WEBVTT - At the Money: Staying the Course 0:00:00.920 --> 0:00:04.320 This is the podcast Spotlight Hour on Bloomberg Radio. 0:00:08.240 --> 0:00:12.040 There are countless factors that distract investors from their best 0:00:12.080 --> 0:00:16.920 laid plans. Markets go up and down, bad news comes out, 0:00:17.280 --> 0:00:22.360 companies miss earnings estimates, Economic data disappoints, to say nothing 0:00:22.520 --> 0:00:27.080 of the endless parade of geopolitical events. It's not too 0:00:27.120 --> 0:00:30.080 hard to see why staying the course can be a 0:00:30.200 --> 0:00:31.520 challenge for investors. 0:00:31.640 --> 0:00:32.200 We'll stay. 0:00:37.840 --> 0:00:40.720 As it turns out, there are strategies that long term 0:00:40.760 --> 0:00:45.159 investors can use to avoid the pitfalls. I'm Barry Riddhelts, 0:00:45.200 --> 0:00:48.479 and on today's edition of At the Money, we're going 0:00:48.560 --> 0:00:52.560 to discuss how to stay the course over the long run. 0:00:53.000 --> 0:00:54.800 To help us unpack all of this and what. 0:00:54.720 --> 0:00:58.280 It means for your portfolio, let's bring in Larry Suedrow, 0:00:58.720 --> 0:01:02.640 head of financial and ECONO research at Buckingham Strategic Wealth. 0:01:03.040 --> 0:01:07.160 The firm manages or advisors on over seventy billion dollars 0:01:07.200 --> 0:01:10.959 in client assets, and Larry has written or co written 0:01:11.520 --> 0:01:15.039 twenty books on investing. So Larry, let's start with a 0:01:15.080 --> 0:01:20.000 simple question. Investing is supposed to be for the long term. 0:01:20.200 --> 0:01:21.320 How hard can that be? 0:01:22.000 --> 0:01:26.920 Investing is actually very simple, but that doesn't mean it's easy. 0:01:27.080 --> 0:01:32.880 And the difference is that markets go through tremendous gyrations 0:01:33.040 --> 0:01:37.280 much more frequently than people think. On average, we get 0:01:37.400 --> 0:01:40.000 one month a year that could go down ten percent. 0:01:40.680 --> 0:01:44.360 We've had six big recessions in the last forty years 0:01:44.640 --> 0:01:48.360 and major bear markets during those periods. When you get 0:01:48.400 --> 0:01:53.280 those big drops, investors tend to panic, They engage in 0:01:53.520 --> 0:01:58.040 recency bias, think this will continue forever. To get that, 0:01:58.160 --> 0:02:01.840 governments take actions to count to the problems, and they 0:02:01.920 --> 0:02:05.720 panic and sell, and the evidence shows that results in 0:02:05.760 --> 0:02:10.120 them underperforming the very funds that they invest in. And 0:02:10.160 --> 0:02:12.680 then the reverse is true. In bull markets, they get 0:02:12.680 --> 0:02:18.480 over enthusiastic FOMO takes over and then they buy high 0:02:18.520 --> 0:02:22.079 and then expected returns along he is, have a plan, 0:02:22.400 --> 0:02:24.360 stick with it and do nothing. 0:02:24.720 --> 0:02:27.760 Be a rip Van Winkle investor, just rebalanced. 0:02:27.880 --> 0:02:31.760 So let's get into the specifics. What sorts of issues 0:02:31.960 --> 0:02:36.280 do you see that getting the way of investors staying 0:02:36.320 --> 0:02:40.160 the course? What are the big distractions that take them 0:02:40.200 --> 0:02:41.040 off of their plan. 0:02:42.560 --> 0:02:45.560 First thing I would say is recency bias is a 0:02:45.720 --> 0:02:49.560 huge problem. Investors tend to project what's happened in the 0:02:49.639 --> 0:02:54.480 recent past and definitely into the future. So for example, 0:02:54.520 --> 0:02:57.760 today AI is hot, so they