2022 EP0528 - Planning Matters Radio - Risk Volatility

Plan planning matters radio yes welcome once again some planning matters radio show where we shed some light on the personal-finance issues of the day that will follow along the way Martin Scott Wallace and I'm here as usual with a Ramsey approved Smart investor Pro, he's an author of understanding your investment options and is a fiduciary, financial, investment, retirement planner, serving his clients throughout the great state of North Carolina.

People shopping for joining us that it is always a pleasure Scott a lot of important information to cover a lot of people.

I think reasonably concerned about the market, their money, their retirement accounts their investments. Call it what it is their life savings that hangs in jeopardy in the balance. Based on what direction the market is going. It really can kinda set the mood. Are we euphoric. Are we happy if we see green on the charts that day. Maybe so, but a lot more red to start 2022. The first quarter no markets and and indices fluctuated 10 to 15% were still down off of highs and although I'd say it's it it's relative.

You've got a really look at this in perspective of the grand scheme of things.

The market is still hovering near all-time highs, as it were, but because we have seen a little draw back from the peak of that all-time high. I think a lot of people are worried that they were losing money because it sort of feels like a a new phenomenon that that the market can even go down leaves become so accustomed to it constantly moving up over the last 1213 years since the bottom of the great recession it it it it feels like it's new and fresh in people I think are worried. As a result. Yeah, there are literally people in their early 30s who have never experienced in a down market in their entire working, investing, saving life yet so it makes a lot of sense that the things that you're saying so they were to talk about risk and protection, and in some ways those things feel like opposites, but they can occur at the same time.

What is risk we hear with that word gets thrown around so much. What is it, well there's many different types of risk there's risk in almost everything that we do. But when we hear about our money or our investments and risk most often were talking about the market base risk. The risk that the market takes a downturn has a drawback has a correction enters into a recessionary.

You know the regular economic cycles of boom and bust. We've been booming for a really long time. Side note a lot of it because of government intervention support infusions of cash in capital but we have been seeing this upward trend in the market for for really so so long.

I mean there was a little downturn in 2015 2018 was the last time they tried to raise interest rates. They raised 1/4 of a basis point at the end of 2018 and as a result, the markets ended the year the month of December was down like 18%.

We we bounced right back from that in 2019 no cove. It had we had a big major downturn then but it happened so fast.

It was like most people didn't even open their statements by the time her or during the time of that downturn. By the time they did open their statements, the market was already back up and so we really have not had investors experience what losses or what volatility in the market feels like for quite some time and as you noted, so there are some investors out there that that it feels fresh. Other investors may have experienced this kind of risk before but it was different last time right because it was 1213 years ago there that much closer to those retirement goals and so we don't want to suffer another round of the.com bubble kind of losses or the great recession kind of losses.

So this time it's a little different. But what is risk. Risk is the chance that anything goes wrong it's the possibility or probability that things don't go our way, that there is inherent danger or damage that can be caused as a result, I mean waking up and rolling out of bed in the morning involve some kind of risk that we gotta measure all risk right is the reward worth the risk. Here's the thing is that with our money. We have been taught and we have been told we have been trained that risk is a necessary part of progress if we want reward. If we want growth, then we have to take risk and we have to wonder where that training where that message has come from right always pull back the curtain. Who's the man behind the curtain.

Where is that message coming from that has been through decades of Wall Street advertising marketing and what I will call propaganda because Wall Street benefits when we choose to trust them and turn our money over to them. The risk isn't necessarily a requirement to make forward financial progress. If you are willing to take risk possibility is that you could make more rapid or larger amounts of financial progress, but risk is risk right.

We can't base the amount of risk or taking or the investment selection the allocation of law off of the reward and the growth that we want and negate the risk factor of losing money. The possibility mean and even if someone not taking action or taking action to mitigate risk can also be inherently risky if you put all your money in a mattress over a long enough time frame. Inflation will make your money go down by affect correct absolutely right again.

