Dave and Steve take a look at how conventional wisdom so often fails when it comes to the stock market. Whether it was the housing crisis or the Coronavirus crisis, we can look back at how the experts got it wrong. How can you prevent yourself from falling into the trap of the iron clad argument that ends up being dead wrong?
Steve:
All right. Welcome to Plan For Life Now. Episode number 73. Dave, how are you doing there?
Dave:
I guess, I’m getting ready for Thanksgiving. Which is, you will probably have heard this after Thanksgiving, but I guess it’s a week from today. Today’s Thursday, right? Yeah.
Steve:
Yeah. A week from today.
Dave:
So we’re having very small, just our immediate family.
Steve:
Good.
Dave:
Coming in, testing, double tests. Even quarantined our three kids. One of them’s here with us now so we’re being extremely careful.
Steve:
Dr. Fauci would be very proud of you.
Dave:
Actually, no. I saw Dr. Fauci today. His kids are not coming.
Steve:
They’re not coming. Yeah.
Dave:
Yeah. But Dr. Fauci is 79, and I’m not there yet. I’m only 58. But I’d say on a scale of one to 10, 10 being you’re basically wrapped up in a bubble suit and you’re never leaving your house, and one being not caring at all, I’d say we’re probably about a 7.5.
Steve:
Okay. That’s good.
Dave:
Seven, maybe. Something good. I mean, so far. We’re going to make it through this thing. And then the vaccine news is very good.
Steve:
That is very good. Yeah. I mean, in the last two weeks, we’ve had some very good news on the vaccine front. So hopefully that means we can return to some semblance of normalcy, I don’t know, would you think by next fall?
Dave:
America actually having coronavirus front, not so good.
Steve:
No, no, no. But in the longterm, it certainly looks better.
Dave:
Honestly, I read somewhere, because I’m devouring this information because obviously that’s what we’re interested in, I’ve read somewhere that we may achieve herd immunity with the mixture of people having it, having already had it, plus the vaccine by as early as June.
Steve:
That’s what I had heard as well.
Dave:
And that’s not bad. It’s something to look forward to.
Steve:
Yeah. Yeah. So all right. Well, let’s get into what we wanted to talk about. Dave, you came up with this podcast topic. But as soon as you told it to me, and I started doing a little bit of thinking, I’ve got pretty much most of one page of a legal pad here in notes about this topic. And the topic that you wanted to talk about is conventional wisdom when it comes to your money.
Dave:
Conventional wisdom, right? The reason I thought about this topic was I just thought about, okay, it’s whatever, we’ll call it the beginning of the year. You’re trying to think about what’s going to happen with your money. And unlike any other year, somebody is going to be able to tell you events that have happened and let you make decisions about your money on January 1. So they’re going to tell you that around the middle of March, we are going to have a once in a century pandemic that is going to shut down the economy. And when we say shut down, we mean that literally everybody, for the most part, will be staying in their house for a good four to six weeks. That restaurants will close. You know restaurants that you go to every day, you’re not going to be doing that. You know your drive to work, you’re not going to be doing that.
Dave:
And you’re not going to not be doing that for a month or two, you’re not going to be doing that for, for the most part, the entire year. And you know restaurants are going to shut that. And you know Broadway? You know that place where people go? Oh yeah. You know the crowded Broadway theaters? Shut down. Nothing. Zero.
Steve:
Totally dark.
Dave:
That never happens ever. You know football games you like to go? Well, nobody will be going to those. So huge swaths of the economy will absolutely positively be shut down, including even just the normal travel you do to work. Your life will be completely disrupted. So based on that, what do you want to do with your money, as far as you want to put some money into the S&P 500 index fund? Or just sort of right now move some of your cash into stocks? What do you think?
Dave:
And I think most people, conventional wisdom would think, gee, instead of doing that, I think I’d just like to basically take all my money and put it in a mattress and hide. And as I just looked today, today being November 19th, let me pull this up again. The S&P 500, I guess this would be as of close yesterday, total return, 12.26%.
Steve:
Absolutely crazy. I mean, and this is-
Dave:
It is stunning to go back in a historical fashion, and think about where we’ve been this year. And to look at a number like that, the S&P 500. I think people would say if it’s flat, that would be a miracle. But to be up over 10%.
Steve:
No. I mean, when you sit here and think back to the discussions and the predictions that were going on in late February, early March, I mean, we were talking about the second great depression here. We were talking about the stock market potentially being down 80%. That was the kind of discussion that was going on. And frankly, if you had those predictive powers in January to say all this was going to happen, that doesn’t seem that unreasonable.
