Market ups and downs are inevitable, but how we react to them makes all the difference. In this video, Mike Brady of Generosity Wealth Management explores the importance of having a plan in place before volatility strikes. From understanding emotional influences to maintaining a long-term perspective, this discussion highlights key strategies to help investors remain calm and focused.
Transcript
Hi there. Mike Brady with Generosity Wealth Management, a comprehensive full-service financial services firm headquartered in Boulder with an office in Denver as well.
I’ve been with my wife for 31 years, and before we got married, someone suggested, “Hey, you really ought to go to marriage counseling or pre-marriage counseling.” The goal was not due to any issues we had, but rather to discuss, “How are we going to handle disagreements or miscommunication moving forward?” So we set ground rules for how we might overcome the speed bumps that are inevitable in any marriage. I’ve got to tell you, 28 years later, I’m still married and very happily married to my wife, Cassidy.
I bring that up because investing is no different. Before you invest, there’s certain things that you have to answer for yourself.
• How am I going to emotionally react?
• How am I going to push to the side the outside influences that want to excite my emotions?
• What about the duration?
• What am I going to do in bad times, because they are inevitable? As a matter of fact, the one certainty is that there will be ups and downs in the market.
So, therefore, how am I going to invest, not trade?
• How am I going to invest for the long term, knowing myself?
• How am I going to keep control of my emotions?
• How am I going to keep the duration, meaning the time horizon, with my goals so that I can have the desired outcome that I want?
You do that before something happens, any turbulent water like we’ve seen in the past few weeks.
I want to talk about that. One thing that I am always very sensitive to, and I admit it, is humility and the fact that the future is inherently unknown. One thing that you will not get from the TV or from reading any columns in the newspaper is a sense of, “Hey, I think this might happen, but I might be wrong.” You never hear that. It’s usually a very certain statement about what will happen.
What’s mildly irritating to me is that many of those pundits have not been held accountable for the previous times that they’ve been wrong. You can sit here and go through almost any pundit and say, “You were wrong here, you were wrong there, you thought this recession was going to happen, and it didn’t,” etc. They’re not always held to their conviction like those of us who actually do it for a living. That’s usually a little irritating to a guy like me.
One certain thing is that the market hates uncertainty. That’s just the nature of it. And I think that’s really what we’ve seen in the last two, three, four weeks. We’ve had some uncertainty. We’ve had some quite strong proclamations, and then maybe back down, and then said again and again and this and that. That just creates some uncertainty.
I’m not here in today’s video to say whether one is right or wrong or what the policy ought to be. Those of us here at Generosity Wealth Management care about how that impacts the portfolios that you have, and the reason you have those portfolios is to help you reach your financial goals.
So we think about that, we talk about it. We, in good times and bad times, try to create the best portfolio so that in either of those times, you’re able to go through it without too much stress.
Up on the screen, I’ve shown and I’ve circled the intra year. It is normal for every year for there to be declines from a top to a bottom within the year. And this has happened the last two, three, four years like it has for the last 45 years that you see on that screen. It is normal for there to be declines during the year.
Is this the beginning of a decline that will continue through March and April and May and June? No one knows. Anyone who says that they absolutely know that is lying to you because the future is inherently unknown.
You’ll see that three out of four years are positive even though the average decline since 1980 is over 14.1% within the year. That doesn’t mean that it ends negatively. It means that almost every year, there are declines, usually double digits. However, three out of four years are positive. I will tell you that my experience has been that three out of four is kind of a magic number. It seems like three out of four quarters are positive. Three out of four years are positive as well. So it’s both three out of four quarters, three out of four years. That’s just kind of the way it has gone, in my experience.
I want to show another chart up there–chart number 2.
Believe it or not, my experience is 34 years, so I’m actually older than this chart, which really makes me feel old. And I’ve been through this entire thing. We are right there. I’ve just circled where you are. And during that entire time from the left to the right, I’ve always heard, “Well, it’s different this time. Well, we’ve never had this before”.
