What’s going to happen going forward? A lot of people are making bold predictions about where the market, and society, is heading. Will the Fed hike affect your portfolio? What about the upcoming elections? Will our future AI robot overlords enjoy this little podcast blurb? All this, and more, on episode 132 of Plan For Life Now.
Steve:
Welcome to Plan for Life Now, episode 132. Dave, we’re chugging along here. We’re past Labor Day, we’re into September. For me, this is the busiest time of year. I think it’s without a doubt because we’ve been relaxing all summer, not doing quite as many meetings. People put stuff off. And then for us, it gets busy with work. And then for me, I’ve got kids going back to school, starting up activities and all of that.
Dave:
Right. And for me, it just gets busy with work because my kids are – A
Steve:
Little beyond that.
Dave:
If I had all that kid stuff, I’d be having problems with my adult children who are basically on their own
Steve:
Most
Dave:
Days.
Steve:
So we are back in the grind, meeting with people, which is all good. And for the most part, it has been a very good year to be an investor, but a little bit, I don’t want to call it a curve ball yesterday because we’re recording this here on September the 17th. And yesterday on September the 16th, the Federal Reserve chairman came out and said there was a unanimous vote, first unanimous vote since 2024, I think, that said they would be raising the Federal Reserve rate by a quarter of a percent. Now, this is what I found interesting and I’d be curious to hear your take. There was a 90% chance that the Fed was going to raise rates. That’s what bond markets were pricing in. But regardless of that, the stock market reacted really negatively. The stock market was up on the day and then the announcement came out and all the gains were flushed away.
I think the Dow was down one and a quarter percent on the day. It’s just interesting to me that that was already priced in, that’s what was expected, and the market still sold off relatively hard.
Dave:
Yeah, I saw that. I figured it would actually be up just because they would think my take, which I’ll give you in a second, is what I was thinking the market was going to think. But having said that, it’s up today. So that was a relatively quick down. And now today it is probably one of the better so far, I haven’t looked in half hour, but so far one of the better days of the last few.
Steve:
It might’ve been one of those things that Wall Street says you sell first, you ask questions later. People just sell, get out. And then as they had the night to think about it, they go, okay, that’s actually not a bad thing. The Fed raising rates, I think the most positive thing about that is the fact that Kevin Warsh establishes some credibility with the market, with the country, that he’s not just Donald Trump’s lackey that’s going to do whatever Trump says.
Dave:
Right. This is why we really only need one of us to do the podcast because that was my point. That’s okay. But that the market would react immediately. It’s like, great, Kevin Warsh. It’s not just Trump, it would be just any president. It’s very important for the Fed to be independent of the whims, not only of the president, but of their own feelings. You know what I mean? Forget about just the president. Suppose you’re just whatever, you’re politically leaning yourself one way and you want it to work out for your political party. So bottom line is, and yeah, Trump’s a good example because he’s pushing so hard for interest rate cuts.
Steve:
Right. I mean, he’s just so vocal. Other presidents have certainly done the same thing. They’re just not getting on true social and saying it.
Dave:
They do it behind the scenes. But having said that, certainly the environment inflation-wise is to raise those rates a little bit. And they did what they said and it looks like they’re going to do it again next
Steve:
Time.
So the predictions, and you have to take these with a big grain of salt because the beginning of the year, the predictions were for three to four rate cuts this year. Now, obviously the beginning of the year, we didn’t know about the conflict in the Middle East with Iran and oil prices and all that, but you were talking three or four cuts. Now you’re talking about probably two hikes for the year. And then the predictions beyond that are relatively flat to maybe cutting over the next couple of years. So this brings me back to what I want to bring it back to actual investors, clients, people who are listening. You don’t really care about all this wonky Fed stuff, blah, blah, blah. What does it actually mean for me and my portfolio? And I cannot get over the fact that we lived through this period of time from 2008 to 2022 where bond yields averaged about one and a half percent.
People during that time period would have crawled over broken glass to be getting yields of over 5%. I mean, it was a dream then.
Dave:
Yeah. And the work we had to do then to get any kind of fixed income portfolio to produce anything was hard. It was very difficult for advisors.
Steve:
Oh, incredibly difficult. Yeah.