Steve:
I even know that we had one client who, real early on in this, I mean the first day or two, he was calling up saying, “I want to sell everything.” And I thought he was crazy. I was going, “It doesn’t really make sense. This is not that big of a deal.” And then three weeks later he was looking brilliant. I mean, he looked like a genius. I said, “Oh my gosh. He really knew what he was doing.” And now we sit here in November 19th, and say how is this possible that the stock market is up this much, and obviously, we’re not in a fantastic place in the economy?
Dave:
I’m going to throw out another one for you. You have your own thing. And I hope I’m not stepping on you, but here’s another one. Okay. So forget about the long term. We’ll do a shorter one. It’s right before the election. And I don’t know if you’ve noticed, but to say it’s a contentious election, to say it’s a polarized election would be the greatest understatement of all time. The current president has said, this is before the election, that no matter what, this is a fake and a rigged election.
Dave:
So you know for sure one of two things would happen. That that president would win the election. In which case, that wouldn’t really be an issue, right? The other case is the other candidate wins. Oh, great. Quite frankly, even if that were to happen, think about the polarization on the other side. Think about everything we’ve had this year with the racial strife and all that.
Dave:
What would happen if Trump had… I shouldn’t even say that because as of right now, technically, we “don’t know” who won the election, but you know what I mean. So if that election night had gone that way, they had already boarded up, not just Washington DC, but every city. The cities boarded up. Looking towards riots. If it goes the other way, which apparently it has, then you know there’s going to be disruption about saying these returns are… And that was already told to you before it happened. So knowing that, now what you want to do with some of your money and stocks?
Steve:
Yeah. Once again.
Dave:
You want to basically move into cash for a while, and just let this settle out because you know the stock market hates disruption and uncertainty. Just move it out for a while until the disruption and uncertainty is over, and then put it back in, or what. And now unfortunately, I don’t have exact statistics on this one, but I’m going to go with, since before the election till right after the election, take a week before to now, a couple hundred points. I’m trying to think S&P, I’m going to guess 3 to 5% up. 3% maybe. Not down. Not down 10%. not down 20%.
Steve:
Yeah. I mean, the market, I can’t pull up the exact numbers. But yeah, it has been positive. And you’re right, I mean-
Dave:
Once again, conventional wisdom, I mean I don’t blame anybody for thinking, gee, this is very uncertain. This election period, gosh only knows what could happen. And I would not expect markets to react positively.
Steve:
Right. Well, and I’ll bring this up, one that I thought. I remember talking to you and a bunch of other people in June, July timeframe. And obviously at that point, the stock market had recovered quite a bit, but it was still a little bit below. Maybe 10 or 15% below all time highs. And I remember saying, “Well, okay, it’s what’s recovered and maybe it’s reasonable where it is. But there’s no way that we’re going to set all time highs in the stock market when we still have this coronavirus raging through our country. It just doesn’t make any sense.” I mean, that seems very logical.
Dave:
Every day you have the same discussion. Yeah.
Steve:
Yeah. And of course, what are we doing? We’re setting all time highs now. So for me, not that I did anything on that, I certainly didn’t trade any clients’ accounts or anything like that. But for me, it’s just added to the humility that you have to have when it comes to investing. Because let’s run through some of the conventional wisdom that I’ve written down here. And I mean, really this is just me coming up with a list of things that in the past have gone wrong that were conventional wisdom. And then I’m going to give you one here at the end that I think you should pay attention to for going forward. Because I think this one might, in a sense, go wrong going forward.
Steve:
So let’s start with some of the easy ones, Dave. What about this idea back in 2006, 2007, that housing prices nationally had never experienced a decline. So housing’s a pretty safe bet. That’s never going to go down on a national level. And that of course was true until it wasn’t. And then we saw, I think it was, a 27% decline in housing prices after that time period. In some areas, it was even worse than that. How about another one? I mean, this is just kind of a quick, easy one that Wall Street always says, sell in May and go away. You ever heard that one?
Dave:
Yes.
Steve:
And it’s basically this idea of nothing good ever happens in the summertime. So just sell in May, go away, and then you come back and buy in the fall. And if you look at the data on that, it has not held up well. That actually there have been good returns in the summertime.
