Jason and Emilia discuss the next stock market correction.
Below is the full transcript:
Announcer: Welcome back America to Sound Retirement Radio where we bring you concepts, ideas and strategies designed to help you achieve clarity, confidence and freedom as you prepare for any transition through retirement. Now here’s your host, Jason Parker.
Jason: America. I guess that’s my cue, I got to start paying attention. Stop looking at my phone. Welcome back to another round of Sound Retirement Radio. You’re listening to episode 177. It’s my good fortune to have Emilia Bernal back on the program with us. Emilia welcome back.
Emilia: Hello everybody.
Jason: Episode 177 is titled The Next Market Correction. So we want to talk about some of the concerns and fears that people have because I had a speaking engagement last night and at the beginning I always liked to ask people in the room what are some of the concerns they have, what are some of the things they’re thinking about and this was one of the topics that came up so I thought we should address this with a larger audience and talk about market corrections.
Emilia: Great. So did you want to get started like we usually do?
Jason: I’m all confused.
Emilia: I’ll lead the way Jason, I’ve got you.
Jason: I do have a verse for us again this morning. I should probably let our listeners know I’ve quit drinking coffee. Three weeks now, I’m at three week three and still I just don’t feel like I’m operating at the same level. But I am sleeping a lot better, that’s kind of nice.
Emilia: Well that’s good news.
Jason: Okay. So we like to start the morning right by renewing our mind and then also having a little bit of fun but to renew our mind I’ve got a verse here for us from Isaiah 12:2. It says “Surely God is my salvation. I will trust and not be afraid. The Lord, the Lord himself is my strength and my defense. He has become my salvation.” I thought that was just really appropriate since we’re going to be talking about market corrections and fear that can come along with market corrections and how we want to try to respond and prepare for bad things that could happen.
Emilia: That’s great. And I’m next and my joke has nothing to do with market correction. I just thought maybe we’d get a little laugh in there. I thought it was funny. But here we go. What happens to a frog’s car when it breaks down?
Jason: I have no idea.
Emilia: It gets toad away.
Jason: Toad. Nice one Emilia.
Emilia: Yes. Thank you. Thank you. I worked hard on that one. All right. So let’s just get into everything. So why is there all of this talk about a market correction?
Jason: Well I think the big news is we’re coming up on I think it’s August 28 will be, if we make it to August 20th we will officially be in the longest bull market in the history of the stock market. And so that’s significant. And people have been around long enough to know that the markets don’t always go up, usually by now we would have seen a correction take place. But the market’s just chugging along so I think that’s the number one concern, a driver that concerns people. The other one though is I hear from a lot of people today they’re worried about Washington D.C. and some of the steps that we’re taking, the leadership has taken in our country. Things like tariffs and trade wars and potential North Korea and Russia and just there’s always going to be bad news out there but it just seems like we’re hearing people bring those concerns to us. And I think they’re legitimate. I mean the economy obviously moves on a lot of different … There’s a lot of different spinning plates. There are a lot of different things that can move the economy and certainly a political shock or geopolitical shock could be one that could drive us into recession. Things like Turkey and strengthening dollar. I mean there’s just a lot of different variables out there right now I think people are concerned with.
Emilia: Very important. And so Jason should people be concerned about a market correction though?
Jason: Well I think so, yeah. Well for some people. If you’re young, 25 years old and you’ve got a long time before retirement they don’t need to be concerned about that all, they just need to keep dumping money, saving as much as they can, investing as much as they can. And I would even argue that they should be investing pretty aggressively. In the young phases of your accumulation life you don’t want to be thinking about being a conservative investor that just isn’t going to serve you well in the long run. You should really probably be more on the aggressive side just because you have so much time on your side. But the people that really need to be concerned about this are the people that are just getting either ready to retire or they’ve recently retired because for a lot of people today Emilia they’re gonna have to use their retirement savings to supplement their income. And so if they’re supplementing their income, taking money out of an account that’s also falling in value that’s kind of like your worst case scenario is to be pulling money out of an account right at the time the market’s getting wobbly.
