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Transcript

Peter Mallouk:                 

Hey, I’m Peter Mallouk, the President and CEO of Creative Planning. Thanks for joining us today. Today, I’m joined by our Chief Market Strategist, Charles Bilello, and we’re going to talk a lot about market timing. A lot of people don’t think they engage in that behavior, but we’re going to cover why so many people do and we’re going to cover why it’s not a great idea and what the alternatives are to get strong performance from your portfolio that has a better chance of meeting your goals. So, with that, let’s get started. Charlie, over to you.

Charlie Bilello:                   

Hi, everyone. Thanks for joining today. Really important topic for today’s webinar, why you should avoid market timing and what to do instead. I’m Charlie Bilello, Chief Market Strategist at Creative Planning, and I’m joined today by Peter Mallouk, President and CEO. How’s it going, Peter?

Peter Mallouk:                 

Good. Good to see you, Charlie.

Charlie Bilello:                   

You, too. So, really one of the biggest mistakes, right, that investors can make is this market timing mistake. You’ve seen it throughout your career time and again. We’re going to talk about all facets of that today, and this is something that Creative Planning likes to do. Month after month, they have these webinars talking about how investors can make better investing decisions, a lot of different topics, financial planning, tax planning, investing topics. Today’s focus is going to be of course on that market timing. We’re going to be running through a number of different areas, starting with the siren song of market timing, which is really just the allure. What is drawing people into market timing? Why are we all falling prey to this siren song?

Two, we’re going to talk about the evidence behind market timing, why it’s so difficult. Three, we’re going to get into the emotions around market timing and then we’re going to jump into what’s going on today in markets and how you could really position your portfolio and how as an investor you should think about your portfolio and trying to avoid really the perils of market timing. So, let’s jump right in here. Siren song of market timing, Peter, when you hear this saying that you can earn 10% in terms of the stock market in the long run, that’s really attractive to a lot of people. This is something phenomenal.

Peter Mallouk:                 

Right, I love this chart, because if you just showed the chart with only this straight line, everyone would be like, “Sign me up for that. Why would I not invest in that?” Because it is been a very, very long run of just epic return, double-digit returns over 100+ years. All kinds of things have happened over that time, world wars, assassinations, epidemics. I mean, just everything that you can think of has happened and you get a 10% rate of return and then you look at the journey people have to go through to get there. That’s what this whole conversation we’re having is about is people just can’t handle that journey and they always think it’s going to be different going forward.

Charlie Bilello:                   

They want to avoid pretty much all of the downside and get the upside, which we know really is impossible. One of the reasons why you get that 10% long-term return, which is really the best inflation adjusted return of any major asset class is because you have risk. You have downside as we’re going to talk about, but still, we want to believe that we can cut off the left side of this chart. So, these are calendar years of S&P 500 returns.

If we can only cut off that left side, avoid all the negative, get all of the upside, then we’re going to be much better off. That’s what’s drawing us in. We’ll talk about why that’s very difficult, but what do you say when people say, “I’m not a market timer. I’m not jumping in and out of the market. I’m not into active trading. I don’t do this, so this isn’t really relevant to me”? What do you say to those people? What are some examples of things where people are actually market timing without knowing it?

Peter Mallouk:                 

Well, one of the things I love about that chart and I’ve started at least one of my books with that chart at the very beginning, it looks like the market’s flipping you off in that chart, just daring you to invest in it. Whenever I talk to clients or prospective clients about market timing as part of our philosophy, avoiding that and what to do instead, they go, “I don’t do that.” But they might be sitting on a bunch of cash and go, “Why are you sitting on this cash?” Well, I’m waiting for to get past this election or waiting for the capital gains lost to change, or I’m waiting for the pandemic to end or whatever the thing is that’s happening at that point. Now I’m waiting for the fed to cut rates.

All of those things are market timing. You’re basically saying, “Hey, this isn’t the time. I’m going to wait for another time.” The evidence is overwhelming that it doesn’t work. The issue is it’s not just one decision. Over and over and over again, we’re going to have this decision to make. If we are waiting for something to happen or to unfold, more often than not, we’re going to be punished for it. We’re actually not going to be rewarded for all the diligence that we’re doing. We’re going to actually get lower returns.

