The Decision Every Investor Faces Right Now

Markets are back at record highs. We discuss whether investors should keep buying, what history says about all-time highs, and how smart money approaches momentum and risk.

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Transcript

SPEAKER_01 0:00

From Wall Street to managing hundreds of millions in climate money, Nick and I use our alphabetic soup of credentials to discuss the investing and tax strategies that actually work. And we played Division I college football together. So strapped in. This one hits hard. Let's go.

SPEAKER_00 0:21

All right, everybody. Welcome to another episode of the Life Goal Playbook. We got a lot going on. It's been a busy week in the markets. We had Q1 earnings report come out. And the market had a a really, really powerful reaction in the follow-up to that, pushing the SP to all-time highs. And that's led to an interesting conversation with investors and clients of ours as to what do I do? Markets trading at all-time highs. And this it is triggered some investor behavior that you need to counteract and work through when people are feeling like, hey, the market's at all-time highs. Maybe I shouldn't be putting my money to work at this point in the cycle. But so today we're going to cover a couple things, uh, hit on you know the historical track record of investing at all-time highs, uh, and some practical approaches um to take when when the market's at this level. So um, Brent, let's let's break it down for folks and and and talk about just from a behavioral aspect, you know, why investing it at the highs feels so scary for folks.

SPEAKER_02 1:30

Yeah, absolutely. Thanks, Nick. You know, this industry, all the you know, the chatter goes to price to earnings ratio, dividend yields, you know, um valuations, all these different metrics, and the psychology of money is oftentimes the highest hurdle and the most difficult thing to appreciate and understand. So there's been a ton of studies by the you know the most well-regarded institutions in the world that point out the idea that losses of your money are twice as painful as gains, even of equal dollar amounts. And that is because the brain is hardwired to survive. The brain is not hardwired to do finance, right? Or or you know, analyze uh small details and look to make incremental incremental progress. It's either when the outcome is binary from survival, the brain is hardwired to survive, right? And therefore, pain hurts more than joy. And that we see every single day right now as clients look to bring new dollars to the table, right? We have clients that are retiring on a daily basis, and we also have clients that have terrific businesses that print money and essentially are bringing new dollars to the table every single day. And we are tasked with giving getting them invested. And um, you know, there's another thing out there, so not just the psychology of it being incredibly important, or an aspect, rather, a chapter within the psychology of it, is recency bias, right? So everybody, you know, kind of goes back to when the last time they got their hand burnt was and says that's definitely going to happen again. And, you know, it also makes sense because valuations, right? Everybody talks about valuations. Oh, the market's expensive and you know, therefore it's going to crash. Uh, but that is not what the data says, right? And our job is to, you know, lean against the data and marry that with psychology and help people uh you know get money to work so that they can enjoy the benefits of compounding over long periods of time. So um, you know, one of the things that we also see is a concept called anchoring. And you'll have clients say, hey, you know, I know the SP is at you know approximately 7,400 right now, and I am a buyer all day long at 7,000. I cannot wait for it to hit 7,000. They anchor to a number, it's easy for them to remember. Um, it allows them to draw a line in the sand. And they say, when it's 7,000, I want you to go in and buy, buy, buy, buy. And it's like, you know, that may work, right? Odds are actually low that that's going to work. Odds are we're not going to see 7,000 again, right? And our job is to, you know, make the best uh decisions we can make while factoring in the numbers, right? And emotionally, that may, um, you know, that may not be as easy, but that is, you know, that's kind of the task that we are uh have in front of us here on a daily basis. And there's a bunch of different uh logical uh approaches that we can use. And you know, I don't want to call them tricks because it's not a trick per se, but it's something that clients, you know, are willing to sign up for because they can appreciate the logic to it. Um so I think you know, why don't we dive into some of the numbers and the data? Because I think clients are gonna be blown away when they hear these numbers uh as it relates to buying at all-time highs.

