and then optimistic and renewed on day three. It really doesn’t make a lot of sense many times.
When I was in college we learned about this thing called CAPM which is the capital asset pricing model. A guy by the name of Markowitz came up with that, a brilliant economist. He actually received a Nobel Prize in economics in the early 1990s because of it. His work was followed up by the work from a guy by the name of Kahneman and work by the name of Thaler, T-H-A-L-E-R, Thaler. They received Nobel Prizes 20 years ago and another one about five years ago. What they determined is that unlike what I learned in college and what Markowitz had said is it’s not all about math. The reason why the value of an asset – in this case it could be the stock market, the bond market – it’s not all mathematics. It’s not just a stream of income payments in the future and the entire formula. It’s an efficient market meaning everyone’s got the available information and not everyone, though, is logical. That’s really the biggest work that came out of the last 20 to 25 years is that go figure, people sometimes are emotional and are illogical.
So, I take that into consideration when I look at what’s happening right now. A lot of it has to do with some of the emotions that we have, some of our predictions, some of our fears, some of our hopes, some of our greed, some of our real fear. And that all boils together in a pot to get what we see on a daily basis and then is in the news.
Over the last two-and-a-half years we’ve had on the demand side. It’s a demand and supply, but on the demand side we’ve had $7 trillion helping to support the demand for goods. Whereas, on the flip side the supply has been restricted. We’ve had supply chain issues. You have lots of demand, lots of money with lower supply. It hasn’t been transitory. The impact of that is being inflation and it’s been exacerbated by various shocks to the system. COVID waves that have led to one right after another. Then we’ve got Ukraine being invaded by Russia. There’s a reason why it’s been this inequality of demand and supply and out of whack has been extended longer than what is frankly comfortable.
What we’ve seen recently is we have the supply chain, there’s an agreed upon consensus throughout the world that we need to focus on getting that fluid again. On the flip side, demand is coming down mainly because of the inflation, the reaction to it. What I would say is the overreaction. The oversold we talked about. So, interest rates are coming down because the real estate, really with mortgage rates dramatically increasing to 40 year highs for mortgage rates, people are buying less houses and so the demand throughout the entire economy has reduced due to some of the inflationary pressures that we’ve seen. But at the same time we’re seeing the supplies go up and so they’re going to be back. Hopefully we’ve got some demand and supply coming back into equilibrium which is what we want to see and that’s good for us. Good for us as investors. Of course good for us as long-term investors as well as things start to settle down.
I always hate it when there’s a volatility. I never mind it on the upside. You get two or three days of an upside and you’re like, “Yeah, right. Things are back.” And then we have a day or two of downs. The important thing is as we stream them together that there are more ups than downs and that starts to happen when things go back into equilibrium. It takes a while for it to happen. I would say that it took a while for it to come to this situation. It’s possible – sorry guys, that’s my dog right here underneath the table – it takes a little while for it to work itself out as well. The risk to us is if there is a shock, especially to the supply side. On the demand side printing more money doesn’t seem politically feasible at this point in time. However, from a supply side if we have a major shock to the supply side that won’t be good. That will derail us from coming back into equilibrium which is what we want for that demand and supply side.
Anyway, Mike Brady, Generosity Wealth Management, 303-747-6455. You have a wonderful day. Thank you.
“All happy markets are alike; each unhappy market is unhappy in its own way”
– Philosopher Mike Brady
The market has gone down even into bear territory for this year, 2022. Painful. It’s just matter of fact, there is no way to deny how crummy it has been to watch. As humans, we’re both logical and emotional – for some the news may cause instant panic. However, rationally we need to look at the data and look at our portfolios and continue to make rational choices based on the long-term plan, not short-term discomfort.
Remaining diversified is really important. Going back over 100 years every single time 100% of the time when it has gone down, it has come back over time – 100% of the time. That’s not the case for non-diversified issues they might have whether that’s real estate, whether that is a business deal, whether or not that’s an individual stock or an individual bond. That’s the reason why you have a huge, diversified portfolio.
Let’s dig a little deeper at the data and importance of balance between your logical and emotional brain.
Watch my latest video update for more on what we’re seeing.