I’ve heard naysaying my entire career that I’ve had for 34 years and I hear it now. I have ice for blood. That’s just the way it works, is that I’ve seen so much that those who the most successful are the people who are patient and the people who have their emotions in check. Doesn’t mean that you’re some kind of a Spock, some non- emotional being. But you can acknowledge emotions, but then not necessarily either act or let it control you.
I remember hearing something on the History channel that a soldier in a war-time setting is not someone who has no fear. If that’s the case, they might be a psychopath. It is human for you to have fear. The question of bravery is when you overcome that fear and do what needs to happen anyway.
This next chart here, three columns on the left-hand side. One year you can see 100% stock market index from 1950, it’s that green chart, the blue is the bond. It’s a huge range. If you look at each year from 1950 till last year, the big range, the best was +33, the worst was -13. When you squish them together, 50% bond index and 50% unmanaged stock index, you can see the range for one year.
But as you go from the left to the right, this is the reason why I’ve got that chart up on the screen, you’ll see that if you have a balanced portfolio of 50% unmanaged bond index and 50% stock index, there actually has never been a five-year time horizon going back 74 years where you haven’t at least broken even, made a little bit of money.
That doesn’t mean that on an annual basis, which is those first three bars we just went over, it could be volatile. My advice is if you go back to the videos that I’ve done for years, for well over a decade, you keep calm, you keep the duration in mind.
One of the most important things is your time horizon, and the more aggressive you are, each year you have more volatility. But my experience has been, and the recommendations that I have for people is that you will probably be happier over a 5, 10, and 20-year time horizon.
By the way, in that chart on the far right-hand side is the 10-year and the 20-year rolling averages. And you’ll see that remaining invested for a 5, 10, and 20-year time horizon is in your best interest. If you’re in your 60s and 70s, you might say, hey, I’m not going to live that long—I’m now retired. The answer is you got to stick with what you have that allows you to stay with your plan. Hopefully, you’ll have many 5 and 10-year time horizons left.
You know, one thing I’d like to point out on this next graph is what I just circled there at the bottom. When consumer sentiment / investor sentiment is at its lowest, you can see what happened in the summer of 2022, a very bad time. The next year, the unmanaged stock market index did +17%. How everybody feels about it, the sentiment, is not necessarily correlated to what is actually going to happen.
That’s why I talk about humility. When anyone tells me, “Well, this is obvious–this is going to happen this way.” Frankly, I discount you right off the bat. I will never talk with you that way in our interactions.
The last chart I have on the screen is the Fed and interest rates. I’ve just circled where we are right now, and this is a good thing. Interest rates coming down is a great thing for our mortgage rates, and for getting loans unstuck in the business environment. Lower rates is a good thing for fluidity in the markets.
So it is not all negative, as you might see in whatever news program–whether it’s from the left, the right, the center, — if it bleeds it leads. Not everything is negative. It is never black or white. If you feel that way, I’m just going to fundamentally disagree with you.
In my career, things have always been grey. It sometimes goes to the left and it sometimes goes right. Sorry, not politically left or right. I’m talking about life takes path A or path B, that’s just the way it works. What we have seen is in all different types of situations, including different precedents, with different styles, with different things happening in the world, that the market has over time always done better.
I don’t know the future any more than you do. But what we do is we have a plan in place beforehand, not during it, but beforehand, and then you just relax during it.
I have to tell you that some of the years that have been really difficult, like 2022 was a very difficult year. We had a lot going on then. Unmanaged bond indexes and unmanaged stock indexes– both of them down for the year double-digits. At the end of the year, some clients fretted the entire year whereas some clients were cool as cucumbers. They both ended with the same rate of return. The question is, which one do you want to do as you’re looking at how you’re interacting with your particular portfolio?
I do not recommend, those of us here at Generosity Wealth Management, do not recommend any changes just because the market has done one of its intra-year declines. It might be the beginning of a decline that might go for another quarter or two. That’s absolutely possible. But that’s why we don’t invest for one quarter, three quarters, even one year. That’s why we are invested for multiple years. If your time horizon is less than a couple of years, you should not have money in the market anyway. That’s one of the fundamental rules in investing.
Generosity Wealth Management. Annie and me Mike Brady, are always available at your service, to talk with you through this at any time.
303-747-6455. You have a wonderful day. Thank you. Bye.