Steve and Dave spend the majority of episode 107 reviewing where we are right now as the markets head toward 2024. Steve adds some prescient* insight on bonds: Dave finishes the pod off with some startling reality about Long Term Care, proving once again that life, money, and segments of Plan For Life Now are truly unpredictable
*Recently voted into the “Fancy Word That Makes You Sound Smart” Hall Of Fame
Steve:
Welcome to Plan for Life now, episode 1 0 7. Dave, welcome. How are you doing here this week?
Dave:
I’m doing pretty well. I’m doing pretty well back from my vacation.
Steve:
Oh yeah, I was to hear about your trip to France.
Dave:
Oh, I’m not going to bore people with my trip to France. They’re interested in money and money talk, but it was awesome. What can I tell you? Good wine, good cheese, good food, good sites. Went to Paris in the south of France, saw everything. I’ve never been there before. My wife and I, and what can I tell you? It was a fantastic trip and I recommend if people get a chance and you’ve never been to France, go to France, especially if you’re interested in things like really good food, put your cholesterol worries on hold, get back to cholesterol issues when you get home. And if you’re interested in museums and art, Paris, it’s like a really cool, it feels like the New York City of Europe, but classier.
Steve:
Well, you also said that you were balancing out all the wine and cheese with 20,000 steps a day, right?
Dave:
That’s what my wife and I, we walk, we do stuff, we walk all the time in general. And on this trip it was perfect for that. So yeah, basically the first couple of days we didn’t get a chance to move around. Probably gained three or four pounds in two or three days and then it ended up being a net zero from the 20 to 25,000 steps. That’s good. That was awesome. And then as always, when you and I talk about behind the scenes, whenever I go on a European trip, which is rare, but the last big one like this was Italy, 2011, that’s when the s and p downgraded the United States and the market tanked. And my next big one in France was just the market just sort went down. I think
Steve:
There was some trips in between, though it’s
Dave:
Not been, I think it went down Peru 2017 went to Machu Picchu. But anyway, so I was like even last my feeling and I’ve heard from people I always hear anecdotally, but I was feeling it too. Times are pretty crappy right now. And you hear from a lot of people, look at this unrest. I’ll start with the unrest in the Middle East, which is such a disturbing thing on top of Ukraine,
Steve:
On
Dave:
Top of what we’ve been dealing with economically with super high interest rates and inflation on top of,
Steve:
Hold on, let me interrupt you there for just a second because I can already hear the people who bought houses in 1981 saying, hold on, dude, don’t call today’s rates super high interest rates because 1981 they got mortgages at 17%. I
Dave:
Know, and that is our group. Remember, all those people are older than me because when that was all going on, I was still, the word keg was still something that was highly in my vocabulary I was dealing with. So you got to be older, but yeah, you know what I mean For your current time. With all that going on, I was thinking, and then this was five days ago and I did some research. I was thinking, why does it feel crappy five days? Well, three months ago to today, August 3rd, the s and p 500 was at 4,500 really coming back and creeping up to, its all time high, getting there, not there. But on the ascension to that things feeling, I don’t know how you’re feeling, but the reality was the market was seemingly stabilizing and doing pretty well and we were looking at a great year in general.
And then you go to five days ago, just five days ago, down to 41 50 in the midst of just negative and depressing feelings for everything that I just described and the feeling of somebody saying, you know what? I’m going to take a break right now. The stocks are down. I could move some money into my savings and make 4% or whatever for a while, make 5%. The feeling goes away 5%, or we’ve talked about interest rates ad nauseum. That feeling is it’s such an emotional understandable feeling yet never try to figure out the stock market five days later. As of 15 minutes ago, and I just looked at today’s November 3rd, I just looked at the s and p for this research at 43 51, meaning up over 5% in five days. The movement of your money, out of your long-term stock plans, whatever they are, is disastrous. When you look at that kind of number and that kind of swift movement, we never recommend doing it, but it’s, I always like to on these podcasts, and you do too, give real examples of why you don’t make these emotional moves versus just saying, don’t make these emotional moves. That’s a real example of a damage done in the long term by an emotional feeling in the short term.
