As the stock market continues to decline, Dave and Steve weigh in with their thoughts and look back at past bear markets. What can we learn from the past declines and how does it relate to today? They also discuss what it feels like to retire and start spending retirement assets in this environment. Is the 4% rule still applicable today? Tune in to hear it all!
Steve (00:00):
All right. Welcome to plan for life now, episode number 91. And Dave, like you said, I think this is the third or fourth podcast in a row. Since the market has been declining.
Dave (00:19):
It, it has been, I, I spoke to the Dow, the S & P and NASDAQ, and they all said, they’re going to start measuring bear markets by how long the market’s down by the amount of podcast we do.
Steve (00:31):
<Laugh> so let, let me see here. It was 88, 88.
Dave (00:36):
It’ll
Steve (00:37):
90.
Dave (00:40):
It’ll be a new chart to go through. And what’s, there’s so many charts. We encourage you not to look at all the charts, but that’ll be the new chart. How many episodes will plan for life? Now is the market been down episodes, 86 or 87 through ??
Steve (00:59):
Somehow. I’m guessing why charts is not going to just jump on that <laugh> and, and have a new chart put out each day,
Dave (01:09):
But we’ve seen some, I mean, the, the downs that we’re seeing are, and right now today’s up a little bit, but we can’t, you like you can’t go up every day by 300 points. You certainly can’t go down every day. S and P by, you know, 80 a hundred or the NASDAQ really can’t go down three or 4% every day.
Steve (01:30):
Right? Well, let’s, let’s revisit the numbers here. So this is as of May the 10th, or really, I should say, as of close of business, May the 9th , because I’m not going to do minute to minute updates here. So it, this, this feels really lousy, right? This feels like we’re in a bear market, but technically we’re not even there yet on the S and P 500, the S and P 500 yesterday closed down 16.7% off of the high. Now I will say the Russell Small Cap, Russell 2000 down 21.3, NASDAQ down 23.7 and international stocks down pretty much in line with, with us stocks down 17%, but it certainly feels much worse than that, but I say that. And then don’t, we always say that doesn’t that everyone always say in the moment, gosh, this one feels so much worse and I’ll give it to you during the coronavirus decline. The COVID decline. That one actually was much worse because you saw those losses. Remember we had 34% losses crammed into a one month time period. So, you know, we, we certainly, in that time can say that one was worse, felt worse, et cetera.
Dave (03:01):
Well, I’ll tell you one thing, Steve, I don’t know this is again anecdotal, but this is a, it became yesterday a basketball guy’s bear market <laugh>. And that I judge by when we go for our Monday basketball, that you haven’t been to it a long time because of your foot injury, but, but the basketball guys yesterday. Oh, it was all over. Yeah. The first guy talked to me, he was a and there’s older and younger in our group. He there’s actually this guy playing now, you know, he’s actually older than me, 65 and he still plays and he isn’t, I don’t think he’s retired yet, but oh, no, he is retired. Yeah. Think he, and he says, and he says, I’m not worried about it. And I’m like, good. You shouldn’t be retired. I’m assuming you’re already. So yeah, my, I, we have between my wife and I, we have three pensions and two social securities coming in. I’m like, I don’t even talk to people like you about emotion <laugh> but then the younger guys, and we’ve talked about this on this podcast many times, and you have that many pensions in social security. You’re pretty much, you know, you’re not so worried, but we, the younger guys oh, they’re bringing it up. What should I do?
Steve (04:12):
Yeah. <affirmative> yeah. It’s interesting. You point that out because I went this past weekend seemed like the first time, really, quite a long time that we went to two different parties on Saturday night, you know, birthday parties for people and, you know, invariably conversation comes around to what do you do? Or if they already know me, they know what I do and you know, stock market, oh, what’s going on? What’s going to happen next? What do you think? So, yeah, that you’re right. When it starts to penetrate into everyday conversation, you know, that that’s when it’s gotten everyone’s attention.
