Episode #64-More Coronavirus Updates
The speed of the stock market decline over the past month has been breathtaking. Dave and Steve offer their latest thoughts on the Cornavirus market decline. How can we use bonds to help us ride out the decline? How quickly have prior markets recovered? Are there any areas of opportunity?
Market declines and recoveries
Recoveries page
Steve:
All right, welcome to Plan 4 Life Now, another coronavirus edition.
Dave:
Yes.
Steve:
I have a feeling we’re going to be doing more and more of these, or I should say more often. Because here we sit on March the 16th and as I’m talking right now, the S&P 500 is down about 27% off of its high. Right? And we’re sitting here Monday afternoon. By the time you’re listening to this, probably going to be Tuesday afternoon. I have no clue what’s going to happen Tuesday. But there is a ton of uncertainty out there still. There is not any clarity so far yet.
Dave:
It’s a different feeling. First, some housekeeping things even before we get into that, a, because we just, we always believe, Steve and I, don’t chat or anything. Let’s just do the podcast.
Steve:
Right.
Dave:
Did you clean this thing off?
Steve:
I did.
Dave:
Good.
Steve:
Does it smell nice and lemony?
Dave:
It smells pretty good and I’m glad to hear that.
Steve:
I don’t know why. I just felt like-
Dave:
Second housekeeping. For, obviously, this is allergy season for me. Trust me. I don’t have a fever or anything. You might hear me cough during this podcast-
Steve:
I know.
Dave:
And I have a stuffy nose. This is not coronavirus. I may cough. This is my allergy season. So don’t worry the Dave has coronavirus or anything like that.
Steve:
Well, I would be more worried. I’m in the same room with you.
Dave:
More importantly, we’re not… Yeah, you should be worried. But we’re not meeting any of our clients. We’re doing virtual meetings-
Steve:
Right.
Dave:
For now until the foreseeable future ’till this thing ends.
Steve:
Yeah, I think it makes sense.
Dave:
But anyway. So, okay-
Steve:
Okay.
Dave:
Continue. So yeah, we’ve set the groundwork. We’re at a stage right now, first of all, where I literally, before I walked in here, looked at the numbers, and I believe today the S&P was down 7% at the moment before I walked in here, and actually said, “Oh, not too bad.” Now that’s bad.
Steve:
You felt pretty good about that.
Dave:
That’s bad.
Steve:
Yeah. And I mean this is coming on the heels… I know it’s hard to keep track of every day, and frankly I’d encourage you not to keep track of it every day. This is coming on the heels of Friday. The market was up basically 10%. Right? Now, it’s very back and forth every single day. You just never know what’s going to happen. But a couple of key points that I wanted to hit on, and then we can kind of really get into it.
Steve:
The first thing that I’ve been talking to a lot of people about is simply the speed of this decline. You know, people say, God, this feels… I lived through 2008. This feels worse than 2008 to some people.
Dave:
Right.
Steve:
And it’s, the thing about this is, is the speed and the quickness that this has all happened. I mean you’re talking about a decline that in the past… And I have a chart here somewhere, but it goes through the crash of ’87 and you know, backs on the oil embargoes in ’73, ’74, and all these past declines that might’ve taken three, four, five, six months to get to where we are in three weeks.
Steve:
So you’re not wrong in that sense. This has been a brutally swift decline.
Dave:
Right. And it’s… I think that’s a great point in that I find this to be real different than 2008.
Steve:
Yeah.
Dave:
2008 you had underlying causes that were festering for a long time. Those underlying causes were also, part of those were things where a lot of people said somebody should be put in jail. Nobody was. But let’s face it, rating services were not doing their jobs the right way.
Steve:
Right.
Dave:
There was a lot of stuff that was wrong in the system and it was the type of deep-rooted, I’ll call it, crash that is a lot different than this one where you can’t blame, everybody wants to blame somebody for something, can’t blame a person or a system. This is something that as of right now is out of just about everybody’s control. But you could understand the driving force of a decline, this precipitous, and that would be pure fear.
Steve:
Right.
Dave:
And that’s what this is. It’s fear.
Steve:
Fear and uncertainty.
Dave:
It’s fear, it’s uncertainty, and it’s things that happen to, that might not mean anything except that they just bring things home. Like no March Madness.
Steve:
Yeah.
Dave:
Like no sports.
Steve:
Yeah.
Dave:
Like everything being closed. All, in my opinion anyway, all for good reason.
Steve:
Right.
Dave:
But again, when you look at something like that and then you expect… What do you expect out of the what we’ll call the average investor? You’d expect fear. And that’s what we’re seeing right now.
