Ep 41: Coronavirus & Your Investment Strategy Part 2

Ep 41: Coronavirus & Your Investment Strategy Part 2

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The Smart Take:

Timing the market sounds great, especially during times of market distress like that caused by Cornovirus (COVID-19) concerns. Who wouldn’t want to participate only in the ups while avoiding the downs!? Sadly, the only way market timing will work is for you to get lucky, which is no way to invest your life savings.

Listen to Kevin describe the theoretical reasoning about why market timing does work and investigate both the academic research as well as the actual record of mutual funds that follow timing strategies. It’s interesting to see how the research has been verified in practice by these funds.

Instead of falling victim to the allure of market timing, Kevin describes the current situation and prudent, processed-based response to help you tune out the noise and stay on track.

Prefer to read? See the transcript below.

See Also: Episode 27 Investing Process

See Also: Zakamulin, Valeriy, “The Real-Life Performance of Market Timing With Moving Average and Time-Series Momentum Rules,” November 2013.

 

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TRANSCRIPT:

Kevin Kroskey Prelude:

Fifteen days, call it three trading weeks since there are five days in a workweek, but you miss that, and then boom, you’re losing about three and a half percent of your return per year over nearly a 30 year period.

Introduction:

Welcome to Retire Smarter with Kevin Kroskey. Find answers to your toughest questions, and get educated about the financial world. It’s time to retire smarter.

Walter Storholt:

This is Retire Smarter. Walter Storholt here alongside Kevin Kroskey, president and wealth advisor at True Wealth Design, serving, you’ve got Northeast Ohio, with offices in Akron and in Canfield as well. You can find us online by going to truewealthdesign.com. Listen to past episodes of the show and find out more about Kevin and the team, which by the way, I do recommend going back and listening to our previous episode. Go back to episode number 40 and check that one out if you want to hear … This isn’t really a series, but it is sort of a part one and part two discussion of the fallout from the Coronavirus pandemic, I guess.

Walter Storholt:

They were pretty close at the time of our recording today, Kevin, of officially labeling that, so we might as well start going that direction and calling it that. But the issue of the Coronavirus, and the market impact that it’s had, and some of the other things that have been going on in the news, we talked a lot in the last episode about how you and your team have responded to that, how your clients and folks who are just everyday people like my dad are responding to that issue. We want to explore that a little bit more on today’s show and go through a couple of different levels, as we look at the fallout from all of that, and also just a current stock of what’s going on. But the structure of our conversation, Kevin, it could be something other than Coronavirus. It’s still going to apply to today’s conversation.

Kevin Kroskey:

Frankly, we’re going to spend most of the time talking about just the market in general, and just how to respond, and things not to do, quite frankly. We’ll set this up in the discussion in terms of looking at your portfolio and the asset allocation, and then we’ll go from there. But honestly, this is really timeless. There’s always going to be some crisis du jour that’s going to happen every … Things have been fairly calm quite frankly for a number of years in the investment markets. That’s not normal. More normal is more volatility.

Kevin Kroskey:

Academics, researchers look at market history. They’ll call the periods of time like this volatility clustering. Imagine maybe an EKG line, and you go through, and it’s like a beep, and a beep, and a beep, and you get the lines spiking up. Did I say that right, EKG line?

Walter Storholt:

Yeah, I think that’s-

Kevin Kroskey:

Yeah. You can tell I’m a big-

Walter Storholt:

… correct.

Kevin Kroskey:

I should’ve been a doctor. Right?

Walter Storholt:

I’ll ask Connie when she later since she works in the hospital.

Kevin Kroskey:

Thankfully, I’m a healthy 43-year-old, and I’ve had very little exposure besides working with a lot of physicians as clients.

Walter Storholt:

I don’t know if they call it the EKG line, but it is the EKG machine that makes the line. Yeah.

Kevin Kroskey:

Okay. All right. There’s a lot of people, a lot of clients that are probably laughing at me right now, but-

Walter Storholt:

They’re probably laughing at us.