Steve:
Oh, totally. And I mean that’s a perfect example right there of when people say, you know what? I’m just going to get out and sit on the sidelines until things turn around. Well, I mean, if you blinked in the last week, I don’t know if the turnaround will hold or not, but you miss out on 5% there and that’s gone. You’re not going to be able to grab that back. And I had written down the percentage numbers you’d written down the value of the s and p 500. I wrote down here preparing for this just to tell the story of the market this year, July 31st, we were up 19.5% on the s and p 500 for the year. Wow, this is a great year. As of Halloween, we were only up 9.2%. So three months go by and we were actually, prior to the last couple of days, we were officially in correction territory.
The correction territory means you’re down 10% off of that high there. So now I should point out the huge divergence that we’ve seen so far this year in technology growth oriented stocks. The NASDAQ was up over 40% at one point, and I think now it’s still probably up mid twenties. And the dao, the Dow, as of Halloween was down, was negative on the year, and the Dow’s going to have much more of those blue chip, probably more dividend paying stocks or definitely more than the NASDAQ there. So of course the stock market always gets the big headlines from everybody. But Dave, what I think is more, I don’t know if you want to say shocking or more sort of interesting, whatever it is, is what interest rates are doing and therefore what bonds are doing. So far this year we had the 10 year treasury hit 5% in the past couple of weeks. So interest rates have been just soaring. And let me take a second here just to explain bonds a little bit because I’ve heard this comment many times in my career and it’s almost verbatim, which is kind of strange is people say, look, I’ve been investing for a long time. I think I finally understand stocks. Right. Okay, well, as well as you can understand them.
I’ve been doing this for a long, long time. I’m not sure I fully understand, but yeah, I get what you mean. You understand stock and people say, I mean, it’s uncanny how often you hear this, but I don’t quite get bonds. I’m just not sure about bonds here. Well, let me use some simple math, and I’m sure I’ve done this explanation before, but it never hurts to hear it again. Let’s imagine that a couple years ago you decided you wanted to buy a 10 year government bond. You said, you know what? I don’t know what’s going on with the economy and everything. I’m just going to put my bond or my money with the government for 10 years and I’m going to get one and a half percent interest per year. That was the deal. You lend your money to the government, they’ll pay you one and a half percent interest as long as the US government is not out of business in 10 years, which of course if that happens, we’ve all got a lot to worry about.
Dave:
And we’re talking about by the way, out of business for good.
Steve:
So I’m not saying that’s impossible, but I’d say highly improbable, you’re going to get your money back plus your one and a half percent interest after 10 years. And that’s the way it works with any bond. And obviously as you lend money to other corporations, the risk goes up. You can do the same thing to Apple. Will Apple be out of business in 10 years? Well, probably not, but a higher likelihood than the US government being out of business and so on. Now, as it stands today, the 10 year treasury is around 4.5%, but a couple of a week or two ago, it hit that 5% mark. So the same exact bonds, you lend money for 10 years, you’re getting 5% interest. Therefore, those bonds from a couple years ago are trading at much lower prices. Nobody wants to pay you full value for your bond. They’re only going to pay you maybe 75 cents on the dollar. And it’s a simple math calculation. Well, if I can get 5% now, how low of a price do I have to pay to make that equivalent to 5% on those old bonds there? And that’s been the really shocking thing, surprising, shocking, whatever is how much interest rates have changed so quickly. And I think it’s really changed the equation, or maybe it hasn’t changed, but I think it should have changed the thinking and the equation for a lot of investors out there because now you have high quality corporate bond portfolios paying you five and a half, six and a half percent, and it’s so different than where we were for the last 15 years.
Dave:
This huge interest rate climb in such a short period of time to me is the great disruptor. It feels like the covid of financial economics because it’s a great disruptor. It’s a big change element, it everything that’s going on.
