In this episode Dave and Steve have a grab bag of topics to discuss. They start (2:30) by discussing how people think differently about investing in estate compared to investing in stocks. Next (7:18) they take a look back at the economy 10 years ago, and compare the changes in our outlook going forward. Lastly, (14:00) they revisit a bucketed retirement strategy. How do you structure your short term, intermediate term and long term assets differently to meet my retirement goals?
Steve: All right. Welcome to Plan for Life Now. Episode number, do you want to guess? I’ll put you on the spot.
Dave: Yes. 53?
Steve: Oh no, it’s a number you should like.
Dave: Oh, 57.
Steve: 57, yeah.
Dave: My age.
Steve: I don’t want to call out your age here or anything.
Dave: Don’t worry, it’s fine.
Steve: Yes. Episode number 57. Thanks for joining us. We’re now in September here. We have, for me, I’ve sent the kids back to school. I know most of our listeners, their kids are kind of way beyond that.
Dave: Yeah. My son just started his job. He just graduated from college in May and he just started his job, so I have three employed children right now, which is a good thing. And I’m not paying for their schooling right now, which is also a good thing.
Steve: Isn’t three people employed with no student loans or minimal student loans, that’s pretty … That’s big.
Dave: It’s fantastic. It’s one of those things that we work on with our clients. And almost all of our clients when they’re in this position are pretty happy about that.
Steve: Yep. All right, so we were talking about what to talk about here today, and no one topic seemed like it was worthy of an entire podcast. So we decided to do one of these grab bag, kind of cover whatever we want to talk about for a couple of minute topics. So I think we start off, Dave, with something that you said to a client no more than half an hour ago. And I think this is a really good way to think about your stock investments, because everybody out there, everybody’s listening. We know that stocks will go up, stocks will go down. We’re bombarded with information about the economy, about what’s going on, is trade policy, and blah blah blah.
Dave: So, I was saying, and sometimes you think of things, when you think of something that makes sense, it’s not like you sit around pondering, “I want to think of something that makes sense.” It just sort of came out of my mouth when we just did that. But I was basically telling the client, who I think is one of our, an average kind of risk tolerance for a lot of our clients. They understand the market’s going to go down, but they’re certainly not thrilled when it does.
Steve: Oh, yeah, I mean guy in his mid 60s who’s not retiring right away, but let’s face it, he’s not going to work for another 20 years. He’s going to retire in the next decade for sure.
Dave: Yeah, we were talking about the ups and downs in the market and I said, “You know what? People should, or at least you and I think about when we putting together these portfolios, thinking about our stock portfolio like we do about our real estate, or even more particular, a house.” So when my house goes down, it’s a bad year for the real estate market and my house goes down. I’m not like looking at Zillow, seeing that it lost like $70,000 or whatever you lose on your house and say, “I’m selling my house.”
Dave: You don’t look at it that way. You look at Zillow and say, “My house is down right now. What else am I going to do?” Because your home and your real estate, most people look at their real estate, it’s a longterm deal. I expect to make some money on my house over 10, 15, 20 years or more. And my point is that’s exactly, that’s how we look at our investment portfolios, the stock side of our investment portfolios. It’s really how you should look at it.
Steve: Yeah, but here comes the problem, because everybody can can nod their head and smile and say, “Yeah, yeah, absolutely. That’s what I think of.” The problem is that it’s hard to sell your house and it’s easy to sell your stocks. I mean, you can make a decision to sell your stocks in two minutes. You call up your advisor, you go on, log onto your account online. You’ve decided, “You know what? I’ve seen this go down. I’m getting out.”
Steve: But you’re right. The same underlying principles, the same fundamental thought process should be going through your head. And I’ve never fully understood this, but I’ve kind of talked around the same thought that you had, is people sort of intuitively know when real estate values go down, “Oh, maybe that’s a good buying opportunity. Maybe I should get that.” When stock values go down, very few people, a very few people say, “Hey, that’s a good buying opportunity.” Most of them think, “Oh my gosh, I got to get out before it goes down more.”
Dave: And, even continuing that, look at Zillow. Do you look at Zillow every day to see how your home value’s doing? I certainly don’t. I occasionally say, “Hey, you know what? I haven’t looked at Zillow in like a year. I want to just see where my home is valued right now.” Or websites like that. “Oh, that’s interesting.” And you move on, versus your stock portfolio that many … Or even CNBC, that you look at the S&P 500 or whatever going up and down every day.
Steve: Well, I mean, you can’t turn on … Let’s say you turn on WTOP, you’re in the car, you’re listening to the news, you’re going to hear how stocks are doing, and so that’s going to impact you. You’re going to feel that what they call wealth effect of when stocks are doing well. You feel good about it. You feel like, “Okay, I can spend.” And when they go down, you’re going to feel, “Oh gosh, we got to pull back. We got to tighten up. We don’t have that much money.”