Mike Brady with Generosity Wealth Management, a comprehensive financial services firm headquartered in Boulder, Colorado, although I am recording this video from our Wyoming cabin where I work during the day and help restore this cabin in the evenings. Just real quick before I get down to business. These windows were all brand new last year. This window over here, a brand new stove that goes up to a brand new roof. All this cladding my wife has done. It’s something that we’re very passionate about. This is a 50-year-old cabin that’s been in my wife’s family and I’m so blessed that I get to work during the day with you clients and prospective clients and work on this beautiful cabin in the Wyoming woods and mountains in the evenings.
I want to start off by talking about human emotions. It is okay as a human being as part of the experience to sometimes have conflicting emotions. To have happiness and sadness at the same time. When your son or daughter got married you probably were sad that they were leaving the fold but happy that they were starting their lives and very happy for them that they found the right person. You jump out of a plane with a parachute. You’re feeling very fearful but you might be feeling alive, maybe conflicting emotions. It is also okay to feel calm but disappointed. I bring that up because I’ve been doing this for 31 years and a friend who is also a client said last week, “Mike, you’re so calm. Aren’t you excited and aren’t you disappointed.” The answer is I can have all of these emotions at the same time. I’m not sure how not being calm helps in any way.
Since I started back in 1991, I’ve seen well over 200 market days a year for 31 years. I’ve seen ups and downs. I have seen it all, and I take it in stride. I’m a big fan of Warren Buffett and Warren Buffett I remember in the late 1990s, he was made fun of for being an old fuddy duddy. Oh, you need to get on all these tech stocks. You need to get on all this new information superhighway. And he was like, “Hey, I’m going to continue with what I do which are good value companies.” He has always talked about avoiding expensive and exotic hedge funds. He didn’t really understand some of the bond offerings and wrappers and products by the various companies in the 2000s, leading up to 2008. Most recently he has been made fun of for badmouthing cryptocurrencies.
Sometimes sticking to the tried and true is the best thing that you can do and that’s something that I believe in very strongly. Staying diversified is absolutely essential. Staying in control of your emotions is essential. And knowing what your time horizon and your duration is, is absolutely essential.
The market has gone down even into bear territory for this year, 2022. Painful. I do not want to give you the impression that it hasn’t been painful. As a matter of fact, I was with a couple of financial planner friends earlier in the week and it was like oh my god, just give us an up day, give us an up week. This is just so painful to watch. We have logic and then we’re emotional human beings as well. The difference is that we acknowledge that as professionals and say, “Okay, great. I’m just going to compartmentalize this over here because that part doesn’t help me.”
Remaining diversified is really important and all I can really say is going back over 100 years every single time 100% of the time when it has gone down, it has come back over time – 100% of the time. That’s not the case for non-diversified issues they might have whether that’s real estate, whether that is a business deal, whether or not that’s an individual stock or an individual bond. That’s the reason why you have a huge, diversified portfolio. I have said in the past that over time – when you look back the last ten years – those of you who have said, “Hey, I can take a high risk tolerance level,” are those that usually, in my opinion going forward, not guaranteed, will have the higher rate of return over a long time horizon even if in the short term it might be more volatile than what you like. It is not a guarantee of losses along the way, but that is why you keep the duration into consideration.
This has been real bad. I’m going to put up on the screen and circle there – it’s going to be in a box actually – that’s what the stock market has done so far this year. Not good at all. Every sector has looked very poorly or performed very poorly and very consistently.
This next sheet that I put up on the screen are bonds which is unique that bond funds have also done very poorly in general, the unmanaged bond market indexes. When interest rates go up, bonds go down in general. That’s the thing. However, in my opinion both with stocks and with bonds it’s oversold. You’ve heard me say that before in previous either corrections or bear markets. I’m saying it again now. That’s just my opinion that it’s oversold.
This third chart that I’m going to put up on the screen, you’ve seen me use this. It’s 40 years’ worth of data, 42 years – since 1980. I’m going to highlight the bottom half. It’s normal for there to be declines. It doesn’t mean the top half there – that’s what the year ends. Three out of four years are positive, ends positive, but almost every year there are declines throughout the year. It doesn’t mean that’s how the year ends. But I want to bring it back to 100% of the time a diversified portfolio of the unmanaged stock market indexes, unmanaged bond indexes have recovered – 100% of the time. That’s what I’m going to do. Could the future be different? Absolutely. I don’t know the future anymore than you. However, that’s something that I’m willing to invest with from a philosophy point of view.