Yes, different types of risk so there's interest rate risk. There's duration risk.

There's legislative risk their sector risk. There's all kinds of different specific company risk. If you are invested in one particular company. Let's take like a shopping mall staple like a consumer at retail JCPenney's or Belk's or something like that. The retail sector. Still, it was going very strong.

But JCPenney's didn't put the.com after their catalog and become Amazon right so their particular company was suffering and losing value, while the retail sector as a whole was still very strong. We could take several other examples Blockbuster video.

The entertainment sector still going very strong. Sure, that company specifically did not keep up with times and so that company had specific company risk where the sector still was doing very well now. Sectors can have their own subset of risk healthcare, energy, oil and gas financial sector, consumer Staples commodities. All of these things behave differently in their cyclical and so there are parts of the economy. For instance, like the commodities that actually held their value relative to the broader markets in 2007, 2008, the great recession, but the financial industry. The financial sector which had the mortgage-backed securities that sort of work that the dominoes that fell in and led to the collapse of the financial industries.

The Bear Stearns and Lehman Brothers right that sector didn't do very well and then you got right, economics, cyclical kind of risk where the entire economy is suffering.

We are just in a recessionary. And right now I think that's what people are worried about as we have seen the supply chain woes continue from covariate and then from the Russia Ukraine conflicts as we have seen prices rise inflationary pressures and the governments response their weapon to try to keep inflation under control is to raise interest rates will interest rates rising does not have positive implications for all lot of the different sectors in the financial markets.

The bond market in particular is likely to lose value as interest rates rise. We hear a lot about the stock market, but the bond market is actually 4 to 5 times the size of the stock market. It's just generally not as exciting but I think this year in particular is rates are rising.

You're going to hear a whole lot more about fixed income losing value about bonds and bond funds losing value about the bond market having more volatility than we are accustomed to seeing. And then, as interest rates rise refinances are going to slow down people continuing to move into larger and larger and larger homes simply because they could afford to on the same payment because interest rates kept going down that's going to slow down and then all the ancillary factors that go into people moving and filling homes with new furniture many different angles that that are impacted by the by the transitory nature of people moving around in large numbers when relocations when refinances when buying bigger and bigger homes slows down. It's going to have ripple effects on other aspects of the economy and we are are are probably going to see some continued volatility throughout the year because the Fed has now raised rates twice their stance at the beginning of the year was they plan on doing it six times in 2022 and two more times in 2023. They said they were going to be more aggressive on the front side of this. So I think they were going to continue to see some ups and downs in the market and people need to be aware that that is part of the investment experience downturns in the market fluctuation and volatility are not something that is new or novel or unusual. In fact, the stability that we have seen over the last 12 years.

The lack of volatility that has been something that has been a bit of an anomaly where we have not seen this level volatility. While there spirit shots taken kind of the overall conditions. If you want to talk with him specifically about your situation, you can call him at 919300586.

That's 919-300-5886 or just go to his website www.rochonplanning.com Peter many people some investors certain type of investor weight for these periods of volatility and and kind of and take advantage of them because that is where perhaps more risk to get small reward how much risk should the average person be taken well so you're correct that there are certain investors that are positioned for these types of instances for volatility. Let no opportunity in crisis go unrecognized or there's always opportunity in crisis. I think some the right to go to where you Thank you yeah and there's another one it's it's even more gruesome. But when there's blood in the streets. There's money in real estate is another saying that I've heard that kind of is the same line of thinking, but only if you are prepared and positioned correctly and can afford and stomach some amount of losses. But when I am Ron boarding a client. I am task with part of my responsibility and part of my process is trying to help them determined, and understand their risk tolerance. How much risk can you stomach and part of that process is a series of questions kind of hypotheticals that II go through one of them being you know if we hypothetically were to invest $100,000 and then we come back one year and we review the progress of this account and let's just say let's pretend that the market is down 30 or 40 or 50%. How much of that hundred thousand dollars. Are you comfortable having lost right and and there's kind of some range of options there and then I go through a little bit of a follow-up question.