So I would say yeah for those folks maybe they’ve been investing very aggressively, they’ve really benefited from the last 10 years, nine years of this bull market that we’ve been in. And maybe it’s time to start considering taking some alternative steps, maybe starting to de-risk that portfolio especially if they’re approaching retirement.
Emilia: Great. And so what are some of the positive and negatives in the economy right now that you can talk about?
Jason: Yeah well a big one is interest rates are on the way up and that’s a good sign because what it says is the Federal Reserve is looking at all these different economic indicators and saying “Boy the market looks like it’s heating up.” Of course they’ve been trying to get inflation. And we saw the most recent in July inflation came in I think it was 2.9% which is some of the highest inflation readings we’ve seen since February. And so inflation’s on the way up. The Fed’s increasing interest rates. We’ve got unemployment at all-time lows. We just had these massive corporate tax cuts take place which means that a lot of companies are going to have a lot more capital to work with, 20 percent more income to work with. So that could mean more share buybacks. It could mean higher dividends. That’s typically what we’ve seen, it could mean even more research and development, more innovation, more jobs being created. I mean companies sitting on cash is usually not a very efficient use of that money especially when 10 year Treasury bonds are paying less than 3%. That money’s just not working for them and so of course companies have that a good cash cushion is a good thing. So those are some of the good things that are happening in the economy right now.
Emilia: And are there any negatives?
Jason: Well the negatives are things like the tariffs, the trade wars, our president has a way of speaking very boldly and sometimes I think that’s a good thing because I think we need bold leadership. People just want him to say it the way that it is. Sometimes I feel like he could be reeled in a little bit. The talk can be pretty aggressive and really scary for a lot of folks. And so I think he’s gotten better especially with the Twitter account. So you look at the geopolitical risks and that’s a real concern for people. And then you look at things like emerging markets are starting to get wobbly, we’ve seen a lot of volatility in emerging markets just in the last six months. And so the reality is the market doesn’t go up forever. It ebbs and flows and that’s a good thing. We get compensated for the risk that we’re willing to take. But there’s just stuff happening right now that make people a little bit concerned. Rising interest rates puts pressure on bonds. Rising interest rates puts pressure on all kinds of income invest investments whether it’s dividend stocks or real estate investment trusts or limited partnerships or bank CDs will benefit. We’re starting to see banks CDs and fix deferred annuities offering better fixed interest rates.
But there’s certainly risk. There’s always risks. I mean if we lived in a world without risks how dull and boring would that be. My son is reading The Giver before school starts, it’s their summer reading project. And he was describing for me in The Giver how everybody that lives in that society there’s no pain, there’s no risk. Everything’s bland. Everybody wears the same things and rides the same kind of bikes and assigned specific jobs. And of course that’s not the kind of world that we want to live in. I heard somebody once say “Look we can help you to be safe and live to 100. We’ll put you in a corner, give you a blanket, three meals a day and boy life will be really safe but you won’t experience life at all.” And so that’s not what we want for people. We want a life of adventure. We want a life of excitement, a life of living fully, of purpose. And you don’t get that by cowering in a corner.
Emilia: That’s great. Yeah. And so I want to take just a quick minute because I know you’ve always talked about, we’re talking about the market but the basis of a lot of the things you talk about is budget right. And knowing where your money is going and so we had the Retirement Budget Calculator just for those types of things. So that can help when you’re looking for-
Jason: It’s the most important part. I mean there’s a reason everybody, everybody regardless of how much money they’ve saved or have not saved they need to understand their spending. Even if all they’re going to have is their social security income in retirement they need to understand what their spending is. It’s the most important part of the entire equation. I found that there wasn’t a really good calculator out there that did that for people and so I invented the Retirement Budget Calculator. It’s software as a service, it lives in the cloud. It’s a fee to have access to it, $54. But for our listeners if they use the coupon code PODCAST when they sign up they can get 50% off. And plus I would love to hear from them. Our calculator is unique in that allows people to start and stop expenses. So if you have a mortgage you’ll be paid off. You can see that. It counts for inflation. So if there’s going to be inflation in the future you can sign a different inflation factor to each of your different expenses so you can see how that will change. Like I say it was just a calculator that was designed for people getting ready to retire so they can really understand what their spending is, how that’s going to change over time. You’re right. It’s the most important part. retirementbudgetcalculator.com is where they can find it.