Keeping cash, keeping money in a bank account after inflation is going to be a loser. Inflation, depending on which index you want to look at – 6%, 7%, 8%. If you look at energy it’s even 30% on energy just in that particular segment. Food is also double digit inflation. You’re going to lose money on your cash after inflation because the banks aren’t paying anything and you’re going to lose principle power on that cash.
“One moment of patience may ward off great disaster. One moment of impatience may ruin a whole life.” – Chinese Proverb
If you flip a coin 1,000 times–mathematically, 500 times it’ll be head, and 500 times it’ll be tails. However, if you look at the distribution of those heads and those tails, sometimes you’ll have 10 tails in a row, or you might even have 20 heads in a row. It doesn’t mean that the 21st or the 22nd will be either heads or tails. It’s just that they get clumped together. The reason we look at this analogy now is that’s what we’re seeing in the financial market. It’s very painful and no one is happy.
Of course heads and tails is completely random, the financial markets are not, their odds are even better than 50/50! When you look back over 90 years, three out of four years, not 50-50 but three out of four years are positive. In year’s like we’re having in 2022, this can be hard to remember because it’s been a pretty sharp decline, not only on stocks but also in bonds. And there’s a lot of reasons for that. We’re going to talk about it here today.
Hi there. Mike Brady with Generosity Wealth Management. Today I want to start off with an analogy. If you flip a coin 1,000 times–mathematically, 500 times it’ll be head, and 500 times it’ll be tails. However, if you look at the distribution of those heads and those tails, sometimes you’ll have 10 tails in a row, or you might even have 20 heads in a row. It doesn’t mean that the 21st or the 22nd will be either heads or tails. It’s just that they get clumped together. The reason why I bring that up is that’s how it feels right now. Every day, every week, every month so far this year has felt like it’s been down. Very painful. I just hate it. Nobody likes it.
One thing that’s a little different from my analogy is, of course, a head or tails is completely random. That is the pure luck of the draw. With investment, and especially when you look back over 90 years – I’m going to put a chart up here in a few minutes that will show since 1980, which is now over 40 years – three out of four years, not 50-50 but three out of four years are positive. But, I’ve got to tell you that this year it’s hard to remember that because it’s been a pretty sharp decline so far this year, not only on stocks but also in bonds. And there’s a lot of reasons for that. We’re going to talk about it here today.
The very first thing I want to show is a long-term chart, and I’ve just put a circle around where we are right now.
Irritating. Absolutely painful and one of the reasons why I am always talking to people about their duration. You can sit back and watch these videos that I’ve been doing for 12-13 years, and in almost every single one I talk about, well, if you need money in the next couple of years, you shouldn’t even have it invested. That’s because periodically, there are these times where the market goes down, the unmanaged stock market indexes, and it takes a while for it to recover. And who knows how long this particular one is going to recover. But I’m going to show you that a balanced portfolio, at least historically, has come back 100 percent of the time. If you’re an individual stock, no, that’s not the case. Things go bankrupt, which is the reason why you stay diversified. Staying diversified, what’s your duration? Those types of things are real nice and cute and almost cliches until something like what has happened so far in 2022 actually happens. And then you remember why it is a core fundamental foundation to investing.
Up on the screen once again is where we are so far this year.
As you look at this next chart, the numbers on the red are the intra-year declines for an unmanaged stock market indexes, the S&P 500. That means that during the year, there’s a decline of that amount. A lot of times, it doesn’t happen at the beginning of the year. Maybe the first half of the year is really good, and then it gives up some of the money. The top number, the black number at the top is the way the year ended, the rate of return. So, just because there’s an intra-year decline does not necessarily mean that the year ends negative. It is too early so far this year; it’s now the middle of May, who knows how the year is going to end. But just because it has started off not good at all does not mean that the year will end negative.
This screen right here, I’ve circled that on the right-hand side.
You’re going to see that depending on where it’s invested, the unmanaged stock market indexes, this is kind of a compilation of them, you’re talking between 10 percent and almost 30 percent negative for the year. It’s really been a broad-based decline so far this year, which is painful for everyone. At least a couple of years ago, when the COVID decline happened, we’d have some up days. It feels like a long time since we’ve had an up day which is absolutely irritating. Sometimes these sequences of returns are not in our favor, and that’s what’s happening right now.
The next page and I’ve now circled it, are the returns for bonds.