Kevin Kroskey:

That’s okay.

Walter Storholt:

Connie’s going to be embarrassed when I tell her this conversation later. She’s going to say, “It’s this line,” or something like that.

Kevin Kroskey:

All right, so you’re in the boat with me, Walter. Whenever the line spikes, that’s a volatility cluster, if you will. But what’s happened really, I would say, post the global financial crisis is, certainly, there were some aftershocks, if you will, from the global financial crisis of ’08 and ’09. There was the Greek debt crisis, and there was the debt ceiling issue that America had, and Congress created in 2011 caused the US to lose its AAA rating. There was a pretty big sell-off in that year.

Kevin Kroskey:

But in general, outside of that, it’s been smooth sailing. There hasn’t been any amplitude. We’ve been down in the valley of volatility if you will, but more recently, it’s peaked. When things do get peaked like this and volatile, historically, there tends to be a clustering effect, which is what I was alluding to earlier. I certainly don’t think that this is going to be over anytime soon. It’s quite likely that the volatility is going to stay elevated for quite some time. Even after the Coronavirus goes away it, it wouldn’t surprise me if something else comes back, because again, these events do seem to cluster.

Kevin Kroskey:

But one of the things that … Well, even before I go into that. We’ve looked more recently at clients logging into their vaults, and we’ve had a lot of clients logging in, and we’ve had a lot of conversations over the last couple of weeks, emails, or phone calls, what have you, and we’ve got a lot of feedback that’s saying, “Hey, seeing where my financial plan results are, and that I’m still okay, certainly, has helped me feel a lot better, and tune out some of the noise that’s going on.”

Kevin Kroskey:

Certainly, our clients can log in. They can see their investment results every single day. They have some benchmark comparisons, but importantly, they have their financial plan results right alongside that as well to connect the investments to their lifestyle and their plan. We’ve just gotten some really good feedback from that. I’ll just make a quick, call a public service announcement, or a True Wealth service announcement. But if you’re listening, and you’re a client, and you haven’t logged in and looked at that, please do. You’ll take a look at it. Certainly, we’ll review that when we get together.

Kevin Kroskey:

But we’ve just had a lot of clients tell us that, Hey, that’s been really helpful. Just to keep things in perspective, and not really get hung up on the daily gyrations that we’ve been going through. If you don’t have that, and if you don’t have a plan, that’s a whole other issue. Certainly, you need to have that because just looking at the investments in a vacuum, not only does it not work, or not work well but at times like this, that’s the only thing that you’re looking at. It just probably makes you more susceptible to making a bad decision.

Kevin Kroskey:

In light of bad decisions, what we’re going to talk about next is market timing. While we’ve had this volatility clustering recently, and I mentioned that the market historically is more volatile than what it has been of late, the last sell-off we hadn’t like this was in December 2018. It wasn’t all that long ago in that regard. It did sell off from peak to trough about 20%, but when a 20% decline typically happens about once every seven years. Here we are, basically, about 15 months later, and having it again. Perhaps that is the volatility clustering that I mentioned. You can really only identified in hindsight.

Kevin Kroskey:

However, even having a 10% decline, it happens about once a year, a 15% decline about once every three to four years. That’s normal. I think what’s really noticeable about this one is just the health scare that goes along with it, the whole global pandemic. I think we can use that P word now, Walter. I’ll agree with you there. But what you really got to be cognizant of is, just resisting any sort of urge just to go ahead and sit on the sidelines, sell, go to cash, or do something extreme like that. It just doesn’t work.

Kevin Kroskey:

To go ahead and walk through the evidence of why … Let me back up and just frame this in terms of asset allocation. We’ve talked about this on past episodes, but the asset allocation, liken that to the recipe if you’re in the kitchen cooking, and the ingredients that you have are the different mutual funds and what have you, that you’re combining in the portfolio. Both the ingredients and the recipe are important. Got to have good ingredients, right? You want them to be a free-range, organic, and all that good stuff.