Charlie Bilello:                   

Absolutely. This is always a good reason. One of my favorites is that election example. We get this every four years and of course politics are very emotional if people have one side or they like the other side, but we’ve seen every end of this in the past few election cycles in 2020, 2016, 2012, all up years for the stock market and all hearing the same things from investors. Why not just wait until we get rid of that uncertainty? Of course, that cost investors in each of those years. It doesn’t matter in the case who won or lost. People think it matters a lot more. If you look at the long term history, it really doesn’t matter what political party wins, but we’re good at finding reasons, we’re good at finding excuses, aren’t we?

Peter Mallouk:                 

I tell clients that the market’s not blue or red, it’s green. It just doesn’t care. When politicians talk, the number one issue they tend to talk about usually is the economy. So, it feels like everything economic is at stake and really the things that they’re talking about are usually very incremental. This very heated tax debate was about moving income tax rates a couple percent. It’s not going to change anything no matter what side of that aisle you’re on. So, I think that people hear this narrative, it’s a drumbeat for a whole year of the election. They think it’s got to matter, but if you step back and go, “Okay, are people still going to go to Disney World? Are they still going to go to Chipotle?” If that behavior’s not changing, the market’s probably ignoring all the political rhetoric as well.

Charlie Bilello:                   

Absolutely. We’re going to save some of these for the end, talking about today’s markets, because a lot of this applies today, but I want to touch on this chart here from your book, really pulled no punches here, probably upset a lot of people. But what do you say to someone who says, “My friend got out at the top, got back in the beginning, or there’s this advisors telling me that they have the perfect system to get in and out of the market”? What’s the appropriate response to someone who’s saying, “We all have neighbors and friends and family who claim they can do it”? What do you say to someone who’s telling you that?

Peter Mallouk:                 

Oh, it’s just universally BS. Yeah, so I remember Jack Bogle, the founder of Vanguard, he talked about how he’d been in the business for over 55 years and he had never once found somebody that had successfully gone in and out of the market over time and succeeded at it. It’s like when someone goes to Vegas and they win, they tell you all about it, but it probably wasn’t the only time they went to Vegas. They probably went to Vegas 10 times. Especially if you win, you’re more likely to do it and the odds are just simply against you. So, it’s one of these games. The longer you play, you don’t get better, it’s the more likely you are to lose. So, you have a very big group of people that aren’t telling you the complete story.

Then you have a very big group of people that don’t understand how markets work. Now I never say it’s 100%, because there probably is somebody somewhere that’s successfully doing it, but my favorite example of that is Bill Miller who founded Legg Mason Value. He was the classic example. There’d been thousands and thousands and thousands of mutual funds. There was only one mutual fund manager ever to beat the S&P 500, to beat the market 15 years in a row. He was the example. Now, unfortunately, all this money went there because he was the example and then the fund collapsed. So, if you actually invested in his fund over the whole time, you lost to the market.

Actually, most of the investors got crushed by the market because people weren’t there when he wasn’t discovered. They all put their money in after he had beaten the market a bunch. This is the irony. If you find somebody who’s actually beat the market a little bit, a bunch of money goes there, then it gets exposed that it’s not a sustainable strategy.

Charlie Bilello:                   

Celeste says, “Quit while you’re ahead. If you’re lucky enough to-“

Peter Mallouk:                 

That’s right.

Charlie Bilello:                   

… beat the market, get it right.

Peter Mallouk:                 

You come back from Vegas with a bunch of money and they offer you free tickets to come back, say, no thanks, quit while you’re ahead.

Charlie Bilello:                   

Absolutely. Okay, let’s talk about the evidence here. There’s a whole lot of it, but there’s a few reasons I think the odds are really stacked against you, why timing is so hard. Well, the market’s pretty efficient. Now, I wouldn’t say it’s perfectly efficient. We definitely see examples all our time of crazy things going on, but pretty efficient, which means the news of today isn’t going to help you time the market. Whatever that news story is, it’s likely already reflected in the prices of securities and it’s forward looking, which means again, that if something bad is going on today, well, the market could be looking ahead to something better. It often does. Two, it’s upward trending, right? Three out of every four years, everyone knows the market tends to go up.

So, if something tends to go up and you’re trying to sell and get in at a lower price, well, a lot of times that’s going to work against you. Most of the time, in fact. Then we have this pesky little issue of being right just once isn’t good enough, so you got out at the top. Great, good for you. Whether it was skill or luck, it really doesn’t matter. You got out. But now you have to get back in, because eventually the market, as we know, has always recovered and it’s that getting back in at the right time that really causes problems for people. Then finally, I think this is one that’s really overlooked. There’s a cost to timing. There’s these long-term capital gains rates are pretty good.