Dave (04:52):
Right. And I also get the impression that these people think that we like me. Oh my gosh, Dave, like, I, I think they feel like when I’m not at basketball, I’m in the smallest space I could find in my house, let’s say a dark closet, shivering and crying.
Steve (05:11):
You don’t do a little bit of that. You know, <laugh>, I
Dave (05:14):
Do
Steve (05:15):
A couple, couple more bad days like yesterday, maybe we all will. No, but I, I went back and I took a look because, you know, I was having this thought, wow, this, this one feels really lousy. It feels pretty bad, but I went back and I took a look and I <laugh>, I actually dug through Dave, you appreciate looking at all of these. I dug through the letters that we have written to clients over the years. And I dug through and looked at, you know, obviously what was the cause of the market decline? You know, at what point did we write the letter? What did we say in the letter? You know, it’s, it’s usually all, pretty much the same, you know, Hey, we’re invested for the long term. You’ve put together an overall financial plan. We’re not worried about stocks paying the bills this year.
Steve (06:08):
Stocks are for the long term, et cetera. But it’s interesting to go through and sort of, you know, get a take on the feelings and, and all that. So I jotted down the declines that we’ve seen in the last decade or so. So I guess I’ll, I’ll stop at the financial crisis, but of course the first one was the COVID decline in 2020. I just talked about that a minute ago, 34% in one month, that was, as people said at the time, that was unprecedented unbelievable, who knew where the market was going. And of course the market bounced back very quickly. You know, the stock market had recovered within six months, basically. In fact, 181 days. So almost exactly six months there mm-hmm <affirmative>. Now I’m going to try everybody’s memory a little bit more, because the COVID decline stands out the great financial crisis, great recession, whatever you want to call it, that one stands out.
Steve (07:11):
But these other ones, they kind of get lost in history here 2018, between September and December, 2018 stock market was down 19.8%. So to, for a comparison purposes, that is a worst decline in a shorter period of time than this current one. Now I would guess that if we quizzed our listeners or random people on the street, I actually, I hope our listeners would do a little better than random people on the street. I, I like to think they’re a little bit more informed, but I’d like to think that that, that if we quiz people, I would say 95 out of a hundred would not have any clue why the market declined almost 20%, you know, four
Dave (08:02):
Years ago. I, I don’t remember why let alone the average person on the street. It just, well
Steve (08:08):
It’s, it was sort of nebulous. It was, well, it was, I guess it was a lot of centered around China slowing down, you know, China is the second largest economy in the world. China was going to slow down. You know, and here in the us economic growth might slow down. And you know, I, I think around that time period, there was some of that two 10 inversion that all the bond geeks like to talk about right. Which is where the two year, you know, is getting higher yield than the 10 year, you know, but it was okay.
Dave (08:42):
But I want to address the elephant in the room. The, if the I don’t know what kind of bomb it would be, but it’s the, it’s the I should get out now. Mm-Hmm <affirmative> and get back when it gets better nuclear weapon argument, ready? I’m going to throw it at you. I’m throwing it at you and you’re going to answer it. Yeah, I know. I, I remember that and, and I, I know what’s happened, but never before. Yeah. Bad start. Never before has the fed been working against us like this, raising these interest rates and announcing these interest rates, these interest rates,
Steve (09:23):
Right.
Dave (09:24):
Raises as opposed to these other ones where the interest rates were still so very low that you knew the bounce back was coming, all we’re getting now is a headwind from these people.
Steve (09:35):
Yeah. Well, I will point out to people, you know, first of all, I, I feel like <laugh>, and maybe I’m wrong. I’m sure I’m wrong on this, but I, I feel like we’re past the point of having discussions about jumping out of the market and jumping back in. I mean, I know I’m wrong on that. I, I <laugh>, I know it’s still
Dave (09:58):
Very appealing to me with you’re now talking about our clients versus right. And probably virtually everyone listening to this, who’ve listened to our pod, you know, versus the rest of the world. Steve.
