Two Current Questions

Welcome in, to another edition of Wisdom & Wealth. Thank you for joining me this week. Please check out the audio version of this newsletter below via my Substack.

In the past few months, I’ve had two nagging questions keep coming back to mind. One: Are we as an investing society being lulled to sleep by “V-Shaped” market recoveries? And secondly, how do I help a generation of folks who lived through the GFC, or great financial crisis, as “accumulators,” think about such an event as “decumulators” or retirees?

So, the first question. What do I mean by a “V-shaped” recovery. In the last decade, most markets have quickly bounced back. It’s been a passive investor’s dream. Just like a Disney fairytale everything comes back into focus and ends with a bow on it. Take the 2020 Covid crisis for example. If you’d fallen asleep in January of 2020 and slumbered through to December of 2020 you wouldn’t have thought much of the market gyrations in-between. In fact, you’d probably have thought it was a great year. But I cannot help but wonder if the average investor is building this in as their base case as a sort of recency bias. Are we getting lulled to sleep and thinking that old fashioned things like balance sheets, and valuation don’t matter? If you have followed me for any amount of time or know anything about TBG (The Bahnsen Group), you know the answer to that question already. I’m of the bias that says this is the only thing that is readily knowable enough that a plan can be made around it.

This past year, the top ten companies of the S&P 500 given their scale and market cap carried the lion share of the return for the index. Because of this, I can’t help but wonder if many investors have become numb to the reality that what market cap weighted indexes gave, they can easily take away when a reversal comes into focus. Furthermore, what might happen if markets trade sideways or stay down for a period of time that is longer than we have previously seen? What if a V-shaped recovery doesn’t happen and you have to live through 2-3 years of down markets or sideways range bound markets? Investors from 2000 -2010 experienced this “worst of both worlds” reality in what some have dubbed the “lost decade” because of a decade bookended by the “dot com bubble” and the “mortgage crisis” on the other end. Don’t get me wrong, I’m not trying to encourage fearfulness here so much as I’m trying to advocate for caution. If you are on the “participation train” to the up-side, you most likely will participate to the down side. Asking yourself how a prolonged sideways or bear market affects your personal situation is only prudent.

So now, let’s move on to the second question. How is being a retiree a different situation when experiencing a market pullback or prolonged down market? For starters, it feels different because you are actually living off your portfolio. The psychology is the first thing. You actually feel like you are losing something because you are spending money that can no longer earn you a return. It’s similar to a business that is bleeding cash while not finding new business or not being able to collect on already completed business. You intuitively know it’s going to probably “be okay,” but the waiting and the silence can be deafening. Your imagination can become your enemy.

Numerically, there is the obvious difference that living off your portfolio and taking money out of it during a bear market is just simply different than contributing to your portfolio on a monthly basis via your paycheck and being able to buy into the market at lower prices and valuations. It’s just math. Bear markets during the accumulation phase of life can be your best friend for building wealth. In retirement they can be far less kind. The leverage is working in reverse on this side of the hill. Scoff all you want at financial planning, but this is where the rubber meets the road for most people. If you are asking too much of your portfolio and your plan, bear markets are even worse for your financial health. It is important that an investor actually partners with someone who can communicate to them the realistic truths about their situation. Most people want to spend a lot more of their wealth in the first decade of retirement. If you are in a passive allocation, where “total return” is the focus of your investing, this can present significant cashflow challenges. Challenges which I do not believe have not been fully discovered yet because, wait for it, we’ve been having quick, “V-shaped recoveries. In more passive or growth focused investing, it is not uncommon for me to see total portfolio yields of 2% or lower. Meaning the portfolio itself is only putting off 2% in the form of dividends and interest. Simply put, if a client is living off 4% of their portfolio, paying their advisor 1% and inflation is up 2.5%, this is not a pretty picture.

So please hear me. I’m not advocating for fear. I’m advocating for making a plan that shields you from the inevitable market corrections which are both healthy and normal. Furthermore, I’m advocating for you making a plan which takes into consideration they way your portfolio is built.

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If you have questions about these two questions or about your situation, please feel free to send questions along. Thank you for reading and as always, please know that I’m continuing to wish you and your family continued Truth, Beauty and Goodness on the read ahead.

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