PODCAST EPISODE 187: The Market Crashed, Now What? (Time Machine Episode)

EPISODE SUMMARY

Hop in the time machine with Paul and Cory to discover some principles and disciplines that are essential for an economy that has crashed or is volatile. Paul had recorded this episode a few years ago and yet, every point is still true to this day because every point is a foundation for holding strong through tumultuous markets.

WHAT WAS COVERED

  • 00:00 – Show starts.
  • 00:33 – Cory welcomes and sets up the show.
  • 02:20 – Paul intros episode.
  • 03:12 – How to connect with Sound Financial Group.
  • 04:44 – the problem with market-timing.
  • 08:06 – crash reviews.
  • 12:37– Should I have stayed in the market, even after a crash?
  • 13:02 – Set and hold strategy!
  • 13:52 – Black Monday! What would have happened to your money if you held with your strategy?
  • 15:58 – Tragedy does a great job of keeping our attention.
  • 20:34 – Don’t take blind risk.
  • 22:06 – overcoming market forces
  • 22:54 – Show ends, Thank you for listening.

TWEETABLES

LINKS

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Sound Financial Group on LinkedIn

Paul Adams on LinkedIn

Cory Shepherd on LinkedIn

Cape Not Required (Cory’s Book)

Sound Financial Advice (Paul’s Book)

Clockwork: Design Your Business to Run Itself

Mike Michalowicz’s Book – Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine

Loserthink: How Untrained Brains Are Ruining America

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MUSIC CREDITS

Contains a sample of “King” by Zayde Wølf courtesy of Lyric House.

Full Episode Transcription


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paul 0:01

Welcome to your business your wealth. We’re your hosts, Paul Adams and Corey Shepard teach founders and entrepreneurs how to build wealth beyond their business balance sheets.


Unknown Speaker 0:34

Your Business your wealth. I’m Corey Sheppard, president of sound Financial Group and co host of this podcast along with Paul Adams. And we’re doing something a little bit different today. Now we’ve been going through a series on asset class investing and we’ve gotten a lot of feedback on that great feedback. We’re going to continue it. In a couple of weeks you’ll be able to tune back in for our episode on life insurance as a volatility buffer.


Cory 1:00

But today, we want us to do something a little bit special because, you know, we see a lot of turbulence out there in the economy uncertainty in our society. And some folks might think, an unprecedented level of uncertainty in the stock market right now. And we’ve seen that nearly V shaped movements in the COVID environment. And so a lot of folks have a lot of questions about what to do when the market makes those big jumps like that. So we thought the best way to help is actually to pull out our time machine. So we’re going back to episode eight of your business your wealth, which we recorded about three years ago, she Paul recorded this one on his own before we had video, so it is an audio only episode. But what you’ll find amazing is that it’ll seem like Paul from three years ago, took a time machine forward to today looked around and recorded an episode this week. That’s how cyclical these different movements are in the market and how there’s very few things that we haven’t actually seen.


Unknown Speaker 2:00

Before and the grounding principles of our work in investing stay the same no matter what craziness the market market does. So, enjoy this trip down memory lane or blast from the past or look into the future, whichever one you want to want to call it. And we’ll be back in a couple of weeks with our asset class investing series. Today’s topic is going to be on the subject of the market crashed. Now what you may be listening this podcast where the market turned down tremendously yesterday or it’s been on a tear upward for 10% in the last month. This is going to be one of those podcasts you’re going to want to go back and listen to on a consistent ongoing basis to help you hold learn and understand investment discipline when the rest of the world is getting undisciplined. Everybody gets on disciplined both in times of market, the markets climbing during bull markets and they get undisciplined when


Unknown Speaker 3:00

bear markets, heck people get on disciplined when it’s level. So we’re going to come back to that that’s gonna be the topic today. You know, if you’ve not already had a chance to engage with one of our advisors, I cannot encourage you enough to just email info@sfgw.com and spend 30 minutes on the phone with one of our advisors. We work with clients all over the country. Our purpose is to help educate you to make solid financial decisions using that educational and coaching based platform. So that all we need to ask you to do is intellectually engage and learn in that process. You can also get to our website@www.fg W. com, download videos, white papers, articles, get the first three chapters of my book for free, or go online to Amazon and have it ordered before we’re done with this podcast. And we look forward to maybe even having you engage with us at one of our live client educational events that we do throughout the year. The schedule is up on the website.