SPEAKER_00 4:42

Yeah, I think and I, you know, just to reiterate, I think the behavior gap, and that can be driven by a variety of the factors that you just you just outlined, uh, creates a really well-documented underperformance from the average investor uh in the funds they own by by letting these, you know, which are totally natural human instincts impact their their their investment philosophy and their their approach. Um, you know, and when we're talking specifically about all-time highs, right? It feels like uh maybe we're due for a for a pullback, but when you look at the the data, uh it it it really is is actually a pretty good time to be investing. Um they're pretty common. You know, if the all-time highs have happened uh over 1,300 times uh since 1950. Uh and on average, more than 17 new highs are made every every single year, right? So 78 and 78% of the years the SP has finished positive since 1928. So base rates, favor beat in the market. Um, you know, these are so the translation there is just you know, all-time highs aren't an anomaly to fear. They're kind of a routine feature of the market that continues to grow and compound over time. Um, you know, if you're looking at just the if investing at the all-time high is your starting point, going back again to 1950. Most most people think like, hey, this isn't the best time to be getting into the market. But if you look at a one, three, and five-year forward returns, you would have been close to the average return over the index in that same time period. So it's it really feels psychologically like I've already missed a boat, I'm getting in too late. Um, you've kind of got the the the gambler's fallacy, like things have to revert to the mean. Um, and that's not necessarily true. So um, and and looking at corrections from all-time highs, if you're looking at a one-year performance of the SP 500, there's only been uh a 10% drawdown from that that all-time high 9% of the time. So you've got a 91% probability, historically looking, um, that your your market money going in at the all-time high is actually going to appreciate. So um those are those those are some uh some interesting stats that I think most people are are a little bit surprised to to hear. Um, because it because you you do have all these psychological impacts um hitting you from from wanting to invest at all times high at all-time highs.

SPEAKER_02 7:20

Yeah, so just kind of looking at, you know, how do you end up at an all-time high? Well, you got to go through a bull market, right? So just kind of looking at you know bull markets versus bear markets, how the results uh of shaking out over the last you know many years, actually going all the way back to 1932, the average bull market lasts approximately five years, and the average cumulative return is 177% over that timeframe, right? The average bear market lasts about a year and a half, and the average cumulative loss is about 41%. So it is not a you know symmetrical situation, it's a very asymmetrical uh situation, and it very much so favors being a long-term investor. Um, you know, if you look at the frequency of uh bear market, you know, you have them pop up about every three and a half years. So essentially, you know, the boogeyman jumps up every three and a half years and shakes the loose apples from the trees, right? Um, but you want to be a long-term investor. You know, you look back over the last hundred years of data, long-term investors have compounded at about 10% a year, right? And that is a um, you know, obviously an ideal situation, whether it's your retirement dollars, um, you know, your family trust, whatever it may be. So, you know, one of the things too that you end up having a lot of right now, kind of going back and touching on that psychology aspect of this that does not get enough screen time, uh, whether it's on social media or CNBC, is when you get late in a bull market, you get a lot of investments that come to the table that are really uh aggressive, they're really geared up. You know, you'll see triple-levered ETFs on the semiconductor index or even triple levered indie uh ETFs on an individual stock. So at Life Goal, right, uh, you know, when we started out with a blank sheet of paper and we're you know essentially tasked with constructing our portfolios, our strategic portfolios, right? What we think is our long-term framework for building a logical portfolio. The thing that we focused on as much as anything was how do we get people invested and keep them on the train so that when the train tracks you know hit a little bump, they don't jump off at the wrong time and then jump back on back in. So we actually, you know, had the psychology of money very much on the front end of the way we built our uh our strategic portfolios. And you know, it goes back to kind of like if you were using a skiing analogy, right? Double black diamonds are sexy and fast, but they also lead to injuries, right? And if we were to have you know a moderate portfolio, not a triple levered ETF, or a moderately aggressive portfolio that really doesn't get rattled, you know, taking it to the skiing analogy, maybe it's a blue square, um, you know, you have a situation where you're much less likely to shake a client out at the wrong time. The clients may complain a little bit when the market goes straight vertical, as it has over the last couple of years, where you may be like, hey, you know, this thing, the market was up 20% last year and you were up 18. And I'm just making an example up, but you know, you may have that situation where there's a slight lag in the portfolio, and you know, it's not the norm for the SP to go up 20% a year, right? We just looked at the long-term average is about 10%. So when you get a very concentrated, rip-roaring bull market fueled by speculation and triple levered, you know, sub-sector uh semiconductors, right? We highly, highly encourage people to proceed with caution because the psychology of it is you get in when everything sun's shining, right? You're sunshine, everything looks amazing. And then you have, you know, a situation, you know, where the market kind of falls out from underneath you because it's a crowded trade, and then you sell at the wrong time. So you bought at the highs, you know, you sold halfway down the lows or whatever it may be, and it's not a recipe for success. So the psychology of this whole situation needs more respect. And, you know, that's why you would build a portfolio, you know, with diversification at the core of it, and and you know, the psychology of it is incredibly important. So, Nick, I know that a little bit of a tangent there, but going back to the all-time highs, um, I the perfect timer analogy that we see coming out of the data. Uh, love to hear what you have to say on that.