Kevin Kroskey:

But what investment sign shows is that the recipe or the allocation actually matters even more than the ingredients. There’s three, I’ll call it two really broad types of asset allocation, and the third is really a hybrid. But you have strategic asset allocation where you’re really just using historical relationships of prices, of risk, and going ahead and combining that in a portfolio. Just really looking at the past, not making any future bets, or expectations, or forecast, or anything of the sort. It’s really more a buy and hold, or maybe a buy, hold and rebalance sort of approach.

Kevin Kroskey:

There’s a firm just down the road from us in Akron, Ohio. We’re somewhat friendly competitors. I think they’ve been in business since like 1990, but my understanding is, they literally haven’t changed their portfolios in more than 30 years. I think that’s a good starting point. Certainly, you have to understand history, and you have to understand how assets behave with one another to go ahead and try to smooth out the rides overall. We’re not in that camp.

Kevin Kroskey:

On the other hand, you have a tactical asset allocation. This is using economic forecast, price trends, maybe a coin flip, for crying out loud, to go ahead and make some sort of a move into over-weighting an asset, maybe even or country, or sector, or maybe getting out and going to cash, and then deciding to get back in at some later date. It’s also called market timing. It’s a very aggressive form of asset allocation. There’s a lot of moves, generally speaking, and those are the two bookends. One a buy and hold, or buy, and hold, rebalance, and the other is a tactical approach, very, very active.

Kevin Kroskey:

At True Wealth, we’re definitely more towards the strategic; however, I’m going to frame it this way. If you think of a runway, and you’re flying in a plane, and you’re getting ready to land, and the captain turns on the seatbelt sign and tells you, “Hey, we’re getting ready to land.” Walter, I don’t know about you, but every time they do that, I look at my watch, or figure out where we are, and we’re like, “We’re still 20 minutes away. What the heck is he telling me this for already? ”

Walter Storholt:

Why does it take so long to land the plane? Just get a mile from the airport and dropdown. Right?

Kevin Kroskey:

Right, right. You can tell I’m really high on the patience category as a personal trait.

Walter Storholt:

We’ve definitely ruled out that neither of us would make a good doctor nor pilot.

Kevin Kroskey:

Right.

Walter Storholt:

Isoelectric line, by the way, I think is the official term for what the line is on the graph, isoelectric or more commonly, just the showing you the waves-

Kevin Kroskey:

The waves. All right.

Walter Storholt:

Or the waveforms. Like the P waves, and they all combine into the-

Kevin Kroskey:

That sounds pretty close to what we said.

Walter Storholt:

… EKG thing. Yeah. Close enough.

Kevin Kroskey:

You’re getting ready to land. I think why they do they want to clean it up a cabin, or have you cleaned up the cabin, right? You’re doing that, and as you actually do get closer to the land, you can see the landing strip and where you’re going to land, and the closer you get, obviously, it becomes larger, and it’s closer to you. You can see it, what have you. It’s always been the same size. But as you get closer to the runway, obviously, it appears larger.

Kevin Kroskey:

When you think about making expectations about the future, whenever you are really on the runway of the financial markets, your day to day, week to week, you can’t really separate noise from any financial science. The studies show, and I’ll relay this here in a moment, is that it’s just indistinguishable. There’s a lot of noise; there’s a lot of inherent volatility. There’s no way to go ahead and be statistically reliable in any sort of forecast, whether it’s using some sort of price trend, or something like that.

Kevin Kroskey:

But as you get a little bit more perspective, as you’re a little bit higher up in the air, and you’re looking about a little bit terms, say, maybe five or ten years, there are ways that you can go ahead and forecast future expected returns. There are ways that you can try to identify if an asset is overvalued or undervalued. Now, if all of this stuff is fairly close to the norm, or to an average, then it probably doesn’t tell you a whole lot. But if something, the more overvalued or undervalued it gets from, say, maybe a historical average, or if you’re looking across assets, say, comparing US stocks, international stocks, for instance, then you can start having more confidence in some of these forecasts, in some of these over/under-weightings that you may do.

