188 How Will A Bear Market Effect Your Retirement

Jason and Emilia discuss how a bear market will effect your retirement.

To learn more visit: CNBC.com– What’s a bear market and how long do they usually last

Below is the full transcript:

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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 and transition through retirement. Now, here is your host, Jason Parker.

Jason: America, welcome back to another round of Sound Retirement Radio. So glad to have you tuning in. It is my good fortune to have Emilia Bernal back in the studio with me this morning.

Emilia: Yes.

Jason: Emilia, welcome back.

Emilia: Thank you. It’s good to be back.

Jason: This is an important episode, number 188, talking about a bear market and how it may impact your retirement.

Emilia: Yes.

Jason: I think it’s important that we address this because of all the volatility that we’re experiencing out there, but before we do, there are two ways that we like to start the morning, right? The first one is by renewing our mind. I had the opportunity to visit Maui recently on vacation, which was amazing, and went to a service there right on the beach. The pastor reminded me of this verse, which it’s just very humbling, but here it is. This is 1 Corinthians 1:26-27. “Brothers and sisters, think of what you were when you were called. Not many of you were wise by human standards. Not many were influential. Not many were of noble birth. But God chose the foolish things of the world to shame the wise. God chose the weak things of the world to shame the strong.” Boy, that’s a good one.

Emilia: Very nice. Thank you. Now, to renewing your minds, I don’t know if this is renewing or making it worse. So, here’s our joke for today. What do you call a computer that sings?

Jason: Alexa?

Emilia: Close. A Dell.

Jason: A Dell.

Emilia: At least you laughed at it. I was having a rough time getting some people to laugh at that one today.

Jason: A Dell. Our listeners may not know who Adele is.

Emilia: The singer.

Jason: Yeah, I know.

Emilia: Oh, okay. I thought everybody would know.

Jason: Only because my daughter’s always sing-

Emilia: Oh, okay.

Jason: She got a karaoke machine for Christmas this year.

Emilia: Oh, that’s awesome.

Jason: Yeah.

Emilia: So, she’ll probably be singing a lot of Adele songs.

Jason: Probably.

Emilia: All right, Jason. Just jumping into our show for today, we’re talking about a bear market. What is a bear market, and how long do they last?

Jason: Technically, a bear market is a decline of 20% or more from market high. Just this morning, I was going through and I was like, “Boy, did we really hit the 20% mark?” It really depends on what index you’re looking at. As I measured it, it looks like we hit the peak of the NASDAQ on August 31, 2018. December 24th was the bottom, so far at least, and we were down 23.63% on the NASDAQ. That officially, I would say, is a bear market.

Jason: Now, the Dow Jones Industrial Average, I saw … and I may be wrong here, but as I looked at the numbers, it looked like the peak was October 3rd. The valley, the floor, the lowest point so far has been December 24th, and there was about 18.77% decline, so not quite that 20% that we would typically declare a bear market.

Jason: Then the S&P 500 Index, it looked to me like it had fallen 19.73%. We’ve got this extreme pessimism. We’ve gotten pretty close to a bear market on the two major indexes, the S&P 500 and the Dow Jones.

Emilia: Yeah.

Jason: We definitely hit it on the NASDAQ. It’s close enough, I guess, for … You know what they say. Close enough for horse shoes and hand grenades.

Emilia: Oh. Well, then, should people be worried about a bear market, then, Jason? Do you think that’s something they should be worried about, then?

Jason: Well, possibly. I mean, the second part of that first question was, how long do they last?

Emilia: Oh, yes.

Jason: There was a great article … and we’ll link to this into the show notes, but it says that since World War II, we have seen … Let me just share with you the highlights of this article. It said since World War II, the bear markets have lasted 13 months on average, and stock markets tend to lose 30.4% of their value. During those conditions, it usually takes an average of 22 months to recover, according to analysis by Goldman Sachs and CNBC. We’ll link to this article for people to look at it, but the good news is, and the important thing to remember as investors, is that this is normal. In fact, last year was abnormal where we saw the market go up every single month in 2017. In 2018, to see a little bit of the market say, “Well, wait a second. The market doesn’t go up forever. This isn’t normal,” I would actually say that’s a sign of a healthy market.