Dave:
I remember just as an aside, I remember one client we had, I believe showed us a chart about selling years ago. They showed us each month and all this stuff. And I remember it was actually making my mind swim. And I had forgotten to have my coffee, my Starbucks right before that. But I do remember. Do you remember that, the chart?
Steve:
I know exactly what you’re talking about.
Dave:
Yeah. A lot of people look at that monthly stuff.
Steve:
Because his argument was, for the investment product that he was in, it mattered when his contract anniversary fell. And for him, it fell in mid November. And he was looking at this chart, and he was saying, “Well, it would’ve been really much better to have it fall in blah, blah, blah months.” And yes, I mean, you can look at those charts, and with that data, you can always come up with good arguments as to, “Well, I should always sell…” I mean, you’ve heard these things before. I should always sell when the NFC wins the Super Bowl, and I should buy when the AFC wins.
Dave:
Oh yeah. Isn’t that that thing about when a Republican or Democrat wins on a presidential year, it says something about the stock market? I forgot. There was one just like that about the election, as a matter of fact, that has nothing to do with anything logical.
Steve:
Yep. All right. I mean, the ones that I’m more interested in are the ones that seem logical, right? That you could sit there and have a reasoned, intelligent discussion with someone, and the conclusion you come to can be 100% wrong. So the housing price one. How about this idea, I wrote this one down, that gold is a safe investment, or that it’s a good protection against inflation? We hear this from people a lot. And this kind of tends to be the news outlets that they listen to and follow promote gold as a safe investment.
Steve:
And the thing about gold, when you look it, and this is the response I give any time people ask about it, is gold is an incredibly risky investment. The volatility in gold is about double the volatility that you experience in stocks. So you’re talking about something that fluctuates around an awful lot. Now people will say, “That’s okay, I’m okay with volatility. I just like the fact that it’s not correlated to stocks.” And it does have a pretty low correlation to stocks. But basically over the long-term, if you invest in gold, you’re getting something that just matches inflation. You’re not getting anything that produces any excess returns beyond that. So I’m going to throw that into that category there.
Dave:
It’s a good one.
Steve:
Here’s one that I think is a little bit analogous to our situation right now. Think back to 2008, 2009, obviously the financial crisis, what the government did at that time seemed like an absolutely incredible stimulus package of, I think, it was eight or nine hundred billion dollars. That seems pretty small when you talk about the coronavirus one we had in the spring at 2.2 trillion. But still, back in ’08, ’09, you’re talking eight, nine hundred billion dollars.
Steve:
And you’ve got the Federal Reserve doing its quantitative easing program. And if you don’t remember, never really cared, what does quantitative easing mean? It basically means that the Federal Reserve is printing money and buying bonds, kind of flooding the marketplace out there. So what was the natural conclusion? Just made total perfect sense, there was no way to argue around it. The natural conclusion from these actions, we were going to see big inflation numbers, and we were going to see the dollar fall relative to other currencies in the world. And that’s what any economist will tell you. If you go to Venezuela and you start printing money off, what are you going to have? You’re going to have runaway inflation. You’re going to have the dollar, or whatever currency, fall relative to other currencies. What have we seen since 2008, 2009? Virtually no inflation, and the dollar’s strengthening relative to most currencies in the world.
Dave:
Right. And it’s hard when you go to the experts. Remember that meeting we went to. I forgot, it was some Fed vice president.
Steve:
I remember.
Dave:
And it was like, okay, let’s go to this one. You and I only go to ones we think might be interested. This was a long time ago. Because I remember the guy was predicting by 2014 or something like that, or 2015, that the market would just be going down. And it seems so obvious. And he had a bunch of charts. And he was a former Fed vice president.
Steve:
Yeah. We went up Turf Valley Country Club. And you’re right. He was a former president of the Federal Reserve Bank from Texas. And he laid out all this evidence. And you and I walked away, and said, “Wow, that was really compelling.” I mean, he showed us PE ratios going back for 100 plus years, and why the market was overvalued by 27%. And pretty much imminent, we were going to have a big decline. And what happened?
Dave:
It was a good thing we didn’t act for you guys, for clients on that meetings.
Steve:
Yeah. Because I mean, from 2013, basically we had a little blip in 2018, but otherwise, stock markets have been on an absolute tear. So yeah. I mean, that’s another one where conventional wisdom, or you could even say instead of conventional wisdom, the most reasoned, rational arguments out there just don’t make sense to make these big changes. I want to touch on one more, and then I’m going to talk about my one that I think might be wrong in the future.