If you start timing in and out and you have short-term gains, well, you can erase a lot of those benefits. So, really interesting that we’ve seen in the past few years a number of examples of this. I want to talk about the forward-looking nature of markets. Of course, in 2020, we see the US unemployment rate spike to its highest levels since the Great Depression. What are you thinking at the time, Peter? Everyone’s saying, “Why would I invest in the stock market when everyone’s losing their job?” It seems like there’s going to be a great depression. How do you respond to that based on the data historically?

Peter Mallouk:                 

I mean I think this surprises a lot of people is that when you look at data that’s super negative, usually, the market outperforms its normal returns in those environments. That’s because the market is forward looking, right? If my dad’s in the hospital and I find out today he’s in the hospital, I’m going to be very nervous, I’m going to run over the hospital. But if he’s been in the hospital for a month and he went from critical condition to serious condition to stable condition, I’m looking at the future. So, even though the current situation’s not great, I’m looking forward and that’s what the market does. The market’s looking ahead and that’s why all of the data that you’re about to share, it confuses people on how the market outperforms when things look their bleakest.

Charlie Bilello:                   

Yeah, we learned this time and again, stock market is not the economy. It’s very hard for people, because in the long run, it is a reflection somewhat of economic growth and of course earnings. But in the short run, markets do crazy things and they’re looking ahead to the future. So, in this case, 2020, they’re looking ahead to better times ahead. Stock market ends up having one of its best one-year periods looking ahead after 2020, those March 2020 lows. But consumer sentiment is something we hear a lot about.

In 2022, this was front and center, because we actually saw a record low. Consumers were never more bearish than we were in 2022. Inflation being the big reason, but fears about recession, number of reasons. But again, here when you say, “Can the stock market do okay even though the consumer is bearish?”, well, I think the evidence seems to prove that it can, right?

Peter Mallouk:                 

Yeah. I’m sure the University of Michigan set out to start doing this survey in 1952. They probably expected, “Hey, we’re going to find out a way to predict when the market’s going to do bad.” An exact opposite, they survey people. When people feel their worst is a great indicator that the market’s probably going to do well going forward.

Charlie Bilello:                   

Right, absolutely. So, let’s talk about really the allure of trying to spread out your money. You have this lump sum of cash, and you often hear this from people, “Well, what have I invested in the top? Why not just spread it out over 12 months, 24 months, 36 months? Wouldn’t that be better? Then I could be at least getting in at a lower price. How do you respond to that based on what we know about the history of dollar cost averaging versus making a lump sum today?”

Peter Mallouk:                 

I mean, dollar cost averaging sounds great. We’ve heard a lot about it, but we know that that market has the upward bias. That chart you showed at the beginning, Charlie, it moves up until the right over time. So, to the extent your money is not in the market, the odds are against you. That’s the basic premise here. So, if you’re dollar cost averaging by definition, you’re holding a bunch of cash back, assuming you have a pile of cash to invest, which is what we’re talking about here. You’re holding cash back and putting it in over time. Well, you’re working against that upward bias. So, it’s no surprising that whether you look at a stock portfolio or a bond portfolio or a combination of stock bond portfolio, the data shows that if someone invests all the money at once, the odds are great.

They will outperform somebody, dollar cost averaging. Now, there are people at dollar cost average for other reasons. So, for example, a lot of people don’t have a lump sum to invest. Every paycheck they’re investing, that’s great. You’re actually lump sum investing all your cash all the time. We’re talking about people that have a pile of cash. Statistically, you’re better off to go in all at once. Now that’s the financial answer. There’s a lot of people that just can’t handle it. It’s like somebody who’s had a big liquidity event, 5 million, 10 million, really big number or a big number to anybody, 500,000 or a million. They really don’t want to put all their cash from selling their business into the market all at once because the odds are still high.

One third that you’d be better off going another way. Just take spreading it out over time, not catching all of a bear market if you get super unlucky, not catching the beginning of a correction. So, I like to walk people through the pros and cons of this, but the math is simple. Statistically, the odds are in your favor if you invest all at once.