think AI will be 0:02:57.840 --> 0:03:03.880 hot forever, and prior it might have been biotechnology or 0:03:03.960 --> 0:03:07.760 dot coms, and that leads to them to react. The 0:03:07.840 --> 0:03:12.919 second mistake is that they fail to understand that when 0:03:12.919 --> 0:03:17.560 it comes to investing, five years is not a long 0:03:17.680 --> 0:03:21.800 time and ten years isn't even a long time, but 0:03:21.919 --> 0:03:25.560 they think three years is a long time, five years 0:03:25.720 --> 0:03:29.840 is very long, in ten years infinite. And the problem 0:03:29.960 --> 0:03:32.839 is that you could go through almost every asset goes 0:03:32.880 --> 0:03:36.640 through at least ten years of poor performance, and when 0:03:36.640 --> 0:03:39.800 you get even three years, they panic and sell, where 0:03:39.800 --> 0:03:41.200 Warren Buffett would be. 0:03:41.160 --> 0:03:42.680 Telling you to be that sur buyer. 0:03:43.000 --> 0:03:47.080 One quick example, three periods of at least thirteen years 0:03:47.320 --> 0:03:50.640 with the S and P underperformed T bills twenty nine 0:03:50.680 --> 0:03:55.240 to forty three, sixty six to eighty two, that's seventeen years, 0:03:55.560 --> 0:04:00.240 and then twenty two thousand to twenty and twelve even 0:04:00.240 --> 0:04:03.800 a forty year period where small cap and large cap 0:04:03.880 --> 0:04:09.400 growth stocks underperformed twenty year treasuries. The riskless investment for 0:04:09.520 --> 0:04:11.000 a long term pension plan. 0:04:11.600 --> 0:04:13.000 What about market crashes? 0:04:13.280 --> 0:04:16.400 Shouldn't investors get out of the way before the market 0:04:16.440 --> 0:04:19.920 crashes and then jump back in after it's done. 0:04:20.279 --> 0:04:23.960 Yeah, certainly if you could predict that. The problem is 0:04:24.000 --> 0:04:28.000 there are no good predictors. One of the great anomalies. 0:04:28.000 --> 0:04:30.719 I even wrote a book about this, Think, Act and 0:04:30.760 --> 0:04:34.680 invest like Warren Buffett is. Buffet is idolized that people 0:04:34.760 --> 0:04:38.120 tend to do not only ignore his advice, they tend 0:04:38.200 --> 0:04:39.440 to do the opposite. 0:04:39.560 --> 0:04:43.040 Buffett says, never try to time the market. But if 0:04:43.080 --> 0:04:44.760 you're going to do so, be a. 0:04:44.720 --> 0:04:48.359 Buyer when everyone else is panicking, and then be a 0:04:48.440 --> 0:04:52.279 seller when everyone else is being greedy. A great example, 0:04:52.400 --> 0:04:57.520 Barry in recent times was much of two thousand and 0:04:57.640 --> 0:04:59.960 twenty recession. 0:05:00.200 --> 0:05:02.000 If you had a perfect crystal ball. 0:05:02.279 --> 0:05:05.320 We went into recession in the second and third quarters, 0:05:05.640 --> 0:05:09.800 and the market bottom down well before that happened, and 0:05:09.839 --> 0:05:12.560 the rest of the year the stocks returned, of my memory, 0:05:12.600 --> 0:05:16.280 served something like fifty percent or something like that in 0:05:16.320 --> 0:05:19.000 those next nine months, from the middle of March when 0:05:19.000 --> 0:05:21.120 at bottomed do owt to the end of the year. 0:05:21.920 --> 0:05:25.120 That's a great example of why you don't panic. People 0:05:25.200 --> 0:05:29.160 forget that. Governments don't sit there do nothing. Central banks 0:05:29.200 --> 0:05:34.440 come in, cut interest rates, government enact fiscal policies that 0:05:34.640 --> 0:05:36.359 try to get out of the recession. 