Ep 53: Investing Vs. Speculating Part 2

Ep 53: Investing Vs. Speculating Part 2

Listen Now:

The Smart Take:

65% of Institutional Investors surveyed in late June believe the market is factoring in the long-term impact of the coronavirus “too little” while only 5% said “too much,” implying the market is overvalued. Yet, the market has continued to go up. Has it come too far too fast?

Hear Kevin discuss the topic in detail and explain why our brain function predisposes us to make investing mistakes, including blindly chasing investment returns and firmly entering the world of speculation (while abandoning principled and process-based investing). He even attempts to work in stories about Homer Simpson, Halloween, Thanksgiving, and pre-modern man to illustrate his points. Quite a feat to attempt. You won’t be disappointed.

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5:34 – Are Markets Factoring In The Impact Of The Coronavirus Appropriately?

9:54 – How Do We Define The Term “Market?”

15:34 – Too Big, Too Fast?

19:19 – An Important Lesson From The Simpsons

25:00 – Breaking The Herd Mentality


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The Host:

Kevin Kroskey – AboutContact

Intro:                                     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:                It’s another edition of Retire Smarter, welcome back. Walter Storholt here alongside Kevin Kroskey, president and wealth advisor at True Wealth Design, serving you throughout Northeast, Ohio, and Southwest Florida as well. You can find the team online at truewealthdesign.com. Click the, Are We Right For You button to schedule a 15-minute call with an experienced advisor on the true wealth team. Kevin, what’s going on in Florida? How are you, sir?

Kevin Kroskey:                  We’re doing great. Florida’s good. Again, I want to say stuck here, but we made the decision not to travel back to Ohio, Memorial Day weekend when we were originally planning just to not introduce any COVID risk to our family. So we’re hunkering down here.

Walter Storholt:                When you say Florida is good, you know the rest of the country is giving you that side-eye that like. Okay. That’s an interesting choice of words.

Kevin Kroskey:                  Well, our home is good. Let’s put it that way. So we are.

Walter Storholt:                Okay. There we go. There we go.

Kevin Kroskey:                  Yes. We have N95 masks. I actually just bought some face shields. I got them delivered. Not that I’ve worn them yet, but yeah, we’re good. In Florida this time of year, if you’re outside, you better be near some water. So we’ve talked about doing some of the building, which is coming along. Take the girls over to the pool a lot. Our two kids could be more different, but my soon to be two year old, Cameron, no fear, none whatsoever. So we were over, there’s a splash pad in our community, and she’s going down these slides. And there were a couple of boys; they were like four or so. And the one boy was the first time that he had been there and he was a little scared to go down one of the slides, some pretty strong jets and he was scared.

Kevin Kroskey:                  And my little, nearly two year old, just pushes them out of the way and goes down the slide in front of him. So he was feeling a little like, Oh man, this little girl just went down, I’d better go. And then the other four-year-old boy was monkeying around, but he was going down the slide in a way that he shouldn’t have. And wasn’t exactly safe. And particularly wasn’t safe for my two-year-old, but of course, she wanted to emulate him and was doing so before I could grab her.

Kevin Kroskey:                  And so she just did this pretty bad face plant, and I went running in, and she was crying, and I picked her up and then she stopped crying, climbed right back up. So I came back over to sit under the shaded area, which is very much a necessity from the Florida sun. And the four-year old’s dad said, dude, your kid is tough. She just went down again. So she’s something. But my older one, she’s an absolute sweetheart, but they’re very different for sure. So just really interesting to watch them.

Walter Storholt:                It is. I think that’s one of the fascinating things about kids. We were at the beach recently as well, over the July 4th holiday, and my cousins have young children, and it was interesting to see, we met one of them for the first time. And she’s about two now, and the other set of cousins, they’re twins about four. And so these two, four-year-olds and this two-year-old, the four-year-olds have been to the beach before. And it’s been a slow process of getting them used to the sand, used to the water, very slow process to get them comfortable out there. And the one kid would pick up his hands after his hands get wet and the sand gets on his hand, and it’s all caked on it. And he’ll cry from the sand on his hands.