Kevin Kroskey:

That’s what we do at True Wealth. We call it Dynamic Asset Allocation. It’s definitely more strategic. We’re not making big moves, necessarily, going in or out. We have a very defined framework that we follow, so it’s clear for our clients what they can expect from us. Having some of those guard rails in place also just helps to go ahead and just put guardrails on the portfolio, because ultimately, that has to be matched back to the financial plan. Those are the three types. Again, it’s really strategic and tactical,  a set it and forget it, and a very hyperactive, and then there are all kinds of gradations in between. But we call it dynamic anyway just to describe what we do.

Kevin Kroskey:

But we’ve gotten some calls recently from some clients. By and large, our clients seem to be very disciplined going through this. Again, I think that’s our emo, plan first. You prepare, you have all the different goals in their lifestyle, and a financial plan ranked. We have a predetermined plan where if we do have to pull back a little bit on spending that we know where we’re going to pull back from. We just beat this tomato stake into the ground, and repetition certainly helps and is warranted, particularly in times like these.

Kevin Kroskey:

However, you’re always going to have some people that are a little bit more concern than others, and we got to be there for them, and we’ve got to do our best to make sure that they don’t cause long-term financial harm by selling and going to cash, and really just trying to get lucky rather than doing something that’s going to be processed-based. We’ve had some of those calls recently, and I just did a little bit of work. Rather than just tell them, “Stick with it,” I just wanted to provide some context in addition to the reassurance of, “Hey, stick with it.”

Kevin Kroskey:

Again, I think the financial plan is, first and foremost, that’s the most important thing. We’ve already looked at when you’re going to need the money. We know that none of the money that you’re going to need tomorrow, or the next year, or the year after that, or the year after that is going to come from the stocks. It’s going to come from the more conservative part of your portfolio. You have plenty of time for stocks to go ahead and rebound. But beyond all that, and that’s really important, but beyond that, when you look at the evidence, and you just look at daily volatility.

Kevin Kroskey:

Again, we’re down on the runway. You can’t really tell what’s going on. I went back last weekend, and I think there were like two down days of more than 3%. But then there were two up days of more than 4%, and Walter, I know about you, but I felt like a ping pong ball going back and forth.

Walter Storholt:

Oh, yeah, absolutely. Oh, is this going to be the end of the volatility? Everybody’s chilling out now. Oh, then it’s back down the next day with the slightest bit of different news. It just sends everybody off in different directions, it seems

Kevin Kroskey:

When you look back on, just say market history, say S&P 500, and they ran data from 1993 through the end of 2018, the S&P 500 returned about 9.3% annualized over that time period. However, if you just missed the 15 best days and Walter, you may have seen data like this before, but this is an open-ended guest type question here, Walter. 9.3% annualized return, S&P 500, if you just stayed invested all through the ups and downs, the 1990s were really good. Tech bubble blew up, and you had the last decade where the S&P 500 made no money through the 2000s. They actually lost money for an entire ten year period, and then the last ten years, at least through the end of 2017, particularly, were all really, really good years. All that being said, you had about a 9.3% return per annum, but if you just missed the 15 best days over that entire, was it 28, 29 year period, what did your return fall to?

Walter Storholt:

I’ll just pick an easy thing and say half, half of that.

Kevin Kroskey:

Not too far off, actually. It’s 5.8%.

Walter Storholt:

Okay. A little better than half. Yeah.

Kevin Kroskey:

Yeah, you lost quite a bit. You go from 9.3 down to 5.8%. Fifteen days, call it three trading weeks since there are five days in a workweek, but you miss that and then boom, you’re losing about three and a half percent of your return per year over nearly a 30 year period. Again, three and a half percent may not sound like a lot if you go ahead and compound that over a 30 year period. Again, just doing bone head math and ignoring compounding, it’s going to be something more than double your money by just missing the 15 days over that time period.