Unknown Speaker 4:00

Now to our matter at hand today, this idea of man, if we put money in the market, the market goes up. And now what do I do? Because the market is going to do well, sometimes sometimes it’s not going to do well. And I need to get ahead of it, I need my money to get a good rate of return. In our last podcast, we talked about this idea that savings is going to be the key to building wealth, it’ll be more important than ready to return. And yet we need to be disciplined in our investing so that we don’t lose the rate of return that we’re building. So one of my favorites is a quote by Benjamin Graham is that investors who have either the enterprise or the money to invest now somewhere near the bottom, are likely to prevail over those who wait for the bottom and miss it. And what that really speaks to is this idea of market timing that we feel like we can put our money in and out of the market in a way that will give us the ability to miss all the downturns. In fact, a great deal of economic and psychological research shows people


Unknown Speaker 5:00

would much rather work to avoid a loss than a producer gain. So these market downturns can really get on peoples nerves in a way that causes them to make bad decisions elsewhere in their life. You see, since 1928, there’s been 87, market drops of 10% or more, and 23, market drops of 20% or more. But since 1946, it’s taken the market just 111 days on average, to rise back to its pre crash levels, meaning that in less than half a year, in like five months, four months, like it doesn’t take that long for the market to get back to where it was. But people try to get in and out to avoid that feeling and in fact, may actually hurt themselves.


Unknown Speaker 5:56

But it is the volatility that causes


Unknown Speaker 6:00

us to get a better rate of return. Let me give you an example. If you wanted to put money in CDs at a bank, you’re going to get in today’s interest rate environment, you’re going to get a pretty miserable overall rate of return on CDs at a bank, you may be like 2% a year. Now think about that, you’re going to give you 2% a year, but that is the rate of return that you get. If what you you would need from the bank is a very smooth and up into the right curve on your money, meaning I don’t want to take any risk. I never want to dip in the money I just wanted to consistently go up every year that is, in a sense, what we would point to in a tool that you experience when you walk into your bank


Unknown Speaker 6:42

is cd 2% rate of return no risk, or very little risk.


Unknown Speaker 6:48

versus when we put money in the market, the market goes up and down. Because it’s it’s opinion base. There’s money that is going in and out of the market in and out of the individual stocks that you’re invested in.


Unknown Speaker 7:00

And the volatility causes our money to go up and down now, but it’s also the volatility that gives us rate of return. You see, if the stock market could somehow be magically smoothed, it would not pay anything more than the risk free rate of return we could get elsewhere, there would be no risk premium. It’s because stock holders choose to get this what’s called risk premium, meaning I take a little bit of risk, and you give me a better rate of return over time. That is what causes us to get a better rate of return over time in the stock market. We are willing to risk so every time you see volatility, it’s very easy to be upset about it. But the other thing to think about and this is what I do and we teach our clients to do is simply realize that it is that volatility, it’s that uncertainty, that gives us the better rate of return over time. That uncertainty is the thing providing the solution. It’s not the problem. It’s just


Unknown Speaker 8:00

We have to stay disciplined and effective in our strategy over time. Okay. So what we’re going to do is we’re going to kind of look at what the markets done in the past, we’re going to look at some crashes going back, starting at 2007. Working ourselves back to the early 19 hundred’s and seeing what happened, looking at the s&p 500, which is a great index for think about what the US markets have done. And it’s the one that’s most visceral to most people who may be on this call. Now, our portfolios are structured passive portfolios. And what we’re doing with our portfolios are much better allocated than the s&p 500. We have about 12,000 different securities in them. They’re managed in a way that has them deployed across 42 different countries. So we’re really trying to be allocated in a way that gives us the experience of the market overall, not even just the US market, but the DOM markets performance. So the crash


Unknown Speaker 9:00

That happened between November 2007 in February 2009 took 16 months to happen. And the total SMP return from that period of time was negative 50%. There were covers of magazines in 2008 with like the old superlines from the Great Depression saying this is it we have quotes like mounting fears shake world markets, as banking giants rush to raise capital. It’s Wall Street Journal 2008


Unknown Speaker 9:29

new phase of financial crisis was on the cover of The New York Times in September 2008. And yet, if you were at the bottom, okay of the finishing of that drop, and you just stayed in the market from February 2009, just the s&p 500


Unknown Speaker 9:50

and then wrote it back up


Unknown Speaker 9:54

to the end of tooth middle of 2013


Unknown Speaker 10:00

You would have had a rate of return that had 2.8 times 280% growth in that portfolio. In fact, if you just use the simulated portfolio, there would be 7030 allocated 30% fixed income 70% all indexes, that portfolio would be up even as much at 2.5%, meaning 250% growth.


Unknown Speaker 10:25

So we would have as long as we were in, we’d be okay. Now, just that same simulated portfolio 7030 portfolio


Unknown Speaker 10:34

since March of 2009. After the crash one year later, that portfolio had returned 54% to the pot of positive three years later, it had grown 22% a year.