SPEAKER_00 11:28

Yeah, and that's again, I think having that diversified portfolio helps you avoid this type of circumstance. But there was a study done on market timing. There were five hypothetical investors. They gave them each $2,000 a year for 20 years that were going to be invested in just the SP $500. Investor number one had perfect timing. He always bought on the lowest day of the year. Investor number two bought on the first day of each year. Um, there was another investor who was dollar cost averaging. And then there was unlucky Larry, who was the worst possible timing. He always bought at the yearly peak. Um, and then there was an all-cash investor, were the five. If you look at the results, the perfect timing, he ended up winning, but by not as much as you you would think he would. Um, the investor on the first day of the year captured about 92% of the upside of the perfect timer. The dollar cost averager captured 89%. And even the the worst possible timer, if you were putting money to work at the yearly peak, still captured about call it 70% uh of the upside uh of the perfect timer. All of those. Everyone who is putting the money to work, whether it was the best possible time in the market or the worst possible time in the market that particular year, significantly, significantly outperformed cash. So, you know, there's there's um if you're have long-term goals, uh it's it's important to realize that A, timing the market is impossible to do on a consistent basis, uh, and that no matter where you're getting money to work uh in the market, it's it's better than sitting there uh on your hands not earning anything. So that's um was a a really interesting study that Schwab actually put together. Um and then looking at you know how you're putting that money to work, and this is this is uh a battle I think folks fight on a on a pretty regular basis when money comes in, like, hey, let's just let's just sit on it for a little bit. Um don't want to put all that money to work at one time. And you know, other studies on lump sum versus dollar cost averaging, um, lump sum beats dollar cost averaging 68% of the time on a rolling 12-month period globally. So it's it's dollar cost averaging better than not doing anything at all. Um but when you get money in, it's best to get that money to work in a diversified manner to continue to grow because the the numbers bear that out. 68% of the time, you're beating that dollar cost averaging uh as that as that compounding starts on more of your dollars at an at an earlier time. So it's uh again, that's a psychological battle you've you've got to fight uh as an investor. Um, but just know that the the numbers are are are in your favor. And if you've built a diversified portfolio, um you know it makes that a little bit less worrisome and scary.