Walter Storholt:                What do I do? And the two-year-old sounds a lot like Cameron and just gets out there. And she just runs face-first into the waves and just like they had to go grab her and throw a life jacket on her before they even could blink and she just loved it. And so that’s how I was as a kid, and my mom kept saying, she’s like you, when you were a little kid, because there’re videos and pictures of me, literally just looking like I’m passed out or dead in the surf as a kid. Because I just loved the waves, just coming and pummeling me and the sand was just getting in every single crevice of your body. And this two-year-old was the exact same way.

Walter Storholt:                Here are her little cousins who are scared of getting a little sand on their hands, and she was just wrecking the whole place everywhere. It was just fascinating to watch. So I love watching those differences play out in kids. Well, glad to hear that you are well and the face shields, do you intend to use the face… I’ve only seen one person actually with the face shield out in public at the grocery store. And it was a younger guy, and I said, going with the full face shield. Huh? And he said, “Yeah. Mom won’t let me work without it.”

Kevin Kroskey:                  I’m debating a trip. I’m considering a trip back to Ohio, just for myself, not for the rest of my family. So N95 mask, face shield, you name it, if I’m going to do it, I at least wanted to be prepared. And so I’m considering it. So it’s more of the planning ahead nature. That is very, very apropos for my chosen profession. So we’ll see, but better to have and not need than need and not have.

Walter Storholt:                That’s right. Yeah. It’s a great point. And a good thing to live it on, that’s for sure. Well, if you listen to the last episode, you know that part two of a conversation we started on the last episode is on the way, we first started talking Kevin, about this idea of stocks diverging from the economy, the economy is shaky a little bit in several regards, lots of bad news out there. And yet stocks at the time of this recording again, have just sort of been trucking along over the last couple months and recovered from the bottom a lot quicker than expected. But part two of this conversation is going to look forward a little bit to say, okay, well, have we gone too far in the other direction? Are we overconfident? And that buzzword are we now speculating instead of investing? And how do we avoid crossing over that line in the sand? If you will, to use our beach references on the show today. So investing versus speculating, being our guiding compass, what do we need to know?

Kevin Kroskey:                  A lot. And I’m actually going to start it with a question. So we’ve been getting a lot of questions from clients, as well as new clients that we’re working with and prospective clients that we’re talking to just about, Hey, if they have cash, should I invest it? How? When? Those kinds of questions. In the last episode, we talked about how many of our clients, we advised that they increase the risk, and that is certainly paid off pretty well, even though it wasn’t necessarily a timing decision.

Kevin Kroskey:                  And some of the questions they’re asking now as well, does it make sense to stay here? Do we take that risk off the table? All of these. I was reading, it was an Institutional Investor magazine, and it was a survey that was conducted by readers of Institutional Investor magazine. So obviously, as the name implies, these are professional investors. So it could be people like me, but it could also be pension funds, could be people that manage college endowments, tends to be more on the institutional side, and not necessarily, they would call people like me more so on the retail side, working with Joe and Jane consumer that are planning for retirement. So these are definitely a little bit more of, I guess you would call it the big boys in the pension run world and endowments and things like that.

Kevin Kroskey:                  And the question that was posed was this, are markets factoring in the longterm impact of the coronavirus appropriately too much or too little? So let me read it again. So are markets factoring in the longterm impact of the coronavirus appropriately too much or too little? And Walter, I did not share this with you in advance. So pretend you are an institutional investor from… Actually, just give me your own opinion. Don’t even pretend you’re an institutional investor. So what do you think, if you think of equity markets, is it too little, is it appropriate or is it too much?

Walter Storholt:                I would say too little. I feel like we’re not going to recover economically as fast as we would like or predict. So I think we have over rebounded, that would just be sort of my initial gut uneducated opinion.

