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Speaker 1: This is the podcast Spotlight Hour on Bloomberg Radio.

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Speaker 2: There are countless factors that distract investors from their best

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Speaker 2: laid plans. Markets go up and down, bad news comes out,

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Speaker 2: companies miss earnings estimates, Economic data disappoints, to say nothing

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Speaker 2: of the endless parade of geopolitical events. It's not too

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Speaker 2: hard to see why staying the course can be a

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Speaker 2: challenge for investors.

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Speaker 3: We'll stay.

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Speaker 2: As it turns out, there are strategies that long term

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Speaker 2: investors can use to avoid the pitfalls. I'm Barry Riddhelts,

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Speaker 2: and on today's edition of At the Money, we're going

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Speaker 2: to discuss how to stay the course over the long run.

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Speaker 1: To help us unpack all of this and what.

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Speaker 2: It means for your portfolio, let's bring in Larry Suedrow,

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Speaker 2: head of financial and ECONO research at Buckingham Strategic Wealth.

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Speaker 2: The firm manages or advisors on over seventy billion dollars

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Speaker 2: in client assets, and Larry has written or co written

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Speaker 2: twenty books on investing. So Larry, let's start with a

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Speaker 2: simple question. Investing is supposed to be for the long term.

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Speaker 2: How hard can that be?

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Speaker 3: Investing is actually very simple, but that doesn't mean it's easy.

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Speaker 3: And the difference is that markets go through tremendous gyrations

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Speaker 3: much more frequently than people think. On average, we get

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Speaker 3: one month a year that could go down ten percent.

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Speaker 3: We've had six big recessions in the last forty years

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Speaker 3: and major bear markets during those periods. When you get

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Speaker 3: those big drops, investors tend to panic, They engage in

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Speaker 3: recency bias, think this will continue forever. To get that,

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Speaker 3: governments take actions to count to the problems, and they

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Speaker 3: panic and sell, and the evidence shows that results in

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Speaker 3: them underperforming the very funds that they invest in. And

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Speaker 3: then the reverse is true. In bull markets, they get

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Speaker 3: over enthusiastic FOMO takes over and then they buy high

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Speaker 3: and then expected returns along he is, have a plan,

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Speaker 3: stick with it and do nothing.

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Speaker 4: Be a rip Van Winkle investor, just rebalanced.

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Speaker 2: So let's get into the specifics. What sorts of issues

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Speaker 2: do you see that getting the way of investors staying

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Speaker 2: the course? What are the big distractions that take them

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Speaker 2: off of their plan.

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Speaker 3: First thing I would say is recency bias is a

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Speaker 3: huge problem. Investors tend to project what's happened in the

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Speaker 3: recent past and definitely into the future. So for example,

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Speaker 3: today AI is hot, so they think AI will be

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Speaker 3: hot forever, and prior it might have been biotechnology or

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Speaker 3: dot coms, and that leads to them to react. The

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Speaker 3: second mistake is that they fail to understand that when

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Speaker 3: it comes to investing, five years is not a long

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Speaker 3: time and ten years isn't even a long time, but

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Speaker 3: they think three years is a long time, five years

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Speaker 3: is very long, in ten years infinite. And the problem

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Speaker 3: is that you could go through almost every asset goes

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Speaker 3: through at least ten years of poor performance, and when

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Speaker 3: you get even three years, they panic and sell, where

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Speaker 3: Warren Buffett would be.

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Speaker 4: Telling you to be that sur buyer.

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Speaker 3: One quick example, three periods of at least thirteen years

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Speaker 3: with the S and P underperformed T bills twenty nine

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Speaker 3: to forty three, sixty six to eighty two, that's seventeen years,

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Speaker 3: and then twenty two thousand to twenty and twelve even

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Speaker 3: a forty year period where small cap and large cap

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Speaker 3: growth stocks underperformed twenty year treasuries. The riskless investment for

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Speaker 3: a long term pension plan.

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Speaker 1: What about market crashes?

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Speaker 2: Shouldn't investors get out of the way before the market

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Speaker 2: crashes and then jump back in after it's done.

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Speaker 3: Yeah, certainly if you could predict that. The problem is

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Speaker 3: there are no good predictors. One of the great anomalies.

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Speaker 3: I even wrote a book about this, Think, Act and

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Speaker 3: invest like Warren Buffett is. Buffet is idolized that people

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Speaker 3: tend to do not only ignore his advice, they tend

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Speaker 3: to do the opposite.

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Speaker 4: Buffett says, never try to time the market. But if

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Speaker 4: you're going to do so, be a.