Steve:
So I mean, let me tell you how we take this into account. When we’re thinking about investing with people, anybody who’s done a financial plan with us, we put together these projections and we talk about, sorry, I forgot to put the phone on Do not disturb. We put together these projections and we’re projecting out and we’re saying, okay, if you lived age 95, if we have this inflation and the rate of return assumption we’re using for most people is between five and 6%. And this is a long-term rate of return for a balanced portfolio. But what we’re looking at in bond portfolios right now, and I say bond, this could extend to CDs, to fixed annuities to bonds, to bond mutual funds, whatever. We’re looking at rates of return five and a half, 6%. And when you’re talking about investing in bonds, that’s your yield.
But now let’s imagine the opposite happens and interest rates the opposite from the last couple of years and interest rates go down. Now your 5% bond becomes more valuable. So if you’re holding a 10 year government bond right now and interest rates go down by a percent, you’re going to see a return in the next year of about 12 or 13%. So that risk reward, trade-off has really changed. And I really think just the thinking about bonds and fixed income in the portfolio, that’s been basically the same. I know it’s changed a little since 2008. I think that’s really changed in the portfolio now. And I think bonds and fixed income deserve a higher percentage of the portfolio than they have in quite a while.
Dave:
Yeah, it makes sense. I mean, again, I think you laid that case out pretty well, but that’s the flexibility is needed and thought by again, our clients are basically counting on us to understand all this stuff and to act accordingly to explain it to them and go from there.
Steve:
Absolutely.
Dave:
But what can I tell you? That’s the paradigm shift that’s occurred, and it’s our job just to act on it and explain it. And to the credit of our clients through all our meetings, they all seem to get it.
Steve:
And I mean, it kind of comes down to our fundamental principle is that we want to be able to accomplish these goals by taking the least amount of risk that we have to. I would much rather accomplish these goals and say, okay, we didn’t have to take any risk and we were able to get six, seven, 8% return if that were possible, I’d love to do that rather than riding some roller coaster of the ups and downs of the market.
Dave:
Of course,
Steve:
All of the things being equal, we’d rather not ride that roller coaster. So you were talking about something, Dave earlier when you talked about how lousy things were feeling, or basically last week, how there was so much negative sentiment and of course stuff with Israel and Hamas that’s deserved, but
Dave:
I feel it’s a piling on. I feel like we had that on top of everything else, not to mention an election year looming and everything else going in Washington that is bound to tug your emotions. Yeah,
Steve:
And we’ve talked about it before. You can always come up with this list of things to say, well, wait a second, I don’t want to invest right now because of X, Y, and
Dave:
Z,
Steve:
And there’s always going to be things. So I’ve seen articles like this before, but I came across this one and I thought this was always good to take us back here. And this is a quote from an analyst. Frankly, I wonder whether any amount of arm waving will incline investors to actually examine the risk exposures in the market here, much less consider the prospect of a 40 plus percent decline in the s and p 500 that would be required simply to bring stocks to historically run of the mill valuations. So this is a quote from an analyst, and then this particular article said, I’ll go out here on a limb and say there’s a good chance that this analyst, John Hussman will be proven, right, even if the market doesn’t actually crash. I think it’s highly likely that stock returns will be lousy for the next 10 years. It’s worth stressing, blah, blah, blah. But ultimately, every historical indicator Hussman is looking at is suggesting that the stock market is wildly overvalued and headed for a period of lousy returns. How lousy Hussman thinks there’s a good chance the stock market will have a 40 to 50% crash that would put the Dow, and now here, I’m going to tip my hand as to when this is from. The Dow will be at 8,500. The way these things are written, you’re always thinking, oh, they’re talking about now
Dave:
I thought you were talking about right now until you said that. Of
Steve:
Course. Oh no, this was from 2013. And if you don’t have these numbers at the tip of your tongue from 2013 to now, the stock market averaged about 12.8% return. So a phenomenal period to be an investor. And this analyst is just going through talking about how lousy returns are going to be for the next 10 years. And you read this stuff, and of course it sounds totally convincing. It’s a smart guy. He’s got a lot of credentials behind his name. He’s citing all of these long-term metrics about valuation. It seems like it’s a FTA complete. Okay, yeah. Market’s going down 40, 50%. And I guess that word humility and this idea that we don’t know and we can’t sit here and just predict that. I think you’ve got to come to terms with that to really be a good long-term investor.