Most of the time, stocks and bonds are decoupled, meaning that when stocks go up, bonds go down, and the other way around, bonds go up and stocks maybe go down. Right now, because of the interest rate increases, the bonds have also declined, and they have priced in future expected rate increases. When interest rates go up, bonds go down. They’ve priced it in. So, from my humble opinion, I believe that this is a relatively short correction, an overcorrection in the bond market, that will be corrected as the months play out. At this point, the hit has happened with the bonds. I don’t expect it to be much greater in the future. But, stocks are down, and bonds are down, which really is the core of a portfolio – stocks, bonds, and cash. Cash is paying nothing; bonds are negative this year, and stocks are negative as well, the unmanaged stock market indexes and the unmanaged bond indexes. So, it’s not really been a rosy picture. It’s been very painful, and this is the reason why you have long-term investments. If you’re looking at things on a daily, weekly, monthly, or even quarterly basis, sometimes you’re going to be very disappointed. And that’s when the fortitude, your emotional control, is so important. The best advice I ever give as a financial advisor is to stay in control of your emotions. You don’t take short-term trends and extrapolate it out into a long-term decision.
This next graph that I have on there are corporate profits.
You’re going to see corporate profits are good. When we’re trying to evaluate the future of the market, one of the things that’s absolutely essential is the money volatility which is high, and also what is the cash reserves and the profitability of the things that we might be investing in. That is good. That is a positive sign. That’s something that I’m very happy about.
One thing that we have to remember, this next sheet here, I said earlier that if you have a diversified portfolio, I now have circled five years out, at 50 percent unmanaged stock market index and 50 percent unmanaged stock and bond index.
It’s returned, at least going back since this is all the way to 1950, so that’s 50, 60, 70, 72 years you’ve had a 100 percent recovery rate within five years. Now, let’s hope that it doesn’t take five years for us to recover our particular portfolios. It’s gone down. The absolute worst was that. Most recently, we had declines two years ago, right around Christmastime. Well, before that, it was the COVID and that recovered within the year, within nine months. Prior to that, in 2018 there was a huge decline at Christmas and it still ended up about breakeven, just a little bit negative for the unmanaged stock market indexes. But it recovered very quickly within months. When we look back at 2011 with the downgrade of the U.S. government, it recovered very quickly. In 2008 it still recovered very quickly. The worst financial crisis that we have seen in most of our lifetime was still a two to three-year recovery if you had a diversified portfolio. That’s one of the reasons why I’m always talking about you’ve got to know what your duration is. It doesn’t mean you’ve got to like it when you’re underwater. It does mean that you’ve got to be patient. Warren Buffet has a great quote that says, “Corrections like this transfer money from the impatient to the patient,” which is the reason why I always say you’ve got to be patient.
Right around this time, this next chart is consumer confidence.
When the market is down, a lagging indicator is confidence. Not a leading, it’s a lagging. Oh my gosh, consumer confidence is at an all-time high. That usually happens after the movement has already happened. In this case, it’s the opposite. Consumer confidence is at a low. That’s because after the fact – and I’m a contrarian – what everybody knows isn’t worth knowing. When everything is going up, then you’ve got to wonder, wait a second, when is it going to go down. When so much has gone down, this is when a contrarian like me says, “Gosh, now is when I might want to put more money in.” If I believe that it’s going to recover and it’s going to be higher in the years going forward from where it is now, don’t I want more invested in the unmanaged stock market indexes. Of course, that just makes sense. But I will tell you that our emotions have this tendency to say well, it’s going up so it’s going to continue to go up so, therefore, you’re buying at the top, and you sell at the bottom. That’s what real investors who do not have professional investment advice many of them do. Not all, but many.
The last chart I want to talk about today is inflation.
It is unbelievable how inflation has shot up in the last year. When we had COVID and the whole world pretty much closed down, we dumped lots of money into the economy and I think that was a wise thing. Otherwise, we never would have been able to restart the economy at any point. This is my opinion, and the opinion of many, many economists is that was a smart thing, but sometimes you can just go too far. A year ago, way too much money was poured in, fiscal bills that were unwise that have thrown so much liquidity in that it increased inflation, and that’s what we’re seeing right now. Yes, there is a strong argument to be made that it’s also through some of the demand that we have when we don’t have the supply in order to meet that demand. I get it. And that doesn’t help that we’ve got China is in lockdown with all of their COVID issues that they’ve got going on. Absolutely. What the value is of these two variables to get to where we are right now, it’s where we are right now. It’s that simple.