Steve:
So one more that’s been wrong. What about this idea, and if you’ve got to follow the investing world pretty closely to know what I’m talking about here, but maybe you’ve heard us talk about it, something that’s called factor investing. And factor investing is basically looking at stock returns. And really breaking it down, and saying, okay, small cap stocks tend to outperform large cap stocks. Value stocks tend to outperform growth stocks. And going through all these different factors, and saying, okay, these factors tend to produce excess return so let’s weight our portfolios toward these factors.
Steve:
And you can go through all this research. And once again, goes back for 100 years, and shows you all the times when these things have proven to be true. And I just looked up, just to pick on one particular thing, if we look at small cap value stocks, right? So small cap factor and value since 2009, the financial crisis, they’ve returned about 300%. What have large cap stocks returned in that same time period? It’s about 530%. So this was another thing where, well, all the good reasoned evidence would say put all your money in small cap value. Did that make sense? No. You’re much better off having that broadly diversified portfolio.
Dave:
And I have a conventional wisdom. Am I interrupting you on whatever you were-
Steve:
No, go for it.
Dave:
My conventional wisdom going forward would be simpler, and basically this. Okay. So now as far as what we’ll call, forget the stock market, but the real economy, is not looking so good. We are in the midst of coronavirus, and it is going crazy. The notion that we would have, forget about a government shutdown, what about just people shut down that we’re going to have during the winter is going to be pretty harsh and pretty harsh on the economy. But the vaccine and spring will be coming. It’s pretty darn apparent that those of us who want it, will be vaccinated.
Dave:
And then if I were to look out, not just for four months or six months, but if I were to look out for the rest of the year 2021, and even into the first half of 2022, that looks good. The economy will come back. Everything will be open again. The economy is bound to roar back. And I would expect the S&P 500 to be up, if it’s around 3,500 today or wherever it is, 3,550, I would certainly expect that it should be up to about at least 500 points higher by the middle of 2022. That’s conventional wisdom now looking forward on a positive side, not a negative side.
Dave:
But same thing. Do I personally know it’s going to hamper that prediction? Do I have a prediction? No, I don’t. But I would not bet on it for the same reason that we know that conventional wisdom sometimes does not work out. Thus I would not place what in the world of our world of retirement planning and investment planning is a short-term bet, a bet through the middle of 2021 or a bet to the middle of 2022 is a short-term bet in our world. I wouldn’t go the other way either with something that I can’t poke holes into the argument now, but we have no idea what’s going to happen.
Steve:
Okay. Well, I think that’s a reasonable one to put out there just to point out of what could go wrong there. Mine is sort of along the same lines, but over a longer term time horizon. My thing that I think will be wrong is this idea that people should just stick to a 60/40 portfolio, and 60/40 will serve them just as well in the future as it has in the past. So when I say 60/40 portfolio, I basically mean 60% stocks, 40% bonds. And when we talk about this, I always break this down terms of, okay, stocks, I have no idea what stocks are going to return in the future. If you listen to firms like Goldman Sachs, they’re kind of predicting for US stocks 6 to 8% returns over the next decade. Vanguard’s a little more conservative saying 6 to 7%. okay, fine. It is what it is.
Steve:
But I think that that 40% that’s in bonds is really going to let people down. Because bonds, right now, you’re sitting with historically low interest rates. And I know it seems long in the future, but at some point interest rates will go up. And I think people are going to be really disappointed with the bond portion of their portfolio. So I don’t know if I’m kind of crowbarring that into a conventional wisdom but-
Dave:
You’re not though because conventional wisdom right now, so you’re basically playing the opposite of conventional. Conventional wisdom right now, interest rates are still low, and the Fed’s never going to raise them. It’s not just the Fed. I mean, interest rates can go up for a bunch of… There was a spike once there was that first vaccine news from Pfizer. Did you notice that interest rates spiked up a little bit that day a little bit?
Steve:
I guess wasn’t paying that close attention.
Dave:
I was. See, I can pay attention to statistical facts too occasionally. So you don’t know what’s actually going to make interest rates go up. All we know now is that they’re historically low. That’s all we know now. But yeah. As you play it out far, you’re going to have interest rates probably, I mean, I would think because conventional wisdom is wrong that they’re not going to keep them at historical lows forever. And that could be another good point.
Steve:
Yeah. All right. Well, thanks for listening. Hope everybody has a safe and a happy Thanksgiving. And no matter what happens through all this, we’ll get through it. And thanks for listening.