Well, if you have the potential to gain this much more would you be comfortable with the possibility of losing this much more we try to hone in on where that risk level is another one of those questions is that the market has experienced several different types of downturns like sharp short-term downturns or more prolonged periods of downtime. If the market was down 25% in two days.

What's your reaction if the markets down one third of its value down 33% over a three month.

What's your reaction and there's a spectrum of answers. Do you move everything to cash do you move things to more conservative investments do you wait and see. Do you move to more aggressive investments or do you add more money during those periods of decline and based off of those answers and we have follow-up discussions. There's no right answer per se, but if we look at fundamentals for successful long-term investment. There are right answers. There's answers that if we have a plan in place if we are comfortable taking the risk in the first place we should be better positioned to not panic and lock in losses during downturns but rather be positioned proactively to take advantage of those downturns because if you can move to more aggressive strategies during the bottom of a market or add more money as prices are on sale then long-term. You should have more potential benefit and you don't necessarily have to take more risk along the way so the question of how much risk should we take. That's a very individual kind of question. There's rules of thumb, you know, as you get closer to retirement.

You should likely be taking less risk is a 30-year-old investor. You can shoot sort of swing for the Fenton's defenses and shoot for the stars, but as a 60-year-old investor kind of on the verge of beginning to make withdrawals and use your money then you really shouldn't be taking nearly as much risk. Also, your wealth level like the network. The amount you have invested is another aspect that needs to go into that equation. If you got $200,000. As far as your net worth, you probably shouldn't be risking all of it or were more than is appropriate to to achieve certain goals. But if you got $2 million, $20 million. Maybe you know at that point in time, we could be a little bit more risky. A lot of these old Wall Street rules of thumb. By the way, and, and, in fact, the, the modern portfolio theory and the asset allocation model.

All of these kind of rules were inspected when Main St., American individuals worked really Wall Street investors that didn't happen until the inception of the 401(k) and and and Arisa that that Main St., Americans became Wall Street investors. Those kind of rules of thumb in the old traditional rules were really set up for institutional investing pension funds ultra wealthy individuals, corporations that were investing their money were the ones that were to follow these rules and they somehow were transposed onto us as individuals.

When us as individuals really can't afford to.

In most cases take the same kind of risk as institutional investors or ultra wealthy investors who were the traditional Wall Street investors before the inception of the 401(k) so again, you know, if it were kind of look and in general how much risk we should take a it is individual, be it changes over the course of our life, our lifecycle we could take a general rule of thumb, the rule of 100 says whatever your age is that the percentage of your portfolio roughly that should be safe.

100 minus your age is the percentage of your portfolio roughly that should be at risk, but again that's not hard and fast. That is not a strict rule that is a very generalized rule of thumb, and maybe a starting point for that conversation and and it's really different for each and every individual based on their situation. 919300586 is the number to talk to Peter Shaw directly about your personal financial situation. It's interesting and one of the smartest that he said a lot of smart stuff.

One of the smartest things that you said is that you have follow-up conversations. That's why it's so important to have a relationship with a financial planner that not only knows your financial situation. The dollars and cents, but knows you because I would imagine that all the conversations you have. There's the amount of risk that someone thinks they can stomach and then after working with them a while. If the amount of risk they can actually stomach right yeah and and were trying to as best as possible.

Set that up on the front end right in there and be prepared for that and discuss expectations for return in time horizon and willingness to accept losses and fluctuations along the way so that we can be properly positioned but everybody is a risky investor when the markets heading up. It's not immortal the market starts to go down that we really find out what somebody's true risk tolerance is because somebody who has said no yeah I'm a pretty moderately aggressive or aggressive investor and then the market loses 10 to 15% and and they're worried and panicked about it. Well that's not truly a moderately aggressive to aggressive investor. If that has you worry than we really need to back up kind of regroup and assess that risk tolerance.