Charlie Bilello:                   

Yeah. So, you’re saying there’s a behavioral part, it’s not all just statistics. If you know someone who has this huge lump sum to invest and if they get in it at the top and they can’t stomach that volatility and then they’re likely to sell after that, well, maybe that wasn’t the best decision for them, even though historically the odds would’ve been.

Peter Mallouk:                 

That’s right.

Charlie Bilello:                   

You have to really know yourself as an investor. I think that’s a big job of an advisor obviously, is figuring out what’s the tolerance for the downside. If you invest something today and the market goes down, well then you could say, “I can invest more and you’re happy about that.” Even if it goes up, keeps going up, you could say, “Well, at least I invest in something.” So, usually, the answer is some type of balance, I think. But if we’re looking at the masses and following the crowd, I don’t think there’s a better illustration of this than saying why you shouldn’t follow the crowd in terms of there was that book, the Wisdom of Crowd.

Yes, they may get it right a lot, but in markets when the crowd is doing one thing, either buying or selling, it’s often the wrong thing. We saw this in March 2020. I’m sure you had a lot of nervous clients at the time saying, “Why shouldn’t I get out?” There’s every reason in the world to believe this is going to go lower, and we know what ended up happening at the time, of course.

Peter Mallouk:                 

Yeah, I mean at Creative Planning, we try to do the opposite. So, during that period of time when I think people were freaking out at their most since 2008-2009, we were only not selling, we were actually buying. We were rotating for bonds to stocks for most clients. Obviously, people have different situations, but as a firm, the policy was we’re selling bonds, we’re buying stocks, and it was rotating against the crowd and betting on that up until the right. That always happens over the long run. It’s one of those few opportunities the market gives you to get ahead of everybody else as in those really steep and scary bear markets or corrections.

Charlie Bilello:                   

I think it gives investors the feeling that they are able to do something. Even though going against the crowd is hard, that doing something in the long run obviously is going to help them, this is particularly a good time to make that type of rotation with a 10-year hitting a record low in terms of yield, you’re selling bonds. They’re yielding almost nothing at the time. Of course, stocks go on to have this record run, but let’s talk about magazine covers and this is a favorite one of mine. Everyone has different magazine cover favorites, but The Death of Equities 1979 has to be the all-time best contrarian indicator. My phrase is it’s their job in terms of the media to entertain you, and it’s your job as an investor to ignore this. The Death of Equities, I think, being the best example.

Peter Mallouk:                 

Yeah. I mean the way magazines and TV stations make money is not by educating. They make money by selling ads, and you sell ads by having viewers and clicks and readers. You get viewers and clicks and readers by being alarmist. So, the media actually works against you in terms of really trying to give you a calm, reasoned approach to how to invest going forward, just like I think it does in just pretty much everything. The motivation is not education. The motivation is to sell advertising. If you can really get your brain around that, no matter where you sit on the political spectrum, it gives you a better way to think about how to absorb financial media. Financial media, they have no incentive. It’s like the weather channel.

There’s no incentive for you to turn it on and see somebody saying, “Hey, look, invest based on your needs, understand your tax bracket, be tax sensitive, take advantage of the few corrections of bear markets that show up. Otherwise, everything’s going to work out fine. You don’t need to watch us 24/7 and know what’s going to happen.” They’re not going to put those people on. Every now and then, you’d see a John Bogle or Warren Buffet, but it’s pretty rare. They’re an outlier in between or 999 other people that are trying to scare you to death. They’ll feed that to keep you engaged with the storyline that can go on for days.

Charlie Bilello:                   

Making outlandish calls. Maybe it’s not intentional. I don’t know that they’re trying to scare people out of the market. That is the end result. I think just by the time the mainstream media, especially things that are not related to the markets, by the time, they’re talking about a topic in the financial markets, it’s often the very end of that trend. We just know there’s mean reversion in markets, so we tend to see the other side going forward. Really following that magazine cover, you couldn’t have picked a better 20-year forward period for the stock market, 17.4% per year. Again, we talked about that long-term average at 10%, but you’re compounding at 17.4% a year. You’re very quickly doubling your money and then doubling your money.

Again, just in incredible opposite right of what the media is saying. But just one more here and this is an important one, because everyone’s concerned when they retire about running out of money and their biggest fear during that period of time is often a long bear market, which is it’s a rational fear to have, a long bear market that’s going to deplete the value of their portfolio and they’re going to be in the withdrawal phase and they won’t be able to meet their expenses.