SPEAKER_02 14:30

Yeah, for sure. I think one place that we see this come through into our conversations all the time is we'll have a lot of folks come to us right at retirement, right? And they'll have two portfolios. They'll have their 401k from work that they'll roll over to Austin and IRA, then we'll also have a brokerage account. Never do we have to, and I don't know if I have to, we actually get to, right? It's a privilege to hear these conversations, but never is there an explanation that comes with the performance of the 401k. 401ks work exceptionally well because people essentially set them on, you know, set it and forget it. The paycheck comes in, it buys every two weeks, and they don't pay any attention to it. Their brokerage account that they control, if they are the one that's in control of it, is very emotional to them. They decide when the cash gets put to work, they decide what they're buying. And those trip lines trip them, you know, they it just trips them. And it's because the human brain is hardwired to not be good at this. We are herd animals, right? We're supposed to run with the herd. And investing, you kind of have to do the opposite, right? Look at Warren Buffett. So, as um as somebody who has to essentially, you know, in order for success, you have to trick the human brain. Uh, it's funny, we'll hear conversations. Yeah, you know, they'll come over with 15 stocks in their brokerage account, and there'll be a long explanation as to why they didn't have strong results. And the 401ks have terrific results and they never say anything. And so, again, we'll use that as an example, like, hey, let's just talk about this and why it happened. Um, so yeah, going back to though, Nick, I one of the things that we wanted to touch on is buying at all-time highs makes it a lot easier when you don't necessarily have to just buy, you know, as an example, the SP 500, right? So at Life Goal, we lean heavily on diversification. And a very typical portfolio for us, uh, maybe it's in retirement, maybe it's not, is 40% stocks, 40% alternatives, and 20% in bonds. Uh, the stocks tend to be global. The alternatives will include private equity, uh, private credit, private infrastructure, private real estate, some farmland and timber forests, a little bit of gold. And then the bonds will be a cocktail of uh of bonds, right? So you'll have some treasuries, some inflation protected U.S. treasuries, some corporates, some mortgages, um, you know, very diversified portfolio. And we tend to implement it with ETFs because that's the most efficient way to do it. So you're gonna hear us say 40, 40, 20 from time to time. It's 40% stocks, it's 40% alternatives, and then 20% bonds. So we sit in a privileged spot when people bring us a million, 50 million, whatever the number is, and we do see that valuations may be at the top end of the range as they have been currently on the S P 500. Uh, we can say, well, hey, why don't we, instead of going, you know, it's kind of like a dollar cost averaging concept, instead of leaning more heavily into stocks today and just nailing our strategic allocation right on the nose, we can look at you know our forecasts on different asset classes and say, hey, we actually think that this asset class is relatively cheap and we have room within the portfolio to be slightly overweight, maybe infrastructure right now, uh, that we think is in a terrific spot to actually deliver stock market returns with about 40% of the risk. And you don't have to deal with the valuation challenge because a lot of the returns that are going to come from infrastructure actually, you're in contract to receive those returns. Similar to a rental property, right? Where essentially the renter is in contract for that rate of return, except for it's not, you know, Mr. and Mrs. Smith for three years, it's Microsoft for 15 years renting the data center from you know from us as the infrastructure owner. So it allows us to overweight certain asset classes and still essentially have a diversified portfolio that also models for very high returns. So we look at it, and just because we were fortunate enough to come through the institutional channel, we were essentially forced to learn all this stuff very young in our careers. Uh, we look at it and we may not be just pounding the SP right now, right? We may be going slightly overweight some of these other asset classes, but that is not as easy as a retail investor. You know, a retail investor doesn't have the same tools, the same software to model things that we do, and um they don't have necessarily the mechanisms to implement on it that we do either. Uh so it's, you know, it is very daunting. Um and I think, you know, coming back to the global investment landscape, uh, Nick, if you want to touch a little bit on kind of the global stock market, how valuations aren't, you know, apples to apples across the board, I think that would be a helpful uh conversation as well.

SPEAKER_00 18:57

Yeah, yeah. And and I think that's an important factor when you're looking at all-time highs, too, um, is is the valuation metrics uh of of the market, right? Uh the market could be at an all-time high uh and still be cheap, or it can be 50% off, or it can it can be expensive, depending on um you know where we are uh in in the cycle, where valuations uh are and and where earnings are. So looking at just some large um indices here, US uh from a you know pretty basic valuation metric, one of the most commonly followed is is just your your price to earnings multiple. If you're looking at the forward next 12 months price to earnings PE ratio for the SP 500, we're trading at about 23 times right now. Um that historically not the best entry point uh for for stocks. Um but we have seen we had a monstrous earnings in here in Q1, um, really driven by the chips, um industrials, materials. There was it was actually a pretty broad-based um and very cyclical in nature um due to the $700 billion in capex that we've we've seen in in terms of of AI build-out from uh from a lot of these large technology companies. But even still, on the whole, SP at the kind of higher end of its range from a forward PE perspective. You look internationally, though, uh things are are uh a little bit more reasonably priced. Uh international developed, um, you're looking at uh probably a 14 on on a forward PE. Uh emerging markets, even a little bit less expensive than that uh at about 13 times next year's PE multiple. So again, I think that really highlights the the thought process that we have here and why it's important to have a globally diversified portfolio. Um, you know, we've we've still got a ton of exposure here in the US, but there are opportunities to get great companies with a different address uh at a much cheaper price. So um that that I think that's uh a huge part of uh when you're looking at investing at all-time highs, a consideration to take in into account uh is is valuation. There's a there's a bunch of different other metrics you can you can take a look at. Um but the you know those that's kind of a a simple way to to look at it uh and you just get a good general sense of where we are in the US and where we are internationally. So um, you know, when you're looking at that, those those those numbers, Brett, what's kind of your your your thought process?