You know, I view it that there's maybe five criteria there five categories for how risky somebody is a risk-averse somebody is. There's ultraconservative, not willing to accept any losses whatsoever. There is conservative to moderately conservative sort of group that in one willing to accept a very very small incremental amount of of losses but really any any dollars, evaporating and disappearing without them having withdrawn. It does raise concerns and in red zone of retirement.

Really, I don't think that you should be positioned to where you have the potential to lose any more than about 5 to 10% of your portfolio value or your net worth, or at least the dollars that are going to be responsible for generating income for you within the next five years or so and that's really how I try to set up the portfolios to time optimize it.

Even if we are maybe a more aggressive type of investor. Well, we don't want to be aggressive with all the money we want somebody that is safe and in absolutely liquid some bank money some money that is responsible for generating income.

If it were to have that need in the short term and then maybe we could be once we got those first two buckets in place more aggressive with the long-term growth money that were not planning on using for 10 years or more but but so ultraconservative conservative, moderate aggressive is willing to take on the risk of the market and then speculative is is really willing to accept even greater losses than the market. I don't have many of those kind of clients but anywhere in the spectrum of conservative to aggressive.

We try to match up portfolios that meet that individual client's acceptance of risk and then monitor them along the way to make sure that we are honed in on that and do at least an annual review of progress to continue to make sure that the portfolio allocations are in alignment with the risk tolerance, and if we've seen a couple jitters in the market.

If we seen some downturns we talk those through and say hey this is a reality of the market. It does happen, it has happened it will happen again. How comfortable are we with the reflection of those losses being shown in the portfolio you we were shooting for gains and growth. Here we we would like to see that happen consistently every year but that's just not a realistic expectation over time. We should see gains in growth because the market not only has always come back.

A has always surpassed previous highs. It it it has gone up over time.

Not every time right there are times when the market is down and we need to be prepared for those down times when we set up the initial allocation so so that it does not come as a shock and so that it does not disrupt the plan because during those downtimes. If we are properly positioned, we can actually take advantage of them. There are several ways we can take advantage of downturns in the market actually send that's would be made to the upside of risk is that you can take advantage of downturns in the market. Balance is also downsides to risk. Of course, and and I guess there's a bunch of ways to look at him at present two scenarios to you, and I think we both heard them both the markets going up, so conditions are good. It is good to keep going up or the markets going up member due for a downturn.

Both of those things can be true right absolutely I can be true.

Simultaneously, we can be enjoying the upswing, but we also again need to be aware and cognizant of the reality that the market will at some point turn around and and have a downturn and it will really overdo just we have not seen a regular kind of economic cycle in all in quite some time and and going back to a previous comment.

A lot of that has been due to the fact that the government and the Fed's new approach to economic volatility and speed bumps is to throw money at it.

I mean, you have during the midst of coven. They were sending checks to the mailbox of every American that was not only bipartisan lease supported which is a rarity but widely popular with the American public, and as a result, we bounced back from that cove it downturn in miraculous time.

So that's probably the new go to play in the playbook is oh economic troubles and and hardships throw throw money at it than just send money out to the American public.

But if you remember the last time around, the great recession. There was equal stimulus in the form of quantitative easing. There were several different rounds of quantitative easing, and there was stimulus thrown out except wasn't thrown out to the American public. It was thrown out to the banks and the financial institutions not so wildly popular, so it was a similar approach economic trouble, throw money at it and it dug us out of it. We recover from the great recession just like we recovered from coven, but they did alter the play a little bit then and pivoted from throwing money at the financial institutions to well how about we just send money out back to the American public.