Steve: So I think that’s a really good bullet point to invest in stocks like you invest in your home. You’re not going to sell based on … You’re going to change your house. You might sell your house because your situation has changed. This would be the same as, “Okay, I’m going to sell my stocks because my situation has changed. I’m going to retire earlier or later, or I need more income or less income.” That has changed. Not because there’s been a trade war or something like that.
Steve: All right. Topic number one checked off. Not that we have to cover a certain ones or whatever. But here is the next thing. This was from a blog that I follow called A Wealth of Common Sense. I’ve probably referred to this before, and it’s called Reframing the Next Downturn. And as always, I’ll post the link to this article right down here below the podcast. But I thought this was a good one just because when you talk about, “Okay, we’re going to have a recession, the stock market is going to go down.” You think of this … Sorry.
Steve: Yeah, so when we think about the last market decline, the big decline in 2008, 2009, ever since that time period, the discussion, the narrative out there has been, “When is the next big decline coming?” And we had this discussion in ’09, 2010, 11. “Oh well, all this quantitative easing is creating all this inflation and we’re going to have runaway inflation and we’re going to have devaluation of US currency.” And you went through all these scenarios of things that could happen that haven’t happened yet.
Dave: Do you know how many things you and I have heard over the last 10 years?
Steve: Yeah. Oh yeah.
Dave: About the next big-
Steve: The next decline.
Dave: We’ve gone through, it can actually be just a documentary on all these things. Remember, what was the one that everybody was … The fiscal cliff.
Steve: Oh yeah, fiscal cliff.
Dave: If I had to point to one that we heard the most of from clients who were freaking out, and this was definitely, it was the fiscal cliff.
Steve: And remember the term that went with it? Sequestration? I mean, I haven’t even heard that term in years. I mean this was what? Back in 2011? Or was this 2013?
Dave: Yeah, it was around then.
Steve: Yeah. I don’t know. I get it all mixed up there.
Dave: There’s just been … It’s interesting though, there have been so many things and so many scares over now so many years that it does become, it actually does become psychologically difficult to deal with. I totally understand our clients who are starting to have trouble dealing with this.
Steve: Well, but here’s the blow by blow analysis of the economy in 2009 versus today. Unemployment right now, 3.7%. 2009 hit a high of around 10%. Inflation is basically nonexistent despite all of this monetary policy, unprecedented monetary policy from the Fed. They’d never done quantitative easing like that, or they certainly cut interest rates before, but unprecedented. And we still don’t have any sign of inflation. I mean the Fed would actually like a little bit of inflation. We have government bond rates that are very subdued, and this is despite the fact that the US credit rating was downgraded in 2011.
Dave: Yeah, and it’s also, you remember these scares, I’m just going to throw out, do not just come from A, a client or a consumer, or a [re-quote] regular person being worried about something.
Steve: No, these are big.
Dave: These are huge. This is, again, we’ve talked about this on a different podcast that time you and I went to that retired Fed chief guy at Turf Valley with all the other financial experts out there listening to this super expert go through a million charts and a super-frightening discussion about how we’re going to have a huge stock downturn within a year and a half. When was that? That was, I believe the spring of 2013 we went to that thing.
Steve: Yeah, I remember that. And he very clearly and logically laid out why the market was overvalued by was something like 25, 27% based on historical numbers, and very clearly laid out why the market was going to correct to that in the next year, year and a half. Did that happen? No, obviously it didn’t.
Steve: What about this? Back to the comparison to 2009, oil prices down 60% from 120 a barrel in 2011 to wherever we stand now. The stock market is basically tripled, quadrupled since then. There are negative interest rates around the globe and we are in the longest economic expansion in modern US history. So these are all things that if you told somebody 10 years ago they were going to happen, they just wouldn’t believe that we’re in the position that we’re in right now. They would have thought, “Well, the economy is going to collapse again. Or all of this quantitative easing is going to lead to runaway inflation.” Or pick your scenario out there. And I always think these things are a good, humbling reminder of how complex and difficult it is to predict and why the prediction business is not one that we get into. We’re not going to sit there and say, “Okay, let’s predict.”
Dave: I think you and I actually behind closed doors, there are no closed doors with a podcast like this, but you and I are basically don’t think you can predict it. Short term, short term predictions are, we’ve made this point a million different times. It’s similar to picking the Redskin game. Which is a perfect example. What’s Vegas come up with? 10 and a half points. The Redskin, this result already happened today’s Monday after the first Redskin game. So the Redskins were 10 a half point underdogs to Philadelphia, and you could go anywhere you want. But the bottom line is I was like, “I don’t like that point spread because I’m a Redskin fan.”
Dave: So the Redskins jump off 17 nothing. Which means from a point spread point of view, they were up 27 and a half points and they were dominating the Eagles. And you might say, “Well the Redskins start off, well they might lose the game.” But you weren’t thinking that point spread was in jeopardy. Well I got news for you, came down to the bitter end.
Steve: The very last-
Dave: With that point spread, and quite frankly the Eagles were going to cover that point spread and then the Redskins scored a trash touchdown at the very end of the game with six seconds left.