SPEAKER_02 21:41

Yeah, so I think a couple things, and and you know, we're 21, 20, almost 22 minutes into this podcast, and I knew it was gonna come up. I was just how long until it comes up? So the dang K-shaped economy, right? So we talk about this all the time, and everybody talks about it all the time, and it's kind of crazy. But what one of the things that comes with a K-shaped economy is you have the top half of the cash. Right, which is is really essentially the you know the the upper echelon of the corporate world as well as the um you know the individual world so the top of the K-shaped economy is really being driven by the AI build-out, right? But there is the bottom part of the K-shaped economy too, where you have many industries out there that are essentially in recession right now, right? That have been in we've had rolling recessions going on in the United States now uh pretty consistently, right? And it's one of the things that we do at Life Goal is we do embrace active management, right? And it's not just us, it's not us trading, you know, a US large cap Vanguard ETF or a US small cap Vanguard ETF. We use a lot of active management where the individual stocks are being selected by what we think are the best managers in the world. So we are going to use some low-quost ETFs as well, but there's a lot of active management going on, and the performance that's coming from active management in the short term here has been exceptional. So that is something that's worth uh looking at too. And I guess where I'm where I'm burying the lead there is there are cheap stocks out there, right? You know, not every stock is trading extremely rich, right? There's a lot of stocks out there. Healthcare is an example, is a sector that's got its its butt whooped, right? A lot of the different uh lower volatility sectors, if you will, I'll give an example. So minimum volatility stocks, right, have actually lagged the SP 500 by 25% over the last one year. Okay, so they're 25% behind the SP 500 over the last one year. If a stock is deemed to be a minimum volatility stock, it just essentially means that it has low volatility versus the broader sector in which it lives. Maybe it's a technology stock, it's a it's one of the less volatile technology stocks. So you can actually buy a basket of these stocks that uh would be labeled minimum volatility. Historically, that basket of stocks has kept up with the SP uh to the tune of about 70% of the upside. So if the SP is up 10, it's up seven. Well, right now the SP is up, you know, call it over the last year 25%. Minimum volatility over the last year is up about two. So there's a huge dispurge in there. These stocks are not broken, right? They're just currently out of favor short term. These are very healthy businesses. They wouldn't be low volatility if they were unhealthy business. They'd be high volatility, right? An unhealthy business is a high volatility stock. So, you know, there's things like that you can embrace uh when new dollars come to the table and you want to get them into the market rather than leave them there in cash getting nothing. And um, so there's many different ways that we can approach it. Uh that you know, the K-shaped economy is giving us opportunities uh where we think there's uh definitely value to be had. And then broader, going back to that 40, 40, 20, right? 40% stocks, 40% alternatives, 20% bonds. You know, bonds have yield 6-ish percent, and we don't have to take a lot of interest rate risk, and we're talking investment grade. Nothing wrong with 6% return, right? It looks kind of stinky next to 20% in the rearview mirror of the SP, but guess what? You know, trees don't grow to the sky. So we want to brace the concept of versification. If we're 40% stocks, 40% alternatives, 20% bonds, somebody brings us 10 million bucks, we get them to work tomorrow. If the market keeps selling off, guess what? We're not stuck 40, 40, 20 forever. We can very easily transition that portfolio to be way heavier in stocks, right? On on, you know, as the market is giving us opportunities to buy when things are cheap. And that's the same, you know, kind of logic on the global scale, too, is um, you know, when you see non-U.S. valuations, Nick, going back to your point there, when you see valuations outside the United States trading at a discount to valuations in the United States, we may want to increase our exposure there a little bit. Now, we do have a home country bias. Uh, we think that the US is the best place to invest long term for a few key reasons. Um, one being we are very entrepreneurial here in the United States. We have the deepest financial markets in the world, bar none, nothing else even close. We've got oil under our feet. Nobody else really has that, right? Or some folks have that, but not in developed economies. Uh, we've got the mighty US dollar that everybody picks on, that's essentially just going up, up, up relative to a basket of global currencies that gets hidden all the time. Um, and then, you know, uh lastly, and and arguably most importantly, we have technology, right? We have all those things. Name me another country in the world that has half those things. Um, you know, it's not it's not the case. So we want to embrace the US stock market, even though valuations are a little uh a little richer than non-U.S. But we definitely have exposure non-US as well. So I think, you know, kind of Nick, trying to land this plane, if you will, um kind of coming back to you on, you know, what are some very logical things that we do on a regular weekly basis to help clients get invested to essentially, you know, buck this psychological problem.