The problem is that you know that money comes from somewhere and write data comes from a couple different places a they collected in taxes or be they created and more than 20% of the dollars that are currently in circulation have been created since the onset of cove which means that the dollars that were in existence before coven have been watered down in value by about 25%.

So seeing the 7% or 8% inflation that is advertised, and I worry that just based on the math of holding the value but increasing the dollar supply in circulation were really only seeing so far, maybe, maybe about half of the inflation that is rightfully do that that that we would expect to see when the money supply is increased like that.

So again, you know, I think that there are some answers that the government has come up with some approaches to economic headwinds and challenges but yeah there's there's an upside. There's a downside to everything including in our personal investments taking risk now. I mentioned there were a couple ways to take advantages of downturns one. Put more money in and you know investing in a downturn, as long as we don't stop our progress. Like if we got our paycheck that's taking care of our standard of living and we have been participating in a 401(k) I've heard some people say all the markets down on the stop contributions to my 401(k).

No don't do that, that's absolutely the worst thing that you can do. Keep contributing because you're buying some of the cheapest shares your bio over your lifetime. During that downturn rebalancing during a downturn is a fantastic opportunity to again kind of shift just the existing dollars that are in your portfolio, but take advantage of those lower prices and then we also have the opportunity for doing some tax damage control some tax planning. Proactively I'd rather have $100,000 in my my account but let's say that's a traditional tax-deferred IRA at some point time taxes are due on that. So if the market has taken a downturn in my hundred thousand becomes 80,000 or 75,000. Yes, of course, I'd rather have the hundred thousand but I'd rather pay tax on the 75,000 so half conversions are another great opportunity if you're properly positioned that you can take advantage of during market downturns. And everybody really should take the opportunity to really take a step back and reassess the risk tolerance that that the market has come a long way but but the market has changed and evolved economic conditions have changed and evolved in our own life situation changes and evolves over time, so we probably do not have the same risk tolerance that we had five years ago or 10 years ago.

Those have changed and we need to make sure that our plan reflects that Mr. Sean's the expert here, but if I could impart one thing to you speak to a financial advisor that's kind of the other summary of this whole thing because they are tuned dead, especially when times are hard or difficult or volatile.

It's easy to turn off the news. It's easy to cut it tuned out because it's hard to hear these things in somewhat of a professional financial advisor like Peter Sean is his job is to not to doubt its magnitude and even a little harder when when things are are volatile and only take risks you can afford to carefully examine your willingness work with a financial advisor and examine your ability to incur losses and maintain your lifestyle is your if your life that your money and you people to depend on you and it's just a wonderful thing to have someone in your quarter like Peter shot if you want him in your corner. Give him a call 919-300-5886 or go to his website www.richannaplanning.com Peter any final thoughts today as we wrap up well as we have gone through the first quarter of 2022. We've seen this volatility with talk to a number of new proactive savers, investors, those that are interested in in making sure their money is is working for them and we've done a lot of those optimized retirement plans. It's a great tool.

Ladies and gentlemen and and it's done for the appointment process through conversation, but it looks at a high level as you get your comprehensive plan looks at the income the investments the taxes healthcare legacy. Make sure all of those things plus the subcategories that fall underneath them are addressed that you know where you stand. You know what your approach to the various risks that we may face are really sheds a lot of light on your situation and that is a complementary service.

It's it's not an overly complicated thousand page binder. It's about 10 to 13 pages but it will really will shed a lot of light on your situation and make sure that your assets are aligned with or goals, your objectives, your risk tolerance and and what you expect your money to be doing for you in the future.

While, thanks so much for the good advice we all appreciate all the listeners appreciated as well. If you want to talk to Peter shot himself. 919300586 or go to www.richauntrichonplanning.com Rich on planning.com and up Peter, thanks much for your help. Always a pleasure Scott. We appreciate the conversation in the time. Think of your RV inherent in hosting the program lays Jim and look forward to speaking with you soon. Or hopefully tuned in again next week to more planning matters ready matters.

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