Emilia: That’s great. It can also help you plan for all those fun things that you want to experience too.
Jason: Yeah but that brings up a good point when we talk about budgeting. The reason that there’s this fear about a market correction. The real reason and this was brought up at that speaking engagement last night is a woman said, she raised her hand and she said “How can we make sure that our money is going to last as long as we do?” And the real concern people have is when you’re retired those assets, that money you’ve saved, that’s really the purpose of it for most people, it’s income, it’s cash flow, it’s making sure that they don’t ever have to go back to work or that they don’t have to become dependent on their kids or family or friends or whatever the case may be and so. And that’s why I believe that concern exists with people because if we didn’t have to worry about ever needing the resources and we serve a lot of people like this too where they have really good pension income, really good social security, their guaranteed incomes greater than their expenses. Well they do take a lot more risk with their investments typically and they don’t worry about what’s happening with the stock market because they know that their basic monthly needs are being met. And that’s really what this all boils down to.
Emilia: So when is the best time to consider de-risking an investment portfolio?
Jason: Well let me just say there’s never a good time and the reason for that is when the stock market’s going up and you’re making money hand over fist you don’t want to make any changes because you say “Why would I make a change now? Everything’s going up.” And then the flipside is when the market’s going down and you’ve lost money you say “I don’t want to make changes now. I want to wait for it to get back to where it was and then I’ll make a change.” So the reality is there’s never a good time. You should not let the market determine the amount of risk you’re taking in the portfolio, your retirement plans should dictate that. And the key is we just don’t want people to be taking risk with the money that they’re going to have to be withdrawing from their portfolio in the short term.
One of the things that I’m always trying to teach people and this is different than the accumulation phase of life. But in the de-accumulation and the distribution phase of life time is the cure to the volatility of the stock market. The more time you have, the more risk you can afford to take. So diversification becomes a two-step process. First you diversify your time horizon based on when you’re going to need the money. And you create different segments of money so money you need immediately you don’t want to take any risk with that. I mean we’re talking savings accounts or laddering CDs, something where there’s absolutely no risk to your principal for the initial money that you’re going to be withdrawing. And then let’s say you have a bucket that’s at five years out where you can afford to try to earn a better interest rate, well you still may not want to take risk with that money because the market’s going to be down for long periods of time.
But typically if we can have maybe three to five years in cash and then have that next bucket five years out where we can try to earn a better rate of return and then we just keep doing that with the money based on when we’re going to need to withdraw it again. This whole retirement thing is an exercise in cash flow, it’s an exercise in pulling money out of the accounts. It’s different than the accumulation phase of people’s lives and that’s why it’s so important and it’s why people are concerned about the risks that we’re seeing today.
Emilia: Yeah and I think you’ve already touched on all of that on my next question was why are people concerned about a market correction but it’s because this is a time in their life when these changes are going to take place and like you said it’s bound to happen right?
Jason: People got caught up in this before the 2008 financial crisis hit. It caught everybody by surprise. It really blindsided people. Just most people weren’t expecting it. And unfortunately what it meant is that some people ended up not retiring when they were planning on it because they saw their investment portfolio in some cases cut in half. And so then they said ‘Well let’s work a little bit longer.”
So for a lot of those people now not only have they recovered everything that they lost during the financial crisis but now they’re even well ahead of that and I mean just the folks I met with earlier this morning what they said to me was they said “Jason we’re happy with what we’ve got. If we could earn a couple of points above inflation and just not worry about having to lose most of what we’ve accumulated.” At this phase of their life that was the most important thing to them. And it’s okay that that’s not the most important thing for everybody because again if you’re young and you’re 20 years old you shouldn’t be worried about losing money. You’ve got your income, your job which is your greatest asset. But once you’re turning that corner towards retirement you really want to make sure that you’ve got a plan and that the plan is solving for cash flow, it’s solving for income and that you’re taking the appropriate amount of risk based on when you need the assets. It seems really simple to me. I don’t know why the whole industry doesn’t do this. I don’t know why everybody doesn’t create a plan this way really, it’s very, it’s just illogical to me.