Dave:
Yeah. Also, when you look at 10 year and 15 year outlooks, first of all, it’s great to predict stuff because no one’s going to call you on it. You’re the first person to ever call anybody on that. That guy was shocked or a woman was shocked that you just called them on it 10 years ago.
Steve:
I don’t even know if he in the industry, who knows.
Dave:
But I guess, and I will admit that when it comes to 10 to 15 year outlooks, I am always bullish personally could be wrong, but I’m always bullish on the stock market because I always look at a much broader thing. And that is, are there avenues for capitalism to succeed in the next 10 to 15 years?
Steve:
And
Dave:
You know what? I think about that sitting here in 2023. Yes. Is what I think, oh yes, there are plenty of avenues for capitalism to succeed in the next 10 to 15 years. I could rattle off a bunch, but the reality is that’s how I look. That’s why I guess I’m always been bullish on super long-term stock.
Steve:
I’m going to get this one wrong, but there’s some quote from John Bogle, the founder of Vanguard, who talked about how something like in the long run, I always wish I had more stocks. And in the short run, I’m always wishing I had more bonds, which is basically over the long run, the stocks are going to do quite well in the short run with the day-to-day volatility and the fluctuation. Yeah, it makes you sick to your stomach. You’re saying, oh, why am I putting up with all this volatility?
Dave:
Yeah, the answer again, everybody’s answer, you’re either using the stock market or you’re playing the stock market.
Steve:
We
Dave:
Are big believers in using the stock market, which is always going to be super long-term and a nice moat built around all your emotional things like immediate expenses and even intermediate expenses,
Steve:
Blah
Dave:
Blah. We’ve been through that a million times. Other people play the stock market. And you know what? Like any gambling, you’re going to have your highs and you’re going to have your lows. That’s fine. I mean, you’re allowed to play the stock market. Some people are good at it, but it’s not the same as using the stock market.
Steve:
And you shouldn’t base your retirement on playing the stock
Dave:
Market. That’s not our belief. We’ve done pretty well not doing that. So we’ll stick with that.
Steve:
Alright. Are we done or do we
Dave:
Have time?
Steve:
No, let’s hit on the long-term care stuff. Yeah.
Dave:
Well, this is just because, again, let’s look at things from a general perspective, but I got some specific information, which I think puts the general perspective, really gives you an idea of what’s really going on. So in general, part of your retirement plan needs to be protected for the potential of long-term care because in general, most of us will need long-term care at some point in our life. And as you know, to a certain extent, this practice has been built on long-term care insurance and clients. And a lot of our clients, and most of you who are listening habit, some don’t have long-term care insurance, but it’s not even about that. It’s about this danger to, I hate to say this, this is like a, and don’t take this the wrong way, but anyone listening to this based on medium net worth is considered rich.
It’s a rich person’s problem. If you have no money, Medicaid will put you somewhere. It’s not good. But that’s the answer in this country. But the cost of care is stunning. It’s stunning. So my mother-in-Law, as we’ve talked many times who passed away in 2018, went to one of the, and now they have different locations. It was just Kensington Park in Kensington, Maryland. Now they know they have a location in Fairfax. I think they have other one of the best assisted living, independent living, and most importantly in our case memory care facility probably in America. So they’re fantastic, they’re great. And in 2013, my mother-in-law went there. She had Alzheimer’s and dementia, but she was certainly in a condition where she had to be watched over. She had to be in memory care, but it wasn’t as it got as the years went on, as the five years went on.