0:05:36.839 --> 0:05:39.800 I've seen some data that suggests you just have to 0:05:39.839 --> 0:05:44.800 miss the worst couple of days and your performance improves dramatically. 0:05:45.080 --> 0:05:46.960 What's wrong with that line of thinking. 0:05:47.880 --> 0:05:51.839 The odds of your identifying those days are close to zero. 0:05:52.560 --> 0:05:55.960 That's what's wrong with that. And of course the other 0:05:56.120 --> 0:05:57.600 side is also true. 0:05:58.279 --> 0:06:02.240 A huge part of the returns happen over very short periods, 0:06:02.960 --> 0:06:07.160 and yet it's virtually impossible predicted. Again, here's an anomaly. 0:06:07.440 --> 0:06:10.680 Both Peter Lynch and Warren Buffett, maybe the two greatest 0:06:11.000 --> 0:06:15.680 investors of all time, to investors you should never try 0:06:15.720 --> 0:06:18.760 to time the market, and neither one of them has 0:06:18.800 --> 0:06:22.800 ever met anyone who has made a fortune by trying 0:06:22.839 --> 0:06:23.840 to time the market. 0:06:24.240 --> 0:06:27.760 And I've also seen some data that suggests that those 0:06:27.839 --> 0:06:31.520 best days in those worst days come clumped very close together. 0:06:31.880 --> 0:06:34.240 So if you're fortunate enough to miss the worst day, 0:06:34.360 --> 0:06:36.320 the odds are you going to miss the best day also. 0:06:36.880 --> 0:06:40.200 Now that's because again governments take action, come in and 0:06:40.240 --> 0:06:42.720 try to counter it, and then you know, everyone who 0:06:42.839 --> 0:06:45.800 was panicked and sold now has to you know, unwind 0:06:45.880 --> 0:06:49.040 those positions, and the shorts have to come in and 0:06:49.080 --> 0:06:51.320 cover as the market starts to recover. 0:06:51.560 --> 0:06:54.600 So forget crashes, nobody's really going to time those wells. 0:06:54.640 --> 0:06:58.320 But what about recessions? What should investors do when a 0:06:58.400 --> 0:07:03.080 recession is on the horizon and coming your way. 0:07:03.240 --> 0:07:06.520 Anyone who's read my books and my blogs I've written 0:07:06.560 --> 0:07:11.760 something like seven thousand now knows that I try to 0:07:11.800 --> 0:07:16.560 tell people that you should make decisions based on empirical evidence, 0:07:16.680 --> 0:07:21.520 not opinions like you hear on CNBC or a Bloomberg 0:07:21.600 --> 0:07:26.320 or whatever from some guru. And the evidence is pretty clear. Barry, 0:07:26.440 --> 0:07:29.160 I think this might even shock most people. We've had 0:07:29.240 --> 0:07:33.880 six recessions since nineteen eighty. The market has bottomed out 0:07:34.200 --> 0:07:37.559 before the recession was declared. 0:07:38.840 --> 0:07:40.600 Four of the six times. 0:07:40.920 --> 0:07:43.160 So even if you could predict when it would happen, 0:07:43.440 --> 0:07:46.920 just like in twenty twenty, would have done you no good. 0:07:46.960 --> 0:07:49.720 You would have predicted recession, got it out, and the 0:07:49.760 --> 0:07:50.840 market took off. 0:07:51.920 --> 0:07:54.680 So let's talk about performance. I know you crunch a 0:07:54.720 --> 0:07:56.560 lot of numbers, and in the books of yours that 0:07:56.600 --> 0:07:59.640 I've read, I always see a lot of data. The 0:07:59.680 --> 0:08:02.440 people who just buy and hold and put it away 0:08:02.480 --> 0:08:06.680 for twenty years, how well does their performance compare to 0:08:06.880 --> 0:08:09.920 those people who were either trying to avoid a crash 0:08:10.400 --> 0:08:11.880 or trying to avoid a recession. 