Steve (10:10):
Yeah, no, I, and
Dave (10:11):
I also mean, I don’t mean just the rest of the world. People who just don’t follow this at all. I mean, other people who, who might have financial advisors even, or whatever. Yeah. A lot of people will listen to what I just said, and it should be explained. I have my own explanation for it, but Hey, that’s, that’s, what’s going around there in the
Steve (10:33):
Well, I, I mean the problem
Dave (10:34):
Semi sophisticated. Talk about what’s going on there.
Steve (10:38):
Yeah. I mean, the problem with that is you can have the greatest reasoning in the world and in fact your reasoning could be spot on. Correct. but the market doesn’t care. <Laugh> the, the market doesn’t care if your reasoning is correct. And you know, we we’ve had some people, the beginning of COVID before stocks even started declining said, you know what? I’m getting out, I’m getting out of stocks. And then when stocks were down 34%, they were not eager to get in. You know, that’s the point of maximum pessimism. You know, that is the point where things seem most dire. And the media is saying, things are awful. Things are terrible. And then the market starts to come back and you say, well, this is not real. This is just a dead cat bounce. You know, you’re familiar with that term, the, the dead cat bounce of, you know, where the market has come back and you say, I’m not going to get back in.
Steve (11:34):
This is fake. This is a head fake. It’s not going to really keep going up. And then it keeps going up and up and up now, what do you do? You know, when do you get back in? So, you know, I <laugh> with, with people who say that I can trot out all the statistics in the world to you, that it is not, you just can’t do it reliably consistently. You can’t. I mean, I wouldn’t even say reliably consistently, you just can’t do it at all. You’re not going to time it, right. You’re going to time it wrong. And you know, most people more often than not, they get out. And then when did they get back in? And the market’s about 20% above where they got out. So it’s, you know, that whole idea of, well, I’m going to jump out of the market. I’m going to jump back into the market in reality, you know, I never see anybody actually do that.
Dave (12:31):
Yeah. Well, and if people do do it, they end up getting burned and quite, and like you said, the lower, it goes, the worse you’re going to get burned.
Steve (12:38):
Right. I, I mean, in
Dave (12:40):
Hearing, because that’s how quickly things start to how much you’re missing out on whatever that rebound is. And quite frankly, my argument against what I just said, which I’ve heard a lot from the quote experts, is that okay? Yeah. Maybe the market is feeling some headwinds and we go into a bear work and then there’s another interest rate. But at some point, there’s not going to be an interest rate rise. As a matter of fact, at some point there’s going to be a rumor that there’s going to be an interest rate cut or an interest rate, no ride. And when that happens, the moment that happens, the moment the inside people get it, start to get that feel. You’re going to see not a dead cat bounce, but a real live cat bounce. I don’t even know what they call it when it’s not a dead cat bounce, but it’s real. I don’t, there’s no phrase for that, but, and you’re not going to know it and we are not going to know it.
Steve (13:29):
No. And yeah, that’s, that’s the other thing people say, well, you <laugh>, and I think this is people that, you know, maybe don’t quite understand what we do quite as as well as others say, oh, well, you’re going to have the inside track on this. And you’re going to know when this will happen, right? No, this is not something where J Powell texts me and says, Hey, dude, we’re going to we’re going to cut rates here. You might want to get positioned for it. That’s just not happening. So just to take my, my little history lesson a little further, you know, I went back 2015, 16, wasn’t quite as bad, but down 14.5% that had something to do with grease and oil prices, 2011, that one, we were down 19.4%, that one had something to do with the debt ceiling and sequestration and all of that.