Kevin Kroskey:                  Okay. So you fall in with the 65% of institutional investors in terms of the two little categories. So you’re in the majority there. So 65%.

Walter Storholt:                It’s not usually good to be in the majority. I’m nervous.

Kevin Kroskey:                  Well, you’re in the institution, you’re a big boy now, Walter, you’re an institutional investor. So you’re within that crowd. So kudos to you in that regard, but that’s what they believe.

Walter Storholt:                I always strive to be institutionalized.

Kevin Kroskey:                  Good job. Now you can share with your wife that you officially are, so say yeah, 65%, only 5% said too much, 30% were it’s appropriate. And then 65% said it was too little. So again, it was the longterm impact of the coronavirus set our market’s factoring in. So interesting that you mentioned that the economy was not going to rebound as quickly, which in the last episode, we talked about how the economy and the markets aren’t exactly the same thing. So I won’t dig too much deeper on that, but it was just interesting that you chose the word, the economy, when the question was, are markets factoring in the longterm impact of the coronavirus approach?

Walter Storholt:                It shows how ingrained it is into us, even though we just had a conversation about how it’s okay that they diverge. Isn’t that interesting?

Kevin Kroskey:                  Yes. And the other thing too, when you think of… What came to your mind like, our markets? So markets is a very broad term. What came to your mind when I asked that question?

Walter Storholt:                Jobs, flashed in my brain. And then honestly, when you say the markets, this is interesting. I think of, and maybe this is just because of the pandemic, but I think of shops and stores and employment, are buildings full of people? And so I think with everybody working from home and potentially that being longterm that’s just sticking in my mind of like, we’re not going to see places as full as they used to be. I also feel like commercial real estate is going to take such a huge hit that, that’s going to create major problems down the road. That’s sort of the other, I guess the third component bouncing around in my mind.

Kevin Kroskey:                  I agree with you. And we’ve heard a lot of that in the conversations that we’ve been having with clients and new clients. The other thing that I think a lot of people where their mind goes when they say markets, is just what they see on the nightly news every night, Hey, the NASDAQ did this, the S&P did that. And that’s certainly a big part of the U.S market. And the U.S is about half of the world market. But as we’ve talked about in prior episodes as well with some of the technology and the big, large-cap technology companies, they’re more than 20%, nearly 25% of the S&P 500. The NASDAQ is almost entirely technology-based companies. And so it’s really, maybe not fully the wide swath of sectors because some sectors, many sectors are underrepresented, like real estate that you mentioned, energy certainly used to be a much bigger component.

Kevin Kroskey:                  Now it’s a lot less industrial companies, things like that. The technology companies have become a bigger part of our economy, but also they become an even bigger part of the market just because of their outperformance. And so, some of the… And we’re not even talking about other countries. I guarantee you whenever people listen to this. And if they think back on when I asked that question, and I said, are markets factoring in, they probably thought about the same sort of things that you thought about, or they thought about, again, the stuff that they see on the nightly news, they didn’t think about, well, well, let me think about how Europe has done, or Japan or China, and are those markets down more or less than [inaudible 00:12:17]? They didn’t go there. You’re listening to this in the U.S, and if we have some listeners outside of the U.S, maybe they went to the country that they’re in, but that’s what we’re conditioned to think about.

Kevin Kroskey:                  And if you look at the sectors in general, for the first half of the year. So through 2020, through June 30th, through the first half of the year, seven of the 11 sectors, basically sectors, and then you can break down sectors into certain industries, but seven of the 11 broad sectors were negative for the year. If I do a little bit of adjusting there and I say, Hey, Amazon, you’re really more of a technology company, which is probably what most people think about when they think about Amazon. But technically they’re in a consumer cyclical sector where they’re classified, which is debatable. And then you think about Google and Facebook, which are also some of these big tech companies that have done really, really well, certainly technology companies, but they fall in the communications services sector. So if I just set those three companies, aside from the sectors, then nine of the 11 sectors in the U.S are down. Again, technology is up. Basically, everything else is down.