Unknown Speaker 10:46

People don’t talk about that we have to be in there and we have to stay in there. So let’s go further back. Perhaps that was an anomaly, although certainly to many people, they still feel that one. Let’s look at the crash from 2001 to 2003. It lasted 22


Unknown Speaker 11:00

Two months and the SNP returned was negative 36.42%. That was, you know, largely referred to as the tech bubble, that white people out. And


Unknown Speaker 11:12

people left and right. It was like the world was ending that that nobody knew what they were talking about. And no investment was gonna pan out because this new economy, everybody was anticipating during the high flying tech years had changed so much. Well, let’s look what happened.


Unknown Speaker 11:31

If you were in at the bottom again, at the beginning of 2003, whether you were in a that simulated 7030 portfolio or the s&p 500. If you were in then, and your portfolio went all the way through the downturn again in 2008. All the way back to today, your money in that simulated 7030 portfolio would be 300% growth.


Unknown Speaker 12:00

Right, your $1 will be $3 over that period of time,


Unknown Speaker 12:04

it was s&p 500, it’s still be about 2.7. And that includes having gone all the way back down in the market downturn of 2008.


Unknown Speaker 12:13

Now, these are all as if you never added any more money. In fact, a rate of return may actually be much better, had you been consistently. And I’m not talking about necessarily adding money every single month. But inevitably, over time, we’re either saving money in life, or we’re deploying money out of our investments in our life in retirement. But we would have had a tremendous amount of growth in our money by simply having stayed in the market. Now, those annualized rates of return of our 7030 portfolio, one year back would have been 44%, three years 20%. But there were that 10 year period of time.


Unknown Speaker 12:53

Remember the last decade people talked about from the end of 2003 all the way through 2013, you’d still have another


Unknown Speaker 13:00

point four 9% rate of return.


Unknown Speaker 13:02

And that portfolio rate of return would have existed simply by holding strategy. If you’ve come to our live events or heard me speak in the past, you’ve heard me talk about this idea that what we need to do is set strategy and hold strategy that a great deal of the financial benefits we will see in life will be simply from not trying to change horses midstream that we need to be clear about the strategy we’re setting. Be sure that whatever advisor you’re working with, you fully understand what you’re doing. If you ever forget what you’re doing, go back and get re centered in why you did the strategy originally, so that you can hold strategy is particularly true for investments. Let’s go back to the next crash 1987


Unknown Speaker 13:49

this is referred to as Black Monday, and we have September 1987 through October of 87. Two months long 23% loss


Unknown Speaker 14:00

The s&p 500. I know several people actually got into our,


Unknown Speaker 14:07

our business, the financial advising business, the day that this happened, like their first day at work, not not a great day to start in a new industry. But here’s what I want you to think about, let’s say, the market fell apart, you stayed in at the bottom, where’s your money?


Unknown Speaker 14:23

About the end of 2005 K, mid 2006.


Unknown Speaker 14:29

If you just held for 20 years,


Unknown Speaker 14:33

let’s just take it from November of 87. October of oh seven. All I did was hold strategy for 20 years. What would the wealth growth have been if you just held that $1 your money would be about 10 times worth 10 times what it was worth. If you’re in the s&p 500 500 or that 7030 types of medical portfolio meaning you would have come back and then some


Unknown Speaker 15:01

$100,000 invested then would be worth a million dollars today without having added to it. Now there’s going to be taxes and things that have to come out of that over time. But I want everyone here to get that each time a market downturn occurs. Everybody wants to get in on the parade and talk about how bad it’s going to be. Earlier in 2015, I remember taking off right as the market started to slide and I got to watch a bunch of pro golfers I was sitting with in first class, all glued to the screen, watching as the market had one of its biggest drops to 2015 in a single day, as they’re trapped in an airplane. And I watched a bit bemused as all of the financial prognosticators were on the TV, on the news media, trying to get people not to make appropriate financial decisions. What did they want to do? They want people to not change the channel.


Unknown Speaker 15:56

So they have got to be able to keep our attention in tragic


Unknown Speaker 16:00

He does a great job of keeping our attention. I just want all of us to be able to hold that when the market goes down like that, we can know that it’s actually producing returns for us, because it’s our ability to hold through the volatility that makes the difference. Now, in a future podcast, I’m going to talk about the differences between building sufficiency and surplus and what that means for you that if you have a safe strategy with promise based assets, you can hold even better through all these problems. Let’s go back to 1973. We had another market downturn that lasted 21 months January 73, through September of 7421 months SMP return negative 42%.