0:08:12.200 --> 0:08:13.840 What does the numbers say? 0:08:15.360 --> 0:08:19.320 The research does show that the more people act, the 0:08:19.360 --> 0:08:20.880 worse their returns are. 0:08:20.920 --> 0:08:22.480 The more they trade, their. 0:08:22.360 --> 0:08:26.320 Worse their returns are as they drive expenses number one, 0:08:26.720 --> 0:08:28.320 and they pay more taxes. 0:08:28.600 --> 0:08:30.200 That data is very clear. 0:08:30.880 --> 0:08:35.040 Good studies by Terrence Odein and Brad Barber, for example, 0:08:35.440 --> 0:08:38.760 have looked at that. In morning Star runs data showing 0:08:38.960 --> 0:08:43.400 persistently that the investors earn lower returns and the very 0:08:43.559 --> 0:08:46.600 funds they invest in, which means that they had simply 0:08:46.679 --> 0:08:50.240 done nothing. They would have done better, but they'd done 0:08:50.679 --> 0:08:54.240 even better than that if they rebalance, which would cause 0:08:54.280 --> 0:08:57.680 them to sell high and buy LUW, not the reverse, 0:08:57.960 --> 0:08:59.800 which is what they tend to do. 0:09:00.200 --> 0:09:03.000 Just do something. Sit there is the best advice for those. 0:09:03.760 --> 0:09:06.480 Two things you want to do. You don't want to 0:09:06.520 --> 0:09:09.240 try to pick stocks at time the market. You want 0:09:09.240 --> 0:09:11.560 to stick to your plan and that means you have 0:09:11.640 --> 0:09:13.800 to act by rebalancing. 0:09:13.960 --> 0:09:14.880 And the other thing. 0:09:14.800 --> 0:09:17.640 You want to do is tax loss harvest to get 0:09:17.960 --> 0:09:21.400 Uncle Sam to share in your losses when they do occur, 0:09:21.520 --> 0:09:22.880 and they certainly will occur. 0:09:23.160 --> 0:09:25.360 So let's talk a little bit about fear, and greed. 0:09:25.800 --> 0:09:30.600 All of these things we're discussing often cause investors to 0:09:30.640 --> 0:09:34.400 become emotional or fearful. What do you do when you 0:09:34.440 --> 0:09:37.120 have a client who calls up and says, Hey, I'm 0:09:37.120 --> 0:09:40.280 not sleeping at night, I'm stressing over the market. I 0:09:40.320 --> 0:09:42.440 got to do something. You got to make the paint stop. 0:09:42.800 --> 0:09:44.199 How do you advise those folks. 0:09:45.240 --> 0:09:48.400 The only way to address this properly is you have 0:09:48.480 --> 0:09:51.160 to have the plan in place in the first. 0:09:50.840 --> 0:09:52.640 Place, so you have to be prepared. 0:09:53.080 --> 0:09:58.320 Investors have to understand that investing is about accepting risk. 0:09:58.480 --> 0:10:01.840 That's a good thing. Volatility is a good thing. 0:10:01.800 --> 0:10:05.560 And the reason is it creates the big equity risk premium. 0:10:05.679 --> 0:10:08.720 If stocks would always go up, then there'd be no 0:10:08.920 --> 0:10:12.120 risk and the equity risk premium would disappear and you 0:10:12.240 --> 0:10:15.880 get CD or Treasury bill like returns. So you want 0:10:15.960 --> 0:10:19.720 that volatility. But the key is you cannot panic and 0:10:19.840 --> 0:10:23.640 sell because that leads to bad results. So key is, 0:10:23.679 --> 0:10:26.360 as I've written in my books, you don't want to 0:10:26.400 --> 0:10:29.920 take more risks than your stomach can handle, because if 0:10:29.960 --> 0:10:34.520 you do, regardless of your knowledge of this and the 0:10:34.600 --> 0:10:38.200 wisdom of the stay of the cost, your stomach is 0:10:38.240 --> 0:10:42.040 going to scream when it reaches the GMO point, it's 0:10:42.080 --> 0:10:45.880 going to scream, get me out, and you will likely. 