Kevin Kroskey:                  Walter, you want to take a guess of what the other sector that’s positive on the year, slightly positive?

Walter Storholt:                What’s that?

Kevin Kroskey:                  Take a guess? I’ll give you a hint. It’s close to home.

Walter Storholt:                Oh, financials.

Kevin Kroskey:                  Think about your wife.

Walter Storholt:                Oh, healthcare, healthcare.

Kevin Kroskey:                  Healthcare. Yes. So healthcare is slightly positive. Yes.

Walter Storholt:                Close to my home. Gotcha.

Kevin Kroskey:                  Close to the… So the broad swath of the economy is down. It’s really, again, the technology companies. We’ve talked about this in the past, but that’s really what’s been up. If you go down to small companies in the U.S., Let me back up for a moment, large companies in general, like the S&P 500, comprises about 75% of the U.S market. And again, the U.S market is roughly about half of the world, or so in terms of the investible universe. So small companies in the U.S comprise about 10% of the U.S market.

Kevin Kroskey:                  Small companies are down 13%. If you go into small value companies, they were down 24% through the first half of the year. If you go outside of the U.S into developed markets, and in dollar terms, develop markets, Europe, Japan, Australia, they were down about 11% collectively. And then emerging markets, think China, Taiwan, South Korea, India, Latin America, to a much smaller extent. They were down by about 10%. So really, our markets, if I go back to the question, the survey question in Institutional Investor magazine, are markets factoring in the longterm impact of the coronavirus appropriately too much, or too little? If I’m going to be nitpicky here, I would say maybe the question wasn’t all that great. Markets are a very, very broad term. And even though this is Institutional Investor magazine, and these are educated professional investors, I guarantee you, their mind went to a similar place where yours went Walter, or towards these large U.S based indices, probably to a lesser extent than yours or people that are listening to the show, but that’s where it went to.

Kevin Kroskey:                  It’s just the home country bias that they tend to have. So it really depends on what markets we’re talking about. So I think that’s an important point to make, but let’s just say that we are talking about maybe the more expensive part it’s other markets. So the NASDAQ through the first half of the year, again, almost all technology-based companies is up 13%. Or if we look at specific companies that are in there, if you look at say Amazon, Amazon’s about 135 times earnings, Zoom, Walter, we’re talking at least in part through Zoom right now, and P/E ratio. So the price-to-earnings ratio is just a way to value companies. Do you want to take a guess what Zoom’s price-to-earnings ratio is?

Walter Storholt:                Ooh, I’m just going to say good.

Kevin Kroskey:                  I will say rephrase that and say high. People listening to this, probably never heard of Zoom before the COVID situation. And if you look back on the trailing earnings, they’re 1400 times; the price is 1400 times their trailing earnings and their forward earnings, given some estimates that analysts make, it’s still 208 times their forward-looking earnings. Comparatively, let’s just talk about the S&P 500, for example, if we go back in time to the last 25 years, the S&P 500 trades about 16 times forward-looking earnings. So let me pause there for a moment. So 16 times versus 135 times for Amazon, more than 200 times for Zoom. Yeah. That’s a pretty, pretty high price. Pretty nosebleed territory, got to have a super ton of growth to even come close to going ahead and justifying pain in those nosebleed prices.

Kevin Kroskey:                  But even if we look at the more broad-based S&P 500, so again, it’s become more tech-based. It’s more than 20, 25%, just between the five big technology companies with Facebook, Apple, Amazon, Microsoft, and Google, but even the S&P 500 is trading at 21 times its forward-looking earnings right now. So that’s basically about 24, 25% above its 25-year average. So has it come too far too fast? Again, I think those were some of the things that were in the mind of these institutional investors when they were surveyed. It certainly seems like that has been the case, particularly for some of these popular stocks that have come through COVID, frankly, only time will tell, but you’re seeing a lot of this sort of euphoria in these certain names and day trading was pretty prevalent in the .com era.