Dave:
As well.
Steve:
So the fact that we are now, and you’re going to know who I’m talking about and I’ll be very vague, but we have clients where we say, “Hey, look, we can lock up guarantee five and a half, 5.8% rates of return for the next five years.” And they go, “But it’s so easy to invest in stocks right now. So easy.” I don’t think it’s ever easy to invest in stocks. I really don’t because I think when they’re way down, it feels awful. That’s really hard to invest. I think most people know that. And when they’re up, people feel like, “Well, this is not going to go on forever, so maybe I should take some risk off the table here.”
Dave:
Right.
Steve:
And
Dave:
Then that’s interesting, just looking at individual stock portfolios, like when you have a bunch of stocks, you look at some of these stocks over the last year, two, three, their gains have been really good based on the company. Astronomic when you look, but with always goes with that is the possibility that you can reverse those numbers.
Steve:
Yeah. Anything that goes up 100% can go down 50 easily.
Dave:
Right. So in the long run, at least the work that we do, which is looking at your overall portfolio as a retirement plan that has to support you for decades, there’s a danger to the irrational exuberance because at some point there’s going to be a price to pay on those exact same investments.
Steve:
Yep. And I mean, that’s why when I was talking with some clients recently about should we go from 80 / 20 to 70 / 30? I though, absolutely. If you’re considering that stocks, depending on where you’re invested in the stock market, you’re up anywhere from seven or 8% to maybe 20%. So you’re taking some of those profits now, and now you’re investing in bonds that are giving you five or 6%. That’s pretty good.
Dave:
It is good. And the other thing is I did a little, because we’ve been talking, we’ve had several conversations these days about lowering that risk a little bit in the portfolio, whether it’s 80 / 20 to 730 or 70 / 30 to 60 / 40. And since more of our lowering is 70 / 30 to 60 / 40, I decided to do some research, actual work for this podcast.
Steve:
Wait a minute, wait a minute. Was this ChatGPT doing the research?
Dave:
No, I have large books I could find in the library. So I got my library. Of course it was ChatGPT. But what’s interesting, but I mean, you and I already know these statistics because we deal with them all the time, but more or less, I wanted to look at a 60 / 40 portfolio return versus 70 / 30 over the last 15 years and over the last 20 years. How have they performed against each other?
Steve:
Now
Dave:
In general, you do know over the last 15 years, over the last 20 years, the more stock you have, the better the return.
Steve:
Of course. Yeah. That’s
Dave:
Always how it is no matter what’s going on at a certain point.
Steve:
There’ve been very few times in history where that’s not true.
Dave:
So the last 15 years, the 60 / 40, 9.53% annual return versus 70 / 30, 10.68.
Steve:
So
Dave:
That’s a little over 1% difference. So that’s one of the things you always have to realize. When you’re making this move, it might feel like you’re getting more conservative, but it’s not like you’re not making money when you’re doing this. The last 20 years was really interesting. 8.24% for 60 / 40, 8.98 for 70 / 30.
Steve:
I figured it would be a closer spread there. The last 15 years, you’re excluding the financial crisis. You go to the last 20 years, all of a sudden that data is in there. So yeah, I figured the spread would be closer there.
Dave:
Yeah. So when you make a move like that and then you could talk to your financial advisor and they say, “Yeah, making that move, losing some of those gains is not going to affect your overall plan, but it really affects your overall emotion.”
Steve:
Oh, absolutely. I mean, it just –
Dave:
Especially when things are down.
Steve:
It feels so much better to say, “Okay, I know I’ve got that extra cushion there. Yeah, probably don’t need it over the long term, but I got that extra cushion and I feel better now that the market is down.” And I should put these into some context here. I think all of our clients know we always look at the rate of return assumption that we’re using in the projections, and the most aggressive rate of return assumptions that we use are around 7%. That’s the most aggressive if you’re all in stocks. If you’re in a 60 / 40, 70 / 30 portfolio, it’s probably around five and a half to 6%. So if historically you would’ve gotten that and then some in 60 / 40, then it’s not like you’re taking this risk where, oh, I’m not going to achieve my goals if I go less aggressive.