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Speaker 3: Buyer when everyone else is panicking, and then be a

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Speaker 3: seller when everyone else is being greedy. A great example,

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Speaker 3: Barry in recent times was much of two thousand and

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Speaker 3: twenty recession.

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Speaker 4: If you had a perfect crystal ball.

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Speaker 3: We went into recession in the second and third quarters,

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Speaker 3: and the market bottom down well before that happened, and

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Speaker 3: the rest of the year the stocks returned, of my memory,

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Speaker 3: served something like fifty percent or something like that in

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Speaker 3: those next nine months, from the middle of March when

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Speaker 3: at bottomed do owt to the end of the year.

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Speaker 3: That's a great example of why you don't panic. People

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Speaker 3: forget that. Governments don't sit there do nothing. Central banks

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Speaker 3: come in, cut interest rates, government enact fiscal policies that

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Speaker 3: try to get out of the recession.

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Speaker 2: I've seen some data that suggests you just have to

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Speaker 2: miss the worst couple of days and your performance improves dramatically.

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Speaker 2: What's wrong with that line of thinking.

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Speaker 3: The odds of your identifying those days are close to zero.

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Speaker 4: That's what's wrong with that. And of course the other

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Speaker 4: side is also true.

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Speaker 3: A huge part of the returns happen over very short periods,

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Speaker 3: and yet it's virtually impossible predicted. Again, here's an anomaly.

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Speaker 3: Both Peter Lynch and Warren Buffett, maybe the two greatest

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Speaker 3: investors of all time, to investors you should never try

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Speaker 3: to time the market, and neither one of them has

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Speaker 3: ever met anyone who has made a fortune by trying

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Speaker 3: to time the market.

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Speaker 2: And I've also seen some data that suggests that those

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Speaker 2: best days in those worst days come clumped very close together.

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Speaker 2: So if you're fortunate enough to miss the worst day,

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Speaker 2: the odds are you going to miss the best day also.

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Speaker 3: Now that's because again governments take action, come in and

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Speaker 3: try to counter it, and then you know, everyone who

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Speaker 3: was panicked and sold now has to you know, unwind

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Speaker 3: those positions, and the shorts have to come in and

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Speaker 3: cover as the market starts to recover.

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Speaker 2: So forget crashes, nobody's really going to time those wells.

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Speaker 2: But what about recessions? What should investors do when a

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Speaker 2: recession is on the horizon and coming your way.

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Speaker 3: Anyone who's read my books and my blogs I've written

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Speaker 3: something like seven thousand now knows that I try to

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Speaker 3: tell people that you should make decisions based on empirical evidence,

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Speaker 3: not opinions like you hear on CNBC or a Bloomberg

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Speaker 3: or whatever from some guru. And the evidence is pretty clear. Barry,

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Speaker 3: I think this might even shock most people. We've had

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Speaker 3: six recessions since nineteen eighty. The market has bottomed out

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Speaker 3: before the recession was declared.

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Speaker 4: Four of the six times.

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Speaker 3: So even if you could predict when it would happen,

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Speaker 3: just like in twenty twenty, would have done you no good.

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Speaker 3: You would have predicted recession, got it out, and the

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Speaker 3: market took off.

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Speaker 2: So let's talk about performance. I know you crunch a

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Speaker 2: lot of numbers, and in the books of yours that

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Speaker 2: I've read, I always see a lot of data. The

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Speaker 2: people who just buy and hold and put it away

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Speaker 2: for twenty years, how well does their performance compare to

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Speaker 2: those people who were either trying to avoid a crash

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Speaker 2: or trying to avoid a recession.

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Speaker 1: What does the numbers say?

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Speaker 3: The research does show that the more people act, the

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Speaker 3: worse their returns are.

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Speaker 4: The more they trade, their.

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Speaker 3: Worse their returns are as they drive expenses number one,

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Speaker 3: and they pay more taxes.

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Speaker 4: That data is very clear.

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Speaker 3: Good studies by Terrence Odein and Brad Barber, for example,

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Speaker 3: have looked at that. In morning Star runs data showing

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Speaker 3: persistently that the investors earn lower returns and the very

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Speaker 3: funds they invest in, which means that they had simply

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Speaker 3: done nothing. They would have done better, but they'd done

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Speaker 3: even better than that if they rebalance, which would cause

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Speaker 3: them to sell high and buy LUW, not the reverse,

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Speaker 3: which is what they tend to do.

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Speaker 1: Just do something. Sit there is the best advice for those.

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Speaker 3: Two things you want to do. You don't want to

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Speaker 3: try to pick stocks at time the market. You want

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Speaker 3: to stick to your plan and that means you have

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Speaker 3: to act by rebalancing.