0:10:45.720 --> 0:10:46.880 Panic and sell. 0:10:47.040 --> 0:10:50.520 Now that's what we see, and then it's never safe 0:10:50.559 --> 0:10:53.240 to get back in. Never have I seen a day 0:10:53.679 --> 0:10:56.600 in twenty my thirty years in this business where I 0:10:56.640 --> 0:10:59.360 could say, gee, it's really safe to be an investor, 0:10:59.720 --> 0:11:02.720 because we know there are all kinds of black swans 0:11:02.760 --> 0:11:07.480 out there that can occur tomorrow, like COVID nineteen as 0:11:07.640 --> 0:11:12.280 just one example, the Black Monday in eighty seven as another. 0:11:12.720 --> 0:11:16.640 I mean taleb has written about this a lot, these 0:11:16.679 --> 0:11:19.720 black swan events. They'll come up and markets crashed, and 0:11:19.760 --> 0:11:22.880 you have to be prepared not only to do nothing, 0:11:23.280 --> 0:11:25.760 but to be able to rebalance, so you get to 0:11:25.840 --> 0:11:28.160 buy low like Warren Buffett. 0:11:28.400 --> 0:11:31.240 So let's talk about the opposite of fear. Let's talk 0:11:31.240 --> 0:11:34.320 about greed. What do you say to a client who 0:11:34.360 --> 0:11:37.880 calls up and says, hey, AI is the future, and 0:11:37.920 --> 0:11:40.080 I got to get me some of that. I don't 0:11:40.080 --> 0:11:42.480 care what it is, Buy me a dozen different AI 0:11:42.559 --> 0:11:45.400 companies because the train is leaving the station and I 0:11:45.400 --> 0:11:46.560 don't want to be left behind. 0:11:47.559 --> 0:11:47.839 Yeah. 0:11:47.880 --> 0:11:51.079 Well, if it was that easy, then the vast majority 0:11:51.640 --> 0:11:58.320 of professional investors who have now today PhDs, not only 0:11:58.320 --> 0:12:03.120 in finance, but in nuclear physics, mathematics, they would outperform. 0:12:03.360 --> 0:12:06.680 And yet the evidence is clear. All you have to 0:12:06.679 --> 0:12:10.840 do is look at standard and poor spever results persistently 0:12:10.960 --> 0:12:15.480 over the long term, even before taxes, over ninety percent 0:12:15.520 --> 0:12:19.480 of the active managers underperform, and there's no evidence of 0:12:19.559 --> 0:12:21.720 any persistence beyond. 0:12:21.360 --> 0:12:22.880 The randomly expected. 0:12:23.160 --> 0:12:26.040 So manager who wins the last three years, that tells 0:12:26.040 --> 0:12:28.400 you nothing virtually about the. 0:12:28.280 --> 0:12:29.319 Next three years. 0:12:29.600 --> 0:12:32.520 So why do you think you're going to be able 0:12:32.559 --> 0:12:37.479 to outperform? What advantage do you have over these geniuses 0:12:37.760 --> 0:12:40.360 who get to spend one hundred percent of their time 0:12:40.480 --> 0:12:43.400 doing it where you're doing it as a part time 0:12:44.040 --> 0:12:48.760 you know, enjoyment. Maybe the odds are close to zero 0:12:48.960 --> 0:12:50.160 you will succeed. 0:12:58.600 --> 0:13:01.400 So to wrap up, invests who have a long term 0:13:01.520 --> 0:13:05.720 time horizon that's not five years or even ten years, 0:13:05.760 --> 0:13:10.120 but twenty years longer, should expect distractions along the way. 0:13:10.559 --> 0:13:13.040 There are going to be recessions and market crashes and 0:13:13.120 --> 0:13:18.040 geopolitical events. Investors need to understand that's just part of 0:13:18.080 --> 0:13:19.240 the normal landscape. 0:13:19.679 --> 0:13:21.839 Markets go up and down, but the. 0:13:21.760 --> 0:13:26.080 Biggest Winners are those who stay the course and hold 0:13:26.120 --> 0:13:36.000 for the long haul. I'm Barry Ridholts and this is 0:13:36.160 --> 0:13:45.360 Bloomberg's At the Money