Kevin Kroskey:

The point is you don’t know when the worst days are going to be. You don’t know when the best studies are going to be. I saw a Peter Magellan, who used to be the esteemed fund manager for Fidelity Magellan for a number of years, wrote something similar about this, about the best months, and how he didn’t believe in timing, and trying to get in or out. Even though he was an active manager, he didn’t believe in trying to time the market. He called it a fool’s bet. That daily volatility is certainly there. That’s there.

Kevin Kroskey:

Now, from an evidentiary standpoint, I’m going to shift gears a little bit. The volatility, yes, it’s tough. But a much younger, maybe over-confident, higher testosterone, Kevin Kroskey in grad school might be sitting in the back of his grad school finance class saying, “Yeah, but hey, what if you were able to go ahead and miss the worst days? Or what if you had a strategy that allowed you to go ahead and identify some of this stuff. Hey, maybe I’m smarter than the average bear, and let’s see what we can do.”

Kevin Kroskey:

I used to be overconfident like, but maybe with the declining testosterone levels and a little bit more humility in life experience, I am certainly different these days than when I was back in grad school. I’m just going to reference, and there’s a lot of different evidence that’s out there. It’s academic evidence, and it’s research, it’s boring. But there was a study in 2014 that was done, and I’m not going to go ahead and name it unless I can bring it up real quick. But in short, what they did, or how these patterns …

Kevin Kroskey:

Let me back up for a minute. A lot of times, these timing strategies, so I mentioned price trends or economic forecasts. A lot of it is price trends. They’ll go back, and they’ll look at the data, what happened over time, and hey if I want ahead, and when the 50-day moving average crossed over the 200-day moving average, I just got out of stocks, and then I would wait for it to go back. And then I would get back in, or they would look at things called the instant decline lines, or relative strength, or all kinds of gobbledygook.

Kevin Kroskey:

They’re basically going back and data mining. I’ll use another way to exemplify this data mining, maybe make it more relatable here. But Walter, I used to do this talk, and it was if you actually sorted all the companies in the S&P 500 that started with their company names, started with the letter P, what I found was the returns on those stocks were greater for the companies that started with the letter P over the companies that started with the letter M. It was in the data. I found it, I said, “Hey, these companies with a letter P are doing better. I don’t know why, but it’s there. Now, hopefully, you can detect the sarcasm and absurdity in my voice.

Kevin Kroskey:

But even though it’s in the data, it has absolutely no bearing on what’s going to happen in the future. You can go ahead and torture the data pretty much do whatever you want if you beat it enough. But that’s one example where it’s in the data. You’re going back, and you’re mining the data. There’s no rational basis to believe the data is going to produce higher returns going forward. It’s absurd. A lot of these price trends and data mining exercises are fairly absurd as well, and they may have worked in the past, they may have … As long as you missed some of the tech bubble and some of 2008, it looks on paper like you have a really good strategy. But again, there may not be any indication that that is likely to work in the future.

Kevin Kroskey:

This paper in 2014, and maybe we’ll link to it in the show notes, I don’t have it at my fingertips, but basically, what I did, I looked at most of the common, the really well-known timing strategies, and that’s what these are called momentum or timing strategies. It said, “Well, what if I just go ahead and test this?” Not during the period where it looked really good, but we tested what’s called out of sample. Test it in another time period, tested in another market. Take it from the US market over to Japan, or take it to the UK, or take it from say the period of 1990 through say 2010 when we had two big bubble bursts. Let’s take it back to the 1960s, or the 1950s, or what have you, you’re taking it out of sample taking, not the good period that you had where it looks like you got something, let’s take it out of sample and tested and see if we can replicate it.