A year ago, I have to tell you that especially as these massive spending bills were being passed that there were many economists who were saying that this was going to lead to a high increase in inflation. I even had a couple of clients send me some articles talking about it, and I said, “No, I don’t believe that. Let’s not extrapolate out one or two months’ worth of data into an entire year.” Well, that whole year has now gone by, and yeah, we’ve gotten higher inflation than most of the economists a year go would have imagined including me. So, it’s remarkable that some of the signs were there. It could have gone the other way. I mean, there’s an old joke that economists predicted nine out of the last three recessions. And we’re always thinking, yeah, oh my god, this is horrible. Well, in this case, it was a situation where it has actually turned out worse than most economists have even imagined. And thank goodness there were not even more fiscal bills that were passed that were proposed.
How exactly the supply issue is going to continue to impact things, we’ll just have to watch it very closely. One thing that we have to keep in mind is that there’s always a reason to be pessimistic, and at a certain point you get that out of the system, and then it’s a buying opportunity again. If you’re already invested, then great, you stay invested. If you’re not invested sometimes, it’s a good place to be which is to be in there for any kind of recovery that might happen.
We don’t know when it’s going to happen or how long it will take in order to break even and for us to be in that positive again because frankly, so far this year we’ve give up much of what was gained in all of 2021. We’ve probably taken a 6, 12, 18 months step back to where we were. But what isn’t helpful is to catastrophize. That means if its gone down, you imagine, oh my god, I just don’t want to lose all my money. Just because you’ve made some money, it doesn’t mean you’ll always make money. And just because you’ve lost some money in some timeframe, it doesn’t mean you’ll lose all your money or continue to lose money. It’s not linear. It doesn’t move in a straight line, and so we have to remember that it truly is three steps forward, one step back, and sometimes it’s two steps back. When we look at the past 12 months, it has been three steps back. Three steps forward, three steps back which is absolutely irritating. So, it doesn’t mean that it’s flawed in any way. It’s how we want to view it and, of course, our emotions allowing us to make the decisions that we need to make which is to stay with the plan that we have.
Mike Brady, Generosity Wealth Management. You have a great day. See you. Bye-bye.
“The Stock Market is a Device for Transferring Money from the Impatient to the Patient.” – Warren Buffet
There are always reasons to be pessimistic. There are always reasons to be concerned. That’s why we keep our investments, keep our strategies sound and we stick with it.
While we’re seeing inflation soar, gas prices rise, and a war rage on between the Ukraine and Russia, we must remain focused through the uncertainty. The reason why we have investments is because we believe that in the future it will be higher. We don’t know exactly when that will be, but a good guess is that now is the low and we’ll be happy in the future.
Let’s take a look at what we’re seeing in the current state of affairs and what it truly means for our investments.
Hi there. Mike Brady with Generosity Wealth Management, a comprehensive, full-service financial services firm headquartered here in Boulder, Colorado.
With today’s technology you never know if this is a backdrop or if it’s reality. And I’m just telling you it’s real. I’m out here in the gardens of my building. A beautiful spring day and I want to share it with you and I’m hoping that you’re enjoying the spring weather we’ve been having as well.
For the past year gas prices have steadily increased and they might go up more—I’m not really sure with the energy through Russia and Ukraine and some of the supply problems we’ve had there. We’ve got inflation. Twelve months ago we started talking about it. It has steadily increased. Now it is at the high in the last 30 to 40 years. We’ve got the worst start to the unmanaged stock market index, the S&P 500, in almost 50 years. There’s lots of reasons to be pessimistic if you allow yourself to be pessimistic. And, we’ve got continued from the pandemic supply chain issues. What does this all mean?
One thing that I like to think about, and I believe that you should as well, is what’s the long term impact of some of the changes that happen. We’ve had globalization now for many decades and I continue to think that’s a good thing. It’s not perfect. It’s not a panacea. I think that’s one of the things that we’re finding out is just because you do business with a country like Russia, it doesn’t mean that they won’t invade you or they might invade another country, one of your allies, that puts you at odds. We are interconnected which is both good and bad. So, there’s no absolutes in this. There’s a spectrum that is continually being negotiated between countries and the world and the economy. Things are complex.