Kevin Kroskey:                  You’re seeing a lot of that again, today, a lot of millennials are. You’re seeing news reports. Unfortunately, there was a sad story. A couple of weeks ago, a millennial was doing some day trading. He logged into his account through a platform called Robinhood. And basically, he was using some options which have leverage to them. And what he saw was I think he owed like, he was negative 700 or $750,000, and that did not go very well in terms of his mental processing. And unfortunately, he ended up taking his life, and his suicide note at least somewhat blamed this Robinhood investing platform.

Kevin Kroskey:                  So you’re hearing stories like this, and there’s a lot of evidence to show that there’s a lot of this sort of day trading that’s going on. And of course, it’s in these popular stocks that people have become more accustomed to that are gunning attention they have gone up a lot in price. So I think it certainly seems reasonable that a lot of the looking forward part that we talked about, which I think is appropriate when you look at the stock market, it certainly seems like certain parts have extended to beyond the prudent looking forward and going into more of the speculative category.

Walter Storholt:                It’s interesting to hear that kind of… I don’t know. That perspective is really hard to wrap your head around, and you’re right, how you define the market really does impact your perspective on it all, whether you have a more global view or country-specific view, how closely you tie the economy into this conversation of the stock market, and then just your personal situation, right. Kevin, I mean, as a 30 something, versus somebody who’s entering into retirement, your view of maybe what speculation is or how much tolerance you have. It’s not just a risk thing, right? But it’s a little bit more involved than even just the risk conversation as we get into this sort of speculating versus following true, good proven financial principles that you’d like to put in place. You’ve got to take into account your own feelings and situation on this subject.

Kevin Kroskey:                  Well, I think you’re getting to an area that it makes sense to talk about, when you talk about emotions and maybe why some of this is happening. So let me maybe weave in a little story here, maybe at least in part a bit humorous. So I was born in ’76. I remember watching the Simpsons when they first aired in the late eighties for Christmas special. And I was basically hooked on the Simpsons after that and watched a ton of reruns of it throughout my college years. And when I read this survey article from Institutional Investor magazine, it made me think of something.

Kevin Kroskey:                  I remember Homer, saying, never late to invest. And what Homer said was he said, this year, I invested in pumpkins. They’ve been going up the whole month of October. And I got a feeling they’re only going to peak right around January then bang that’s when I’ll cash in. And so Homer, here is looking at the prices of pumpkins, continue to go up throughout October. Obviously, we know what a holiday is at the end of October, and the pumpkins are pretty prevalent around that time period. And he’s just looking at recent past prices and then projecting them forward. Or maybe we’ll go to the next month and think of the month of November. Walter, what kind of food do you think of when you think of the month of November?

Walter Storholt:                Sweet potatoes. No, Turkey.

Kevin Kroskey:                  Sweet potatoes. Thank you. Yes. Sweet potatoes are inanimate objects. So Turkey is much better. Thank you. You didn’t ruin my story.

Walter Storholt:                I was already going to the cook side.

Kevin Kroskey:                  So think about the life of the Turkey. The Turkey, I don’t know. I’ve never been to a Turkey farm, but the turkeys are getting fed every day by these humans. Maybe by some robotic equipment. I’m not sure, but they’re getting fatter and fatter, and they’re like, Hey man, this is a pretty good life. Yeah. Yeah. I’m stuck in here with a bunch of other birds, but I’m getting fed. I’m happy. Life is good. And then they keep believing that all the way up until I don’t know, late October, early November. And then something pretty drastic happens in the Turkey’s life. What happens, Walter?

Walter Storholt:                They are killed. I was going to go with a more colorful description, but we’ll keep it basic.