Steve: Yeah, totally meaningless.
Dave: To cover the 10 and a half. So once again, picking short term, trying to figure this out, no matter what evidence might look like and what expert says what, is similar to trying to bet on football games. And most people know that betting on football games boils down to luck, not skill. And that’s really the end game of these short term predictions for things.
Steve: All right, let’s move on to number three in our hodgepodge here. I think we’ve given equal time to each one. Once again, this is not something that’s brand new or groundbreaking, but I saw this article from Mary Beth Franklin. Mary Beth Franklin, if you’re familiar with her. I’ve heard her speak a couple of times. She writes an awful lot about Social Security, different filing strategies, but just on the the topic of retirement income in general.
Steve: So she wrote this article that I will once again post a link to, where she interviewed this advisor who’d been in the business for 35 years, helping people create and manage retirement income plans. And he uses a strategy that a lot of us use, but maybe don’t always call it this same thing, but he uses a strategy called bucketing. And bucketing basically means that you divide up your assets into different categories to say, “What money am I going to need that has to be safe I’m going to need in the next five years?”
Steve: What’s appropriate for this? CDs, money market accounts, ultra short term bonds, things like that. That’s money that you know, stock market plunges, the economy tanks, short of a general collapse of the infrastructure of the financial infrastructure, you’re going to have that money. Then you go to that second tier, that intermediate term type of stuff where this might be money that you need 5 to 10 years. And then you go to the longterm money. And this is the growth oriented money. And I think this really comes into play when we’re talking with people about what is their asset allocation. “Oh my 60, 40, or my 70, 30.” One of the things that we’ll look at is not always that absolute percentage, but how many years could you survive in a market downturn?
Steve: And to be able to survive, what do you need to have? You’ve got to have cash, you’ve got to have bonds, you’ve got to have annuities, you’ve got to have pensions, you’ve got to have things that are going to pay you, even though the stock market might be down 50 or 60%. So I always think that bears repeating, a good idea and a strategy that we essentially employ. But she’s interviewing somebody here who’s got years and years of experience and saying this is the best way to be able to weather these ups and downs.
Dave: Yeah. I find this to be the number one … I mean I think I read that also and thought it was interested, but I think this is the number one thing that I deal with. And so you don’t run into this Steve, but I do cause I’m old. I’m older than you. I hate to say that one. A lot of people listening, you’re older than me, but we talked about I’m 57 so the circles I run in, the people I just meet randomly are all around my age and older. So they’re thinking about retirement. So besides our job, I just run into people, “Dave, what do you do besides talking about sports all the time?” I’d say, “I do retirement planning.” “Really? Because I always wonder if I have enough money. Wonder how my … Hope my investments do well.”
Dave: They can be retired or not, or in that age group of 57 where I am to whatever, 63. And they always ask, “Well, what do you guys do?” And I say what you just went over is sort of what you need to start thinking about. Like where’s the money coming from? That is the basics of retirement planning that a lot of people who are listening to this podcast already get. If you’re listening to this, you already understand what Steve just said and maybe enhanced your view.
Dave: You should know that when you go to a cocktail party and you’re not us and you’re talking to people about it, that’s a good thing to start to mention to people, what they really should be looking at. This topic is like you’ve got to start thinking about … Sometimes when you hear this advice from a regular person, not someone who’s in our business, it helps people sort of get off the ball. You got to start thinking how much social security is coming in? Where’s this other money coming from? Why do I need to be able to hold onto my stocks even though they’re down and I’m withdrawing money? It is like the number one thing that is, I’m not going to say hidden, it’s just never talked. It’s not a sexy topic, so you don’t see it on the front pages of CNBC or the other websites about withdrawal strategies.
Steve: It’s more fun to talk about X, Y, Z stock has quadrupled in the last six months versus, “Well, if you employ this strategy, you can take three and a half or 4% withdrawal instead of three.” Well, that’s not exciting at all. But that’s what it comes down to is trying to figure out how much can I safely withdraw and how do I ride out the ups and downs? Because there will be ups and downs. And I can’t be, for most people, can’t be invested all in safe, conservative, no stock market investments. I have to have some risk in there, so how do I balance getting income, now living off of it, and also getting that growth to get me to last 20 or 30 years?
Dave: Yeah. This is where I find the the do-it-yourselfers out there. “Hey, why should I pay a fee to a financial advisor?” These are some of the reasons why. You’re expecting the right investment choices from a financial advisor, but you should also be expecting for the fee you pay this kind of advice, which is very difficult to come about on your own. It’s difficult to actually do it. Hey, we have pretty sophisticated software, not in a retirement income calculator online to help us do this stuff. And it’s also just from an emotional point of view, difficult to do this work, which is probably a commercial, not just for us, but any other financial advisor who like, “Why would I use one and why wouldn’t I?” When it comes to that article you just went over and some of these strategies, this is where it really matters.
Steve: All right, thanks for joining us. We’ll check in again next month.