The older I get, that is one of the messages and one of the things that I’ve learned is that it’s not if A, than B. It’s A plus B plus C plus all these things and then I might have an output of X, Y or Z. There are many things that contribute to an ultimate equation, to the solution, to the output. And we have to always remember that. Things are not simple. Things can be complex, and so we take that humility of not knowing exactly what the future holds into the decisions that we make.
I remember back in the 1990s. This is before I owned my house and I was in my 20s. Listening to this older couple – of course this old couple were in their 40s – younger than I am right now. And they said, “Oh no, we rent here in Boulder because it’s so expensive. We think that it’s real high in the market. We’d be crazy to buy a house here in Boulder.” Really? What do any of you who have property think of that decision. Not very long sighted. Not very forward thinking. I remember when I bought my house that I’ve lived in for the last 22 ½ years. I bought it in 2000 which was pretty much the high of the tech bubble. I remember people saying, “Oh my god, housing is at a bubble and you’re kind of a fool for having bought it.” Since then it’s doubled, it’s tripled depending on what source you want to go to, and I’ve lived in it the entire time. I love my house. I’m probably going to die in in hopefully many decades from now and it’s served my purposes.
Just yesterday I was talking with someone who’s considering real estate again and they said, “Well, should I really buy because it’s really at a high.” Well, it is at a high from where it was one year ago, five years ago, ten years ago. When we look back 10 and 20 years from now are we going to say that it was at a high now? Most people would say no. I’ll bet if you really think to yourself wow, if I have a 10 or 20 or 30 year house that I’m going to live in or rent out, it’s probably now might be the low.
Let’s take that into investments. It’s the same concept. When you have a diversified portfolio, and I’m going to put up on the screen some bar graphs that you’ve seen before, that a diversified portfolio of 50 percent of diversified unmanaged stock market index, and 50 percent of a bond index diversified, there’s actually never been a five year time horizon going back to 1950. One hundred percent of the time it has at least broken even or made money over a five year time horizon. The next five years could absolutely be different. Frankly, it’s still something that I believe is important for me to think that I’m making a bet. That’s why I have investments that five years from now, now might be the low in the markets.
I said two years ago when the markets went down significantly that I thought it was an oversold position and we might, for the rest of this year, the markets as an unmanaged index might still be down. It might happen, absolutely. It could even be in the next two years, but that’s why we always have to have a time horizon of, you know what, it might be high right now, it might feel that way. It’s definitely lower than where it was four months ago. That’s the reality. But it’s higher than where it was a year ago, five years ago, ten years ago, 20, 30. Going forward nine months from now it could be lower. Two years from now it could be lower. It could be lower – there’s no guarantees – anytime in the future.
However, the reason why we have investments is because we believe that in the future it will be higher. We don’t know exactly when that will be, but I would guess that now is the low and we’ll be happy in the future. Even though the ride, the fun of seeing it go up every single month isn’t there and it stinks along the way, that’s the reason why you don’t look at it every day, every week or even every month. That’s why you’ve got to string these things together.
There are reasons to be pessimistic. There are reasons that I’m concerned. I’m not going to lie. If the Fed doesn’t get this inflation, these numbers, under control that will be bad for the economy. That will not be good. You know what? We have recessions periodically. That’s why we keep our investments, keep our strategies sound and we stick with it. That’s what we do here as well.
Mike Brady, Generosity Wealth Management. Give me a call at any time, 303-747-6455. You have a wonderful day, week, month and let’s make it a great year. Bye-bye.
“The best way to find yourself is to lose yourself in the service of others” — Mahatma Gandhi
As the quarter is now over, it’s a wonderful time to reassess our mindset–do we have an investor mindset or a trader mindset?
An investor understands the long term and is not deterred by short-term events. They do not look for reasons to be pessimistic or instantly act upon a negative reaction.
A trader mindset does that. Short-term events are important, even if you’re invested for the long-term.
This was a tough quarter, and negative. Negative quarters are part of long-term investing, and what investors will experience periodically.
Let’s take a look at what we’ve seen so far in 2022 and compare it to years previous.
Hi there. Mike Brady with Generosity Wealth Management, a comprehensive, full-service financial services firm headquartered right here in Boulder, Colorado.