Emilia: Yeah. It does. It seems that way. So how can people have more confidence as they approach retirement?
Jason: Yes. So retirement is not a investment strategy. Now of course an investment strategy is going to be part of the retirement plan. But I think what so many people focus on and it comes back to this whole greed and fear thing. Everybody’s interested in making money. They want to make as much as possible. And you really need to step back and be able to ask yourself “What’s the purpose of this money? Why have I accumulated it? What are we going to do with it?” And then not only what’s the purpose of the money but how are you going to spend your time I think would be a good question for people to ask and who are you going to spend your time with. So we want to know what’s the purpose of the money, how are you going to spend your time and who you’re going to spend your time with. If you start going through this exercise of developing what I would call a purpose statement for retirement it’s going to make it really that much easier for us to create a plan based on those values instead of trying to beat some index or beat some specific rate of return. Or instead of a retirement plan based on what you want, let’s create a plan on what needs to happen not what you want to have happen.
And I think it’s prudent to say that if we hope for the best but plan for the worst. Let’s hope for the best. Let’s create a structure that’s going to give you the most upside potential but also create a plan that protects you as much as possible from the downside. I was thinking about this the other night actually Emilia as we were doing this speaking engagement. There was this really beautiful setting and there’s a little marina and I sold my boat a couple of years ago so I don’t have a boat anymore and it’s been on my list to buy another one.
Emilia: Bucket list, remember.
Jason: Yeah. So this friend of mine he just bought a 24 foot Bayliner and he and his family have been going out on this thing just about every weekend and he’s got a little cabin too so they’ve been camping and going to different islands here in the Puget Sound. I mean to live in the Puget Sound region and not have a boat almost seems like sinful.
Emilia: I think you need another boat.
Jason: Anyway, so I was walking around the marina and as I was walking and looking at the different boats there one of them was this probably like 35 foot cruiser. Looks like people go out on these long trips around the Puget Sound and the name of the boat written across the bow was bucket list. And I thought to myself “How cool is that” And I was thinking about the work that we do and part of the work we do is to help people capture opportunities and to live their best life. And so for those people having that boat was obviously part of their bucket list and so I was excited about that. As I was walking back off the marina I had a glass of water in my hand. And as I was starting to walk up the ramp my foot slipped, it’s like somebody had spilled fish guts or something on this thing and my foot slipped and I fell to one side and my elbow went right into this metal railing, hit me right in the funny bone. And the first thing I thought of was “Huh. That’s the other part of our job is to help people mitigate risks.”
And boy when something like that happens it happens very unexpectedly, it happens very fast and you don’t have time to prepare for it and plan for it once you’re your foot has hit the fish guts, you’re just in fall mode. And it hurts. And so we want to try to give people the most opportunity, live those dreams, know what the purpose is. Know who they’re going to spend their time and their money with because ultimately you can have all the money in the world and if you’re not really intentional about the relationships the money doesn’t mean anything. So if you’re not intentional about maintaining your health the money doesn’t mean anything. So we want to make sure that people have their priorities right as their adventuring into this.
But having a good plan means understanding cash flow, it means making conservative assumptions, it means you have to plan for inflation. It means that you have to look at things like Social Security and pensions. Make sure you’re optimizing those, maximizing that income. It means of course that we need to take the appropriate amount of risk to try to earn the highest rate of return with the money that we don’t need for the longest period of time. But that we also need to have some money diversified towards a more secure position so that we know that cash flow is going to be there for us when we need it. It means that we need to understand what happens when one spouse dies, is the pension going to go away, what’s going to happen to Social Security. It means we need to be thinking about long term care, how to handle those risks and costs. Should you have insurance, should you not have insurance. It means that we need to be thinking about inflation and what’s the best way to battle inflation because again it comes back to cash flow.