Jason: Now, one of the things that I think scared people a little bit was Treasury Secretary Steve Mnuchin, when he came out and said, “Yeah. I called 10 of the largest banks and wanted to make sure there was enough liquidity.” Now, I can understand that. That razzled people a little bit like, “Wait a second. Why is the treasury secretary calling the banks? Is there something we should know about that we don’t that we’re not thinking about?” I think that added a little bit of fear and panic to all of this. But what I would say is bear markets are normal. They happen. It’s just like the seasons. Winter comes every year, and bear markets come. The good news is it’s been 10 years since we’ve had a real winter, but winter’s here.

Jason: Now, the second part of your question was, should people be worried? It really depends on their specific situation. If they’re young, 30, 40 years old and they’ve got a long time horizon … Man, I would say when you hear words like pullback, correction, and bear market, those are like walking into Macy’s and seeing 50% off or 30% off or 20% off sales. It’s like, “Oh, man, things are less expensive.” An example of this, Warren Buffett has recently … He’s been adding to his stake in Apple. I looked at Apple, and Apple’s fallen more than 35% from its peak. So, things that used to be a lot more expensive are all of a sudden a lot more affordable. For young people, I would say, “Hey. Get after it. Don’t be sitting on the sidelines when things are on sale. That’s the time to be … definitely if you’ve been sitting on cash … maybe the time to be thinking about getting money invested.”

Jason: Remember, when you are an investor, you have to be an optimist. It means you have to believe that the future’s going to be better than the present. There’s a lot of people out there right now that are hammering on this drum that doom and gloom is on the way. The thing I’m reminded of about the seasons is that they come and go. The great thing about winter is that spring closely follows behind. Spring is one of my favorite times of the year, so I’m really not worried about this little blip.

Jason: Now, I think the people that are concerned … See, there were a lot of people that were investing, and they weren’t rebalancing their portfolio, and they’re right about to retire. They’ve got this big bucket of money, and now they’re seeing that thing drop by 20% or 30%, and they’re starting to wonder if they can retire. I think that’s where more of the volatility starts to scare people, and it’s probably a good time to re-evaluate and get a second opinion and-

Emilia: So, people that are just about to retire have seen these changes [crosstalk 00:07:20]

Jason: Those are the people that are probably a little bit more … They’re feeling this a little bit more because they just don’t want to get wiped out right at the time that they’re going to retire.

Emilia: Yeah. Going on, Jason, what is causing all of the volatility, do you think?

Jason: Well, again, we had a 10-year run-up in the market. There were a couple of things that fueled that, and the Federal Reserve has, at least in my lifetime … From an investing standpoint, they are just so on the headlines of which way the market’s going to move. There were two things primarily that they were responsible for when there was all this economic meltdown during the financial crisis, and that was purchasing assets. That was called quantitative easing. They were purchasing treasuries and mortgage-backed securities, and then they were also slashing interest rates all the way down to zero. Slashing interest rates made it really inexpensive for people to borrow money. It drove up asset prices. Especially I think the asset price that most individuals experienced was housing, the recovery that took place in housing. Then these asset purchases where they were buying the municipal bonds or buying the treasury bonds and the mortgage-backed securities.

Jason: The challenge that we’ve run into right now is that they’re doing the exact opposite of what they did during the financial crisis. Now they’re doing what’s called QT, quantitative tightening, where they’re not purchasing those assets anymore, and they’re raising interest rates at the same time. You’ve kind of got a double whammy from the Fed, and I think Steve Mnuchin … When the treasury secretary called the banks, I think what he was trying to just let everybody know is the reason that … or one of the things that we were concerned about in the financial crisis was not enough liquidity in the banks for them to be able to continue to lend, and so he’s just saying, “Look. Even though we’re not purchasing assets anymore and we’re increasing interest rates, the banks are still in a healthy position to be able to continue to lend.” That’s what he wanted to try to … I think is the point that he was trying to get across, but it just injected some fear into people’s minds like, “Well, wait a second. We didn’t even think that that could be potentially an issue.”