I want to take us back to some recent history, just the first quarter of 2020. Covid hit, markets down 20%, 30%, 40% in the unmanaged stock market indexes and everything just looked horrible. At that time I said, “Hey, I think this is an overreaction and an oversold position.” But never in my wildest dreams did I imagine that by the end of 2020, not only had the unmanaged stock market indexes and the unmanaged bond indexes had recovered what they had lost, but they then went into strong positive territory.
So, 2021 which was last year, nice positive territory again. The first quarter of 2022 is negative for the unmanaged stock market and bond indexes. That’s part of the game.
One of the recurring themes that I have in my videos, whether they’re within the quarter or at the end of the quarter like this one is, is that we need to have an investor mindset, not a trader mindset. The difference is an investor understand the long term and is not deterred by short-term events. Does not look for reasons to be pessimistic. Does not say to him or herself, “Okay, it was so obvious,” or, “Oh my gosh, I should have been able to avoid that.” No, that’s a trader mindset. If a quarter of decline is not something that is palatable, then you have either a trader’s mindset or you really should not be in the stock or bond markets at all. It’s just that simple because it will always happen.
If you are an investor anywhere in the U.S. or the world, you have a portfolio that is probably down so far this year. But what history has shown even if it is in correction territory, which is what we have been in, correction territory is negative 10%. I’m recording this on Thursday, March 24, so I don’t know exactly how the quarter has ended. But if it’s around 10% that’s correction. A bear market is 20% negative or greater. If it’s negative 10%, what history has shown is that 75% of the time it’s positive again a year to a year-and-a-half out. And sometimes it’s longer.
When we look at major, major impacts like 2008 and a blended portfolio of 60/40, it took about three years to recover. However, that stands out in memory because it’s so unique when events like 2008 hit. So, 75% of the time going back decades it has recovered within 12 to 18 months. And that’s part of the process of being an investor. Having the temperament to remember that no, we should not have short-term vision. We should not have a short attention span. We need to think about what does this mean for the long term because you don’t invest for the short term, you invest for the long term. You trade for the short term and that’s not what we’re doing. We’re investing for the long term.
As we look to see what this actually means – I’m kind of curious but I’m watching it very closely. What does globalization look like with China and Russia? What does globalization look like with the supply chain breakdown over the last couple of years? Is there more onshore versus offshore? Are we going to bring a lot of that manufacturing, a lot of the being self-sufficient from an energy point of view to our country? Is there going to be more of that with many countries throughout the world than there is now.
We’ve become interdependent which is a good thing in my opinion. It’s better than not being interdependent with others, but this is a shake to the system. The geopolitical events that are happening is reshaping how Europe sees itself and it’s reshaping how the world sees its supply chains and its dependency. Does doing business with someone mean that they won’t invade you? No. The answer is no. We’ve just seen that. Does it mean that you can be a pariah and still invade your neighbors even though you’re part of the global economy? The answer is yes. So, what are the longstanding impacts of this is what I’m always looking at.
When we look at things from a portfolio point of view, from an investment point of view, there is still huge cash reserves by the main companies in the S&P 500 which is an unmanaged stock market index, the Dow, et cetera. The Apples of the world, the big companies have huge cash reserves and this is a good thing. They have seen and weather bad things over the last 10 to 15 years, and the alternatives of cash – just putting your money into a CD – is very unattractive.
So, I continue to be a long-term investor and recommend that for clients. Volatility is something that with experience you become well, experienced. That’s why we call it experience. And so that’s something that you have to live with.
That’s it. Things are going to be down for this first quarter. That’s the way the temperament of an investor has to acknowledge. I love what Warren Buffett says. “In times like this, it transfers money from the impatient to the patient.” Give or take a few billion dollars, he and I we hang out in the same crowds – I kind of wish.
Mike Brady, Generosity Wealth Management, 303-747-6455. Give me a call. Let’s hope the second quarter and third quarter and as things move forward when are we going to break even again? We don’t know, but history has shown that it does break even. Not a long time, but usually in a short time. Thank you. Have a great day.
“Learn from the ocean; not fearing turbulence, it uses the wind against it to rise instead.” – Matshona Dhliwayo
We invest because we believe the long-term is going to be better than the present. During turbulent times like we’re seeing right now with Russia invading Ukraine, in the midst of a mid-term year we need to remember this strategy.
Short-term events shouldn’t dictate our long-term financial strategy. In this video update, Generosity Wealth Management founder, Mike Brady, reiterates the strategy he recommends to his clients: Time Horizon Long-Term Vision.