Here we have this cover from July 2002, right near the tail end of that bear market that started in March 2000 and retirees were worried, S&Ps cut in half, and this is going on for a few years. I think it’s going to continue to go on, but once again, time really is the best indicator about this, but the next 20 years ended up being just fine for investors that were able to stick with it.

Peter Mallouk:                 

Yeah, I mean it’s the time in the market, not timing in the market mantra over and over and over again. If you’re in the market for one year, the odds you’re going to be positive or only three out of four. Still good. Stick around for three years, it’s over 90%. If you stick around over 20 years, it’s all the time. Most of us, even those that are retired, the stock part of our portfolio is going to have to be around for us to live for over 20 years.

Charlie Bilello:                   

Yeah, absolutely. So, let’s talk about economists, newsletters, investment managers. We all have our favorite here. People tend to latch on to these things, especially if there’s a noted economist or investment managers had a good performance run and they’re saying something about the future and they’re using their expertise as a way for people to buy into the fact that they might know something about that future. Perhaps there is someone out there who can do this repeatedly. What’s your favorite story of either a noted economist or investment manager, newsletter, writer where they just repeat repeatedly have gotten it wrong time in and time again, but yet people still want to believe that they can predict the future?

Peter Mallouk:                 

So I like Jim Kramer. I find it entertaining, but I write in one of my books about it. If you take all of his picks, you actually did worse than the market. I mean, imagine you’re following these hours a day every day for 20 years and all this time and all this energy. You actually wind up underperforming the market. Now, people tracking the inverse Kramer ETF. If you bought stocks when he tells you to sell them, you would be better off. If you sell stocks when he tells you to buy them, buy them, you’d be better off.

I don’t want to pick on him because it’s pretty much almost everybody, but it’s trying to beat the market by stock picking or by going in and out of the market. You’re creating higher fees, you’re creating higher taxes to underperform. There are other things to do tax harvestry, but things we’re going to talk about. But that is not the way. There’s just example after example after example of it.

Charlie Bilello:                   

Yeah. There hasn’t been a study that I’ve seen at least that have shown the persistence of any of these. So, a newsletter can get it right for a period of time and then they flip to getting it wrong. We’ve talked about investment managers doing that. Obviously, economists are noted for often wrongly predicting recessions or predicting recessions time and time again. So, you either have perma-bear economists or permeable economists. Since the stock market’s not the economy, none of that does much good in terms of trying the stock market anyway.

So, a lot of the people who foresaw and they actually had good rationale for seeing the financial crisis in 2008 ahead of time, they couldn’t flip over to being positive in 2009, even after the market is down over 50%, even after you had just way more opportunity. They couldn’t flip because they were attached to that narrative. They had a following because of one opinion being a perma-bear and they couldn’t flip to the other side. So, very difficult to find someone who can consistently do this well. Yeah. So, let’s talk about emotions, Peter. We’re all human beings, so we’re emotional. Peter Lynch has really my favorite quote about this saying, the real key to making money in stocks is to not get scared out of them. We get scared.

Every year, we have a reason to be scared, because every year, the one constant is risk. There’s no year where the market just goes straight up. There’s drawdowns every year, year in and year out. They’re to varying degrees, but the one constant is risk. But if we look at the long term, what has the market done? It’s gone up in spite of this, which to me means as an investor, you have to be thinking of risk as a feature, not a bug.

This is a good thing, because it’s the reason why you’re earning this high long-term return is because you have to deal with all of these drawdowns as an investor. They all have different reasons. I know we just said that you shouldn’t try to predict the future, but do you think that there’s going to be a correction or a bear market coming in the future? What would be your response to that?

Peter Mallouk:                 

Well, I think obviously you could predict that because it’s like not making a prediction if you say it’s going to rain at some point in the future. Obviously, it’s going to happen. We know every year on average, we have a correction, which is a drop of 10% or more. We know about every five years, we have a bear market, which is a drop of 20% or more. We know that a lot of the average bear market’s pretty bad. It’s 34% and we’ve had some severe ones lately. COVID was the fastest 34% drop in history. 2008-2009 was the biggest decline, 50% plus since the Great Depression. 9/11 and the tech bubble were both worse than normal, more than 40% drops. I mean, this is fresh in a lot of people’s minds, but it’s completely normal.