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Speaker 4: And the other thing.

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Speaker 3: You want to do is tax loss harvest to get

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Speaker 3: Uncle Sam to share in your losses when they do occur,

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Speaker 3: and they certainly will occur.

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Speaker 2: So let's talk a little bit about fear, and greed.

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Speaker 2: All of these things we're discussing often cause investors to

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Speaker 2: become emotional or fearful. What do you do when you

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Speaker 2: have a client who calls up and says, Hey, I'm

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Speaker 2: not sleeping at night, I'm stressing over the market. I

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Speaker 2: got to do something. You got to make the paint stop.

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Speaker 2: How do you advise those folks.

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Speaker 3: The only way to address this properly is you have

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Speaker 3: to have the plan in place in the first.

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Speaker 4: Place, so you have to be prepared.

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Speaker 3: Investors have to understand that investing is about accepting risk.

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Speaker 4: That's a good thing. Volatility is a good thing.

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Speaker 3: And the reason is it creates the big equity risk premium.

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Speaker 3: If stocks would always go up, then there'd be no

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Speaker 3: risk and the equity risk premium would disappear and you

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Speaker 3: get CD or Treasury bill like returns. So you want

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Speaker 3: that volatility. But the key is you cannot panic and

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Speaker 3: sell because that leads to bad results. So key is,

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Speaker 3: as I've written in my books, you don't want to

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Speaker 3: take more risks than your stomach can handle, because if

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Speaker 3: you do, regardless of your knowledge of this and the

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Speaker 3: wisdom of the stay of the cost, your stomach is

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Speaker 3: going to scream when it reaches the GMO point, it's

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Speaker 3: going to scream, get me out, and you will likely.

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Speaker 4: Panic and sell.

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Speaker 3: Now that's what we see, and then it's never safe

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Speaker 3: to get back in. Never have I seen a day

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Speaker 3: in twenty my thirty years in this business where I

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Speaker 3: could say, gee, it's really safe to be an investor,

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Speaker 3: because we know there are all kinds of black swans

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Speaker 3: out there that can occur tomorrow, like COVID nineteen as

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Speaker 3: just one example, the Black Monday in eighty seven as another.

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Speaker 3: I mean taleb has written about this a lot, these

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Speaker 3: black swan events. They'll come up and markets crashed, and

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Speaker 3: you have to be prepared not only to do nothing,

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Speaker 3: but to be able to rebalance, so you get to

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Speaker 3: buy low like Warren Buffett.

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Speaker 2: So let's talk about the opposite of fear. Let's talk

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Speaker 2: about greed. What do you say to a client who

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Speaker 2: calls up and says, hey, AI is the future, and

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Speaker 2: I got to get me some of that. I don't

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Speaker 2: care what it is, Buy me a dozen different AI

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Speaker 2: companies because the train is leaving the station and I

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Speaker 2: don't want to be left behind.

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Speaker 4: Yeah.

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Speaker 3: Well, if it was that easy, then the vast majority

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Speaker 3: of professional investors who have now today PhDs, not only

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Speaker 3: in finance, but in nuclear physics, mathematics, they would outperform.

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Speaker 3: And yet the evidence is clear. All you have to

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Speaker 3: do is look at standard and poor spever results persistently

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Speaker 3: over the long term, even before taxes, over ninety percent

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Speaker 3: of the active managers underperform, and there's no evidence of

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Speaker 3: any persistence beyond.

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Speaker 4: The randomly expected.

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Speaker 3: So manager who wins the last three years, that tells

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Speaker 3: you nothing virtually about the.

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Speaker 4: Next three years.

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Speaker 3: So why do you think you're going to be able

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Speaker 3: to outperform? What advantage do you have over these geniuses

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Speaker 3: who get to spend one hundred percent of their time

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Speaker 3: doing it where you're doing it as a part time

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Speaker 3: you know, enjoyment. Maybe the odds are close to zero

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Speaker 3: you will succeed.

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Speaker 2: So to wrap up, invests who have a long term

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Speaker 2: time horizon that's not five years or even ten years,

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Speaker 2: but twenty years longer, should expect distractions along the way.

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Speaker 2: There are going to be recessions and market crashes and

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Speaker 2: geopolitical events. Investors need to understand that's just part of

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Speaker 2: the normal landscape.

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Speaker 1: Markets go up and down, but the.

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Speaker 2: Biggest Winners are those who stay the course and hold

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Speaker 2: for the long haul. I'm Barry Ridholts and this is

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Speaker 2: Bloomberg's At the Money