Jon Gay

TRANSCRIPT

Jag: Welcome to the Art of Wealth and Broken podcast. We’re here each and every week to provide you with investment and economic insights. We’re here to discuss trends and developments in the field of finance. Creating certainty in uncertain times, these discussions can help you make better informed decisions so you can make better financial choices with a wealthy built and are continuing to grow.

Our goal is to help you live the lifestyle you’ve imagined for retirement. Stacy Andres is a registered financial consultant and Michael Wallin is a certified financial planner. Michael joins me today. I am Jon Jag Gay and for our topic today, Mike, we’re going to discuss embracing volatile times. That phrase carries a lot of weight as we record this on May 26th, 2022. 

Michael: Hello, Jag. You’re absolutely correct. The S&P 500 keeps flirting with finding traction around 4,000 points. This week has been more of the same. The price of the market has expanded. The following day we’ve given some of it, all of it, or more of it back. It just, it continues to be this saw blade approach.

 The volatility can be more unsettling to those in retirement or those that are looking at the finish line ahead as they’re approaching. And looking at maybe five to seven years away from leaving that earned income and becoming dependent upon that nest egg,that they’ve saved. 

Jag: You love that saw blade analogy. Not the first time you’ve mentioned. I think you mentioned it a week or two ago as well. It’s a great visual for our listeners to better understand the movements that you’re just talking about. What are the main factors that are driving the expansion and contraction in the market’s pricing as we look at it today?

Michael: Well, Jag, that’s a moving target week to week. The main factors that continue to disrupt the confidence in the market is of course the Ukraine-Russia war inflation the market’s uncertainty of whether or not the government is going to be able to slow down this economy without over-tightenning in the money supply. Global supply chain problems still continue to be a leading indicator or issue. As we’re looking at a recovery out of this market drop ,domestic employment issues are also causing some impacts. 

Jag: That is a lot of external forces. So how does today’s investor navigate through those impeding issues and have confidence to some degree in their enjoyable retirement.

You talked about either being in the beginning of retirement or approaching it early on. 

Michael: Well, I think a solid investment strategy should already have the contractions of the market included into the plan. You should build that with expectations. And I would challenge all of our listeners that are listening to the show at that have an investment advisor they’ve been working on building out a plan. When you built that plan, was it all about moving from bottom left to upper, right? Was it a situation that you started putting money in the market and you only expected it to be an escalator to the next floor? I think that a true plan should include an expectation that the markets are going to contract. It is amazing to me that when I sit down with a client that the market contracts by 4%, 8%, 12%, and they are ready to abandon the strategy.

What was your expectation on the front end? When you were building that into your overall expectation, did the adviser omit explaining to you that the markets do not always move up into the right? For those that do not have a comprehensive investment plan, it can be a little bit more challenging and unnerving during these times.

Step one should be to begin with the end in mind and build an investment strategy that only exposes one to the amount of risk necessary to achieve their strategy. It is amazing to me JAG that every day as I review client’s portfolios, I see an amount of risk exposure that is not commenserate to the amount of risk to return that’s needed for a successful plan.

When you’re looking at an individual, let’s just say, when you look at an individual’s financial independence score, that means how much assets do they have already saved against how much are they actually going to need in return? So let’s just say you have an individual out there that’s 50 years old and they’re 80% of their financial independence score, meaning that over the course of the next 15 years or 20 years, however much longer that they want to work, that they only have to grow their portfolio by another 20% to hit that magic number.

Well, looking at those numbers, why are they exposing themselves to a full market volatility? Why are they in aggressive portfolios? Why are they in even an aggressive, moderate? If you’ve got 15 years to just make up that extra 20%, you can really reduce down your risk exposure, and land that proverbial plane on the landing strip of retirement without overexposing to the wings falling off.

Jag: I’m thinking of this video that went viral this week of James Corden and Tom Cruise promoting this, the Top Gun sequel. Tom Cruise took James Corden up in a fighter jet. I don’t know if you’ve seen it, but it’s hilarious. And he he terrifies the heck out of James Corden with all the dips and stuff.

The flying around in the fighter jet. It’s unnecessary risk to your point, Mike. 

Michael: It is. And it’s, I think a good analogy of what we’re seeing in the market today. If you’re not comfortable being in the cockpit of a fighter plane, you probably do not want to be going two G’s or three G’s. That is not going to be comfortable for you.

Well it’s the same thing in the investing strategy. If you are exposing yourself to unnecessary amounts of risk during volatile times, turbulent times that we’re seeing today, it can be way more unnerving. So I would tell our listeners, step two is build your investment plan around your budget plan. No when you’re going to be dependent on assets from your investment plan and adjust accordingly. So those funds are available and liquid to you when you need them. And step three, the topic of our show today is embrace the volatility. Volatility is the price you pay to make money in the stock markets. When I was growing up in our household, we had to eat all of our greens before we could get to our dessert.

It’s kind of like the same thing. Now you’ve got to stomach these contractions in the market and stay with your investment plan. To get to the next market expansion. 

Jag: Mike, I’ve known you for a couple of years now, and that might be my favorite analogy you’ve ever dropped on me. I liked that a lot. The markets are similar to other businesses that go through that business cycle.

The four main parts are expansion, the part that we all like. Peak, contraction, hopefully not turning into recession, and then trough and many pundits are saying we’re finding support around the 4,000 points in the market. And we’re saying we’ve hit that trough phase. 

Michael: With the market’s approaching a 20% contraction. I hope we have found support at this point. Some of our recent studies have indicated that there is still a 12% chance that the markets will continue to contract and move deeper into a recession for investors. This is an important fork in the road. History has shown that a recovery from where we are now typically takes around that 90 days for a recovery back into the expansion phase.