To your point, if there were not corrections in bear markets, that would mean there was not any volatility and we would have lower expected returns. People are scared of this that keeps all their money out, which gives the people that understand that this is fine and volatility is not going to hurt you, that they get rewarded for being willing to handle that volatility. I think when we use the word risk, most people, when they think of risk, they think of loss. Really, what you and I are saying is volatility is that if you put 100,00 in the market, it’s going to go up and down. That’s volatility.

The risk of 100,000 on your statement might be 90,000, but in a broad market in the US, large cap US, mid cap US, small cap US or even large cap developed markets, there are no precedent for permanent loss. We have the volatility, but the market still moves forward. Now, a lot of people go, “Well, the United States is going to decline.” Well, United Kingdom declined. It was the world’s superpower. Its market is still higher, so you don’t have to be the leading global economy to have the stock market continue to go up. So, I think that if people can understand that volatility is different than risk or loss, it makes it easier to invest.

Charlie Bilello:                   

Yeah, I think you always have that counter. The one I always find on Twitter is that people say, “Well, what about Japan?” They’ll talk about how after the Japanese equity bubble in the 1980s after the peak, Nikkei never recovered. The answer to that is not more market timing. The answer to that is more diversification. So, you don’t want to be 100% exposed to any one country for sure. You definitely don’t want to be exposed to a country that’s in the midst of the biggest bubble that we’ve ever seen, which is pretty much what we saw in Japan. So, the counter to that, they often don’t respond after that part, but it is just more diversification is going to help you more than trying to time that.

So, if we talk about bear markets, this is one I like to put out and it gives you context for the history of bear markets in the US, but to me more importantly is to show that there’s really no rhyme or reason to the timing of these. As you said, that happen every four or five years on average, but in the past few years, we’ve seen bear market in 2018 then again in 2020 and now again in 2022. So, it can happen much more frequently and then we can go very long periods without a bear market. We went from 1990 to 1998, so there’s not a set pattern to these.

The magnitudes are all different. Sometimes we’re in a recession, sometimes we’re not in a recession. Sometimes it’s just one month, as you said, the quickest bear market in history and sometimes it lasts year. So, trying to figure out, “Well, we’re in a bear market, how long is it going to last?” and trying to time that is pretty difficult based on what we know about bear markets.

Peter Mallouk:                 

If you look at how long they’re going, they don’t go on that long. So, even if you look at say March 2002, this is really a double whammy. It’s the tech bubble and 9/11 back to back. It’s pretty rare to have it go on a long time. Now when you’re in the middle of it, 500 days, 700 days seems like forever and you feel like an idiot staying invested through it, but when it turns, it turns fast and that’s the danger of trying to play it.

Charlie Bilello:                   

Yeah. Speaking of which, we have the one-year returns following the low. Unfortunately, no one tells you this. So, part of that difficulty in timing is that if you’re going to wait for things to get better, they can get better in a hurry. Often, the stock market is running up like this and the news is still bad. We saw that obviously in 2020. We saw it in 2009 where we were getting earnings reports in the first quarter of 2009 saying earnings are collapsing. I think that’s a P 500 earnings for the first time went negative if you looked at gap earnings. So, how is that possible that this could be the bottom? Well, time and time again, the market is running up far in advance of the better news that’s eventually going to come. The history of investing is a history littered with reasons to sell.

So, since the 1940s, we’ve seen many different reasons. Take your pick. When you’re living in it, this feels like the ends of the world. Really only thing that can get you through this emotional response that you’re going to have and it’s natural. I think it’s normal during any of these for people who feel like we’re not going to get out of it, this is different, it’s worse. I think the only thing that could provide some type of comfort and some type of rational response in terms of your emotion is just looking at the bottom line.

It’s that every bear market in history, every one of these crises have ultimately recovered with a new economic expansion, new all-time high. Really, it’s a bet on prosperity in the future. To be an investor, Peter, at the end, you have to be optimistic. So, if your doomsday investor saying that things are going to be worse 20 years from now, very difficult to invest.

Peter Mallouk:                 

If you really truly think that companies are not going to do better 20 years from now, you shouldn’t be investing, but boy, you have to construct a very interesting narrative to believe that. When you look at everything that the world, it just marches on through, so only some of which is on your chart, to somehow believe that somehow in the next 20 years, we’re not going to have technological innovation. We’re not going to have consumerism. We’re not going to have companies find ways to do things better and more efficiently. It just flies in the face of what we know.