Kevin Kroskey:                  The turkey’s life changes. Not necessarily for their good, maybe for our good, if you’re not a vegetarian, I suppose, but it’s another example where things continue and align for a while until it changes. And in the case of turkeys, it changes quite dramatically in the case of the pumpkin prices. Again, it changes quite dramatically and-

Walter Storholt:                It’s interesting. You could play that out every month has something, right. We just had July 4th recently. So the price of fireworks is always ramping up right before July 4th. I’ve been to shop for fireworks on 3rd, and it’s extremely expensive, and I’ve been to shop for fireworks on the 5th, and you can buy the whole place for $20. Do you know what I mean?

Kevin Kroskey:                  Right. And so some of these, obviously with turkeys or fireworks or Christmas decorations, we know when these times are, when things are going to be really different, you don’t have that clarity with stock prices, but some of them-

Walter Storholt:                But sometimes you’re the Turkey, and you don’t know how it ends.

Kevin Kroskey:                  Yes. And it’s our brains that do this. So if you think of investor psychology, our brains just work, and they take very shortcuts that tend to service pretty well in many areas of our lives, but it tends to set us up to make some pretty common and repeatable investing mistakes—using past performance. Like, Hey, pumpkin price is increasing or whatever it be is one of those. In fact, there was a 2011 study. It was at one of the big national discount brokers, like Schwab, Fidelity. And these researchers looked at all the trading decisions for a bunch of DIY investors. And wouldn’t you know it, that they found that the investment purchases that they had made had outperformed the market over the prior two years prior to their purchase by 40%. So it’s not like they bought the things that were out of favor.

Kevin Kroskey:                  They’re like, okay, Hey, the price got a lot cheaper, though. Like, no. Hey, man, this thing has gone up 40% over the last two years on average, I’m going to go ahead and buy this because it has done really well. And then what the researchers found was that the thing that they sold to free up the cash to buy what they bought that had recently done well if they wouldn’t have done anything if they just held onto the investments, they would’ve actually been better off and had more money. And so using that past performance, again, it works in other areas of our lives, for sports, it works really well. LeBron James, I always say, was a great basketball player for the Cavs. He won when he went to the Heat, he was a great basketball player. And nowadays, with the Lakers, he still is, his performance has persisted. In investing, it just doesn’t work that way.

Kevin Kroskey:                  The other thing that I think really comes into play here. And so just to make sure I actually draw the line back to what we were talking about. So these stocks that have done really well, particularly, Zoom, Amazon, many, many others that are like that. And within generally speaking the technology or the biotech space, there’s just, Hey, we’re looking at it, it’s going up. So it’s going to continue to go up. So we’re just going to go ahead and pile on. That’s speculating. You have to find the greater, full to go ahead and willing to pay the higher price than you because when the price becomes detached from the fundamental valuation, then eventually the music’s going to run out and people are going to be looking for chairs.

Kevin Kroskey:                  If you think about something else that people do, Walter, you’re millennial, I won’t say pick on you for a moment, but what is FOMO?

Walter Storholt:                Oh, fear of missing out.

Kevin Kroskey:                  Yes. And so FOMO, I think it was coined maybe 20 years ago or so, but it’s really, I think, been exacerbated by a lot of these social platforms like Facebook and what have you. And it’s easy to share information. What are people doing? Oh, they’re having fun. I want to have fun too. Oh, they’re making money in the stock market by buying Zoom. I’m going to do that too. And a lot of the technology makes it so much easier. So FOMO is there, but even somewhat related to that, if we think back a little bit longer-term, more of like a herd mentality, it served us really well when we were in tribal times before our culture was industrialized and we had pretty harsh conditions that we had to deal with.