And then of course we need to be thinking about sequence of return risk. And that’s what our planning process is designed to do, it’s designed to help people understand all of these different pieces that go into a good retirement plan. And Emilia one of the things I’ve found is that a lot of people are very sophisticated and many of the people we serve have these really amazing spreadsheets that they’ve created but they know that this is one of the biggest financial, if not the biggest financial decision of their entire life. And so they just want somebody to come alongside them and say “Hey, can you look over my shoulder, maybe give me a second opinion? Just make sure that I’m not missing something here.”
Emilia: Or say watch out for the fish guts right there.
Jason: Yeah, watch out for the fish guts. And that’s the work that we do. And we have a webinar coming up that people can sign up for at Sound Retirement Planning. And at our firm we’re structured in a way where if people just want to pay a fee to have somebody help create a plan for them we can help them in that way. And a lot of people in our industry don’t want to work that way because they only want to manage investments for folks. Now we are structured as an investment advisory firm so we also manage investments for people. So many times people will say “Hey Jason this plan looks great. Our vision of retirement is not sitting around managing our investments, we actually want somebody to help us do that.” And so we can do that for folks that would like some assistance.
And then the other piece to it is risk mitigation. It’s making sure you have the right insurance in place to protect you if something bad happens. If your house burns down most people fire insurance, if they get into a car accident most people have car insurance. Long term care is one of those issues where I think Medicare said that 70% of couples who turn age 65 will end up needing some assistance before they die. That’s a really high probability. Unfortunately most people don’t have insurance for that. And so not everybody needs it but everybody needs to be thinking about it and planning for it and saying “OK how are we going to handle this when we get there?”
Emilia: Very important stuff there. And so again just to help you with the beginning of planning and just if you want to get started looking at where you are, where your money is going. Take a look at retirementbudgetcalculator.com.
Jason: It’s the number one first, probably the most important piece.
Jason: Emilia I can’t overemphasize this. So many people come into our office and they can tell me down to the penny how much money are in those investment accounts. And I ask them how much do you spend every month. And it’s just high income people they focus on the wrong thing. Well that’s not the wrong thing, accumulating money is the fun part of retirement planning. Nobody wants to do the hard work of understanding the spending piece and it’s the most important piece and everybody has to do it.
Emilia: Yeah, were there any other questions from our event that came up that you think are important for our listeners to kind of think about as well as the market and the corrections are coming up possibly?
Jason: Yes, one the things that I think stood out last night was taxes. People are concerned about taxes. We’ve been doing a lot of analysis of tax returns to compare 2017 versus 2018. Of course in a rising interest rate environment that’s going to put pressure especially on those high end homes, those million dollar homes. And Congress changed the rules and said that now you can only write off interest on mortgages up to $750000, it used to be a million dollars. So there’s some forces I think coming against housing right now that have people concerned because housing has been doing so well. That was a concern that was brought up last night.
A lot of times people will ask us questions about different financial tools. They want to know about annuities or mutual funds or ETFs or stocks or bonds or bond mutual funds and those are all just financial tools. The plan comes first and then the financial tools. And unfortunately what I’ve experienced is most people have the financial tools but they don’t have the plan. And that’s the piece that’s missing. With that Emilia we’re out of time. Until next week, thank you for being here.
Emilia: Thank you.
Announcer: Information and opinions expressed here are believed to be accurate and complete. For general information only and should not be construed as specific tax, legal or financial advice for any individual and does not constitute a solicitation for any securities or insurance products. Please consult with your financial professional before taking action on anything discussed in this program. Parker Financial, its representatives or its affiliates have no liability for investment decisions or other actions taken or made by you based on the information provided in this program. All insurance related discussions are subject to the claims paying ability of the company. Investing involves risk. Jason Parker is the president of Parker Financial, an independent fee based wealth management firm located at 9057 Washington Avenue Northwest, Silverdale Washington. For additional information call 1-800-514-5046 or visit us on line at soundretirementplanning.com.