So, I think you have to be optimistic to be an investor, but you can also just be a realist and be an investor. But if you’re the pessimist, if you’re the doomsday guy, like you said, I mean the markets are not for you because there’s always that reason to sell.

Charlie Bilello:                   

Yeah, it’s been a mistake to bet against human ingenuity and grit, especially in America, right? In the past 100 years, I don’t see any reason to believe the next 100 will be different. Really, I don’t know what the alternative is. If you’re thinking what’s going to capitalize on a period that is more difficult, it’s hard to say that as well. So, just having that optimistic attitude for most investors is going to be much better off, obviously financially, but also I think emotionally than thinking all these negative thoughts for the future, but let’s jump in today.

Speaking of reasons to sell, we just have a litany of reasons today, and they are all pretty compelling, Peter. I mean, take your pick, inflation, interest rates, the fed, fears about recession. It’s probably the most anticipated recession in the future. I mean, there’s literally every reason in the world to feel like this is going to be different this time. There’s going to be more downside ahead. How do you counter that?

Peter Mallouk:                 

I counter it with what you just laid out. At any given moment in time, you’ve got 5 to 10 reasons that are big, that people are telling you why the world is going to fall apart. Some of these things can be right for the short term. So, some of these things, I don’t want to ignore all these. So, one of these things in 2020, COVID was on this list. Is this going to be a real thing? Is it going to be a big thing? It was one of the 10 things. Turns out it was. The key is not to say that these aren’t real or we should ignore them. It’s that they’re not actionable, that most of these things will not result in something. The few that do, they will be temporary and the economy is self-healing and it will find a way to move ahead. That’s basically the reason.

So, I think a lot of people try to look for these reasons and then validate the reasons and then make their market calls based on it. The reality is you can never have more information across everything. The market’s too dynamic. It’s not just driven by one thing, a banking crisis now or COVID a couple years ago. There are other things like the fed’s actions, congressional presidential policy, innovation, all these things, other things. There’s too many variables that go into the market for an exercise in prognostication would be worthwhile.

Charlie Bilello:                   

Yeah. It’s never that simple. You hear this saying that my favorite one is don’t fight the fed. That makes it sound very simple. So, if the fed is easing monetary policy, then you should be bullish and be long. If the fed is tightening, you should be selling or getting out of the market. You just go back historically and you see that that simply isn’t the case and you don’t have to go back very far to find counter examples to this. We saw the fed cutting rates throughout 2008. They actually started in 2007, cutting rates in the market. It didn’t stop the market from going down 50%. They did the same thing following the .com bubble. They were cutting rates the entire way down until 2002. The market’s down over 50%.

So, fighting the fed, using any of these things as like you said, a single variable thing is very difficult. Same thing with interest rates. Historically, there’s actually zero correlation between interest rates and stock market returns. You actually tend to see a little bit better returns when interest rates are rising, because it’s a sign of better economic growth. You actually see the worst stock market returns when interest rates are aggressively falling, but that doesn’t mean at times that interest rates can’t go up and the market go down. Of course, we saw that in 2022. Same thing with inflation. In the short run, there could be high inflation, stocks are bad, but in the long run, really there hasn’t been a better asset class to protect you against that very same inflation.

So, very confusing for investors. There’s always a million reasons to sell, but really what I like to say is there’s really only one good reason not to sell and that’s hurting you achieving your goals. The highest odds of achieving your goals are actually not selling, sticking to your plan. That’s the only good reason to sell. But Peter, I want to talk about this chart here in terms of timing and the importance that we place on it. I really think it’s instructive for investors to know that they don’t have to time things perfectly to do well as an investor.

Peter Mallouk:                 

Obviously, we know staying in cash doesn’t work. The person who stays in cash invested 2000 a year from 2001 to 2020 doesn’t wind up with a lot of money. But if you have somebody who’s perfect, absolutely perfect in calling tops and bottoms, they wind up with 151,000. Someone who just did no research, did nothing, and just threw the 2,000 in every single time they got, it wind up with 135,000. I mean, the gap between perfection and just throwing money in is not that significant. Here’s the thing is it’s impossibly perfect. Nobody’s perfect, nobody, zero, not 1%. 0% are perfect.