Kevin Kroskey:                  Well, Hey, maybe we were going to get hunted. We had to find food, hunting, gather. We really needed to go ahead and have that herd and foster cooperation within the groups. But today, certainly we don’t have that sort of harsh… I would say nothing like those harsh conditions, but we still have that sort of a similar brain, and our brain functions in a way that was ingrained over many, many, many years to go ahead and get us where we are today. But the shortcuts that it takes or these behaviors that it’s has ingrained to it, like the herd mentality or maybe the modern-day version of it in FOMO, doesn’t really serve us well. And I think it’s probably contributing to a lot of the euphoria that you’re seeing in certain pockets of the market. There are other things that the mind does, again, that maybe work pretty well in the past or in other areas of our lives, but doesn’t necessarily work so well in investing, but whenever you’re buying something for several hundred times earnings, and just think that for a minute.

Kevin Kroskey:                  If you’re buying something for ten times earnings and just doing simple math, basically, whatever you buy today, you’re going to get paid back over 10 years. You can simplistically think of it that way. If you’re buying Zoom for 200 times earnings, well, I don’t know, about you Walter, [inaudible 00:27:37] maybe I hope I live 200 years. Maybe I don’t, depending on what the quality of those years look like, what sort of innovations we have. And if I have enough resources, to live that long, quite frankly, I’m done working whenever that may be, but-

Walter Storholt:                Your brain will live in the cloud for 200 years. We don’t know-

Kevin Kroskey:                  Zoom, better keep zooming in terms of their earnings. If anybody’s going to make any money on this stock unless they’re going to find that greater full is what I’m saying. So there’s a lot of that, that’s going on. So again, we started talking about markets. I think the question was poorly phrased, but these were institutional investors that answered this. And two-thirds of them think that basically, the market is factoring in the longterm impact too little. So just as you believe, Walter. So I think you do have to look through that a little bit. I don’t think it was a perfectly worded question. You have to look at these earnings. And again, nobody really knows right now. Probably about half of the companies that usually do provide earnings estimates, are not doing so right now, just because they’re saying like, look, we don’t know. The last quarter was pretty crazy. And so, because we don’t know, we’re not going to provide any guidance, but I think as we’re in July now, people are going to be reporting Q2 earnings.

Kevin Kroskey:                  I think they’re going to have to start providing some more guidance. And I think we’re going to start having some more clarity on really what we can expect, but there’s still a ton of uncertainty because who knows exactly how the pandemic is going to continue to manifest. Is it going to come under control? It’s probably going to continue to vary both over time and over States and countries until we do get that widely distributed vaccine. So there’s a lot of wide-ranging outcomes that we can have now. So even though that we’re going to be getting earnings estimates, you got to take some of this with a grain of salt. So what does that mean? I guess maybe let’s bring this home. What do we do as investors? Well, it’s the thing that we should always do. First and foremost, you need to have a financial plan.

Kevin Kroskey:                  If you’re in retirement, you need to make sure that you know where your income’s coming from and how that’s to be derived. The shorter-term money that you’re going to need should be in the shorter term, very high-quality assets, cash, high-quality bonds, so on and so forth. If you look out longer-term, yeah, there are certain parts of the market that are still marked down quite a bit. And as long as those companies stay in business, it’s likely that you’re going to see a big rebound in prices in certain parts of the market.

Kevin Kroskey:                  Like a lot of this, uncertainty does go away, and we do work through this over the next, one, two, three years, whatever it may be. Hopefully, it’s not longer than that, but you need to be starting with the plan. The investments need to be aligned to your plan, making sure you’re taking the appropriate amount of risk. Again, if you can be a little bit more opportunistic, if you have the ability to do that, then we could look at that, but you have to start with the plan, is nothing is done in a vacuum here. And then this wasn’t in the Simpsons episode, but it was a Nobel prize winner that said, diversification is the only free lunch in investing. So all of those different sectors and countries that I briefly mentioned as we went through the episode today, frankly, we should own all of that to varying degrees.

