“Alcohol: the cause of, and the solution to, all of life’s problems.” – Homer Simpson
One thing we hear, especially during challenging times like these is, “I just don’t want to lose it all. I’m fearful of losing all of my portfolio.” In a diversified portfolio you are invested in hundreds to thousands of various things whether it be stocks or bonds. Whether you have a conservative portfolio or an aggressive, it should be diversified. So let’s unpack the fear of “losing it all.” What exactly does that mean and is it something that could actually happen? How does one then walk out of that fear and what action is needed to overcome?
Transcript
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Hi there. Mike Brady with Generosity Wealth Management, a comprehensive, full service financial services firm headquartered right here in Boulder, Colorado.
You can see from the backdrop that I’m still self-isolated at Generosity Wealth North Boulder Headquarters which is also known as my home office. Hopefully all of you are doing well. I have some random thoughts today and the first one is something that I periodically hear from prospective clients over my last 30 years which is I want to be invested but I just don’t want to lose it all. I’m fearful of losing all of my portfolio. Let’s deconstruct that and talk about that as a fear or as a concern.
In a diversified portfolio, and you should have a diversified portfolio, you’re invested in hundreds if not thousands of various issues. Whether or not that’s stocks or bonds or whatever that particular portfolio is whether it’s conservative, moderate, aggressive. It’s invested in hundreds like I said, or thousands. In order for that portfolio, that pool of investments, to go down to zero all of them would have to go down to zero. All of the manufacturing companies, all the technology, all of the oil, all of the service. They’d have to go down to absolutely zero.
Can individual sectors go down at certain points? Absolutely. Can individual stocks go from something to bankruptcy? The answer is absolutely. That’s why you shouldn’t have a portfolio comprised of only an individual stock or just a few stocks or just some specific sectors. It just doesn’t make sense to be that undiversified. Having a diversified portfolio does not guarantee against having market ups and downs, and right now we’re seeing some of those market downs. It does not protect you fully from that, but in order for it to go down to zero all of the underlying investments that comprise that portfolio which would be hundreds and thousands and the most common names and common stocks and companies out there would all have to go bankrupt and down to zero. Hopefully you can see this is not very probable. If that was to happen we truly would have an Armageddon here in the United States.
The economy and the market are not necessarily the same thing. In March of 2009, March 9 to be exact, was the absolute low for the stock market. At that point if I was to say to you over the next eight years we’re going to have two presidential terms, two four-year terms, for the very first time where an economy that’s going to have a sluggish recovery and never be greater in any of those eight years a GDP growth of over three percent. It never happened before. Two-four year terms for a presidency where the GDP didn’t grow more than three percent. And it’s not Obama’s fault. This is not about Obama. I’m just using that as a benchmark that the economy is going to be sluggish and it’s never going to be over three percent and oh, by the way, the best thing that you can do is invest in the stock market. You’d say that’s crazy. The economy is – really, you’re telling me the economy was sluggish and the stock market is going to be great? The answer is that’s exactly what happened. It was almost a tripling from March 2009, almost a 300 percent increase during the next eight years. The stock market, the buy market, those unmanaged stock market indexes, the S&P, the Dow Jones, et cetera, they’re what we call forward thinking. What investors believe is going to happen in the future. And sometimes they get it right and sometimes they get it wrong.
In 2008-2009 I would say that it was oversold because you can see that what they thought was going to happen, that the economy was going to be even worse. And then they realized wow, we overshot this thing. We overshot and then it was a buying opportunity.
If I was to ask the person on the street, if I was to ask you who the best investor of all time is most people would say Warren Buffett. I mean Warren Buffett of course. If you have some longevity in the markets you might remember Peter Lynch who retired about 25 years ago. You might say Peter Lynch. He worked at a big mutual fund company. Both of them believe that, and this is a direct quite from Warren Buffett, “Be greedy when others are fearful, fearful when others are greedy.” So, I wonder what did they know? What do I know that they don’t know if I do the opposite of what they say.