Steve (14:25):
I heard this quote somewhere recently and I, I really like this. So I wrote it down, said, bear markets are normal. The reasons are different, but the emotions are always the same. And this is a sort of a spin on what I’ve said many times before, which is the reasons for declines. You’re right. We, we are in a unique position where the fed is raising interest rates and we’ve got high inflation and we’ve got Russia invading the Ukraine. We have never been in this exact position before. But that’s always the case, you know, whatever the reason for the market decline, it’s always the case that we have never been here before.
Dave (15:10):
It’s always, I mean, don’t forget the fiscal cliff.
Steve (15:13):
Oh gosh,
Dave (15:15):
Whatever elder reason it was. You know? Yeah, yeah. But you, but we should also focus or we should talk about, there’s a lot of good. I mean, I’m sticking with, I went back and looked at the transcript script from the last podcast, which I never do know much research I normally do for these podcasts. And most of you can tell that’s none, but I went back and looked at what I was talking about. And I think I feel stronger than ever about my being bullish on this bear market for all the right reasons that interest rates, I think need to go up and they’re going to help older investors have some, some things that aren’t so risky, but can get some return.
Steve (15:56):
Well that maybe
Dave (15:57):
Even starting with your savings account, like at least, you know, I don’t think anybody’s thinking I’m going to make a lot of money on my savings, but it’d be better than like making absolutely nothing.
Steve (16:10):
Yeah. That’s the silver lining that of yields going up that I don’t think anybody’s really talking about is, Hey, haven’t we been complaining for a decade, plus that savers are being punished with low rates on their savings, accounts, CDs, bonds, things like that, you know, haven’t we been complaining that you can’t get any yield. Well, this is what it takes to get some yield is have interest rates go up.
Dave (16:38):
Right. And as soon as they say, I feel, it’s the feeling like I was telling you this yesterday, but I’ll just say it for this again. A few weeks ago. I don’t know how many weeks ago, maybe it was four, six. I don’t know. I, for some reason, within a few days I read the same version of the article. The 60 40 portfolio is dead. Yeah. And no matter how much reasoning, the people who write it and research, they put it in. Whenever I see the headline and I read, I say, know what chances are now that they wrote this to 60, 40 portfolios a lot. <Laugh>
Steve (17:09):
Well, that’s what I told.
Dave (17:11):
And I’m kinda a 60, I’m kind of a 60/40 guy myself. And I don’t know, I feel like it, it’s not dead. And quite frankly, I feel like, and I’m going to ask you about this and throw you, because we did not really prep for this podcast, but I feel like I feel good about where I am. I feel good about the stocks that I’m holding. I, I feel okay about bonds and now I’m going to throw this one at you. I feel good about basic rebalancing right now.
Steve (17:46):
Oh, I mean, basic rebalancing makes a lot of sense. And you know, we did some of that at the beginning of the year and have been doing some of it, you know in the spring here. But of course that’s basically saying, taking things that have done well selling off on those and buying some of the things that have done poorly, which when you put it that way, a lot of people look at you like you’re crazy, you know, oh my God, why am I putting money in small cap stocks or emerging markets right now? That stuff’s garbage. It’s down 23, 20 5% off its highs. Well, that’s what rebalancing is, is taking those things that have done well selling off of some of those and buying things that haven’t done well. And when you talk about the, the plethora of 60/40 being dead articles that we’ve seen out there you know, how about the, the articles that pop up from time to time?
Steve (18:43):
And I saw one of these recently about how the 4% rule is either dead or adjusted or changed or whatever. And if you’re not familiar, the 4% rule was a rule that some guy financial advisor came up with back in the nineties that essentially said that if you took 4% off your portfolio and adjusted for inflation, chances are you weren’t going to run out of money? Well, there was an article in the Wall Street Journal a week or two ago that said the 4% rule guy, the guy who came up with this, which I can’t remember his name, you know, he was totally changing his tune now. And you know, he, he himself is actually retired, but doesn’t even like to keep a 60/40 portfolio because he’s nervous about where the market is, et cetera. And, you know, as I was reading this, it was just for me driving home, this idea that risk tolerance and 4% rules and Monte Carlo analysis in a spreadsheet are very different than living through it.