Jason: I think that’s driving a lot of the volatility, but, Emilia, if people have been listening to this show, they know that we’ve been talking about everything’s expensive right now. Stocks are expensive. Bonds are expensive. Housing is expensive. I mean, that’s just the world that we live in, and so to see a pullback, see a correction, see a bear market, that’s normal.

Emilia: Yeah.

Jason: So, I wouldn’t worry about it too much.

Emilia: Well, that’s good. I guess the next question that’s probably on everybody’s mind, then, is when should people consider making a change?

Jason: My friend and mentor, Dean, used to say, “The only people that like change is a baby with a wet diaper.”

Emilia: Very true.

Jason: Nobody likes change. The hard part is, see, when the market’s just going up and you’re having a year like 2017 and every month is positive, you say, “Well, why would I want to make a change now? Everything’s going so good. I’m just going to let it ride.” Then what happens is you have three bad months, like we just had, and people start saying, “Well, I don’t want to make a change now. I want to wait until things get back to where they were, and then I’ll make a change.”

Jason: The hard part about change is that we always have a way of talking ourselves out of it. The important thing to do, I think, is to have a plan, because what a plan does … It’s kind of like a lighthouse. It sits out on the edge of the beach and warns the ships as they’re coming in, right?

Emilia: Yeah.

Jason: It shines its bright light that says, “Hey. Be careful. You’re getting close to an object that could sink the ship.” Having a plan just helps you understand some of the different risks that you could face. There’s never a good time to change, but if your plan says that it’s time, if things have gotten out of wack, if your risk is too high, if you’re overexposed to certain asset classes or sectors, or you’re over weighted to stocks and you don’t have enough fixed income, or maybe you have too much fixed income and not enough stocks, or maybe you don’t have enough cash or safe money on the sidelines to weather a storm, you just need to make the change when the plan says that it’s appropriate. But then we don’t want to panic, either.

Jason: When we create a plan, what it does is we stress test against these different scenarios and say, “Okay. If this happens, how are we going to fare?” What that does for people is it just gives them more confidence. That’s the great thing about having a plan, especially as you’re making this transition into retirement.

Emilia: Yes, that’s great. Always having a plan in anything is pretty good. It makes you feel confident, and you know what you’re looking at and what to expect.

Jason: Just a lot more clarity, yep.

Emilia: Absolutely. Moving on, Jason, how do people protect what they have but grow at the same time?

Jason: Yeah. This is so important, and this really gets into people that are making this transition into retirement or people who have recently transitioned into retirement. Again, my friend Dean used to say … There was one time we were driving home from a speaking engagement, and I remember I was looking out the window. Dean was driving, and it was raining, kind of like the weather happening right now, and I was just looking at that rain hitting the windshield, and I was like, “Oh, man.” At the same time, as I’m thinking, looking at this rain, Dean says, “Look at how beautiful those trees are. Look how green they are.” I thought to myself, “Well, isn’t that interesting that we can both be looking out the same windshield and see something totally different. I’m focused on the rain. He’s focused on the green trees.”

Jason: I guess the question I would have as I think about that is, who’s right? I mean, we were both right.

Emilia: Yeah.

Jason: We both saw what was true. It’s just that one set of thinking isn’t very productive, because the rain is what it is. You can either focus on the bad, or you can focus on the good. When you are creating a plan, I think it’s important that you focus on the right thing, and the right thing to focus on is cash flow, because you don’t want to focus on your net worth. That’s wrong thinking when it comes to retirement. Retirement is an exercise in cash flow. It’s understanding that you need your income to match up with your assets.

Jason: So, the first thing you want to do to create a plan that gives you more confidence is just to have a really good understanding of what your cash flow needs are and where those different cash flows are coming from and how much you’re having to take out of a portfolio. Understanding cash flow is important. That’s the reason we created the Retirement Budget Calculator, retirementbudgetcalculator.com, to help people understand how much they spend so that we can really dial that piece in. But then, Emilia, what we want to do is we want to create a structure that helps people diversify their money across time. Time is the cure to the volatility of the stock market. The more time you have, the more risk you can afford to take.