They’re very smart investors. They believe, and I do as well, that you make decisions with your head and not with your stomach because the stomach when you do that in the midst of difficult decisions you make bad decisions. That’s why you have a multiyear plan that you stick with that I’ve talked about in some of my previous videos.
It’s just very important that the economy is not necessarily completely indicative of what the stock market’s going to do and that we make decisions with our head and not with our stomach because that leads us down the wrong path.
If we knew, if we had perfect foresight we would know what to do, but none of us have perfect foresight. I have had it in my mind I’ve thought about that there’s two different types of people in the world and this applies to so many different areas. When I talk with people about unintended consequences and potential consequences there’s one type of person who says hey, I’m not going to actually do anything until I know it’s going to have a positive outcome. I want to know not 100 percent but I want to have a pretty high probability that the action I’m going to take is going to have the positive outcome that I want.
There’s a second type of person who says I’ve got to do something. If it has an unintended consequence and it might even be negative, well at least I’m moving forward. At least I’m taking action. And not taking action, particularly when we don’t know the consequences of that action is sometimes the most difficult thing to do is to not do something just so that we can feel that we’re doing something.
If there is an action that someone wants to take it’s a systematic rebalancing. The problem with that meaning that maybe your stocks or equities have gone down, it’s increasing the equity exposure. Doing the exact opposite of what your emotions might actually be telling you at this particular time.
So, if there’s some action to do it’s actually to reevaluate. Maybe my stock and equity portion has gone down. Maybe it’s time to rebalance to buy more of that. That is a question that should be asked that you can think of.
I’ve said for many years as part of my random thoughts here I’m just going to go that some of the most difficult times to talk with an investor to make investment decisions is when you’ve made lots of money and you’ve lost lots of money. It has everything to do with your mindset and the behavior that you’re bringing to the decision. If you’ve made lots of money you might have just been lucky, but you have overconfidence in yourself, in your decisions. If you’ve lost lots of money it’s the opposite. There’s a fear that’s always the way it works and it just doesn’t work that way.
Most years have a 10 percent decline. I’ve thrown up on the screen not now but in previous videos that you’ll see that’s the normal. There is a correction of 10 percent I most years. There is a 20 percent bear market about one out of every four years. There is a large correction of 30 percent and 40 percent, let’s just kind of look back. In 1973-74, in 2000-2001-2002, in 2008-2009, that time and then right now. When we look at all that we’re talking about once a decade. The 70s, the early 2000s, the late 2000s and now. About once every decade and in every single time it has recovered. Maybe not exactly when we wanted it to. Of course we want it to go away next week, next quarter, next year. And it might. I doubt it’s going to happen tomorrow, but it has always come back and it’s about once every 10-15 years.
You’ll notice that I didn’t say 1987 because 1987 was actually a positive year for the unmanaged stock market indexes. Everyone thinks that it was this, it’s because it happened very quickly. It just wiped away a years’ worth of gain, but actually ended the year positive. And then the years after that the next couple of years were positive as well.
So, it’s good to keep everything in perspective. That’s why I’m always talking about a long term vision. I said something in my last video about Point A to Point B an the reason why I bring that up is Point B is not retirement. It’s not outliving your money. or not outliving your money, you and your significant other’s money. You might just happen to have a retirement event inside there. If you’re 60 years old, I’m just arbitrarily picking 60 years old, your point is not 65 years old. It’s for the rest of your life because you don’t want to outlive your money. But during that timeframe you just might have some life events that happen – your retirement, perhaps the loss of your spouse or significant other. There’s lots of major things that happen during your life expectancy or when you add in your spouse or significant other, both of your lives.
It really does boil down to having longer time horizons even when we’re close or already in retirement. That’s why it’s good to say we had multiyear strategies, it’s good to keep that in mind. That’s why you do all the work before something like what we’ve seen in this past month which has been very bad, not good at all. You do it before that happens. Steel yourself for those decisions and five and ten years from now you’ll say it absolutely was horrible while I lived through it. I sure am glad it’s over. It was a painful lesson. I hate that. You know what? The best thing that I did was I did nothing at that point.
Call me at any time, 303-747-6455. You have a wonderful day. Bye bye.