Kevin Kroskey:

Basically, what this researcher found was that “Hey, this stuff sounds great. Who doesn’t like a simple strategy that can go ahead and get you out from catching a falling knife, preserve your capital, and then tell you when to get back in.” But what they found is out of sample, all of those strategies in aggregate had an 80% failure rate, eight zero, 80% failure rate. Walter, if you flip a coin, what’s the probability you’re going to get ahead?

Walter Storholt:

Hey, I can do this one. 50%.

Kevin Kroskey:

Right. If you follow these very common market timing strategies that supposedly are going to go ahead and help you avoid catching the falling knife, they have an 80% failure rate. I wrote a client communication recently. I said, “Okay, hey, let’s get out of the ivory tower. Let’s get out of theory. Let’s go to practice, and let’s look at some mutual fund evidence.” Morningstar, who has classified mutual funds benchmarked, and what have you for forever, it seems, they have a category. It’s called their tactical asset allocation funds.

Kevin Kroskey:

All of these funds stay and behave as they’re doing tactical asset allocation. They’re getting in; they’re getting out, they’re using data. These are people with a lot of resources. This is their professional job, day to day. They went to some of the best schools, and they have deep pockets, they have you name it, they got it. They’re going out there, and they’re trying to use these strategies, these timing strategies, when to get in and when to get out of the market to go ahead and have higher returns, better risk-adjusted returns. There are exactly 250 funds as of the end of February 2020 in this category.

Kevin Kroskey:

One way to go ahead and compare these funds say to a strategy that’s not doing that, that’s staying invested through all the ups and downs. It’s just to look at risk. One way to consider risk, or said another way, I guess more exactly is volatility, or what’s the wiggle factor, how much is it moving up and down. That tactical asset allocation category has similar volatility, a similar risk to the Morningstar’s category that has a stock allocation between 50 and 70%.

Kevin Kroskey:

What we’re going to do is compare the funds in that tactical asset allocation category just to the average return of the 50 to 70% stock category. When we do that, what we see is over the last three years, again, this is ending February of 2020, over the last three years, 78% of the tactical asset allocation funds did not do as well as the category average. I’m not cherry-picking the best or the top 20%. I’m just picking the category average for the 50 to 70% stock. 78% failed to be the category average. Over five years, 89% failed to beat the category average. Walter, what did we say the academic evidence found about these timing strategies?

Walter Storholt:

Invest in companies that have the letter P.

Kevin Kroskey:

Walter, Walter. Oh, my gosh, Walter. Wrong. Thank you for playing. 80% failure rate, right?

Walter Storholt:

Oh, my gosh. That’s why the old monkey can hit the dartboard mentality, or phrase is out there, right?

Kevin Kroskey:

Right. A broken clock is right twice a day, right, Walter?

Walter Storholt:

It’s right. There you go. Or 20% of the time.

Kevin Kroskey:

80% failure rate. You look at the actual evidence of mutual funds of professional managers that are doing this for a living with deep resources, and probably not uncoincidentally, their failure rate just compared to a similar risk benchmark, nothing great. Just the average return for the category was 78% over three years and 89% over five years. I suppose you can argue that the actual evidence is even worse because of what the data shows. Oh, by the way, while there are 250 funds in that category today, at least at the end of February, there were more than 340 just in 2014. Walter, what do you think happened to those other 92 funds?

Walter Storholt:

Oh, they’re probably not around anymore, I would guess.

Kevin Kroskey:

Why do you think they’re not around?

Walter Storholt:

They were so bad; they couldn’t even survive through today.

Kevin Kroskey:

You’re absolutely right. What I represented is what the eggheads call survivorship bias. Even though 78% failed over three years and 89% over five years, when you add in all the losers and correct for that survivorship bias, the numbers are even worse. I think we need to just, again, let’s step back for a moment. Things are bad right now in the market as I record this on March 10th. The market last week was up more than 4% on two days, was down more than three on two days. For the week, it was actually slightly positive, but it was coming off a really bad week the week before.