Jason: Like that article I just shared a minute ago, we know that bear markets don’t last forever, that spring follows winter. We just want to make sure that we have enough safe money, enough cash set aside to cover the expenses that people are going to have in the short term. Then the more time we have before we have to access the money determines how much risk we can afford to take. It’s a really simple idea. It takes a little bit of work to set it up, but once you get it set up, then you’ve got a plan that you can follow. When you know that you’re pulling money out of accounts that aren’t falling in value, it just gives you a lot of confidence in what you’re doing.

Jason: Your question was, how do people protect what they have but still grow at the same time? Well, it’s just understanding that some of the money needs to be set aside in low-risk positions, cash and safe money, for the withdrawals that they’re going to be needing to make in the short term, and the money that we don’t need for 5, 7, 10 years, that’s where we can afford to take more risk with the money because we know that time is the cure to the volatility of the stock market.

Emilia: Yes. I like that you always repeat that, because it always puts me at peace, and I know that our clients that have these plans in place understand that-

Jason: Yeah.

Emilia: Yeah. That’s just what it’s all about, having that plan and knowing what to look for.

Jason: One of the hardest things that we will do as young investors … So, I’m talking to people in their 20s, 30s, and 40s … is to not get caught up in the panic of the headlines. The headlines are designed to create and elicit panic and fear.

Emilia: Very true.

Jason: You’ve got these red, flashing bars across your TV. You’ve got these guys that come on the radio with these very serious voices. Again, Emilia, for us, for you and I and for our listeners out there driving down the road in Seattle this morning, they need to remember if they’ve got a 25-year time horizon, this is not the time to be sitting on cash. Cash is really … It’s probably the one place you’re guaranteed to lose to inflation over a long period of time, because you might be earning 2% in a high-yield savings account today, but if inflation’s 2.5%, you’re losing purchasing power. At least with a business… like Warren Buffett. The majority of the stocks that he owns pay dividends.

Jason: For Apple, for example, you’ve got almost a 2% dividend yield on Apple, maybe a little bit less than 2%. You’re earning income from owning the stock, but plus you have the potential for capital appreciation. So, you have this asset that can grow. Why in the world would you ever want to have a whole lot of money sitting in cash, not doing anything for you, losing purchasing power? I’ll tell you the reason that you do it is because you allow fear to dictate your decisions. I think there’s a lot of people out there that are going to not be able to retire comfortably because they’re-

Emilia: Fear.

Jason: … because they let these headlines rule their lives. That’s why the work that we’re doing is so important. We need to get people focused on the right things. If you’re getting close to retirement, the right thing to focus on is cash flow. If you’re 20, 30, 40 years old, the right thing to focus on is time. Get your money out of those safe positions. Of course, you need to have some money safe, three to six months cash to weather a short-term financial crunch. If you lose your job or have a health event or something, you want to have enough cash on hand to weather those small storms. Part of that, too, is understanding your risk profile. Not everybody should be as aggressive an investor as I am. I’m pretty aggressive because I’m comfortable with time, and I’m comfortable understanding that there really isn’t a lot of risk if I have 25 years to work with, but-

Emilia: That’s good. Yeah.

Jason: That’s the way I look at it, at least.

Emilia: Thank you, Jason. Do we have time for one more question?

Jason: Yeah, let’s do it.

Emilia: All right. How about investing in a turbulent market, and how should people position themselves when doing that?

Jason: Yeah. There’s two ways that we teach people that I think are intelligent ways to invest. One is what I call strategic asset allocation, and the other one is what I call tactical investment money management. Strategic asset allocation is built on the foundation of things like modern portfolio theory and efficient market hypothesis. Both of those ideas have won the Nobel Prize in economics. Essentially, what they say … They’re closely related to one another, but strategic asset allocation, modern portfolio theory, efficient market hypothesis, says that the market’s efficient, that nobody has any information quicker than anybody else, and that nobody’s going to be a better stock picker than anybody else. Instead of trying to outguess the market, what you do is you create a broadly diversified portfolio, globally diversified across asset classes and sectors. You use low-cost index funds to create that asset allocation, and then you rebalance the portfolios necessary to maintain that asset allocation.