Steve (19:54):
And the real world, you know, it’s very different when you’re actually going through it because in a spreadsheet, in a Monte Carlo analysis, basically what it’s saying is yeah, the market’s down and it might even be down for several years but go ahead and keep spending like you were spending because chances are it’s going to come back. And you and I have talked about this a lot in the past that unfortunately that’s the advice of a lot of financial advisors is yeah, it’s down, but don’t worry, it’ll come back. Right. And I, you know, I don’t disagree with that. I think that is true <laugh> but I think you also have to have a more sophisticated plan and a more sophisticated response for people to say, okay, yes, it’s down, but here’s where your income’s going to come from. You know, here are the assets that are not down or that are generating income.
Steve (20:53):
And you know, it’s this difference between thinking of financial planning as this one time thing that I do. Okay, I’m going to go out, I’m going to hire an advisor. He is going to give me a plan and boom, I’m done with it. I’ll just stick with the plan forever. And ever versus this idea that financial planning is, is really a process, a lifelong process where you’re adjusting, you’re changing, you’re living through it. And it’s not just in a spreadsheet, it’s the real world with emotions and with markets going up and markets going down and, and all of that. And that’s, you know, I don’t think I’m breaking any new ground. I think that’s really where an advisor can add value is by helping people put together this plan that can not only by the spreadsheet and by the numbers with stand ups and downs, but withstand the emotional ups and downs as well. Because I think sometimes that gets lost in the world of spreadsheets and numbers and all of that
Dave (22:01):
Absolutely agree. Cause when a client comes to us and they’re worried which they’re allowed to be when they see what’s going on. And we’ve always talked about how the more technology we’re in a society where you can see everything in real time, anytime you want. Yep. The more those emotions are going to churn and when they call us or email us and they want answers, those answers have to be tangible. <Laugh> not emotional answer. Like it’ll get better soon. Right. But here’s where we are. And here’s why we don’t think we need the worry. And most importantly, as we always say, here’s why we don’t have to sell any of our stock based holdings while they’re down. Yeah. You know, and, and then I think a lot of our clients are, are more like, I always put myself in the same emotional that place as many of our clients, I think, you know, a lot of them are getting to the point where just like me, I’m kind of like excited about my rebalancing right now. <Laugh>, you know, it’s like, it’s, you know, it’s like, yeah, it’s about time. We’re rebalancing this way. <Laugh> right. Instead of the way. And yeah, good. So I remain extremely bullish on the bear market.
Steve (23:25):
Yeah. I mean, long experience, long term bullish. Absolutely. But that doesn’t mean that’s
Dave (23:29):
What I long term.
Steve (23:31):
Yeah. That doesn’t mean we’re out of the woods or that we’re
Dave (23:34):
Oh, I don’t know about that.
Steve (23:35):
Yeah. We could be one, one client responded to an email and he said, buckle up. I think we’re in for a bumpy ride probably would tend to agree. It, it might be a very choppy market for the rest of the year. Yeah, but you
Dave (23:49):
Can’t have, and I said, this last podcast, you can’t have an historical look at the S & P 500 and every year be up. Oh, right. That year was down 2%. Oh right. That year was flat, but every other year is up. That’s it doesn’t work that way. Yeah. We’re going to have, I think I, I should have looked at charts before, so I’m not going to say anything specific, but it’s been a long time that since we’ve had a year, year to year, January to January S and P 500 being down more than 10%. And if this happens to be that year, how in the world historically, can you look at that and not say that’s healthy,
Steve (24:23):
Right? No, we have not had a 10% decline going back to the financial crisis. So it’s, it has been a long time. All right. Let’s end things there. Thanks for checking in. Hopefully next time we check in things are a little smoother at the very least. Take care.