Kevin Kroskey:                  We may want to overweight some assets rather than others, we may not want to completely go away from some of these technology companies that are expensive, but we may want to go ahead and prune our allocation to it a little bit and put it into the some of the things that, that haven’t participated as much. And frankly are a lot cheaper, but Homer would probably say, Hey, I like the concept of free lunch. And for Homer, maybe diversification means, I don’t know, beer and donuts, but we need to think a little bit more than that and do a little bit more analysis in terms of what that needs to be. The final thing I will say is, I think I mentioned this in the last episode, but Vanguard came out with a report recently saying that 90% of their investors or accounts have made no changes this year.

Kevin Kroskey:                  And that may sound good on the surface. That’s great that they did not panic out in March, and were able to get the rebound. However, they didn’t change their allocation. Maybe some of them should have been raising more cash because they are in retirement and things are more uncertain, or maybe they’re in a higher risk business and maybe their job is more prone to not being around, and they need to change their financial plan and thus have some changes made in their investment plan. They didn’t rebalance in March after stock prices had gone down 30, 40, 50% in some cases.

Kevin Kroskey:                  They didn’t sell the bonds that held up in value. And buy things that fall in price, that’s a big mistake. They lost out on a lot of returns and a lot of dollars there. For the taxable investors, they didn’t realize tax losses that they could have realized in March, and completely avoided or really mitigated income taxes that they’re going to have to pay this year on their investments. And probably next year and the year after, these are all things that need to be done. The process for planning, as well as investing, is dynamic. And the inputs to that process have been changing in very quick order this year. And while there’s a lot of uncertainty around some of these inputs, nonetheless, certainly some things are becoming much, much more expensive. Other things are not all that needs to be factored in and adjusted accordingly, and it’s going to be ongoing.

Kevin Kroskey:                  And so as we get new information, again, the process stays the same. The inputs are changing. And as certainty around those inputs increases, then you’re going to be able to take more conviction and making a decision whether to overweight or underweight, own more stocks, own fewer stocks, whatever it may be. But the do-nothing approach really falls short and certainly having the bad behavior approach, whether you’re like Homer, and just chasing pumpkin prices, or maybe like some people just zooming on the Zoom price or other technology stocks or on the other opposite side of the coin, if you were panicking out, neither of those is really a good investing decision. That’s where you get into speculation, and that’s no way to invest your hard-earned money or your life savings.

Walter Storholt:                And too often, we’re making these decisions in a vacuum and not considering how it impacts our overall financial landscape, our overall financial plan, our future, everything that is to come, you have to take into account all of those things. You can’t just say, this is one good opportunity and isolate everything else, or at least it doesn’t seem like you can do that very often from what I’ve learned from you, Kevin, you’ve got to keep it all in perspective, in all in focus and in the picture. And so if you have had any trouble doing that yourself, making sure that you’re making wise financial decisions looking to be proactive and not just following the herd, that herd mentality anymore, reach out to Kevin and the team.

Walter Storholt:                You can schedule a 15-minute call with an experienced financial advisor on the True Wealth team, by going to truewealthdesign.com and clicking on the, Are We Right For You button to schedule your call. That’s truewealthdesign.com and click on the, Are We Right For You button or give a call to 855-TWD-PLAN, that’s 855-893-7526. Kevin, we don’t want the herd mentality to turn into Lemmings following one another off the cliff in the financial landscape. So we look for good leaders. We look for people who are proactive in this space. Something that I think is missing from this space many times, but I appreciate your perspective and your guidance, your ability to look forward, to put things into perspective and to challenge the norm and making us all a little bit smarter when it comes to retirement today. So thank you.

Kevin Kroskey:                  Well, I do my best, and I appreciate you saying that Walter, and hope it’s helpful for the people that are listening.

Walter Storholt:                Absolutely. We’ll look forward to talking to you again in the next episode, Kevin, and thanks to our listeners for tuning in today as well. Don’t hesitate to reach out if you ever have any questions at all for Kevin. I’m Walter. We’ll talk to you next time. Right-back here on, Retire Smarter.

Disclaimer:                          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.