Jason: There’s a lot of different theories out there about how often you should rebalance. Because most of the people we serve are retired or getting ready to retire, we probably rebalance more frequently than the younger folks should because they want to allow their assets to run, whereas we’re trying to keep that asset allocation pretty tight and keep the volatility down. That’s what I call strategic asset allocation, and people can research. They can learn more about that. They could just go to Google and type in modern portfolio theory. They can type in efficient market hypothesis. The crazy thing about the world that we live in right now, Emilia, is for everybody that says that that’s a wise way to invest your money, you’ve got an equal number of people out there that say that’s insanity and that you shouldn’t invest that way. I believe that those people are right. I think that there are definitely inefficiencies created through indexing, which is what modern portfolio theory and efficient market hypothesis point to.

Jason: The opposite side of strategic asset allocation is what I call tactical money management. If strategic asset allocation is the science of investing, tactical money management is the art of investing. We’ve got the art and science of investing. The art of investing says there are times when it’s going to make more sense to move to cash to try to protect your portfolio from downside risk than to just ride it all the way down and ride it all the way back up again. Now, who needs to be worried about that? Obviously, not somebody that’s 20 or 30 years old. They’ve got a long time horizon before they plan on touching those assets, but somebody that’s in retirement, they may want to have a tactical piece because they don’t want to have to ride the market all the way down and then wait for however long that recovery could be to get back to even.

Jason: There’s trade-offs. First of all, tactical money management, even though we can look back historically and say, “Well, that looks pretty good in the past,” there’s no guarantee that it’s going to work again in the future. The other thing is that there’s a premium that you pay. You pay higher fees and potentially higher taxes as a result of having the tactical piece because it’s active money management. It means that there are times when we’re going to sell and we’re going to move to cash to try to protect a portfolio. So, you’ve got additional fees as a result of that additional management. But some people, if their time horizon isn’t as long, they just want to know that they have some kind of emergency brake or safety brake built into that overall plan.

Jason: Today, I like to tell people, Emilia, I’d rather be right 50% of the time than wrong 100% of the time. Yeah. Let me say that again because I don’t know that a lot of our listeners are going to catch that. I’d rather be right 50% of the time than wrong 100% of the time. You can make your argument for and against strategic asset allocation, and you can make your argument for and against tactical money management. Right now, what we’re recommending is that we consider using, depending on people’s risk tolerance and what they’re comfortable with, somewhere between 70% strategic and 30% tactical, or if they’re really conservative, maybe we’re going like 60% tactical and 40% strategic, but just getting those allocations right so that people are going to be comfortable, because here’s the mistake we want them to avoid. We don’t want people to move because of fear. We don’t want them to just exit and move to cash, and that’s exactly what people are doing right now.

Emilia: It’s emotional.

Jason: They’re looking at what could be a potential slowdown in growth, so they’re making emotional decisions based on what they see on the headlines. I’m just reminded that the market does not go down forever, and the market does not go up forever. The important thing to focus on if you’re getting ready to retire is cash flow, and you need to make sure your cash flow matches with your expenses. All these budget calculators out there. In my opinion, all of them are inferior to the Retirement Budget Calculator because it was designed based on my 10,000 hours of experience working with people, all of the different things they need to be thinking about from a cash flow standpoint. So, I really encourage people if they’re getting ready to retire to dial in the spending piece. Practice retirement. You only need $8,000 a month of income. Try living on that and make sure that you can actually do it before you pull the trigger.

Emilia: Great tool. Thanks. Yeah.

Jason: Absolutely. Then the last thing I wanted to say, Emilia, sometimes you can hear these words, and it’s hard for people to wrap their mind around understanding how this all works. How do you put all the pieces together? I’m reminded … I had a chance to spend some time with some people, some friends of mine that are really close to me that are great business people, but we were talking about businesses, and we were talking about investing. Sometimes where I spend my time and energy, what I think is just common knowledge … I come to realize that a lot of people don’t have what I consider to be common knowledge. So, for some people, it’s one thing to hear it. It’s another thing to read it, but if they can see it and they can understand what a good plan should look like and how it should work, then that’s where they … A lot of the times, the light bulb comes on for them.

Jason: We have a webinar that we’re going to be doing in January, and so if people out there have not had a chance to visit one of these webinars and get a clear understanding of what having a good plan means, I’d encourage them to do that. But, Emilia, I realize once again we are out of time. 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 online at soundretirementplanning.com.

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