So, this chart I think more than any other illustrates like look, when you get investible assets, whether it’s in your 401K plan or money that’s been gifted to you or a bonus or whatever, if you’re trying to get financially dependent and stay financially dependent, put the money to work and that will be everything else other than being perfect, which is impossible.

Charlie Bilello:                   

Right. So, I think we’ve pretty much established that investors shouldn’t be market timing. What are some things they should be doing instead? What are some things we should be thinking about?

Peter Mallouk:                 

I think it’s interesting. People spend thousands and thousands of hours building their wealth, but they don’t spend a couple hours every now and then to handle their own financial plan. So, I think one, you have to have a plan. Where are you? What are you trying to accomplish? What’s your tax bracket? Is it going to change? Where are you going to live? Do you have a concentrated stock position at work? Do you already own a couple rental properties? These things are important because they influence directly what your allocation should be, which is your biggest decision, how much should be in stocks versus bonds? Then you’ve got to get into not putting all your eggs in one basket. We talked a little bit about the home country bias.

You don’t want all your money in the United States. Just like in the ’80s, it would’ve been a bad idea to have all your money in Japan. So, you start to do what we call a sub-allocation. Then you want to have those holdings be individual stocks or ETFs that are not actively traded, where we’re really trying to mimic market returns, which is what we think will outperform most active managers. You want to keep out the noise as much as you can, know that where you think you’re getting education, you’re really getting entertainment. So, try to focus on your plan on the long run, have bonds to cover the short run, stocks to cover the long run. If you’re wealthier, you can start to consider some alternatives for the very long run.

If you’re educated and you have a plan, it becomes a hell of a lot easier to keep your emotions in check. If your emotions are in check, then you get your opportunities to outperform. You get those corrections, you get those bare markets, and we saw those in your charts that they come and they go. So, those are your opportunities to shift your allocation from bonds to stocks. Those are your opportunities to place tax trades. That’s how over the long run you’ll wind up having a real chance of outperforming a pure buy and hold investor is by just taking those few opportunities the market gives you. That might happen once a year, that might happen every five years, but those are your shots and it’s very hard to do that if you don’t have a plan, an allocation that allows you to keep your emotions in check to do it.

Charlie Bilello:                   

Yeah. So, what it comes down to is just probabilities and odds, right? What we’re saying here is that yes, it’s theoretically possible for someone to market time. You’re just not likely to find them in advance. You’re not likely to benefit from it. The odds are so small that you shouldn’t attempt to do it, and the odds are in your favor in the long run. But how do you become a long-term investor? Well, you’re extending your holding period of time, you’re getting rid of that noise, or you’re not thinking about the day-to-day. You’re thinking about years instead of days. You’re keeping your emotions in check, so you’re not jumping in with the masses in terms of jumping in, throwing bubbles or selling out after panics and just finding that portfolio that fits you. Everyone’s different. I know you’re a big believer in this, Peter.

I am as well, customize portfolio to the person. So, knowing that we’re all different. Well, you need that portfolio you can stick with in the long term and ideally add to during times of market stress, right? All of these periods of market weakness have ultimately been opportunities. If you have a portfolio that you feel good about and take advantage of that, I think that’s going to be huge in the long run.

Peter Mallouk:                 

If you have a portfolio that really matches what you’re trying to do, it becomes a lot easier to accomplish what you want.

Charlie Bilello:                   

Awesome. Well, Peter, thanks so much for joining me today. Thanks everyone for joining us on this webinar. Look out in the future for more of these to come, and thanks again. We’ll see you next time.

Peter Mallouk:                 

That was great, Charlie. Thank you. I really enjoyed it and looking forward to doing that again with you. If you’ve saw a little bit of yourself in this presentation, when it comes to market timing and you’re looking for more of a custom needs-based approach, Creative Planning is in the business of helping people really figure out where they are today and what they’re trying to accomplish and building portfolios that have the highest probability we believe of getting them where they want to be, taking into account where you live, your tax bracket, how much income you have, your outside income sources, your outside assets and so on.

Planning-led approach will help you build an allocation that’s right for you, diversify the portfolio appropriately, avoid getting caught up in whatever financial media narrative happens to be popular today, and allows you to take advantage of market opportunities as time goes on. So, we hope that you give us a call or in the alternative, you’re going to be getting an email from us inviting you to learn more. Again, thanks for joining us. We look forward to seeing you at our next virtual learning series event.