Whereas a recovery from a recession is going to take on an average of about 300 days and JAG for retirees, this can be a very impending doom to their plans because if you’re dependent upon it. If you have not properly, tranched your assets out into different categories of when you’re going to be dependent upon those resources to fund your budget plan, having to take money out of that account or out of that position during a contracting market, you get what’s called a triple compounding in reverse, and it is very, very difficult to ever, if you can, to ever be able to recover from that type of loss.

Jag: When you’re taking those variable assets out when they’re down, you’re locking in that loss, not giving them a chance to recover. Mike, I’ve also read that the markets were pretty overpriced for a period of time recently, and it was inevitable for a movement from peak to contraction.

Are we within normal ranges at this point? And should investors just kind of stop and take a breath? 

Michael: I think you bring up a great point there. JAG. I do believe that the markets are reacting as expected. I think that where we are today is normal volatility. We are just seeing so many of those points that we brought up earlier, all hitting at the same time.

But as we saw the market over the last year, run all the way up to around 4,800 points. Each day, we kept hearing that, oh, where the market has hit its all time high and the next day the market hit its all time high. Well, if we had journeyed up the side of Mount Everest JAG and we’re standing at the peak top point, I think 26,000 feet is the peak of the mountain.

Well, if I raised my heels up, just a smidge, a little bit higher. And if I go up just a little bit more on the balls of my feet, I’m a little bit higher. If I could do like my daughter, that’s a ballerina, and I could go up on my tip toes. I’d be a little bit higher. Well, that’s what everybody on those new cycles kept hearing.

We kept hitting new market highs, new market highs, but those changes were just very, very small changes. Now what really drove up the market? Well, we had an infusion of $2.9 trillion into the economy. We cannot overlook. That was a one-off situation. That was a crisis situation that the government stepped in to be able to provide resources to the citizens of America so that there wasn’t a collapse.

So when you drop $2.9 trillion into the economy, And individuals are then turning around and buying goods and services. And at that time we did not have supply chain problems. We had plenty of inventory that was filling up the store shelves. We were seeing a lot of companies see their price to earnings inside of their numbers increase.

So when you’re looking at that, that was a little bit of a false positive, but that also made the market, and I’m referring to the S&P, we’re looking at the broad base market. We saw that grow well, not having that continued infusion, coupled that with employment issues, coupled that with supply chain problems, those are issues that we have to be considerate of, of why the market’s doing what it’s doing.

Now. We’re also looking as can this fed chair, Jerome Powell? Is he going to be able to land this plane without crashing it? Is he going to be able to tighten up the supply chain of the money in the market today against the goods that we have to offer? Is he going to be able to tighten that without over tightening it?

 That is what a lot of the market is uncertain. We’re looking at that saying are we able to do this? There’s policies that have been implemented that may be a little too aggressive? Too quickly? Too many things happening at one time? And so maybe looking at reserves that we have in oil, when we’re looking at price of gasoline, continuing to increase, we look at diesel fuel costs going up.

What is that impacting the ability to get goods and services to the store shelves. And then we cannot overlook an unstable global enviromnent. And the impact of the pandemic. If China happens to be the global producer of goods and other countries are not able to bring their ships into port and take those goods and then deploy around the globe, we are going to still have global problems and we’re still going to have the impact of the pandemic, where you’re going to have supply chain problems. So I think it’s very important that we look at all of this holistically and balance out our strategy that we have today. If you are in an investment strategy that you’re not going to be dependent upon these resources that you have for five, seven years or less.

I don’t think abandoning your strategy is the right course of action. You may want to tamper it down a bit, but don’t abandon it. The same thing is if you’re dependent upon this money that you have saved over the next one to three years, you definitely, probably want to reduce down your risk exposure. And hopefully your investment advisor has done that for you over the course of the last five to seven years, leading up to where we are today.

So at the end of the day, if you see that your investment strategies are not where you feel they should be. If it’s causing you to really be concerned and you’re losing sleep at night, this is a great time to really lean in on those financial professionals that you’re working with. Lean in on your financial planner.

Look at that current strategy that you have. And if you don’t have one, build a plan, if you do have one modify it, but definitely be reviewing it because the way you feel today is the reality that your financial professional really needs to know and understand to help you bring certainty to these uncertain times. 

Jag: To bring it full circle, Michael, to your point from earlier in the podcast, if you have built a plan that includes volatility, which you inevitably see, you’re not as nervous as if you had done this sunshine and rainbows and puppies and kittens plan where nothing ever goes wrong.

So if one of our listeners wants to come talk to you or our co-host Stacey about their financial plan, about their financial future retirement planning, they can go to our website, artofwealthunbroken.com or give you a call. And the phone number is? 

Michael: 855-378-1806. 855-378-1806.

And as an additional offer. We are going to continue just by popular demand. Individuals have been coming to the website to get a free copy of life arc plan subscription. This allows individuals to be able to go in and the comfort of their home enter all their information. And actually get a comprehensive strategy and plan built for them that Stacey and I can review with them, help make sure that their own plan, that their budget plan is aligning with their investment plan.

Along with their social security plan, their income plan, their education plan. We have to look at everything comprehensively and life arc plan is the tool that gives us that resource. So go to our website. We’ll send you a free link. 

Jag: Mike, you have inspired me. It is time for lunch here, and I’m going to add some vegetables to my salad today.

So appreciate it. 

Michael: Thanks Jack. Have a great week. 

Jag: Investment advisory services offered through optimize advisory services, LLC. An sec registered investment advisor, optimize only transacts business in states where it is properly licensed or excluded or exempted from registration requirements.