Steve:
Well, okay, so I had a couple things written down. So the speed of this decline, it is simply breathtaking. Just how quickly it’s gone down. The next thing, this was a friend of mine who’s a CPA, I was talking to him, and he tends to be more on the analytical side of things, right? A CPA deals with numbers all day long. And he said something that sort of clicked with me. And he said, “It’s interesting. The stock market is supposed to be a discounting machine.”
Steve:
Now what he means by this, because that doesn’t mean a whole lot to those of us out there, what he means by that is when you price in a stock, you’re looking at the earnings of the company from now into the future. And you’re saying the earnings are going to be X amount, and therefore I’m willing to pay this amount for the stock. What we’re looking at is, you’re going to have a year, maybe two years, of earnings wiped out, right? You’re going to have companies losing money. Obviously businesses are closing.
Steve:
But that does not mean that it’s going to be wiped out for the next 20 years. I mean this is of course conjecture, but this was his point. Sure, it’s going to take a hit in the short term, but that doesn’t mean that these companies… They’re probably going to be around for 20 years or so.
Steve:
So I thought that was an interesting perspective on things, to say yeah, it’s going to take the hit now, but longer term, I think the companies will still be around.
Dave:
Well, I think longer, anything longer term, it depends if you’re an optimist or a pessimist. Now, I’m personally an optimist that, as I read somewhere, this isn’t me just saying, “This too shall pass.” So what in the future is going to happen? Will we all be confined to our house, and social distancing, and giving everybody the evil eye when they cough, and freaking out like the… I’m not saying this is the peak, but let’s face it, this is the beginning and it’s…
Steve:
Right.
Dave:
Or at some point will things get better? At some point will we be allowed to do… Basically the peak of the cases now, right now as of this broadcast, we don’t know if this peak is going to be real soon, or hopefully what they call the flatter curve, that that works the right way. But at some point you’ll have a peak, and then you’ll have a decline, and then you’ll be like the celebration they had the other day. I saw the weekend in Wuhan when they were allowed to take off their masks and everything and for the most part go back to business as normal.
Steve:
Yep.
Dave:
Will that occur in this case? Well I’m, so I’m an optimist. I think all of that-
Steve:
Will it occur?
Dave:
Of course it will occur.
Steve:
I think it’ll occur, it’s just is it in May or is it in December?
Dave:
But everything about investing is long-term.
Steve:
Right.
Dave:
What do we preach? And now, and this is… I was telling Steve before the show. I said we could call this the, I Told You So podcast. And when I said that I didn’t just say, oh, we’re just saying that. I say the one thing that we have that some, I’m assuming some advisors have but most don’t, is what we’ll call a recorded history of everything we say. Podcasts that you can go back and listen to these podcasts we’ve done over the years, or radio shows, and see what do we say?
Dave:
So one of the things we always say is that when it comes to us and the way we look at investing, it’s always long-term.
Steve:
Well, and it’s also… What have I said many times? That we put together this plan. And people laugh or roll their eyes or whatever when I say this. I said we put together this plan as if the market’s going to crash tomorrow. And I don’t think we had anyone unlucky enough that we had just put their plan together February 15th and it crashed the next day. But pretty darn close. Because, and this comes back to when people ask what are you doing? What changes are you making? If we have money in stocks, we have gone through a detailed look at when do you need this money? What’s the plan for the money? And we’ve got to have enough money in cash bonds and annuities that let us ride this out. Right?
Steve:
And I’ll just kind of go through an example.
Dave:
And when you say write it out, we always tell our clients we’re not talking days. We’re not talking months. We’re talking years.
Steve:
Right. I’m talking five to seven years maybe.
Dave:
We’re talking five to seven. And I want to throw out, it was interesting, I was looking at… The other day I was looking at all the stats of market lows in these bear markets. Regardless of how low it went and how long it took to get back to where it was-
Steve:
Okay.
Dave:
At the end of the bull market.
Steve:
Right.
Dave:
And I always use my benchmark at 2008. And I don’t remember everything. But I’m like, oh man, well it was like six years. I was like thinking in my head how long was it. You know how long it was? Less than three years.
Steve:
Really?
Dave:
Less than three years.
Steve:
Because that’s what I usually think, that it’s about five or six years.
Dave:
No.
Steve:
No.
Dave:
No. It was less than three years. That was a cataclysmic crack. But the reason we say years is because we don’t know how many years it’s going to be, and you have to be looking in the timeframe, or at least this is our opinion with our clients who for the most part when we meet them are over the age of 55. Many of our clients in their sixties now. Some obviously in their seventies.
Steve:
Right.
Dave:
We have to be looking at 10 to 15 year horizon. That’s what we’re looking at with our stocks.