But she went in there and I believe the cost to be on the first floor there and have a nice place and everything that Kensington Park offers for memory care. I believe it was $95,000 that year, 90, 95, something like that. And that cost escalated by the time my mother-in-law passed, she was paying $130,000 a year. And that was with us knowing the people there and trying to work out something. Now to be in the, and this is from, I don’t feel like revealing sources, names, whatever, but now basically that first year in Kensington Park, when you’re in your best shape, not as it gets more expensive, that’s running one 90 to 200.
Steve:
Wow. Oh geez.
Dave:
And that’s just to be in a regular room there. People who’d want bigger room for this, that and the other. This is great care. These guys are great,
Steve:
But the memory care part is probably,
Dave:
That’s the memory care part
Steve:
Even more.
Dave:
But that is the memory care part. That is what, yeah, the regular a part would probably be a little less, let’s say regular assisted living might be, we’ll say we’ll start around 150 there probably something if I had to guess. But that’s staggering. That’s staggering to a retirement plan. That’s 2023 costs. What are 2033 costs going to be? What are 2043 costs going to be when I might need long-term care at 60, soon to be 62 years old. And this is why. And at the same time, yeah, long-term care insurance has gotten more expensive and it requires more creativity and work on the financial advisors. And I don’t know what to tell you. At the end of the day, this needs to be addressed. It’s staggering. Just I heard all this and I’m like, this is staggering and I’ve been in this business my entire career. It’s something that has to be addressed and has to be dealt with. Fortunately, many of you listening already have long-term care insurance from when you worked with us or me a long time ago. And even with price raises on those policies, well worth it to protect the chance. It’s not like a zero chance. It’s a real chance that at some point you’re facing at least one year of this
Or two or three or four or whatever.
Steve:
But take a minute if we can do it in a minute or two and talk about how these policies have changed. We’ve touched on this a little bit before about how the traditional long-term care policy, the policy where I always use the analogy, it’s like car insurance where you pay your premium, you don’t get into an accident. IE need long-term care and the premium is gone. You’ve just paid it. But I mean, we’ve talked about how those policies have gotten so expensive and there’s frankly not a lot of companies doing it. And so now that the hybrid policies are really, I mean, that’s where most,
Dave:
Yeah, that’s basically it. Now, you could still do a regular, what we call traditional policy. And quite frankly, everyone listening to this, including myself, has had a price hike already on a traditional policy as they’ve gone to the state insurance commissioner, all these companies, and they said, look at all these claims. Look at all this money versus premium, and we have levels of reserves we have to keep by law and we need price hike. Now those levels have risen dramatically and there’s very few companies that sell traditional, but do you have a much better chance of a stable price and a traditional Oh yeah. With the interest rates the way they are, and that’s how these insurance companies make their money on reserves and keep reserves. Oh yeah. The stability and price I feel pretty good about. It’s just the price itself is super high as they’re now pricing this the right way.
And you’re right. Yeah. The hybrid policies, which are a mixture of life insurance and long-term care, and they offer on the pro side, if you die and never use it, you’re basically getting a death benefit of let’s say a couple hundred thousand dollars to $300,000 based on how you design it. So you put a lot of premium in, but you got some, or at least your heirs got something back and you protected the estate that way. The problem is putting the couple hundred thousand in to begin with. These policies, most you dump in a premium, a one-time premium, not all but most. And when you do that, look at what’s going away on that is the money you could be making on that money over 10, 20 years investing. So you got to figure, there’s a lot to figure out on all that. And I don’t feel like doing a long-term care seminar right now. I tried to do that in a minute. The bottom line is through your own asset, through long-term care insurance, in some way, shape or form, this has to be addressed. You can’t look at a financial plan and say, I’m looking great based on the software. And the software is not including, oh, but are you looking great without long-term care insurance? If you take a hit of three years at $200,000 a year,
Steve:
How
Dave:
Great are you still looking? I mean, we’re fortunate that almost all of our clients, because of we practiced what we’ve preached here for a long time, they have that long-term care protection. We have a few who weren’t able to get it, and we have to always think about this and we do in our financial plans.
Steve:
Alright, let’s wrap it up there. Thank you all for listening. Hope everybody has a good Thanksgiving and we’ll talk to.