Kevin Kroskey:

Monday, yesterday was a terrible day in the market, sold off the most since the global financial crisis. Things are bad right now, but you’re not going to be able to go ahead and time this stuff. The theoretical evidence is terrible for the more sophisticated strategies to go ahead and make timing decisions. The actual evidence from mutual fund managers that do this on a day in, day out basis that is, they’re smart people. I think they’re a little bit wrong-headed in what they’re doing, as the evidence shows, but they’re smart people with a lot of resources, a lot more resources than you, or your advisor down the road, or whatever.

Kevin Kroskey:

The results are terrible. Be humble. Don’t go ahead and just panic out, and sell to cash, and go to cash just because it feels good. You are completely making a knee-jerk reaction, and maybe you get lucky. But for us, there’s no reason to go ahead and invest your hard-earned money in any way that’s going to be reliant upon luck for a good outcome. You need to stick to the plan. If you don’t have a plan, you certainly need to get one, and then you have an investment process.

Kevin Kroskey:

We did a four-part episode, and I think it was last year on our investment process. There are some additional things that we’re doing right now in terms of rebalancing, tax-loss harvesting things that we won’t get into today. But we talked about what a prudent process looks like, talked about the process that we go through. We have the plan in place, we have the process in place, we stick to it, and this is where we roll up our sleeves and get things done. Bonds have held up a lot better, stocks have sold off, interest rates are a lot lower today, so we can’t expect much from them going forward. Certainly, they can preserve some capital, but they’re not going to get the returns our clients need.

Kevin Kroskey:

We are thinking a little bit differently about our portfolios in light of the new information that’s been dealt over the last couple of weeks. There are also some other things going on in the market that people should be aware of. Some people over the last years have been reaching for yield. The interest rates are low. They have been loading up on things like real estate, or high yield bonds, or other bank loans, other credit-sensitive investments. These are not really liquid investments. Even if you own them in an ETF or mutual fund format, you see big dislocations in the market. If you don’t understand this stuff, hopefully, your advisor does. He can tell you we spent a lot of time looking at these market dynamics and making sure that we’re very prudent in how we’re allocating our client portfolios.

Kevin Kroskey:

But it all comes back down to that being prudent and having a process and sticking to it. Don’t go ahead and capitulate, don’t go to cash, don’t make a knee-jerk reaction. The money that you need for your spending for tomorrow, for the next year, or the year after that is not in the stock market, and if it is, you’re making a big mistake. I can tell you none of our client’s money that they need for the next few years is in the stock market. The money that they need for five, or 10, or 20 years is in stocks, and they have plenty of time to go ahead and recover.

Kevin Kroskey:

But as seductive as these market timing strategies sound, I mean, who would not want to be in the market only when it’s going up and be out when it’s going down. Walter, I don’t know about you, but if I could find somebody to do that, I’d be happy to close down my business and I always just give him my money, because you can’t lose, right? But it just doesn’t work. It’s easy to fall victim to unscrupulous people selling this stuff, but it’s also easy for people to go ahead and fall victim to their own emotions and fear during times like these.

Kevin Kroskey:

It’s really our job as advisors, as leaders to go ahead and show them why that’s not a good decision, show them that they’re going to be okay, show them that, “Hey, not only do we have a plan, but we’re rolling up our sleeves, and we’re executing that plan right now to make sure that you’re going to stay on track.”

Walter Storholt:

I’m still hung up on the investments with the letter P did so well. There’s got to be a reason, Kevin. We need to dig into that further if I know why.

Kevin Kroskey:

Walter, I just I’ve lost-

Walter Storholt:

It’s like kids that get named with the letter A,  what I’m saying? They say, “Name your kid with the letter a because they’ll be called at first for things. They’ll get to experience more in their schooling years.” There’s a rhyme or reason to that early in the alphabet mentality. As a Walter, I was always at the tail end of whatever process there was, whatever line there was.