Steve:
Yeah. Well let me go through an example of, basically a hypothetical client that, this is probably similar to a lot of people we work with. A woman retired a year ago, she’s… Excuse me, I’ve got the hiccups here. She’s taking money off of her portfolio. The plan was to take it off of a mixture of stocks and bonds. Obviously the markets crashed now. We don’t want to be selling those stocks.
Steve:
Well, she’s got $600,000 that’s roughly, let’s call it 50-50 stocks and bonds or annuities. When we looked at this, I said to her, I said, “Listen. We’re not touching the stocks. They’re way down. It could take a while. But what are your income needs?” “Well, it’s about $30,000 a year.” Okay. We’re going to take $30,000 off of your bonds. And if we had to, we could do that for 10 years. Right? That’s going to give the stocks a chance to recover.
Steve:
And by the way, she’s got social security kicking in later on, so her income needs are actually going to go down. So in a case like that, I think it really helped her to look at that and say, all right, yeah, that hurts, that the stocks are down. But now I see where I’m going to get my money from. And now if you tell me I’ve got 10 years or even seven years, five years, I feel better about stocks.
Dave:
Yeah. And in times when things are good… And I want you all to go back. I wish I knew. I cannot label each podcast and remember when I said this.
Steve:
Come on. You’ve got to have a photographic memory of everything you say.
Dave:
I don’t. But I know it wasn’t that long ago. Because you’ll remember when I talked about it, because the market was going up and up and I started just referring it to the irrational exuberance of what Alan Greenspan said back in the day.
Dave:
And you’re so tempted. This is not being wrong or right. This is human nature. Human nature is when everything’s going up-
Steve:
Yep.
Dave:
Part of you says, I’m missing out on something. I always use… In fact, I don’t know if this was the last podcast, but I said, I think maybe compared to some people my age at 58 I might be a little conservative. I have about 65-35 split of stocks and bonds.
Steve:
Right.
Dave:
But you know when things are going up and up, I’m like, I don’t know. But that’s good for my risk tolerance.
Dave:
Now when things go down, really down, like say right now, what does the brain start to think? Here’s what it thinks, what do I have coming in every month? How much do I need to live on? I have a mortgage. I have my car payment. I want to be able to go out to eat. Just kidding. I mean take in. But I might want to do that. How much do I need to spend and how much do I know is coming in?
Dave:
And this is where there’s a difference in financial advice. We feel for clients who don’t have a pen, now we live in the Washington D.C. area and we have a lot of clients who never need to do any income/annuity planning because they had pensions. And some of you listening do, and you know how nice that is to have that security.
Dave:
But there are others of you who’ve had to do some annuity planning. Why? Because now we’re in a situation where we don’t know. We don’t have to sell our stocks now because we know we have income from social security coming in, from whatever that annuity is bringing in every month. And some of you have little pensions. Or whatever we know is coming in every month, that’s enough. Along with maybe a little bit of money off the bond part of the portfolio, is we’re not selling stocks when they’re low. That’s why we do that.
Steve:
Yeah.
Dave:
That’s why I’ve said this before. Do I like blanket statements by advisors like, “I hate annuities.” No. I don’t like those statements.
Steve:
Right.
Dave:
And now is the time when I hate those statements. No one’s ever called out for it, but you know what? When you’re looking at a real portfolio and real life people, you need to be able to not just say, I’m not going to sell my stocks when they’re low. Because fear runs high sometimes. But to say, this is what’s coming in, this is what I have, this is the money that’s safer. This is why-
Steve:
Right.
Dave:
I don’t need to. Not don’t, you shouldn’t. Don’t do it. Here is why.
Steve:
Right. Having that concrete, numbers that you can hold on to and say, okay, that’s what I know I have coming in. That’s a lot easier than the general market statistics. Which by the way, you know we’re still, we always love to look at those too. Or say, oh, it’ll come back. That’s nice, but that doesn’t hit home nearly as much as like you were saying, this is how much money you know you have coming in. That makes me feel warm and fuzzy. The, “Well generally everything’s coming back.” It makes me feel a little better, but it’s still, what if this is different.
Dave:
All right. Now I’m going to throw something out. You’re going to get to your points.
Steve:
Okay. I’ve got one last one.
Dave:
I’m going to get to my next point while it’s on my brain.
Steve:
Sure.