Unknown Speaker 16:43

But if you just held for the following 20 years, just stayed in your money would be worth 20 times


Unknown Speaker 16:51

with a diverse allocated portfolio 20 times what you started with by just holding like don’t just do something


Unknown Speaker 17:00

Stand there, if you would have just stood there, you would have had 20 times a return. And even in a plain old boring s&p 500, though it would have been a rougher ride than a well diversified, academically allocated and globally diversified portfolio, even the s&p 500 would it be about 16 times what we started with


Unknown Speaker 17:23

the rate of return again one year after the downturn was 33%. The 20 year rate of return of our 7030 portfolio was 16%


Unknown Speaker 17:37

after the crash,


Unknown Speaker 17:40

so


Unknown Speaker 17:41

we can go back and look at 1970s crash 1962 crash of negative 17%.


Unknown Speaker 17:53

I’m going to go back we can look at 1946. The downturn at that time was 11 months.


Unknown Speaker 18:00

In a 20%, negative rate of return, in fact, one of the


Unknown Speaker 18:05

articles from the 1940s just like the, the equities are coming, unwrapped, and there’s gonna be problems and people are liquidating, left or right and, you know, they’re gonna have to do something about this in Washington DC.


Unknown Speaker 18:23

Truman was speaking about the market at that time and the problems


Unknown Speaker 18:28

and yet what we see is that the market came back


Unknown Speaker 18:32

1934


Unknown Speaker 18:35

you know, we had a downturn get this I want you to hang here with me.


Unknown Speaker 18:40

This is the big one. The total SMP return


Unknown Speaker 18:46

from 1929 to 1932.


Unknown Speaker 18:51

Okay, and this is the best description of the s&p 500. It wasn’t it didn’t exist in its current form back in 1934.


Unknown Speaker 19:00

But it was down 83% 83%. And imagine if what someone would have done is said, I’m just going to swear off the market. I’m never going to be back in the market again.


Unknown Speaker 19:13

If


Unknown Speaker 19:15

you went through that, and then went through the remainder of World War Two, where three quarters of the world’s capital production was destroyed,


Unknown Speaker 19:25

but you just held for 20 years after That’s it, then do anything fancy, no market timing, holding a well allocated portfolio that’s globally diversified for the following 20 years in the 7030. You would have done what you would have had gone from $1 to $24, a 20 400%. return


Unknown Speaker 19:49

that is simply by holding strategy. In fact, the single year after that huge jump in the market. The market was up one year after by two


Unknown Speaker 20:00

126% one year after the crash,


Unknown Speaker 20:05

and yet have you locked in losses even after the end of 2008 and the downturn in the s&p 500. And then you went right into fixed income assets, which treasury bills at that time, were staying at less than 1%. It would take you thousands of years to rebound, your loss without staying and holding in equities. So the the thing that I don’t want people to take away from our call today and our podcast today is this idea that what you should do is blindly take risk and never look your portfolio. In fact, I think that that causes people to not have understanding and later, be a little bit resentful and not take full responsibility for their investing. I want you to look, but I also want you to begin to increase your understanding. Does that bother


Unknown Speaker 21:00

Till that gives us the rate of return.


Unknown Speaker 21:03

You see, reminds me of a very funny quote that that I’m going to use to close out our


Unknown Speaker 21:11

podcast today.


Unknown Speaker 21:14

In 2001, during the big tech blow up, there was actually a stock by the name of Nortel that just got crushed. You see if you’d purchased $1,000 worth of Nortel stock about a year prior


Unknown Speaker 21:29

it would be worth $67 after the crash.


Unknown Speaker 21:34

If you’re taking that same thousand dollars and purchased a bunch of Budweiser the beer, not the stock, then drank all the beer and then redeemed each bottle for the nickel deposit. You’d have $78 the moral of the story and this is the funny thing people say out there about the market is drink heavily and recycle rather than invest


Unknown Speaker 21:55

in the person that made that investment. Nortel is blaming the market.


Unknown Speaker 22:00

Not their own behavior


Unknown Speaker 22:02

and convinces others that it’s the market and not their own behavior. And yet, what we can do is we can overcome many market forces by simply holding strategy watching our behavior. And in a future podcast, we’re going to talk about the importance of making sure you have other strategies in place that Produce Safety and peace of mind for you. So that this market based assets, these surplus assets can get you the highest, most predictable and consistent performance.


Transcribed by https://otter.ai


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PRODUCTION CREDITS

Podcast production and show notes by Greater North Productions LLP

Recorded using Switcher Studio: sales@switcherstudio.com