But
Dave:
It helps a lot to think about your emotions, and I always do this for myself. I think about horrible situations and the market really crashed in how I feel. So in other words, it’s easy to say, yeah, whatever, I’m going to stick with 80 / 20, it’s been doing great, or I’m just not even. Why would I even look at bonds making 5.5%? But now suppose in a whatever, there’s a cyber attack on DC and for two days we have no power, no computer, no anything. I don’t know who’s doing the AI cyber attack, and the markets plunge.
Steve:
They
Dave:
Absolutely plunge. It is critically important for you not to panic at that time. Everyone’s going to be telling you to panic. So I always say, okay, we have a horrific crash in the market or the drip drip of a couple years of nothing happening or just losing S&P down 10% and then 12% the next year. And it’s like, why am I in stocks?
Steve:
You
Dave:
Got to test for the bad. Hey, the AI world apparently is deciding if they’re going to test for the worst. You yourself on your own portfolio need to start to think about emotional things, think the worst, think how you’d really react and then go. That doesn’t mean everybody gets conservative. We have tons of clients who are very, they’re very happy. They’ve been through a lot of downs with us. They have very aggressive portfolios and they’re great at dealing with it. They’ve tested their own emotions and they’re good with it.
Steve:
Absolutely. Okay. So something I’ve been wanting to talk about, and Dave, I searched to see if we had talked about this before. I couldn’t find anything, but I find it hard to believe we’ve never touched on Ray Dalio. Are you familiar with Ray Dalio, some of his books and his hedge funds and all that?
Dave:
Very familiar with Ray Dalio. Yeah. Okay. So I read the same stuff you do.
Steve:
If you don’t know who he is, Ray Dalio founded what is, I believe still, the largest hedge fund in the world. I think it’s called Bridgewater Associates. And you don’t get to be the largest hedge fund in the world by knowing nothing. You have to have some knowledge and some base there. But Ray Dalio, he’s sort of retired from actively running it, so he’s just kind of this talking head that goes around, and he also likes to go to places like Burning Man and to do that kind of stuff, but that’s pretty popular with some of these super rich guys now. But what I want to talk about are these predictions that Ray Dalio has been making for a long, long time, talking about how we are close to 1937 in the United States. So what happened in 1937? Obviously we had the great repression, the stock market crash in 1929, the economy and the stock market started to recover, and then we had another crash in 1937.
And he has been drawing these analogies for years and years, and it’s frustrating at times because there’s this great Charlie Munger quote that I won’t get exactly right. Charlie Munger was Warren Buffet’s right-hand man, and it was something about, show me the incentive and I’ll tell you somebody’s action. Well, Ray Dalio is running a hedge fund. A hedge fund is an investment for ultra wealthy individuals, pensions, places like that, where they’re going to invest. And they’re not just looking to get stock market exposure, they’re looking to hedge or protect against some losses there. And when are you going to want to hedge or protect against losses more? Well, if you think there’s a big event coming. So he’s been out there beating this drum of, oh yeah, we’re in the next 1937 here. We’re going to have this big default on US debt and we’re going to have this rotation and this is how empires fail.
And at the end of the day, I’m not saying that none of his points have any validity, but what’s the reasoning? What’s the incentive there? Well, he’s trying to raise more money for his hedge fund. You’re more likely to invest in something that’s hedging or protecting you against downside if you think this big negative event is coming.
So I think the big picture takeaway here is that even though you have these super smart guys that, I mean, I’m sure he’s forgotten more about finance than I will ever know, that doesn’t always mean that they’re investing or recommending what’s best for you or even appropriate for you in your situation. Right.
Dave:
Or it just comes back down to whether you’re Ray Dalio or us or you listening, it’s like it’s very hard to predict the future, almost impossible. Every time someone’s tried to predict it, they’ve been wrong. I’ll never forget spending two years worrying about nothing working on when 2000 was going to strike because of the. I forgot what that was. The computers were going to
Steve:
Shu
Dave:
Everything. Y2K. Okay. Well, that was a waste of time, at least a few months waiting for us. That didn’t happen. Nobody predicted, really predicted the 2008 crash. Nobody predicted COVID. When they predict stuff, they’re often wrong, which makes me feel good about humanity ending in three years. By good, I mean I don’t think it will. At least someone predicted it.