SPEAKER_00 26:48

Yeah, I think the number one and that kind of the the a practical playbook to have is to have a plan in writing, is the first thing that we're doing. We've you know, we've worked with our clients, we've established what their risk tolerance is, their time horizon, and and what we're trying to accomplish. So this kind of helps hold everybody accountable uh to a degree to make sure that you know no matter what the market is is doing, whether it's at an all-time high or if it's just a couple months ago and uh a war breaks out and the market's selling off, um that we we've come to a consensus um as to what we're trying to accomplish and we can we can keep that plan in place. Um I you know, I think when you're looking at new money coming in, uh it's again coming up with an approach whether you're gonna invest at lump sum, if you can stomach that, again, because the numbers kind of bear out, um, or you whether we're gonna dollar cost average that over over a given time period. But um we we want to make sure that we've we've got a plan in place um and and that we're we're getting cash invested and working for you to help you accomplish the goals that you've you've set out for yourself and your family. Um I think those are the kind of the most practical things to do. And there's there's a variety of other um you know things that we do regularly with clients to help you know rebalance and make sure that we're in the parameters that we've set out in that kind of investment policy statement, if you will. So um I think that's um you know really important to have uh and to make again hold yourself accountable, uh try to eliminate all of these biases that we've we've touched on from affecting uh your long-term goals. So uh with that, Brett, I'll let you wrap it up and we'll we'll go from there.

SPEAKER_02 28:35

Yeah, sure thing. I think the markets are extremely, extremely challenging to invest in, right? And psychology drives a lot of that challenge. There's a lot of other stuff out there, too, that I don't think gets categorized as in the psychology bucket that trips people up from time to time, too. But think of your financial advisor or you know, investment professional that you're working with as your jungle guide. Uh, embrace the jungle guide, you know, travel with the jungle guide. Uh, if they have you know recommendations or guidance, whether it's an investment policy statement, I've got a meeting on Thursday with a church that you know to take over that portfolio for them. They don't have an investment policy statement in place. Like you're, you know, what? You don't have an investment policy statement in place, you're a church, you have to get some things in writing as an institution. So embrace the game plan, get a game plan in place, and then you know, going back to the numbers, right? So Nick pointed those out early. A lot of times the best days in the market are clustered among the worst days. So you may have, you know, a situation like right now where the stock market's down essentially the last three days in a row, it wouldn't shock anybody to have a big up day tomorrow, right? Um and that's just how it goes. And if you don't get in and stay as a long-term investor in a diversified portfolio, either all or some of your money is gonna miss that big up day. And if you miss that big up day, you very, very materially underperform. So um, you know, going back to the jungle guide analogy, um, you know, we're here, we're here to help, and uh, you know, these little things add up materially over the long run. So um, you know, and we look forward to uh to continuing to put out um you know commentary on the markets, whether it's psychology or you know, the underpinnings of of uh direct lending and private credit, whatever it may be, on a weekly basis to you all. We appreciate you listening. Um, you know, like and forward it along to a friend if that makes sense. And we'll look forward to catching up with you next week. Thank you so much.

SPEAKER_01 30:22

Quick ask. If you're enjoying the show, hit the follow and drop a rating. It helps more folks find our podcast. Thanks so much. The information discussed in this video is for educational purposes only and should not be considered investment, tax, or financial advice. Investing involves risk, including possible loss of principal. Always consult a qualified financial professional before making any investment decisions.