Dave:
What do you guys, how do you guys invest? What stocks are you picking? How are you… What do you think about this or that? And when I say this, there are two philosophies in the advisor world. One is the mutual fund/ETF philosophy, where you are, that’s what you believe in for these types of assets. We’ll call them long-term growth. And the other is a portfolio of, I’m not saying putting someone in seven stocks and saying that’s my portfolio, but I’m saying a portfolio of say anywhere from 30 to 50 stocks or whatever,- and managing a portfolio and making movement. Everybody has their own opinion. You and I are in the opinion of we’re looking at long-term. We’re looking at one thing and one thing only, which you always say, but I’ll repeat, our whole job is to make sure clients don’t sell their stocks when they’re low no matter what.
Steve:
Yep.
Dave:
And then we’re looking at statistics over a long period of time that say if you don’t, these perform really well based on the evidence of 10 to 15 years, and that’s why we’re putting you in this. Versus, what’s wrong with the four to 30 to 50 portfolio. Not that the advisor isn’t doing their best to manage that portfolio, that within that portfolio, what if there is even one company, let alone two or three that go under, or go down and never come back? And because there was a fundamental change in how business occurred, in how life was lived.
Steve:
Yeah.
Dave:
That’s my… My problem isn’t with the person who’s trying to do the best they can. My problem is with the philosophy and then the psychology of their client now. Because the client can say, “Well I think people are going to go on cruises again.” But what if it’s just, “Eh”?
Steve:
Nah.
Dave:
Nah. If it is, then now 1/30th of my portfolio is done forever.
Steve:
Right.
Dave:
And that is again a philosophical difference in advice. When things are going up and it’s… So remember, meetings. So that’s why you and I very honestly meet a lot of people. A lot of you are clients. So you said, the philosophy. You guys are saying, I agree. Well a lot of you listening are our clients and we are on the same page. But other people say, I want the Wizard of Oz. I want the one who’s moving and picking.
Steve:
Because-
Dave:
And that doesn’t mean some people aren’t good at it. And I know several people in our business who I talked to, I don’t know. Right? But the bottom line is they, they talk such a good game that I start to… I don’t know if they were going to do it, but I say, wow, you, okay.
Dave:
But the reality is now it’s impossible to see in the future what an event like coronavirus is going to do to the fabric of society and how they move forward from that event. Which is why, you and I are obviously on the same page, that’s why I emotionally don’t like the stock-picking versus mutual fund/ETF. Let’s go with the best of those for our goals.
Steve:
Yeah. No, absolutely. I mean we can all think of and name companies that seemed that they would exist forever. Of Sears or GM, or gosh, even in my time, Yahoo. I mean that was the first search engine. And they’ve all fallen from that. So let’s go through my last point here, which is that statistical analysis. And I’ve got this great chart that I’m going to try to post right below the podcast here. And it basically shows the five worst declines in the stock market. So the five worst that we’ve ever had. Financial crisis, the tech bubble, ’73, ’74 back with the oil and everything, the beginning of world war II, and then the great depression. Five worst declines in stock market history.
Steve:
And then it shows us the five subsequent year returns for each of those particular events. So for instance, the financial crisis, that one ended March 9th, 2009. They show us a year later, and then the next year, and so on and so forth. And the amazing thing about this chart is you’ve got 25 different data points, right? So five worst declines, five years. Out of those 25 there are only two negative years. So 23 years. And the average annual return for that five year time period is 23%. I have no idea how that’s going to correspond to our current crisis. I could be, could be, whatever. It’s not going to be the same. I’ll guarantee that. But I think that’s a pretty powerful chart when you look at what are the returns coming out of a crisis like that.
Dave:
Yeah. Well, so now that we’re basically done, I’d like to say to anyone listening,and your families, hopefully you’re all safe.
Steve:
Yep.
Dave:
Hopefully you’re all, this is my opinion, me, Dr. Fauci, and my daughter, Hannah, who is really off the charts with this, doing the social distancing and doing the best you can to follow that stuff. I think the more we do of that, the better.
Steve:
Yeah.
Dave:
And if you’re going overboard and you think you’re the one who’s like crazy, I wouldn’t go that route. I would say if I’m going overboard, that’s better on this thing. But more importantly, all of you and our clients and family, and I hope you’re all safe. And that’s my first thing on that. And my second thing would be if any of you who are our clients, or even if you just, somebody sent you this.
Steve:
Yeah.
Dave:
Someone said, Hey, here’s two guys rambling about whatever but you should listen to it. And you’re interested in, a, your clients, and you just say, hey, that all sounds good, but I want to just check up on my portfolio obviously.
Steve:
Tell me specifics as to why I’m okay.
Dave:
Right. Let’s look at your portfolio that we put together. If you’re someone who just got this and you’re interested in talking with us for any reason, really, you know where to find us because you’ve got this podcast.
Steve:
All right. Thanks for listening. I have a feeling we will be checking in again with you real soon.