Steve:
What about coming out of the 2008 crash? I feel like it was virtually unanimous that all these people were talking about, well, it’s going to be a double dip recession and all this government spending is going to lead to runaway inflation. The US currency is going to be devalued against the rest of the world. There’ll be no growth in the US markets for a decade. I mean, I remember listening to very smart people tell us this. They
Dave:
Did. Who was that guy at that country club in Baltimore that you listened to? I forgot how many. I’m going to guess this was 13 or 14 years ago. The stock market was going to crash and all this stuff. And if you had listened to him, your retirement plan would not be as good as it is now.
Steve:
Yeah. He had some fantastic data going back and running these things for the last 150 years and talking about when Federal Reserve levels get to blah, blah, blah, blah, blah. And of course it all seemed credible. But yeah, I mean, it’s just made me appreciate again and again that nobody can predict the future. When they’re getting up there trying to predict something, there is always an incentive for them to push in one direction or another direction. And then the other thing is, I mean, this is not the case in Ray Dalio’s case because he’s been on this 1937 thing for a decade plus, but if you listen to CNBC or whoever, if they have a talking head up there one day that says he really likes something, that doesn’t mean he really likes it two days later. He or she could change their mind on a dime.
So I wouldn’t go basing your whole philosophy on, “Oh, I heard so-and-so on Jim Kramer two weeks ago.” Could be totally different. You want to talk about midterm elections and that kind of stuff?
Dave:
We could save it for next time. Or I mean, all I know is I made a prediction in January that so far is on target and then we’ll see. Has to do with the midterms. My prediction was the market would end up the year, like the S&P would actually end up the year up three and 4%, but the first three quarters of the year would do much better. And then when the midterms came and the Democrats won something, all of a sudden there’d be a sobering in the business world about the party sort of on the horizon being over and other things that the market would then go down to be up a little bit for the year, but down for the fourth quarter. So far, but of course the harder part of that prediction was the fourth quarter part. All
Steve:
Right. I’m not sure I even just followed what your prediction was there. You
Dave:
Have to go back and listen to it. The market would do well from January to November or whenever the election is. The S&P would do well. It’s done well, right? But it will end up January one to January one up for the year 2026, but only a little bit because in the fourth quarter or
Steve:
After
Dave:
The November election, then the market’s really going to go down because Democrats won something and it’s sobering.
Steve:
Okay. Well, I mean, coming off of our previous segment where we said nobody can predict anything and you don’t really know anything, you got to take it all with a grain of salt. But historically what has happened, and this is since 1970, is that the markets for the couple of months going into the midterms have not been great. And maybe this has held form a little bit. The market were a little choppy in July, kind of bounced back in August and it’s doing okay. But then actually from the midterm elections through the next three months, or four months I guess this is, that the market’s been up in midterm election years on average 14% and non-midterm years 5.7. So that would actually, I guess that would go against your prediction of a fourth quarter selloff. It
Dave:
Is totally going against it. So now for the rest of the year, we will compare my prediction versus your chart.
Steve:
But I wonder – And we’ll see
Dave:
Who’s right. I mean, your chart may very well be right. It’s just a prediction.
Steve:
I wonder if you took a little more nuance to it and you said, okay, if you had a. I mean, I know a lot of time in the midterms there is a change in the control there. It happens fairly often. So I wonder if you split it down even further and said, okay, if you had a Republican president with a Republican controlled Congress and then the Congress flips over, there might not be that many sample sizes that might not be the most meaningful.
Dave:
I did no research for my prediction. As a matter of fact, I came up with it off the top of my head when we did that podcast in January or whatever. So we’ll see. It’ll be interesting.
Steve:
If we remember, we’ll come back and compare. I’ll
Dave:
Remember. Don’t worry.
Steve:
Good. I’ll put that on you. All right, let’s end it there and hope everybody is settling into what I consider to be fall, but I guess we have a few more days before it’s officially fall, but settling into fall here. Hopefully we’ll check in again before Halloween and hopefully we won’t have any big scares to share with you then. But thanks for listening and we’ll talk to you soon.