Kevin Kroskey:

Oh, now I see why this is coming. This is a really-

Walter Storholt:

The P is jumping out to me.

Kevin Kroskey:

This is some deep-seated thing about Walter and him getting called lasting class. I understand now.

Walter Storholt:

That’s right. That’s right. There’s some jealousy of letters in front of me. No, I’m just messing around. But this is really helpful, Kevin. I think some of the stats that you’ve given on today’s show. They’re definitely eyeopening to hear that, the case for why it’s so dangerous to just stock-pick, and everything related to that. You laid it out very well.

Walter Storholt:

By the way, for listeners who are interested in hearing more about the process that you were discussing, Kevin, that begins in episode 27, our four-part series on your investing process. Do you have an investing process, and lots of conversation about most people not understanding their advisor’s process, if they indeed have one in the first place. It’s definitely a great series to listen to, especially if you’re new to the podcast. You’re maybe looking for some episodes that have already been published that you can go and learn more about Kevin, learn more about the show, and get a good introduction to what we talk about here each week. That’d be a great place to start. Go back to episode 27, and it’s a four-part series on the investing process. We’ll put a link in the show notes of today’s episode, where you can go and find those four episodes if you’re interested in checking those out.

Walter Storholt:

Well, Kevin, really appreciate the help and the guidance on today’s show as well as the previous one as we talk about Coronavirus and timing, and asset allocation, and how you’ve responded over these last two episodes. It’s been a lot of fun to get that information from you and hear how you view this whole thing. It may not be the last that we talk about it. Coming up later in April, we may come back around to this conversation, depending on what continues to happen to the market. We’ll keep an eye on that and look forward to your analysis and guidance as we move through this.

Walter Storholt:

It definitely changed the time period. No longer are we in that never-ending bull market. Now we’ve got a new thing to analyze and talk about compared to the past couple of years. More to keep our eye on, and we look forward to doing that with you again soon.

Kevin Kroskey:

Yeah, Walter, let’s end on a positive note, and I’ll give you a question here so you can also finish on a positive note. Historical market returns for S&P 500 over time, what are those come in at? I know this one.

Walter Storholt:

That’s 9%, right?

Kevin Kroskey:

Yeah. I have, it’s not just S&P 500, but I have total us market here 1926 through January 2020, about 9.6% per year. We’ve had a decline recently here of about 15%, certain parts of the market are down more than 20. I don’t believe the total market has reached a 20% decline yet. But whenever the markets sell-off 10%, and you look out a year later after that happens, the average return on the market on this research index is about 11%. If the market sells off 15%, it’s around 9.1%, and if the market sells off 20%, the next one year return is about 14.2%.

Kevin Kroskey:

Just keep that in perspective. Prices have gotten cheaper. In general, markets go up over time. They’re just permeated with these short term declines that we’re going through right now. But what’s interesting about that as well is while 9.6% is the historical average, all of those returns are not too dissimilar. We’re talking about anywhere from nine to 14%. It’s difficult to predict, just another way to go ahead and show that as far as the timing. High returns are looking better. The market has discounted things. Stocks have gotten cheaper. That means forward-looking expectations look better.

Walter Storholt:

Well, that’s so interesting to hear your analysis of these things, Kevin, each and every time we join, and can’t wait for the next episode already. If in the meantime, you have some questions for Kevin about something we’ve talked about on today’s episode, or a recent episode of Retire Smarter, we do encourage you to reach out. You can also schedule a 15-minute call with an experienced financial advisor on the True Wealth team by going to truewealthdesign.com, and click on the Are We Right For You button.

Again, go to truewealthdesign.com, and click the Are We Right For You button to schedule your 15-minute call. Or you can dial indirectly at any time at 855, TWD plan. That’s (855) 893-7526. For Kevin Kroskey, I’m Walter Storholt. We’ll talk to you next time right back here on Retire Smarter.

Outro:

Information provided is for informational purposes only and does not constitute investment, tax, or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance reference is historical, and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.